Jefferies lifts Tapestry to Buy on better sales growth, gross margin outlook

Investing.com -- Tapestry (NYSE:TPR) stock received an upgrade by Jefferies analysts, from Hold to Buy, based on the company’s potential for sales growth, margin expansion, and a significant share buyback plan. The investment firm also hiked its price target on the stock from $50 to $80. 

The company's shares rose more than 2% after Thursday market open. 

Jefferies forecasts Tapestry's earnings per share (EPS) to grow at a low double-digit percentage compound annual growth rate (CAGR) and suggests that the stock could reach $90 or higher.

The upgrade follows the completion of the Capri Holdings (NYSE:CPRI) deal, which has shifted market focus to Tapestry's improving sales and expanding margins.

Tapestry's primary brand, Coach , which accounts for approximately 75% of sales and over 90% of profit, is expected to drive results with its sustained brand appeal and potential recovery in China. Jefferies projects a 2-3% growth in Tapestry's overall sales, supported by Coach's product momentum and average unit retail (AUR) gains.

In addition to sales growth, Tapestry's gross margin (GM) is anticipated to benefit from full-price sell-through and supply chain efficiencies. The company's management is expected to leverage selling, general, and administrative expenses (SG&A) in the second half of the year to offset any potential slowdown in gross margin benefits.

“SG&A leverage in 2H should help offset any GM% slowdown such as lower freight benefit, while co. could flex on marketing, which has grown to 9% of sales,” analysts said. “Overall, we see 6-7% EBIT growth the next two years as our base case.”

Jefferies also highlights the impact of Tapestry's $2 billion accelerated share repurchase (ASR) program, which is seen as a sign of management's confidence in the stock, initially announced when shares were priced at $56. This buyback is expected to contribute to an EPS growth above the current guidance, with Jefferies estimating next year's EPS at $5.51, which is 9% above the consensus of $5.07.

For the sales growth outlook, Jefferies expects an acceleration from flat in the first quarter to an increase of 2.5% in the fourth quarter. This projection is driven by continued AUR gains, product momentum, and a modest recovery in China.

Analysts said these improvements are led by Coach, without major changes assumed for Tapestry's other brands, Kate Spade and Stuart Weitzman, which could offer additional upside.

Tapestry management forecasts Coach’s growth in AUR will continue at a low-to-mid single-digit percentage rate. Jefferies points out that this growth is not solely due to price increases, but also to strategic initiatives such as product quality enhancements, SKU rationalization, reduced discounting, and a growing direct-to-consumer (DTC) mix, which attracts long-term value customers and reduces department store exposure.

“The co. is also adding popular bags at full-price into outlet, highlighting consumers' preference for newness over price,” Jefferies said in the report.

The firm also highlights Tapestry's limited wholesale exposure, which is approximately 10%, as a favorable factor in the current market. A higher DTC ratio allows for better pricing control, data analytics, consumer engagement, and sales predictability. Moreover, DTC has been instrumental in attracting new, younger customers who tend to transact at higher AURs.