You might not know the name Tapestry (TPR -0.47%), but you may know its brands, including Coach, Kate Spade, and Stuart Weitzman. This luxury goods stock has held up relatively well in 2022 with a decline of 6% year to date versus a drop of 18% and 31%, respectively, for the S&P 500 and Nasdaq Composite. Here's why the company looks well-positioned to provide investors with solid returns as we round the corner into 2023.
Tapestry keeps chugging along
For its fiscal 2023's first quarter (ended Oct. 1), Tapestry reported record revenue of $1.5 billion. The company shrugged off concerns about inflation and China's lockdowns and managed to grow revenue 5% year over year on a constant currency basis. International sales grew by 11% year over year on a constant currency basis. Earnings per share also grew 8% on a constant currency basis.
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Tapestry has a large presence in China (deriving 15% of revenue there), and this market has been a challenge because of China's "Zero COVID" policy that has led to a series of lockdowns. North America, where the company derives the bulk of its revenue, was also sluggish due to weaker consumer spending. However, Tapestry was able to combat these challenges in China and North America with significant growth in Europe (where revenue grew 24%) and elsewhere in Asia.
Japan is a key market for Tapestry, and the company increased revenue 16% there year over year. Japan is a large and growing market for luxury goods. According to data from Statista, this is a $26 billion market in 2022 and it is expected to grow at a compound annual rate of just over 7% during the next five years, so it is encouraging to see Tapestry capturing some of this growth.
Revenue in the rest of Asia exploded, skyrocketing to incredible 135% year-over-year growth, which the company attributes to increased in-store traffic and moving beyond last year's COVID-19 headwinds. While China is an obstacle right now, Tapestry is confident that it has a strong brand position there and that this market still represents a key long-term opportunity for the company. When China eventually returns to a normal economic environment, it should shift from a headwind to a tailwind for Tapestry.
Tapestry's gain of 1.4 million new customers in North America during the quarter was another highlight. While revenue in North America only grew 1% year over year, perhaps this increase in its customer base will help to sew the seeds for future growth.
Discount rack valuation
The shares look appealing on a valuation basis, trading at just under 12 times earnings and under 9 times forward earnings. They also look attractive from a price-to-earnings-growth (PEG) ratio perspective. This metric is used by investors to take a company's earnings growth into account as part of its valuation. In general, investors view a stock trading at a PEG ratio of under 1 as undervalued. Right now, Tapestry sports a PEG ratio of about 0.9, so it looks like a buy based on this metric.
A deluge of shareholder returns
Tapestry is focused on its shareholders. The company plans to return a cool $1 billion to them in 2023 via a combination of dividends and share repurchases, and it says it is on track to do so. This is no small amount for a company with a market capitalization of about $9 billion.
Shares of Tapestry currently yield about 3.2%. The stock paused its dividend in 2020 during the COVID-19 pandemic, but it looks like it is back on track after resuming payments during the second half of 2021. Tapestry recently increased its quarterly payout from $0.25 to $0.30 per share.
During the first quarter, the company allocated about $100 million toward share repurchases, buying back about 3 million shares with an average cost of $33.83. These share repurchases are accretive to shareholders since they were below the stock's current value, reduce the total number of shares outstanding, and increase earnings per share. They can also be seen as a sign that management is confident that its stock is undervalued.
Looking ahead to 2023
With a resilient business that has held up well despite macroeconomic challenges, an attractive valuation, and a compelling combination of shareholder returns, Tapestry looks like the right type of stock to add to your portfolio heading into the new year.
