While rates have a direct impact on low income consumers first, as interest rates have remained high, relative to recent history, they have impacted high end consumers as well. But, with the rate and economic cycles on the mend, these consumers are historically the first to put discretionary funds back to work, and this could be a great time to get a bargain luxury goods stock.
I prefer a company that can perform, and grow, in a challenging climate as well as a thriving economy, and Tapestry (TPR – Get Rating), the owner of Coach and Kate Spade, has continued to grow despite general economic slowing caused by high rates.
And, assuming the economy strengthens, with lower inflation, in 2024, TPR will be in a much expanded position to take advantage of the turn. In August TPR announced the acquisition of Capri Holdings (CPRI – Get Rating), owner of the iconic Versace, Jimmy Choo, and Michael Kors brands. Tapestry expects the deal, valued at $8.5 billion, to close in 2024. This would add approximately $12 billion annually to TPR’s current revenue.
The deal is expected to achieve over $200 million in synergistic cost savings over the next few years. The combination gives Tapestry entry into markets it does not currently hold a strong position in, notably footwear and ready-to-wear clothing.
Speaking of which, in its recent quarter, CEO Joanne Crevoiserat, reported, “[Tapestry] achieved record first quarter revenue and EPS as we continued to successfully advance our strategic growth agenda…we drove revenue gains at constant currency, significant gross margin expansion, and high-teens adjusted EPS growth.” The company currently has gross margins of over 70%, and a return on equity (ROE) topping 40%.
Despite being a consumer cyclical company, TPR pays a 4.55% dividend, has strong and consistent cash flow, and trades at just 7.7x earnings and 6.8x projected earnings.
With an overall B rating in our POWR Ratings, Tapestry receives its highest marks in the Quality and Value components, not surprising given the recent pull back in the stock. It ranks in the top 97% of the stocks we track on the Value Component.
Trading at just over $30, the stock is significantly below recent highs in the mid-$40s, and could be offering investors a chance to get in at discounted levels. Tapestry stock is one place where “luxury” can be bought on the cheap right now, before a turn in the economic cycle drives prices higher once more.
