Tapestry, a luxury goods retailer known for its handbags, shoes, and accessories, is set to announce its fiscal second-quarter results on Thursday, February 8. However, it is expected that the company's stock will experience a decline after the release, as revenues and earnings are anticipated to fall short of expectations.
One factor influencing Tapestry's financial performance is its plan to acquire Capri Holdings, formerly known as Michael Kors, in an $8.5 billion deal financed by debt. This acquisition would create a vast portfolio of luxury brands, combining Tapestry's Coach, Kate Spade, and Stuart Weitzman with Capri's Versace, Jimmy Choo, and Michael Kors.
In the first quarter of the fiscal year, Tapestry observed a strong performance from its Coach brand, with a 3% increase in sales compared to the previous year. However, the sales for Kate Spade and Stuart Weitzman experienced declines of 6% and 19% respectively. Notably, the Coach brand accounts for approximately 75% of the company's revenues.
Geographically, Tapestry reported flat year-over-year sales in the United States and a 1% decline in Europe. However, the company saw growth in international markets, particularly in Japan with a 12% increase and Greater China with 9%. Tapestry's presence in China, where the luxury market is rebounding strongly from the pandemic, is expected to contribute significantly to its future growth.
Despite experiencing gains of 35% from early January 2021, the trajectory of Tapestry's stock has not been consistently positive. In 2022, the stock witnessed a decrease of 6%, followed by a 3% decline in 2023. In comparison, the S&P 500 index showed increases of 27% in 2021 and 24% in 2023, but a decline of 19% in 2022. These figures indicate that Tapestry underperformed the broader market in 2023.
Considering the uncertain macroeconomic environment with rising oil prices and increased interest rates, it remains to be seen whether Tapestry will face a similar situation as in 2023 and continue to underperform the S&P 500 over the next 12 months.
According to our forecast, Tapestry's valuation is estimated to be around $35 per share, which is 15% lower than the current market price.
When looking at Tapestry's earnings estimates for the fiscal second quarter, it is anticipated that revenues will slightly miss consensus estimates. In the first quarter, Tapestry reported sales of $1.51 billion, representing a 0.7% year-over-year increase. Looking ahead, the company expects full-year revenue of $6.7 billion and earnings per share (EPS) of $4.10 to $4.15. Additionally, Tapestry expects a free cash flow of approximately $1.1 billion for the full year, excluding deal-related costs.
In terms of EPS, it is projected that Tapestry will marginally miss consensus estimates for the fiscal second quarter. The company's gross margin improved by 250 basis points year-over-year in the previous quarter, resulting in an 18% increase in adjusted earnings per share.
Based on Tapestry's valuation, with an EPS estimate of around $4.15 and a price-to-earnings (P/E) multiple of close to 8.5x for fiscal 2024, our calculations suggest a price of $35 per share, which is 15% lower than the current market price.
While Tapestry faces challenges in meeting market expectations, it is essential to assess how it compares to its peers. Understanding Tapestry's performance in relation to industry competitors can provide valuable insights for investors.
In conclusion, Tapestry's fiscal second-quarter results are likely to disappoint, with revenues and earnings missing expectations. The company's planned acquisition of Capri Holdings and its presence in the recovering luxury market in China may play significant roles in its future growth. However, caution is advised due to the current uncertain economic climate, which could impact Tapestry's performance in the coming months.
