Weekly Equity Idea Highlight - 2019 01 02
TPR is currently trading at a 13.6x Uniform P/E (Fwd V/E'), at the low end of historical levels ex-2008-2010. At these levels, the market is pricing in expectations for Uniform ROA to decline from 19% in FY2018 to all-time low levels of 16% by FY2023 accompanied by modest 3% Uniform Asset growth. These expectations imply that the market believes the firm's brand value and competitive advantages will continue to decay, and it will grow at below peer average levels.However, analyst forecasts show that the market may be too pessimistic, as sell-side consensus estimates reflect expectations for ROA′ to recover going forward, not decline. Analysts recognize that the company has strategically adjusted their strategy for Coach and also has begun pursuing a strategy following in the likes of
LVMH, adding new brands through strategic acquisitions to gain market share and better align strategies. Analysts forecast similar 3% growth going forward, but with ROA' rebounding to 24% in FY2019, and 27% in FY2020.
Tapestry, formerly Coach, went through a challenging period from FY2012-2015, as the company's saturation of the US luxury market, and in particular an outdated aesthetic and willingness to discount in the outlet market led to significant loss of brand strength, pricing power, and saw ROA' fade from 40% levels to 20% levels.
Towards the tail end of that downturn, the company had a management change, with Victor Luis taking over in January 2014, and re-focusing the company. This began with a strategy of repositioning the brand, but has subsequently continued with the company focusing on following LVMH's strategy of buying up premium brands, sometimes at advantageous prices, a strategy that CEO Luis saw first hand in his time at LVMH. The company bought Stuart Weitzman in 2015, and Kate Spade & Company (Kate Spade, Jack Spade, Liz Claiborne, etc) in 2017, to begin to build a broader bench of brands. The goal of the strategy is to operate the brands, and extract value from both a lower cost centralized approach to some parts of operations, and to help the businesses improve on their overall strategy. As forecasts for ROA' to recover, the strategy is already succeeding.
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.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
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