Tapestry Financial Outlook Revised to Stable

On Tuesday, Tapestry (NYSE: TPR) Inc.'s financial outlook was revised to stable from negative by S&P Global Ratings. This change follows the termination of its merger agreement with Capri Holdings (NYSE: CPRI) Ltd. due to uncertainties regarding regulatory approval.

Tapestry has redeemed $6.1 billion of notes, funded with cash on hand. S&P Global Ratings confirmed Tapestry's 'BBB' issuer credit rating, expecting the company to maintain leverage in the high-1x area over the next year while providing consistent shareholder returns.

Sales Projections and Financial Status

The stable outlook is based on expectations that Tapestry's sales will remain steady with a slight increase expected in 2026 and beyond. The company is anticipated to sustain strong EBITDA margins compared to its peers. Following the redemption of senior notes, Tapestry's gross funded debt is projected to be around $2.4 billion by the end of its fiscal year in June 2025.

Financial Risk Profile

Tapestry's financial risk profile has been reassessed to modest from intermediate, with expectations of sustained leverage in the high-1x area for fiscal year 2025 and modest improvements thereafter. The company has authorized a $2 billion share repurchase program, planned to be financed through debt issuance. Tapestry currently holds $750 million in term loans and $1 billion in revolving credit, which it aims to refinance soon.

Cash Flow and Expenditures

Despite flat demand anticipated for 2025 and ongoing investments, Tapestry is forecasted to generate over $850 million in free operating cash flow annually for the next two years. The company plans to allocate approximately $200 million annually for capital expenditures to support its operations and store renovations.

Revenue Growth and Profitability

Tapestry's revenue growth is expected to remain stable amid challenging discretionary spending environments. In Q1 of fiscal 2025, revenue was flat compared to the previous year, while Coach, Tapestry's flagship brand, saw a modest sales increase due to direct-to-consumer growth. In contrast, Kate Spade experienced a decline.

Coach's performance, driven by innovative products and digital growth, is anticipated to bolster Tapestry's long-term growth. The company's profitability is expected to improve due to disciplined cost management and higher average unit retail. As of Q1, Tapestry's EBITDA margin improved, reflecting increased ticket sizes and decreased freight costs.

Tapestry aims to attract new customers, especially from younger demographics, while expanding its digital sales channel, contributing to profitability enhancements.

Ratings Outlook

S&P Global Ratings' stable outlook is predicated on Tapestry maintaining strong operating margins relative to peers. A ratings downgrade could occur if leverage approaches 2.5x due to worse-than-expected consumer spending or aggressive financial policies. Conversely, an upgrade could happen if the company sustains leverage at 2.0x or below while balancing shareholder returns with a conservative debt approach.

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