EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat Tapestry Continues to Integrate Kate Spade Segment; Sustainability of Growth a Concern

Tapestry has developed a narrow moat through a collection of brands that command high gross margins and a sourcing and distribution edge. In the U.S., we think better inventory management and reinvigorated Coach brand premiumization will drive pricing power, top-line growth, and margin expansion. Management’s efforts to increase the fashion relevance of the brand, improve the store experience, and rationalize wholesale and retail distribution points have started to yield the desired results, with promotional days in the Coach wholesale channel down over 20% in fiscal 2018 versus 2017. While adjusted gross margins declined 250 basis points in fiscal 2018 to 66.2%, we expect further Kate Spade integration, elevated product positioning, and greater control of promotional activity will drive gross margin expansion, with company gross margins exceeding 68% on average over the next 10 years.Now that management has repositioned its Coach business, we think it is strategically well positioned to execute on acquisitions. While production delays and lower sell-through of key carryover styles continued to plague Stuart Weitzman in the first quarter of fiscal 2019, we believe these are temporary headwinds resulting from the adjustment to new brand management and infrastructure and capacity issues. We think growth at Stuart Weitzman (about 6% of sales in fiscal 2018) stands to outperform, with room for distribution expansion longer term. Further, we see Kate Spade (22% of fiscal 2018 revenue) as allowing management to use its talents in elevating brand distribution channels and achieving supply chain efficiencies to bolster shareholder returns, targeted to reach double-digit accretion in fiscal 2019. Given the relationships and knowledge Tapestry has generated through its robust international business (43% of total Coach sales in fiscal 2018) plus domestic new product and outlet opportunities, we think revenue growth at Kate Spade (17% of 2018 fiscal sales were international) can average in the midsingle digits through international growth and once the pullback from wholesale disposition and online flash sales ends.