Home Coach outlet profit Tapestry (TPR): on track but execution risks remain

Tapestry (TPR): on track but execution risks remain

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After a series of strategic missteps that included steep discounts and a broad retail presence, Tapestry’s (TPR) flagship brand, Coach, which had been one of the leading brands in the affordable luxury space in North America, began to lose market share to rivals. 2011, notably to Michael Kors (CPRI) and Kate Spade (Tapestry acquired Kate Spade in 2017). After recording steady revenue growth in previous years, Coach’s revenue growth rate has also begun to take a lumpy trajectory, despite efforts to boost sales with aggressive discounts, suggesting a weakening in the strength of the brand and a decline in pricing power.

Chart Tapestry Revenue 2006-2021

macrotrends

Along with declining market share, Coach’s profits began to sag in subsequent years, dragging overall profitability down in the process. From his twenties to his thirties, Coach’s return on assets began to steadily decline around 2014 reaching low single digits in 2018 after the acquisition of Kate Spade.

Chrat - Tapestry ROA 2006-2021

macrotrends

From the fourth quarter of fiscal 2014, Tapestry took steps to reverse Coach’s declining brand image, changing direction and with it also changing strategy, which saw the company limit discounts promotions and reduce the number of its stores as part of its multi-year “transformation plan”. ”. In the meantime, as part of its “operational efficiency plan”, a number of cost reduction measures have been implemented, including the optimization of the workforce and the location of the offices.

In fiscal 2020, Tapestry took steps to further improve its competitiveness as part of its multi-year “acceleration program,” which included further store closures and exits from non-strategic regions, and greater focus on digital channels (“Leverage Data and Lead with a Digital-First Mindset”, i.e. using data to support product development and inventory allocation).

After a pandemic-induced decline in sales and earnings for fiscal year 2020 (ending June 2020), Tapestry rebounded strongly in fiscal year 2021, with revenue up double digits, compared to its rival Capri Holdings (owner of Versace, Michael Kors and Jimmy Choo) which has seen revenue declines and continued losses. Tapestry’s margins also recovered as revenue recovered.

Tapestry

(Year ended June 2021)

Capri Holdings

(Fiscal year ended March 2021)

Year-over-year revenue growth

15.8%

-26%

Gross margins

71%

64%

Net margins

14.5%

-1.5%

What’s more remarkable though, is that Tapestry’s margins in fiscal 2021 hit their highest levels since 2014 (the year the company’s fortunes began to decline noticeably), which which suggests that not only is the company benefiting from an overall recovery in consumer spending post-pandemic, but its multi-year turnaround strategies finally appear to be yielding results. Tapestry revenue grew 15.8% year-over-year in fiscal 2021, the highest revenue growth rate since fiscal 2008, when revenue grew 21% year-over-year year-on-year (not including fiscal 2018, when revenue grew 31% year-over-year, primarily due to the revenue contribution from the Kate Spade acquisition) .

Tapestry’s return on assets reached 9.9% in fiscal 2021, a hair higher than in fiscal 2019 when ROA was 9.4%, and the highest level since June 2014. when the company’s return on assets was more than 20%. Fiscal 2021 net profit margins of 14% were the highest since June 2014, when net profit margins were 16%. Fiscal 2021 gross margins reached 71%, the highest level since June 2013, when gross margins were 72%. Tapestry’s margin breakdown reveals that its flagship brand – Coach – achieved gross margins of 74% in fiscal 2020, reaching levels seen before 2011 (the year strategic mistakes began to reduce the power brand pricing and eating away at margins), suggesting that the Coach brand has recovered well from these mistakes and looks poised to continue driving long-term growth. Turnarounds usually take time, and now, after more than half a decade of constant efforts to streamline their businesses and rebuild the Coach brand to its former position, recent results may indicate that the company has finally turned the corner. .

Tapestry’s momentum continued in the first quarter of 2022, with the company delivering strong revenue growth of 26% year-over-year while maintaining healthy gross margins of 72%.

Several favorable factors exist to support Tapestry’s performance going forward. Through its “acceleration program,” the company achieved approximately $200 million in gross expense savings in fiscal 2021 and is on track to achieve gross savings of $300 million in during the 2022 financial year.

