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Morningstar | Coach’s Brand Power Provides a Narrow Moat for Tapestry as It Develops a House of Upscale Brands

We think narrow-moat Tapestry has successfully restructured Coach and that its Kate Spade and Stuart Weitzman brands have potential. In our view, Coach shares many of the qualities of other luxury brands per the Morningstar Luxury Brand Power Framework and, therefore, has the brand strength and pricing power to provide a narrow moat for Tapestry. Coach, after years of strong growth, began to slow around 2013 due to excessive distribution and competition from no-moat Capri’s Michael Kors and others. We think, though, that Tapestry has solidified Coach’s leading market position in the $48 billion (company estimate) premium leather goods market the past few years through store closures, restrictions on discounting, and increased e-commerce. However, we don’t believe its opportunities are limited to leather goods, as we also expect growth in complementary categories like footwear and fashion. We expect China to be a key growth region for Coach as, according to Bain & Company, Chinese consumers will compose 46% of the worldwide luxury goods spending in 2025, up from 33% in 2018. We forecast Coach’s Asia sales will increase to $2.2 billion in fiscal 2028 from $1.6 billion in fiscal 2019. Beyond its mainstay, we view Tapestry’s plan of building a house of luxury brands as promising but unproven, and we don’t believe the recent acquisitions of Kate Spade and Stuart Weitzman contribute to Tapestry’s moat. Kate Spade was a natural fit for Coach as both generate most of their sales from Asia-sourced handbags. However, Kate Spade merchandise is priced lower than Coach and lacks Coach’s international reach. Still, we think Kate Spade can grow in both North America and Asia through store openings and new products, such as shoes (currently licensed). Tapestry has a stated goal of $2 billion in Kate Spade revenue, which we forecast will be achieved in fiscal 2024. As for Stuart Weitzman, while its women’s shoes achieve luxury price points, we view it as a niche brand (under $400 million in annual sales) with considerable fashion risk. We do not forecast Stuart Weitzman will reach Tapestry’s goal of $1 billion in sales in the next 10 years.