Kate Spade Is An Interesting Turnaround Story, But Tapestry Is Now A Sitting Duck

Growing international retail is a strategic imperative for all the brands, but it doesn’t seem the like only one. When Tapestry acquired Kate Spade, it changed the management team by bringing Anna Baskt, from Michael Kors, to be CEO, and Nicola Glass, also former MK, to be Creative Director. That means Tapestry wants to have a saying in the direction of each brand. I am not saying that they want to influence the artistic direction, it’s more about the price positioning.

Again, that is all about applying Coach turnaround playbook to the other brands. In KS’s case, we are talking about reigning in years of sales driven by discounting. That, in part, explains the -16% sales comps. If we look at the company’s total sales, the picture is less grim, with a 6% decline. These are the same symptoms that Coach experienced during its turnaround.

Final Thoughts

Right now, all eyes are on Kate Spade’s performance. I’ve seen this horror movie before. Wall Street is going nuts about high-teens comps sales declines, which are part of the pricing cure. If we look at non-GAAP 20Q1 operating earnings (excluding some impairments), we’ll see that Kate Spade still has around 6.3% operating margin. A higher weight of full-price (plus international store expansion) is partially offsetting the US sales decline. In due time, the US will likely stabilize, the international expansion, and better pricing-mix will drive sales growth and margin improvement.

However, the current stock price at around ten times forward earnings offers some room for surprises. The fact that the company is trading around 2.5 times its book value, and 1.3 its sales, against the 5-years averages of 3.7 and 2.2, respectively, makes it a sitting duck, in my opinion. One might argue that this is the best time for other conglomerates to try to swallow the company. And, the same rationale is valid for Capri.

Therefore, a new set back in one of the brands might result in an outsider trying to buy the company. A couple of things might happen. As mentioned before, an established conglomerate coming to the scene, trying to buy the company. Another possibility is one activist investor buying a stake in the company to force a break-up. Or even a merger with other companies in the same situation. Capri comes to mind.

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Disclosure: I am/we are long TPR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company ...

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