Wells Fargo Likes Tapestry, Says 'Coach Brand Back In Action'

Wells Fargo's research team had the opportunity to travel with luxury accessories and lifestyle brand company Tapestry Inc TPR's management team, including CEO Victor Luis.

The Analyst

Wells Fargo's Ike Boruchow maintains an Outperform rating on Tapestry with an unchanged $40 price target.

The Thesis

The trip follows the company's fiscal second-quarter report, which had some investors concerned with management's ability to inflect comps and gain momentum after an "operational misstep" and EPS guide down Boruchow said in a Monday note.

While the conversations with management didn't focus on specific strategies and initiatives, there were three takeaways that helped reinforce Wells Fargo's bullish stance, the analyst said: 

The Coach brand is "back in action" and should continue delivering a low-to-mid-single digit comp, with outperformance expected in the North American market. This view is based on continued improvements in North America conversion and compelling traffic trends at brick-and-mortar stores.

The Kate Spade brand continues to deliver margins that are "well below" peers, but management has several initiatives to lift margins, including supply chain improvements, licensing arrangements and a path toward scaling in the low-margin international business.

The company started a longer-term plan to invest $900 million in its portfolio in 2014, and the "heavy lifting [is] almost complete." The early years of the multiyear investment period resulted in poor margin performance, but trends began to stabilize after fiscal 2016, and the company operates 700 "modern luxury format" stores that have already shown significant inflections in comp trends.

Price Action

Tapestry shares were down 1.87 percent at $34.69 at the time of publication Monday. 

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Photo by Fashionmouse/Wikimedia.