Tapestry Stock Is Poised To Fall

Tapestry’s stock (NYSE: TPR), a luxury goods retailer of handbags, shoes, and accessories under the Coach, Kate Spade, and Stuart Weitzman brands became vulnerable during the pandemic due to its nonessential product assortment. Consequently, the company’s revenues have fallen 20% to a consolidated figure of $4.8 Bil for the last 4 quarters from the consolidated figure of $6.0 Bil for the 4-quarter period before that. However, TPR stock gained 17% – moving from about $29 to $34 in the last 12 months, due to better-than-expected fiscal Q1 (ended Sept), the announcement of two Covid vaccines, and the U.S. federal elections. That said, we believe the company stock could potentially slump going forward due to this revenue and stock price mismatch.

This is taking into account a lackluster revenue growth of Tapestry’s revenues, which declined 18% year-over-year in fiscal 2020 (ended June’20), and grew only 3% in fiscal 2019 – before the pandemic. While Coach brand, which makes around 71% of total sales, has been fairly stable – Kate Spade and Stuart Weitzman have been all over the board. Though both these brands saw a top-line growth before the pandemic in FY 2019, Kate Spade’s adjusted operating profit fell by 5% to $186 million and Stuart Weitzman ran at an adjusted operating loss of $17 million. That said, luxury goods tend to be cyclical in nature and economically sensitive, resulting in uncertainty until the Covid threat abates. Our dashboard,Buy or Fear Tapestry Stock? provides the key numbers behind our thinking, and we explain more below.

Tapestry stock declined 73% from almost $46 in fiscal 2018 to around $13 in fiscal 2020 (year ended June 2020), with much of this decline coming from the pandemic driven store closures. During this period, Tapestry’s revenues declined 16% from $5.9 billion in FY2018 to $5.0 billion in FY2020, and the shares outstanding declined 3%. Taken together, revenue per share fell by 13% from around $21 in FY2018 to $18 in FY2020.

Finally, Tapestry’s P/S multiple declined from 2.2x in fiscal 2018 to 0.7x in fiscal 2020. While the company’s P/S has now increased to 1.9x, there is a downside risk when the current P/S is compared to levels seen in the past years – 0.7x in 2020 and 1.5x in 2019.

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How Is Coronavirus Impacting Tapestry Stock?

For the fiscal first quarter, which ended on Sept. 26, sales continued to decline. Its top line dropped by 14% year-over-year to $1.2 billion, due to reduced demand driven by the pandemic. Tapestry did grow its e-commerce sales by triple digits, though, and e-commerce accounted for nearly 25% of its quarterly sales. In addition, operating profit almost tripled y-o-y to $151 million.

While TPR stock may be overvalued now, 2020 has created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Amazon vs Etsy.

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