BofA: Tapestry Brands To Weave A Happy Tale

Tapestry Inc TPR’s third-quarter earnings triggered a 15-percent selloff despite having top- and bottom-line beats.

Now, Bank of America Merrill Lynch thinks the stock’s a steal.

The Rating

Analyst Lorraine Hutchinson upgraded Tapestry from Neutral to Buy and raised the price target from $50 to $53.

The Thesis

Frequent promotions at the Coach outlet justified earlier analyst ambivalence, and while concern remains, lower product costs are expected to offset discounts over the next year, Hutchinson said in a Thursday note. (See the analyst's track record here.) 

BofA forecast gross margin growth beginning in the fourth quarter, particularly as the Generalized System of Preferences trade program eliminates duties from some of Coach’s imported handbags.

“Management continues to work on the assortment at the outlet division and we expect more innovation and marketing to help stabilize the promotional cadence,” the analyst said. 

Kate Spade is projected to exceed guidance for earnings accretion and synergies, especially as the brand leverages Coach’s expertise in China, Hutchinson said. The Stuart Weitzman segment is also expected to return to profitability by the second quarter of next year.

“We think the recent pullback to a 14x P/E represents a rare opportunity to own double-digit EPS growth at a discount to the market," then analyst said. 

BofA anticipates 17-percent and 13-percent bottom-line growth in 2019 and 2020, respectively.

Price Action

Tapestry shares were up 0.51 percent at the time of publication Thursday at $45.62. 

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