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Tapestry: A High-Quality Luxury Goods Cheaply Valued

Luxury goods concern Tapestry (TPR) has an average ‘Buy’ rating from the 19 research firms that cover it. However, the stock has declined more than 14% year-to-date and currently looks undervalued at its current price. So, with Wall Street analysts projecting a potential upside in the stock, I think it could be a quality addition to one’s portfolio now. Let’s discuss in detail.

Luxury goods company Tapestry, Inc. (TPR) in New York City is a luxury accessories and branded lifestyle products provider in the United States, Japan, China, and globally. The company operates through the segments of Coach, Kate Spade, and Stuart Weitzman, offering women’s accessories and novelty accessories.

TPR has received an average recommendation of ‘Buy’ from the 19 research firms that cover it. Moreover, 11 investment analysts have rated the stock as Buy, while only five have rated it Hold.

TPR’s stock has declined 14.9% in price year-to-date and 8.8% over the past month to close yesterday’s trading session at $34.54. However, it has gained 2.4% over the past five days.

So, is the stock a buy now?

Solid Bottom Line

For its fiscal second quarter, ended January 1, TPR’s net sales increased 27% year-over-year to $2.14 billion. Its non-GAAP operating income rose 15.8% from the prior-year quarter to $476.10 million, while its non-GAAP net income improved 13.9% from the prior-year period to $367.90 million. Its non-GAAP net income per common share was $1.33, up 15.7% from the same period the prior year.

Favorable Past and Expected Growth

TPR’s revenue has grown at a 2.8% and 7.4% CAGR over the past three and five years, respectively. The company’s net income, EBITDA, and levered FCF have grown at a 4.7%, 5.3%, and 9.2% respective CAGR over the past three years.

The  $1.08 consensus EPS estimate for the quarter ending June 30, 2022, indicates a 45.9% year-over-year increase. And the $1.72 billion consensus revenue estimate for the same period reflects a 6.6% improvement from the prior-year quarter. Furthermore, TPR has an impressive surprise earnings history; it has topped consensus EPS estimates in each of the trailing four quarters. Its EPS is expected to increase 17.2% per annum over the next five years.

Discounted Valuation

In terms of its forward P/E, TPR is currently trading at 9.77x, which is 29% lower than the 13.76x industry average. The stock’s 0.50 forward non-GAAP PEG multiple is 48.7% lower than the 0.97 industry average. In terms of its forward EV/EBIT, the stock is trading at 8.38x, which is 30.3% lower than the 12.03x industry average.

Impressive Profit Margins

TPR’s 70.59%, 19.02%, 12.84%, and 13.39% respective trailing 12-month gross profit, EBIT, net income, and levered FCF margins are 94.86%, 104.77%, 97.69%, and 180.73% higher than their respective 36.23%, 9.29%, 6.50%, and 4.77% industry averages.

Furthermore, its trailing 12-month ROE, ROTC, and ROA of 28.75%, 11.96%, and 10.55%, respectively, compare with the 7.65%, 7.96%, and 6.09% industry averages.

POWR Ratings Reflect Promising Prospects

TPR’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

TPR has a Quality grade of A, in sync with its impressive trailing 12-month profit margins.

The stock has a B grade for Growth and Value, which is justified by its impressive growth and discounted valuations.

In the 67-stock Fashion & Luxury industry, TPR is ranked #14. The industry is rated A.

Click here to see the additional POWR Ratings for TPR (Momentum, Stability, and Sentiment).

View all the top stocks in the Fashion & Luxury industry here.

Bottom Line

TPR possesses solid fundamentals and is currently trading at a discount. Moreover, Wall Street analysts see a 60.7% upside potential in the stock. Thus, I think the stock might be a solid bet now.

How Does Tapestry, Inc. (TPR) Stack Up Against its Peers?

While TPR has an overall POWR Rating of B, one might consider looking at its industry peers, J.Jill, Inc. (JILL) and Hugo Boss AG (BOSSY), which have an overall A (Strong Buy) rating, and H & M Hennes & Mauritz AB (HNNMY) and Oxford Industries, Inc. (OXM), which have an overall B (Buy) rating.

TPR shares were trading at $33.15 per share on Friday afternoon, down $1.39 (-4.02%). Year-to-date, TPR has declined -17.85%, versus a -9.40% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.


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