Luxury apparel and lifestyle products manufacturer Tapestry, Inc. (TPR) has gained 185.7% over the past nine months owing to rising demand for retail consumer products globally. The company’s solid e-commerce presence and international supply channels have contributed to its growth over the past couple of months as global economies have begun to exhibit signs of recovery from the pandemic-driven recession.

TPR has gained 183.8% over the past six months, and 35.6% year-to-date.

However, rising competition from recovering players in the lifestyle products space could mar TPR’s growth in the future.

Here’s what we think could influence TPR’s performance in the near term:

Rebounding Economy to Boost Demand

The ongoing global COVID-19 vaccination programs, governmental  pandemic  relief packages, and Fed’s dovish monetary stance are expected to be among the key driving factors behind the U.S.’ economic recovery. The U.S. House of Representatives approved President Biden’s $1.9 trillion bailout package last week. It  provides direct fiscal checks of up to $1400. The anticipated package, which still requires passage in the U.S. Senate, combined with lower than expected unemployment claims filed last week, suggests  a fast-paced U.S. macroeconomic recovery may be in the offing. The optimistic economic outlook has led to a recent spike in U.S. Treasury yields.

Though rising per capita income indicates higher aggregate spending levels, the increasing adoption of remote lifestyles is expected to be a major headwind in  TPR’s growth prospects. With more people spending time indoors, demand for luxury items, particularly handbags and day-to-day casual accessories, are expected to decline substantially in the long run.

Weak Financials

TPR’s revenues have declined 22.8% year-over-year, while its EPS fell 175.6% year-over-year. In terms of long-term performance, TPR’s revenues have declined at a CAGR of 3.7% over the last three years, while its EBIT slumped 15.4% over this period. However, the company’s total assets and levered free cash flow margins have improved at a CAGR of 2.9% and 4.7%, respectively, over the past three years.

TPR’s trailing 12-month gross profit margin of 69.57% is106.4% higher than the industry average  33.71%. However, its trailing 12-month net income margin, ROE and ROTC values are negative.

Premium Valuation

In terms of forward price/sales, TPR is currently trading at 2.15x, 66.1% higher than the industry average  1.30x. Its forward ev/sales and price/book ratios of 2.55 and 3.86, respectively, are significantly higher than their  industry averages.

However, in terms of non-GAAP forward PEG, TPR is currently trading at 0.89x, 42.9% lower than the industry average  1.57x.

Consensus Ratings and Price Target Reflect Uncertainty

TPR is currently trading slightly below its 52-week high of $42.92; its  closed Friday’s trading session at $42.14. Analysts expect the stock to hit $42.75 soon, indicating a marginal upside.

TPR has an average broker rating of 1.64, indicating favorable analyst sentiment. However, of 29 Wall Street analysts that rated the stock, only four  rated it Strong Buy while 12 rated it Hold.

POWR Ratings Indicate Mixed Prospects

TPR has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.

It has a C grade  for Growth, and Value. This is justified, given its unimpressive financial performance and premium valuation.

The POWR Ratings system reviews TPR from eight different dimensions and we only shared a few of those above. So, if you want to know how it scores for Quality, Stability, Momentum, and Sentiment Grade, then get all the TPR ratings here.

TPR is ranked #25 of 67 stocks in the B-rated Fashion & Luxury industry.

There are 21 stocks in the Fashion & Luxury industry with an overall rating of A or B. Click here to see them.

Bottom Line

TPR has been on a growth streak since Credit Suisse upgraded the stock’s rating from Neutral to Outperform nearly a week ago. Rising investor optimism has failed to justify the stock’s  bleak fundamentals of the stock, however, making it relatively overvalued versus its peers. Moreover, with rising inflation concerns given the Fed’s extensive quantitative easing policies, we think it advisable to wait for a better entry point before investing in TPR.

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TPR shares were trading at $41.68 per share on Monday afternoon, down $0.46 (-1.09%). Year-to-date, TPR has gained 34.11%, versus a 4.36% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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