On Monday, Evercore ISI upgraded Tapestry Inc. (NYSE:TPR) from In Line to Outperform, while also raising its price target on the company's stock to $50 from the previous $30. This optimistic revision is grounded in several key factors that suggest a more favorable outlook for the luxury fashion holding company.
The primary reason for the upgrade is the acceleration of Tapestry's core brand, Coach , in North America.
"Despite a declining US handbags category pressuring results in recent quarters, we
think Coach N. America accelerated by enough in F2Q to raise TPR’s full year ’24 guide," said the analysts.
Additionally, the firm believes that Tapestry's guidance for China might be conservative and has increased its FY24E earnings per share (EPS) estimate to $4.19 from $4.14, surpassing the consensus of $4.13. The FY25E EPS forecast has also been adjusted to $4.60 from $4.48, aligning with the street's prediction.
Another factor contributing to the upgraded status is the condition of brands under Capri Holdings Limited (NYSE:CPRI). Despite concerns regarding CPRI's brand health, the consensus EBIT has been reduced by 40% since their initial FY24 guidance, indicating that market apprehensions may have already been factored into the stock's valuation.
Also, concerns regarding Tapestry's balance sheet have been addressed. Initially, the firm's $8 billion in pro-forma debt was a point of contention. However, Tapestry is expected to generate at least $1.5 billion in pro-forma free cash flow (FCF) per year, even under conservative assumptions. This robust cash flow is projected to reduce the leverage ratio by 0.8-0.9x annually, positioning the leverage below 2.0x within three years. The potential for business synergies and an improving interest rate environment also contribute to a more positive financial outlook for Tapestry.
The combined effect of these factors underpins Evercore ISI's decision to upgrade Tapestry Inc. and increase its price target, reflecting a more bullish stance on the company's stock performance potential.
InvestingPro Insights
In light of Evercore ISI's upgrade of Tapestry Inc. (NYSE:TPR) to Outperform, it's worth noting a few key metrics and insights from InvestingPro that may further support this optimistic outlook. Tapestry's market capitalization stands at a solid $9.28 billion, showcasing its significant presence in the luxury fashion market. Additionally, the company boasts an attractive P/E ratio of 10.08, which suggests that the stock may be undervalued given its earnings potential. This aligns with one of the InvestingPro Tips, which highlights that Tapestry is trading at a low P/E ratio relative to near-term earnings growth.
The company's gross profit margin for the last twelve months as of Q1 2024 is an impressive 71.36%, indicative of strong operational efficiency and control over costs. This is further supported by another InvestingPro Tip, which commends Tapestry's impressive gross profit margins. Investors may also be reassured by the company's dividend history; Tapestry has not only raised its dividend for 3 consecutive years but has also maintained dividend payments for 15 consecutive years, reflecting a commitment to returning value to shareholders.
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