Tapestry, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Tapestry Inc. is a global house of brands that includes Coach, Kate Spade, and Stuart Weitzman, all known for their handbags, accessories, and apparel. The company is primarily a retailer with global sales network.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Tapestry, Inc. is a global fashion house, operating through three iconic brands: Coach, Kate Spade, and Stuart Weitzman. While each brand has its own distinct identity and target customer, they share a common goal of creating value through desirable, well-crafted products. Tapestry manages its own retail stores (both physical and online), wholesale distribution, and also uses licensed partners to make its products available.

Revenue Distribution: The company’s revenue is divided into three segments: Coach, Kate Spade, and Stuart Weitzman, with each brand operating across three different segments:

Retail: Revenue generated through the sale of goods from the brands’ own physical stores and e-commerce platforms.
Wholesale: Revenue generated through sales to a variety of third-party retailers, such as department stores and e-commerce retailers.
Licensing: Revenue derived from licensing the brands to other parties.

Industry Trends: The fashion retail industry is currently experiencing a few notable trends.

Evolving Consumer Preferences: Consumers are increasingly demanding more unique styles, putting pressures on brands to offer unique products, and also sustainability.
Growth of E-commerce: The importance of online channels are steadily increasing in the fashion world, as the share of sales through online sources continues to grow.
Supply Chain Issues: Supply chains and logistics are still volatile and can be unpredictable, which increases the costs and time it takes for inventory to reach customers.
Global Expansion: Companies are looking toward markets outside of Europe and North America to find growth opportunities.

Competitive Landscape: The fashion retail industry is fiercely competitive, with many brands vying for the same customers. Some well known brands include Louis Vuitton, Gucci, Chanel, and Hermes.

Differentiation is key for any successful brand, as companies need to offer differentiated products and have brand recognition.
Companies have to put capital behind marketing, distribution, and sourcing.
Switching costs are relatively low among brands, and consumers have multiple options.
New brands are constantly being created and released, making it very difficult for current brands to retain all of the growth.

Tapestry’s Differentiators:

Brand Recognition: Tapestry owns three very recognizable brands that have a diverse audience and customer base.
Omnichannel Presence: The company has a well-established network of direct and wholesale channels, allowing it to service customers in many ways.
Geographical reach: Tapestry has a global footprint, and so can gain access to a diverse range of customers and economies.
Focus on Leather Products: Tapestry is especially strong in leather products, like handbags, shoes, wallets, and other accessories, which allow it to capture an important segment of the market.

Moat Analysis: 2 / 5 While Tapestry benefits from its prominent brands, they do not fully meet the criteria of an economic moat because of some factors:

Intangible Assets: While brand recognition is present with the company’s brands, it is hard to say that it is enough to sustain long-term superior margins because of the low switching costs and the constant threat of new competitors and trends. Intangibles are present and create slight customer lock-in with higher brand value for the price, but the value is limited by the ease of copying the products.
Switching Costs: There are little to no switching costs. Brands are easily swapped in favor of others, and consumers buy on aesthetics.
Network Economics: There is no real network effect. A larger network of stores does not provide increased value for a business like Tapestry.
Cost Advantage: Although some may see a potential cost advantage through large scale manufacturing and distribution, competition in the apparel industry is brutal, and this would be too easily copied to be a real economic moat.

While the company’s brands have value that they are able to extract from customers, the switching costs are low, and the barriers to entry to new brands that do similar things are also low. They may be able to create a mini-monopoly in some areas, but its unlikely for the moat to be truly durable. As such, a moat rating of 2 is justified.