The program also increases online sales, allowing the company to increase its offline in-store presence in strategically important markets, namely North America and especially China (China is expected to overtake the United States and Europe as the largest luxury market in the world by 2025), while reducing its store base in non-strategic markets. Increased focus on strategic markets is delivering results; Coach sales in China jumped 54% year-on-year in fiscal 2021 and 22% in North America. Coach sales in other regions saw year-on-year declines.

Not only does this strategy reduce the company’s fixed costs, i.e. rent, but it could also increase store profitability. Revenue per store reached $4.5 million in 2021, the highest level since 2014, when revenue per store was $4.7 million. Tapestry still has some way to go before it can achieve the per-store revenue numbers seen at its peak. Nonetheless, the rise could be the start of a long-term uptrend as continued brand strength, reduced discount activity and continued store fleet optimization drive revenue per store growth. in the future.

Coach revenue per store:

As Coach gradually reclaims its brand image, Tapestry strives to move Coach from its accessible mid-range luxury niche into the luxury segment opportunistically targeting “white space” in the market. Such a move suggests increased brand strength and pricing power, which could drive revenue growth with potentially higher margins in the future.

Kate Spade’s turnaround is taking longer than expected, but the strategy is promising

Kate Spade, whom Tapestry has struggled for years to turn around, continues to squeeze Tapestry’s margins; Kate Spade achieved gross margins of 63.5% in fiscal 2021, compared to 74% for Coach. However, Kate Spade’s gross margins are slightly higher than its pre-pandemic margin of 63.2% in fiscal 2019 and are at their highest level since Tapestry acquired the brand in 2017. Like Coach, Tapestry worked aggressively to strengthen the brand by improving product quality, reducing discounts, selling more products online at full price and optimizing its store base. This strategy seems to have worked with Coach, and early signs suggest that Kate Spade could be reaping similar rewards as well. A successful turnaround by Kate Spade could benefit Tapestry immensely; Coach positions itself as a ‘classic’ brand with relatively subdued colors and designs targeting a slightly more mature market, while Kate Spade is unique in positioning itself as a ‘whimsical’ brand with vibrant colors and playful designs (like this $348 pineapple handbag crossbody bag that was a hit) targeting a younger crowd, i.e. millennials.

Together, the two brands enable Tapestry to capture a greater share of the global handbag market and position Tapestry as one of the world’s leading handbag players. Greater scale gives Tapestry an edge to invest in technology, design, production, raw materials, to better navigate consumer preferences, create better products and streamline operations, as well as invest in marketing and brand building to improve pricing power.

Kare Spade pineapple handbag

Kate Spade

Low P/E compared to peers

With a P/E of just 10, Tapestry is on the lower end of the price spectrum compared to its peers, but is on the higher end in terms of profitability.

Net margin %

ROA %

P/E (front)

Ralph Lauren

(Fiscal year ended March 2021)

7.2%

-1.5%

14

Tapestry

(Year ended June 2021)

14.5%

ten%

10.8

Capri Holdings

(Fiscal year ended March 2021)

-1.5%

-0.8%

11

L Brands

(Fiscal year ended January 2021)

7.1%

7.8%

12

HPV

(Fiscal year ended January 2021)

-16%

-8.5%

ten

Risks

Although Tapestry appears to be on the right track, Tapestry still has some way to go before it can return to the level of profitability it used to generate at its peak (at just 10% ROA for FY2021, it is well below the ROA of 20% to 30%). Tapestry range used a decade earlier). Execution risks could prevent anticipated gains from materializing and could therefore limit the performance of the share price. Additionally, in China, niche brands would be increasingly popular among millennials. The rise of these brands could hamper Tapestry’s growth in this strategically important market.

Conclusion

Tapestry has had a tough few years, battling market share losses, brand dilution and declining profitability. While execution risks could hamper its upward momentum going forward, major operational improvements under its acceleration program, including increased operational efficiency, enhanced brand value and pricing power, provide a solid foundation to support Tapestry’s future growth. Tapestry is already seeing results and, in addition, the company has raised its revenue forecast for fiscal year 2022 (ending June) from $6.4 billion to $6.6 billion. With margins at the top of the scale compared to its peers and a P/E at the bottom, Tapestry could be worth a look.