Weekly Equity Idea Highlight - 2019 03 27
TPR, formerly Coach, saw significant operational headwinds due to brand struggles earlier this decade, and the market still believes those issues will continue going forward. However, since the management change in 2014/2015, and the significant turnover of the C-suite, the company has reformulated their strategy in a new way that points to significant reason for optimism. Following in the LVMH model, a strategy that has not been pursued in the US so far, in buying up high quality luxury brands, sometimes at distressed prices, and running a portfolio approach, the company has already acquired Kate Spade and Stuart Weizman, and plans to continue to pursue this strategy. This has already led to significant potential UAFRS -based (Uniform) ROA expansion forecast for the next two years, even as the market is pricing in profitability to collapse.Thanks to the company's smart management of the balance sheet, Credit Cash Flow Primeâ„¢ analysis shows the company has significant liquidity to continue to pursue this strategy, with limited need to access the credit markets in the near-term.
Incentives Dictate Behaviorâ„¢ analysis highlights that management compensation framework is focused on margin improvement, a key area that caused the company's profitability decline previously, because of a loss of pricing power. Management is appropriately aligned to drive growth and seek to improve profitability to succeed where the market does not expect the company to.
Earnings Call Forensicsâ„¢ of the Q2 2019 earnings call does highlight concerns about their efforts to penetrate China and their branding initiatives, which could cause near-term volatility, however this is already reflected in the company's stock price.
Considering low market expectations, management's success in implementing their new portfolio approach, significant liquidity to continue to pursue growth, and correct management alignment, the company appears to be mispriced currently and there appears to be equity upside potential even if there is near-term volatility.
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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