Tapestry Stock Upgrade by Jefferies

Investing.com — Tapestry (NYSE:TPR) stock received an upgrade by Jefferies analysts, from Hold to Buy, due to the company's potential for sales growth, margin expansion, and a significant share buyback plan. The investment firm raised its price target on the stock from $50 to $80.

Stock Performance

Tapestry's shares rose more than 2% after Thursday's market open.

Earnings Outlook

Jefferies forecasts Tapestry's earnings per share (EPS) to grow at a low double-digit percentage compound annual growth rate (CAGR) and suggests that the stock could reach $90 or higher.

Market Focus Shift

The upgrade follows the completion of the Capri Holdings (NYSE:CPRI) deal, which has shifted market attention to Tapestry's improving sales and expanding margins.

Brand Performance

Tapestry's primary brand, Coach, which accounts for approximately 75% of sales and over 90% of profit, is expected to drive results with its sustained brand appeal and potential recovery in China. Jefferies projects a 2-3% growth in Tapestry's overall sales, supported by Coach's product momentum and average unit retail (AUR) gains.

Margin Expectations

In addition to sales growth, Tapestry's gross margin (GM) is anticipated to benefit from full-price sell-through and supply chain efficiencies. Management is expected to leverage selling, general, and administrative expenses (SG&A) in the second half of the year to offset any potential slowdown in gross margin benefits.

Analysts stated that "SG&A leverage in 2H should help offset any GM% slowdown such as lower freight benefits, while the company could flex on marketing, which has grown to 9% of sales." They see a 6-7% EBIT growth over the next two years as the base case.

Share Repurchase Program

Jefferies also highlights the impact of Tapestry's $2 billion accelerated share repurchase (ASR) program, viewed as a sign of management's confidence in the stock, initially announced when shares were priced at $56. This buyback is expected to contribute to an EPS growth above current guidance, with Jefferies estimating next year's EPS at $5.51, 9% above the consensus of $5.07.

Quarterly Projections

For the sales growth outlook, Jefferies predicts an acceleration from flat in the first quarter to an increase of 2.5% in the fourth quarter. This projection is driven by continued AUR gains, product momentum, and a modest recovery in China.

The analysts noted these improvements are led by Coach, with no major changes assumed for Tapestry's other brands, Kate Spade and Stuart Weitzman, which could offer additional upside.

Coach’s Growth Strategy

Tapestry management forecasts Coach’s growth in AUR to continue at a low-to-mid single-digit percentage rate. Jefferies points out this growth is not solely due to price increases but also from strategic initiatives such as product quality enhancements, SKU rationalization, reduced discounting, and an increasing direct-to-consumer (DTC) mix that attracts long-term value customers and reduces department store exposure.

Jefferies reported, "The company is also adding popular bags at full-price into the outlet, highlighting consumers' preference for newness over price."

Wholesale Exposure

The firm also notes Tapestry's limited wholesale exposure, which is around 10%, as a favorable factor in the current market. A higher DTC ratio allows for better pricing control, data analytics, consumer engagement, and sales predictability. Furthermore, DTC has been crucial in attracting new, younger customers who tend to transact at higher AURs.