Risks to the Moat and Business Resilience

Fashion Volatility: Consumer preferences in fashion are very fickle and change quickly, and this could leave Tapestry exposed. Fashion trends can change quickly and suddenly, and Tapestry could be left with a portfolio of outdated brands.
Counterfeit Products: Because of brand recognition, Tapestry is more susceptible to counterfeit products.
Economic Downturns: Demand for luxury goods is more vulnerable to economic recessions and financial crises. During bad times people tend to buy far fewer luxury goods.
Competitive pressures: Intense competition can easily hurt margins and lower the amount of pricing power that brands can exert.
Supply Chain Disruptions: Given the company’s complex global supply chains, disruptions to logistics can impact profitability and revenue.
Management Missteps: Changes or missteps in management direction can make the company fail to meet long term goals.

Financial Analysis Revenues and Profitability

Tapestry’s financial performance over the last few years has seen both periods of growth and decline.

Revenue Volatility: Although the company has seen periods of growth, there have been periods with very limited to no revenue growth. Revenue was negatively impacted during COVID-19 and the financial crisis of 2007-2008.
Margin Pressure: The company faces fierce competition across the fashion and accessories markets, which results in margins that are less stable. Also, it can be hard to pass through higher costs to customers because of the very price-sensitive nature of the industry.
Acquisition Impact: The company has made numerous acquisitions of brands, and so their financials may be less stable because of acquisition costs and restructuring.
2024 10-Q: In their most recent 10-Q report, released on Nov 2, 2023, Tapestry’s net sales increased by 1% compared to the same quarter last year. Net sales for the Coach brand grew by 1% in North America, and 4% in Greater China, and decreased by 2% in International. Kate Spade’s sales increased by 6% in North America, decreased by 14% in Greater China, and by 2% in international. Stuart Weitzman’s sales decreased 12% in North America and increased 3% in the international markets. Tapestry has a pretty diverse revenue stream, and they are working on improving their sales even with difficulties.

Balance Sheet Health: 3 / 5

Debt Levels: The company’s debt load is a factor in its financial health. In recent years, the company has utilized debt for numerous acquisitions, and also the operating leases from its retail outlets are categorized as debt. The latest 10-Q showed that total debt is at about $4.67 billion.
Liquidity: Tapestry usually maintains large amounts of cash and cash equivalents that provide enough to cover short term expenses. In its latest 10-Q report, it had about $833 million of cash and cash equivalents, suggesting that their cash flow situation is acceptable and not dire.
Tangible Assets: The company has a fair amount of tangible assets, such as stores and manufacturing equipment that add a degree of stability, but still are subject to write downs as fashion preferences change.
Stock Repurchase Program: They have recently renewed a stock repurchase program, with a plan to buyback $700 million in stock, which could provide value for shareholders in the future.
Goodwill: The company has quite a large amount of goodwill, which implies that the company is likely overpaying for acquisitions. As long as these acquisitions do not turn out to be bad, these charges should be fine, but still need to be monitored.
Their current ratio (current assets divided by current liabilities) has been fairly stable over the last few years, often around 1.75, indicating that the company has enough short term assets to cover short term debts. While the company’s balance sheet is not in poor shape, it could be improved. This is why we rate it a 3 / 5.

Understandability Rating: 2 / 5 Tapestry’s business is relatively straightforward to understand, but with some complexities:

Straightforward Business Model: At the core, the business is simple: buying products, adding their branding and design elements, and selling to customers at a profit.
Global Supply Chains: The company has a vast network of retail locations, production, and supply chains, which makes a complete understanding of the company more difficult.
Brand Complexity: The company is based around 3 separate brands with different target consumers.
Financials: The company has fairly complex financials because they include financial derivatives, non-consolidated subsidiaries, and other items.

Putting it together, a 2 / 5 rating seems appropriate.

Recent Issues A notable recent development is that Tapestry acquired Capri Holdings. There is a large amount of skepticism about this acquisition and whether or not it will yield enough benefits to justify its enormous price tag of $8.5 billion. In their most recent earnings call, the executives have said that they expect synergies of about $100 million in the first year to help justify the decision, and are emphasizing a long-term goal of achieving a combined revenue of $15 billion.