I think that sentiment around the TPR story will change dramatically over the course of this fiscal year, and would without question buy the stock today at $40. Though this was a respectable quarter by any means – leveraging a 7% top line into 16% EPS growth – I think that it will become apparent with each passing quarter that this business model is inflecting today, and will deliver consistently higher revenue, margins and cash flow off a disproportionately lower capital base. The end result will be an accelerating earnings/return algorithm alongside the Street’s realization that there’s $5 in TAIL EPS power – which in hindsight will show that buying the name at $40 equals a 15% FCF yield. It’s difficult to find this kind of setup elsewhere at this valuation, especially with such defendable margin of safety on the downside. All in, nearly everything we saw in the quarter was spot-on with our recent Black Book outlining why this is one of the most attractive names in retail today. TPR | Battleground = Opportunity LINK
Biolsi’s take on the quarter…
Print Quick Take
- 7% EPS beat at $.48 vs. $.45 and HE’s $.49 est. Took up the bottom end of guidance range by $.05 to $2.75-2.80.
- Gross margins expanded 160bps driven by a 250bps expansion at the Coach brand and 270bps expansion at Kate Spade.
- SG&A grew 10.3% due to regional license takebacks and distribution growth.
- EBIT margins were flat.
- Inventory decreased 4%.
Revenue layers
Management spoke to the multitude of growth initiatives for Coach which are the layers of growth in our black book.
- E-commerce led growth with notable strength in the full price website.
- Men’s continued to comp across channels and geographies led by outerwear, ready to wear, footwear and accessories.
- Signature performed well in women’s, men’s, and across channels as the number of products was expanded.
- The launch of the Edit collection in outlets raised the AUR.
- Wholesale growth was driven by footwear (a recent license takeback).
- Handbag customization will be expanded from 110 stores to 150 stores by year end. The customization feature has become a notable traffic driver to the brick and mortar stores.
China growth plans unchanged
- While the market is very concerned about the growth in China from a slowing economy as well as a potential pullback in spending abroad by aggregators, Tapestry sees nothing to alter its plans.
- The Chinese consumer represents a mid to high teens percent of the company’s overall sales mix. Spend by Chinese consumers globally was positive in the quarter. Management noted that there was a pickup in sales in other Asian countries and away from Japan as some Chinese tourist flows changed.
Coach – numerous initiatives behind same store gross profit dollar growth
- Coach grew SSS by 4% with the US and International growing at similar rates. China and Japan was positive while Europe was slightly negative. Traffic to the stores was positive globally. Men’s continued to comp led by outerwear.
- Wholesale is being driven by footwear, a license takeback this year. International wholesale declined due to the regional license takebacks over the past year. This will be the first holiday in many years that Signature will be available in its retail channel. Coach’s gross margins +250bps benefited from improved product costs and lapping a lower margin sales mix.
Kate Spade – ramping for growth
- Kate Spade comped down 5% due to a combination of a pull forward in demand from the founder’s passing last quarter, a pullback in promotions, and quite frankly – likely a stale assortment as it preps for the redesign that launches next quarter.
- Management has planned on a return to positive comps in the 2H behind the new creative direction and product flows.
- Kate Spade’s gross margins expanded 270bps driven by cost savings synergies as the brand migrated to Tapestry’s supply chain network.
- New doors are exceeding plan which has given the green light to a return to a faster pace of store growth. Kate Spade will open 40-50 net new stores this year in addition to the 21 stores acquired in license takebacks. We expect the low double digit store growth rate combined with a +MSD% comp will drive 20%+ bottom line growth in the 2H.
Stuart Weitzman – worst behind us
- The brand was a $.05 headwind YY to overall results. Sales were only down 1%, but margins contracted significantly due to the manufacturing problems disclosed last quarter. Management said the production issues are now caught up. Stuart Weitzman expects a return to profitable growth in Q2.
- Since the holiday quarter is the most profitable quarter for Stuart Weitzman there is a lot of range in that guidance which is why I revised my estimate lower for the brand in Q2. The 30 net new locations planned for Stuart Weitzman represent 30% overall growth and nearly 100% international growth.
- Investors are probably overestimating how long the brand will take to contribute to Tapestry’s growth after the production problems which penalized the company’s earnings multiple more than it did earnings.
Next year investors will be surprised by the cash flow
- Tapestry has now deployed the first phase of ERP implementation. Management has not discussed the systems upgrades much, but its completion this year will cap the peak in capex spend. Next year we estimate Tapestry’s FCF yield will be 12% which will lead to much more discussion about what the company may acquire next.
Guidance
- Management largely kept guidance the same, but raised the low end of the EPS range by $.05. We were expecting no change this early in the year, but still expect the year to finish at $3.00 vs. consensus of $2.77.
Model changes
- Very little as Q1 was only a penny off my estimate. I lowered my Stuart Weitzman Q2 EBIT margins and raised my Kate Spade Q2 EBIT margins.
