Tapestry Inc (TPR, Financial), the parent company of renowned fashion and accessory brands Coach, Kate Spade, and Stuart Weitzman, recently experienced a daily gain of 1.45% and an Earnings Per Share (EPS) of 3.68. However, over the last three months, the company's stock has seen a decline of 19.75%. The question that arises here is whether the stock is modestly undervalued, as suggested by its GF Value. This analysis aims to provide an answer to this question while offering a comprehensive evaluation of Tapestry's financial health and prospects.
Company Overview
Tapestry Inc (TPR, Financial) operates approximately 1,400 company-operated stores, wholesale channels, and e-commerce platforms across North America, Europe, and Asia. The company is best known for its affordable luxury leather products under the Coach brand, which contributed to 74% of its fiscal 2022 sales. Kate Spade, known for its colorful patterns and graphics, made up 22% of the sales. Stuart Weitzman, Tapestry's smallest brand, generates nearly all its revenue from women's footwear. Women's handbags and accessories produced 69% of Tapestry's sales in fiscal 2022.
The stock is currently priced at $35.1 per share, with a market cap of $8.10 billion. When compared with the GF Value of $45.27, it suggests that the stock might be modestly undervalued.
Understanding GF Value
The GF Value is a unique valuation model that considers historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. This calculation helps derive the intrinsic value of a stock, represented by the GF Value Line. If a stock's price significantly deviates above the GF Value Line, it is deemed overvalued, indicating a likely poor future return. Conversely, if it is significantly below the GF Value Line, the stock is likely undervalued, suggesting a potentially higher future return.
According to this model, Tapestry (TPR, Financial) appears to be modestly undervalued. Hence, the long-term return of its stock is likely to be higher than its business growth.
Financial Strength
Investing in companies with poor financial strength can lead to a higher risk of permanent capital loss. Therefore, it is crucial to evaluate a company's financial strength before deciding to invest in its stock. Tapestry's cash-to-debt ratio stands at 0.2, which is worse than 69.17% of companies in the Retail - Cyclical industry. Nonetheless, Tapestry's overall financial strength is ranked 6 out of 10 by GuruFocus, indicating a fair financial health.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. Tapestry has been profitable in 9 of the past 10 years, with an operating margin of 17.21%, ranking it better than 91.04% of companies in the Retail - Cyclical industry. This high profitability, combined with the 3-year average annual revenue growth of 6.1% and EBITDA growth rate of 9%, ranks Tapestry's growth better than 52.77% of companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) with its weighted average cost of capital (WACC) provides another perspective on profitability. The ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. In the case of Tapestry, the ROIC stands at 17.28, significantly higher than the WACC of 8.27.
Conclusion
In conclusion, Tapestry (TPR, Financial) stock appears to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 52.77% of companies in the Retail - Cyclical industry. To learn more about Tapestry stock, you can check out its 30-Year Financials here.
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