Updated: Nov 15, 2020
" Tapestry Inc (Ticker: TPR ) the upscale luxury brands retail owner of Coach, Kate Spade, Stuart Weitzman, is a great company but are there reasons to be upbeat with the stock.
By: Allan R Kirby
Tapestry is a New York-based corporation that produces and sells modern luxury brands. These brands include the Coach, Kate Spade New York as well as the Stuart Weitzman brands. All of which have a great history of providing affordable luxury products to its customers.
Coach was founded in 1941 by Lillian and Miles Cahn with a workshop in Manhattan’s Garment District. They initially developed various leather wallets and billfolds using the same leather used in baseball gloves. Later they began producing a line of women’s handbags in the early 1960s. Coach would eventually become known for its high-quality craftsmanship and filling the affordable luxury handbag niche. Kate Spade New York considered similar to Coach, was purchased by coach in 2017 in a $2.4 billion deal. Finally, there is Stuart Weitzman which started out in the late 1950s as a luxury shoe company. The brand was purchased by Coach in 2015 for $574 million.
Today the company known as Tapestry has developed into a luxury brand powerhouse that has the brands and quality that consumers want. However, we still need to see if this company can build on success in this current environment.
The decline in Tapestry’s stock has been ugly, just a few years ago this stock hovered in the high $40 range and has crashed all the way from dawn to $14 range, in fact, you can find Tapestry is now lower today than during the great recession going back to 2008. There is a good reason for the recent downward spiral, of course, COVID-19. The last quarter only provided a partial result of the effects of COVID-19, it was not bad as I thought it would be, however, sales were down, as shown below:
Net sales totaled $1.07 billion for the fiscal third quarter as compared to $1.33 billion in the prior year.
Gross profit totaled $616 million on a reported basis, while gross margin for the quarter was 57.4% compared to $916 million and 68.8%, respectively, in the prior year. On a non-GAAP basis, gross profit totaled $720 million, while gross margin was 67.1% as compared to $921 million and 69.2%, respectively, in the prior year.
Operating loss was approximately $685 million on a reported basis while operating margin was (63.9)% versus operating income of $110 million and an operating margin of 8.2% in the prior year. On a non-GAAP basis, operating loss was $32 million, while operating margin was (2.9)% versus operating income of $145 million and an operating margin of 10.9% in the prior year.
Net interest expense was approximately $13 million in the quarter as compared to $11 million in the year-ago period.
Other expenses were $6 million versus $4 million in the prior year.
Net loss for the quarter was $677 million on a reported basis, with earnings per diluted share of ($2.45). This compared to net income of $117 million with earnings per diluted share of $0.40 in the prior-year period. The reported tax rate for the quarter of 4.0% compared to the prior year reported a rate of (23.4)%. On a non-GAAP basis, the net loss for the quarter was $76 million with earnings per diluted share of ($0.27). This compared to non-GAAP net income of $122 million with earnings per diluted share of $0.42 in the prior-year period. The non-GAAP tax rate for the quarter was (48.2)% compared to 6.8% in the prior year.
Inventory was $853 million at the end of the quarter versus ending inventory of $811 million in the year-ago period.
Given the current unpredictable environment, the company suspended the 33.8 cents quarterly dividend in May, along with its stock buyback program. This is not a surprising move in this unprecedented environment.
Unfortunately, we do not know how COVID-19 is going to play out over the next few quarters. The virus coupled with lower consumption and consumer spending may affect luxury brands such as Tapestry. Will people be more inclined to continue buying leisurely apparel and sports equipment and less on luxury bags and accessories? Time will only tell and the next earning release this week will give more clarity to how they are handling the pandemic. Tapestry having to temporarily shutter stores in North America and Europe, along with lower demand could result in an ugly few quarters.
Although the resignation of CEO Jide Zeitlin is in our view is not going to adversely affect the brand however if additional wrongdoing is found, has the potential to affect the brand's names and stock value.
Tapestry is doing everything right to ensure success. The company has taken action to cut expenses such as cutting 2,100 part-time workers across its brands. Tapestry also is halving cash compensation for the directors and paring salaries 5% to 20% for all North American corporate employees above a certain pay threshold. As per its last quarterly results, Tapestry moved quickly to mitigate the impact of Covid-19.
Driving SG&A savings by eliminating non-essential operating costs, such as marketing, across all key areas of spend and reducing corporate compensation;
Tightly managing inventories by reflowing late spring and early summer product introductions and canceling inventory receipts for late summer/early fall 2020, which is expected to result in over $500 million of working capital savings;
Reducing Capex by at least $100 million in fiscal 2021 as compared to its run-rate spend of approximately $275 million. The Company is delaying or canceling new store openings, while prioritizing investment in high-return projects aligned with the multi-year growth agenda, notably in digital.
Drawing down $700 million from its $900 million revolving credit facility, funded after quarter-end, to add to cash balances;
Suspending both its quarterly cash dividend and share repurchase programs saving approximately $700 million annually as compared to fiscal 2020.
As outlined in their last earnings report, Tapestry is aggressively leaning into the global digital opportunity for all brands. Ensuring that the Company’s e-commerce platforms and distribution centers remain operational across all major regions;
“Good News Q4 update: Tapastry's gross margin expanded on a year-over-year basis, reflecting lower promotional activity, while inventory declined from the prior year. In addition, the Company ended the year with a significant cash balance of approximately $1.4 billion”
Is TPR a good stock to buy?
Goldman Sachs upgraded the luxury retailer to a Buy rating from Neutral and bumped its price target to $18 from $16, while other analysts also have price targets well above its current share price. With a healthy balance sheet, a great direct-to-consumer distribution system, strong brand recognition Tapestry is a stock worth looking at. Additionally, we believe TPR will be one of the survivors in a brutally harsh environment that has seen many retail stores and brands going bankrupt. Long term this stock could recover and appreciate in value but it could be pressured near term. We also like the fact Tapestry's exposure to Chinese consumers is significantly lower compared to many European brands.
We take pride in ensuring that we look at ESG when reviewing Consumer Discretionary stocks . When looking at Tapestry (TPR) We found them to be a highly focused ESG company. They are working proactively laying out a 2025 blueprint that aims to "hire more ethnic minorities in North America, filling 60 percent of senior-level roles in an effort to support career advancement and reducing differences in the company’s Employee Survey Inclusion Index scores based on gender and ethnicity". Additionally, Tapestry has increased the number of women/minority board members and 60% of senior managers are women. As a result, Barons recently ranked Tapestry 37th on social responsibility metrics out of 100 top ESG companies. We encourage investors to always take a look at companies' efforts to improve their Environmental, Social, and Governance.
As a highly rated ESG company that will survive the current economic downturn due to the pandemic, Potential investors should take a serious look at this great company as an investment. Do your research and see if this great stock is worth adding to your portfolio.
Apparel Stocks to Buy
There are other highly rated ESG consumer discretionary stocks that are doing well in this current environment such as Levi Strauss & Co. (LEVI) and Nike Inc (NKE). These may be others stocks to take a look at. In fact we currently like LEVI stock.
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