Our TPR call is the highest conviction name on our Best Ideas List – it's one where we should see multi year earnings upside as licenses are converted/renegotiated a la RL in 2003-2006 in addition to simply ‘running KATE better. That latter part is true, but it’s a weak consensus view. This license angle is one of the most powerful occurrences for a retailer entering a different stage of maturity. It’s growing consolidated revenue at an accelerated rate, setting up for better organic growth as it both owns and controls its own content, and deploys disproportionately low levels of capital to get to the income statement re-acceleration. There’s your 1,000bp RNOA acceleration and re-rating to a multiple that looks way too high today, until the sell side upgrades it at $80 ($55 today). I can build to a triple digit stock over 2-years.
Though it’s a powerful TAIL call for us, I think that TPR is set up to beat the quarter. We’re 8% ahead ($0.53 vs the Street at $0.50). TPR has not anniversaried KATE yet, so model is still prone to some unknowns, but this time LY Coach was closing wholesale doors to improve the amount of marked down product. The Street has come up since last quarter narrowing the gap with our above consensus numbers), but it’s still low. I think we’re conservative on GM, so there could be upside from our number.
The risk, as always is down traffic in outlets – though new apparel offering and acceleration in footwear likely to offset. Ditto for accelerating Int’l growth. Keep in mind that less than 5% of US sales come from wholesale, so door closures have already impacted the company (unlike the RL’s and PVH’s of the world). The core Coach brand is at the tail end of a bottoming process, which will likely be the focus, but I think that KATE integration is ahead of plan – especially now that there is a new CEO of the brand and Victor Luis can now return to his day job of running the portfolio instead of a recently acquired component.
