Analysts Find No Frays In Tapestry's Quarter

Tapestry Inc TPR recorded mixed third-quarter earnings with a 42-cent bottom-line exceeding 41-cent estimates and $1.33 billion in revenue falling short of $1.34 billion forecasts. Analysts were generally bullish on the report.

“[The] results reflect the favorable impact of go-forward trends, in our view,” MKM Partners analyst Roxanne Meyer wrote in a note.

Here were some of the focal points.

Tightened Operations

Tapestry has almost fully incorporated enterprise resource planning into its operations and, by KeyBanc’s assessment, it’s making better use of vendors, e-commerce opportunities and artificial intelligence.

Management is also leveraging the Coach strategy to reboot Kate Spade.

“We have been impressed as TPR has built out a set of core capabilities and an operating playbook that can be leveraged across the platform,” KeyBanc analysts Edward Yruma and Matthew DeGulis wrote.

Kate Spade Turnaround

Kate Spade improved its conversion rate for both e-commerce and brick-and-mortar channels, which led to sequential comps growth.

“Kate’s -3% comp was above Street expectations, signaling that merchandise under new design leadership is resonating, despite pressure from the clearing of residual holiday product,” Meyer wrote.

Total segment sales grew 5 percent as management opened new stores, incorporated products from Nicola Glass, and acquired operations in Australia, Singapore and Malaysia.

“Despite promotional concerns, TPR continues to make progress in its Kate Spade reboot and reiterated positive comp guidance for 4Q19,” Yruma and DeGulis wrote.

Notably, not everyone was impressed with the pace of transformation. Bank of America analysts Lorraine Hutchinson and David Buckley said the “turn is taking longer than expected.” They anticipate a fourth-quarter decline in gross margins as the comparable period profited from merger synergies and surged in honor of the founder’s death.

However, they also expect comps growth as management replenishes stores with entirely new products. On the latter point, KeyBanc agreed.

“Increased penetration of Nicola Glass’s product is a key part of the expected positive 4Q comp as all product in the full-price channel should be new by the end of 4Q (while three-quarters was new in 3Q) and outlet penetration will ramp over coming quarters,” Yruma and DeGulis wrote.

Capital Improvements

KeyBanc considers the authorization of a $1 billion share repurchase a sign of capital discipline.

“[...] we expect the Company to be opportunistic when the window is open,” Yruma and DeGulis wrote. “Tapestry remains committed to its multi-brand strategy as it leverages its capabilities across platforms and brands to realize run-rate synergies from COGS and SG&A of $100M-$115M in FY19, up $45M from FY18.”

The Ratings

Bank of America expects multiple expansion and double-digit bottom-line growth in 2020. MKM forecasts similar outcomes as it anticipates comps growth in Coach, Kate’s inflection on product improvements, the anniversaries of distributor acquisitions, operational synergies, and Stuart Weitzman growth from leadership changes.

• Bank of America maintained a Buy rating and $48 price target;
• KeyBanc Capital Markets maintained an Overweight rating and $42 target;
• MKM Partners maintained a Buy rating and $52 target.

Tapestry traded around $32.39 per share at time of publication.

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Photo credit: Leitonmahillo, via Wikimedia Commons