Jefferies Upgrades Tapestry to Buy Amid Strong Growth Prospects

Tapestry Receives Analyst Upgrade from Jefferies

Tapestry (NYSE: TPR) has recently been upgraded by analysts at Jefferies, moving from a Hold rating to a Buy. This positive change is attributed to the company's strong sales growth potential, an outlook for better profit margins, and an extensive share buyback plan. In response to this announcement, Tapestry's stock climbed over 2% shortly after the market opened.

Positive Earnings Projections

Jefferies analysts are optimistic about Tapestry’s earnings, predicting that the company's earnings per share (EPS) will experience a healthy rise at a low double-digit percentage rate over the upcoming years. They point out that this growth could push the stock price as high as $90.

Market Dynamics and Competitive Positioning

The upgrade coincides with market attention shifting to Tapestry following the completion of its acquisition deal with Capri Holdings. This shift has allowed analysts to focus on Tapestry's improving sales figures and expanding profit margins as key components of the company's future.

Performance of Tapestry’s Core Brand

Tapestry's flagship brand, Coach, plays a significant role in the company’s financial performance, representing approximately 75% of sales and over 90% of profits. Its sustained brand appeal, combined with a potential rebound in the Chinese market, is expected to provide positive momentum. Analysts are forecasting a manageable growth rate of 2-3% in Tapestry's overall sales, largely driven by Coach's innovative product offerings and average unit retail advancements.

Strategies for Margin Enhancement

In addition to sales growth, improvements in Tapestry's gross margin are anticipated, thanks to effective full-price sell-through strategies and enhanced supply chain efficiencies. Company management is also focusing on reducing selling, general, and administrative expenses (SG&A) in the latter half of the fiscal year, which should help mitigate any declines in gross margin performance.

Analyst Insights on Cost Management

Jefferies analysts noted, “The leverage in SG&A should help balance out any reductions in gross margin percentage, like lower freight benefits, while management is expected to adjust marketing expenditure, which now constitutes around 9% of sales.” They project a robust growth in earnings before interest and taxes (EBIT) over the next two years, estimating growth rates between 6-7% as part of their base case scenario.

Impact of the Share Buyback Program

Additionally, Tapestry's $2 billion accelerated share repurchase program has been highlighted as a critical indicator of management's confidence in the company. This program, originally unveiled when shares were trading around $56, is projected to significantly boost EPS, with Jefferies estimating that next year’s EPS will hit $5.51, which is 9% higher than the consensus forecast of $5.07.

Sales Growth Outlook for Tapestry

Looking at the anticipated sales growth trajectory, Jefferies expects Tapestry's sales to graduate from flat in the first quarter to a growth of 2.5% by the fourth quarter. This shift in growth dynamics is corroborated by persisting advancements in average unit retail, continued product momentum, and signs of a gradual rebound in the Chinese market.

Broader Market Outlook

While Coach has been a driving force behind these projections, analysts indicated that Tapestry’s other brands, such as Kate Spade and Stuart Weitzman, are expected to maintain stable performance, leaving room for potential upside. Tapestry's management anticipates that Coach will continue to see growth in average unit retail, primarily due to various strategic initiatives aimed at enhancing product quality and optimizing SKU offerings, thereby decreasing the need for discounting.

Emphasizing Direct-to-Consumer Sales

Jefferies also recognized that Tapestry's limited exposure to wholesale operations, sitting at around 10%, strengthens its market position. This high direct-to-consumer (DTC) ratio enhances pricing control, allows for better data analytics, boosts consumer engagement, and leads to greater sales predictability. Furthermore, the DTC model has proven effective in reaching younger consumer demographics who typically engage with higher average unit retail prices.

Conclusion

Tapestry’s recent upgrade by Jefferies reflects a growing confidence in its business strategies, particularly its focus on core brand performance, strategic cost management, and an aggressive capital return policy, setting the stage for promising growth in the upcoming periods.

Frequently Asked Questions

What did Jefferies analysts predict for Tapestry's EPS growth?

Jefferies forecasts Tapestry's EPS to grow at a low double-digit percentage CAGR, possibly reaching $5.51 next year.

Why was Tapestry upgraded from Hold to Buy?

The upgrade was due to strong sales growth potential, improving margins, and a significant share buyback plan.

What is Tapestry's main brand and its importance?

Coach is Tapestry's primary brand, accounting for 75% of sales and 90% of profits, driving overall company performance.

How is Tapestry managing its gross margin?

Management focuses on full-price sell-through and efficiencies in the supply chain, while also managing SG&A expenses.

What is the expected impact of Tapestry's share buyback program?

The $2 billion accelerated share repurchase program is expected to enhance EPS significantly above current guidance levels.

About Investors Hangout

Investors Hangout is a leading online stock forum for financial discussion and learning, offering a wide range of free tools and resources. It draws in traders of all levels, who exchange market knowledge, investigate trading tactics, and keep an eye on industry developments in real time. Featuring financial articles, stock message boards, quotes, charts, company profiles, and live news updates. Through cooperative learning and a wealth of informational resources, it helps users from novices creating their first portfolios to experts honing their techniques. Join Investors Hangout today: https://investorshangout.com/

Disclaimer: The content of this article is solely for general informational purposes only; it does not represent legal, financial, or investment advice. Investors Hangout does not offer financial advice; the author is not a licensed financial advisor. Consult a qualified advisor before making any financial or investment decisions based on this article. The author's interpretation of publicly available data shapes the opinions presented here; as a result, they should not be taken as advice to purchase, sell, or hold any securities mentioned or any other investments. The author does not guarantee the accuracy, completeness, or timeliness of any material, providing it "as is." Information and market conditions may change; past performance is not indicative of future outcomes. If any of the material offered here is inaccurate, please contact us for corrections.