We’re removing TPR from our Best Ideas Long List and are it adding to our long bench. Last quarter we elevated it to be near the top of our Best Idea list as hate-selling drove the stock to $18.50 – a level at which you got Kate Spade and Stuart Weitzman for free and Coach at a trough valuation. But with a subsequent 50% run in the stock since then and a nail biter quarter we’re left with too many questions and not enough answers about the business model. At $27.50 the name is super cheap – trading at 11x EPS and a 9% FCF Yield, but cheap isn’t enough when growth is not accelerating, and the ‘get Kate for free’ thesis no longer holds true given the change in EV. The Coach brand is performing fine, but if it hiccups just once – whether it be due to cyclical risk, China, or simply by accident, then this whole business model loses its only pillar of support, and this stock becomes a teenager again. KATE is getting better on the margin, but this turnaround will likely take another 2 years until its consistently comping positively. Stuart Weitzman burped again this quarter after showing progress just 13 weeks ago. Its only 7% of the portfolio, but should be performing better. I still like the licensing angle at KATE, as it has 24 licenses that can be repackaged, renegotiated or taken in-house – though TPR is in the fifth inning as it relates to taking in anything of size and we’re still not seeing it in results due to weakness and mis-execution in the acquired companies. The license accretion is in our model, which puts us at $2.55 for the year, and $2.95 in FY2021 – not far enough above consensus for me to look someone in the eye and say this is a Best Idea given the risk profile. We’d revisit the name if it pulls back to the low $20s, or as time simply de-risks the weakness at KATE putting pressure on Coach to be the only horse that drives this P&L.
