Sitthipong Pengjan
The consumer discretionary sector (XLY) has led the market higher over the past month (ETF performance heatmap below). Retail stocks have generally rebounded, but there is some uncertainty with the back-to-school shopping season underway. Back to school The period is actually the second biggest shopping time of the year (the December holidays are number one). Meanwhile, China is always a question mark. There’s a luxury goods company at the heart of it all: Tapestry (NYSE: TPR).
ETF One-Month Performance Heatmap: Discretionary Strong, China Weak
Finviz
According to Bank of America Global Research, Tapestry is a leading specialty retailer located in an attractive segment of the market (affordable luxury). Tapestry consists of brands Coach, Kate Spade and Stuart Weitzman and is best known for accessories (especially handbags). Its products are sold primarily through retail stores, outlet stores and online. The brands have a strong presence in select department stores and specialty retailer locations.
The $8.5 billion consumer discretionary market cap is sensitive to both domestic consumer and macro issues in China. Unsurprisingly, TPR is down 17% from a year ago, but it bottomed out with many stocks sensitive to China well ahead of the broader US stock market and consumer discretionary in 2022.
At the valuation, Tapestry trades at a scant 10.9 times last year’s GAAP earnings, according to The Wall Street Journal. TPR offers a solid yield for a small retailer: 3.0%. A potential bullish feature ahead of its earnings date in mid-August is high short interest of 9.9%. BofA analysts see the retailer’s earnings per share growing well through 2024 at a faster-than-market rate. Given an impressively low multiple earnings growth rate, the stock looks cheap. Its EV/EBITDA is reasonable and the company has a high free cash flow yield.
TPR: Earnings, Valuation, Dividend Forecasts
BofA Global Research
Tapestry, like many retailers, reports earnings the week of August 15. The New York company’s Aug. 18 Q4 report crosses the wires before the opening bell that morning. The calendar of corporate events doesn’t stop there, though. According to Wall Street Horizon, Tapestry has an Investor Day on Friday, September 9. Investors should expect some volatility around this date as key information can be obtained from TPR’s management team.
Tapestry Calendar: Earnings August 18, Investor Day September 9
Wall Street Horizon
The technical dam
TPR had rolled into what is sometimes known as a bullish lower triangle formation. A price target for this pattern is found by taking the vertical length from the start of the triangle and adding it to the top of the breakout point. In this case, it’s $11 plus about $32. This gives a target of $43. Interestingly, the $42-$43 range was resistance earlier this year, so this is a natural place the stock could head as long as $32 holds. If $32 fails, look for the next support at $26, the May low.
TPR: Bullish breakout, price target $43
Stockcharts.com
The bottom line
I like what I see with TPR. The stock is cheap and there are good prospects for growth. The stock also broke out of a triangular consolidation pattern. I think the stock goes up to $43 before taking a break. Consider the bearish scenario: If the TPR breaks down to $32.
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