On Friday, Evercore ISI adjusted its outlook on Tapestry Inc. (NYSE: NYSE:TPR), increasing the price target to $63.00 from the previous $47.00, while maintaining an Outperform rating on the stock. This revision follows a recent court ruling in favor of the Federal Trade Commission (FTC), granting a preliminary injunction to halt Tapestry's planned acquisition of CPRI. The analyst noted that, despite the likelihood of an appeal process continuing through February, the market is expected to react as though the deal will not proceed.
The potential blockage of the deal by the courts means Tapestry may resume its previously paused share buyback program, which was put on hold in anticipation of the acquisition. The company had planned to halt approximately $700 million per year of share repurchases for fiscal years 2024 and 2025. If the deal is definitively blocked, Tapestry could have up to $1.4 billion in buyback capacity later this year, equivalent to 13.5% of its current market cap.
The analyst projects that if Tapestry initiates a $1 billion share buyback in the second half of the fiscal year, it could increase the earnings per share (EPS) estimate for fiscal year 2025 from $4.50 to $4.65, a 3% rise. Furthermore, adding back another $700 million in repurchases could boost the fiscal year 2026 EPS estimate from $4.90 to $5.55, marking a 13% increase.
The revised price target of $63.00 reflects an 11.4x price-to-earnings (P/E) ratio, based on the updated EPS estimates and accounting for a 13% appreciation in the S&P's multiple since the pre-deal period. This new target compares to Tapestry's current value of approximately $53.00 per share.
Looking beyond the acquisition developments, the analyst anticipates a strong first quarter for Tapestry's brands, Coach and Kate Spade. Despite the pressures faced by luxury brands in China, Coach China is expected to potentially exceed expectations, contributing to an upside for the first-quarter EPS, which is estimated at $0.95, aligning with the consensus. The first-quarter results are set to be reported on November 7.
In other recent news, a U.S. judge has blocked Tapestry Inc.'s planned $8.5 billion acquisition of Capri Holdings (NYSE:CPRI), thwarting a merger that would have combined two leading U.S. handbag manufacturers. The Federal Trade Commission argued the merger would reduce competition, potentially leading to unfair price increases for consumers. The court ruling effectively ends the proposed transaction.
In financial developments, Tapestry recently exceeded earnings estimates, with a fourth-quarter earnings per share (EPS) of $0.92, surpassing the expected $0.88, as reported by TD Cowen. This was attributed to stronger gross margins and a tax benefit. Tapestry's revenue also saw a slight increase of 1% on a constant currency basis, driven by growth in international markets despite a sales decline in North America.
In other recent developments, Tapestry's digital business now accounts for nearly 30% of its total revenue. Furthermore, the company's brands are demonstrating progress, with Coach achieving record annual revenue, Kate Spade focusing on profit growth, and Stuart Weitzman working towards increasing brand relevancy. These are all recent developments in the company's growth strategies.
InvestingPro Insights
Tapestry Inc. (NYSE: TPR) continues to demonstrate financial strength and resilience, as evidenced by recent InvestingPro data. The company's market capitalization stands at $10.35 billion, with a P/E ratio of 12.43, indicating a potentially attractive valuation relative to its earnings. This aligns with the analyst's positive outlook and increased price target.
InvestingPro Tips highlight Tapestry's impressive gross profit margins, which is corroborated by the latest data showing a gross profit margin of 73.29% for the last twelve months. This robust profitability supports the company's ability to potentially resume its share buyback program, as discussed in the article.
Additionally, Tapestry has maintained dividend payments for 16 consecutive years and has raised its dividend for 3 consecutive years. The current dividend yield of 3.15% may appeal to income-focused investors. This consistent dividend history, coupled with the company's strong financial position, suggests that Tapestry could continue to reward shareholders even if the CPRI acquisition does not proceed.
For investors seeking more comprehensive analysis, InvestingPro offers 8 additional tips for Tapestry, providing deeper insights into the company's financial health and market position.
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