Morningstar | Tapestry Posts Improved Full-Year Results, Driven by Kate Spade; Shares Slightly Overvalued
Narrow-moat Tapestry’s strong fiscal 2018 results reflected sales outperformance in North America and in the Kate Spade segment. For the full year, Tapestry's sales grew 31% (2% estimated organic) with adjusted gross and operating margins down 120 and 120 basis points respectively (in line with our full-year expectations of 30.5% sales growth, 66.8%, and 16.5%). Additionally, management‘s initial 2019 outlook calls for mid-single-digit sales growth to $6.1 billion-$6.2 billion and adjusted earnings per share of $2.70-$2.80 compared with our estimates of $5.9 billion in sales and earnings of $2.82. While we intend to digest the results and review our assumptions, we do not expect to significantly alter our $45 fair value estimate, and after a low-teens appreciation, shares strike us as mildly overvalued.The Kate Spade segment (around one fifth of sales) reported a full-year global comparable sales decline of 7% (better than our expectation of an 8.3% decline). The reduced sales reflected the firm’s strategic pullback in wholesale disposition and online flash sales (which we think stands to bolster its brand intangible assets and the pricing power of the brand), offset by the consolidation of its joint ventures in Asia. While we agree that these actions are prudent to defend the brand (highlighted in the steady segment gross margin of 63.6%), we are skeptical surrounding the sustainability of managements’ lofty growth aspirations. We see the double-digit revenue growth expected in fiscal 2019 as overly optimistic as there are still several execution headwinds as the brand is repositioned for growth in China while balancing increased pull back in wholesale disposition. As a result, our long-term expectations call for mid-single-digit growth for the Kate Spade segment on average over the next 10 years.
The Coach segment (more than two thirds of sales) reported full-year global comparable sales growth of 1% (versus our expectation of 1.8%), while expanding adjusted gross margin 10 basis points (69.5% of sales). We are encouraged by the strength of the gross margin as we see it as a byproduct of the intangible brand assets that underpin our narrow-moat rating for the firm. And we posit this edge should prove sustainable, as our long-term forecast expects Coach’s segment gross margin to improve to 70% by 2020, from 69.2% on average over the past three years.
Tapestry is a lifestyle company. The company's primary product offerings, manufactured by third-party suppliers, include women's and men's bags, small leather goods, footwear, ready-to-wear including outerwear, watches, weekend and travel accessories, scarves, eyewear, fragrance, jewelry and other lifestyle products. The company has three reportable segments: Coach, which includes sales of Coach brand products to customers through Coach operated stores; Kate Spade, which includes sales primarily of Kate Spade New York brand products to customers through Kate Spade operated stores; and Stuart Weitzman, which includes sales of Stuart Weitzman brand products primarily through Stuart Weitzman operated stores.
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