3 Reasons to Avoid TPR and 1 Stock to Buy Instead

Tapestry has been on fire lately. In the past six months alone, the company’s stock price has rocketed 47.5%, reaching $107.60 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Tapestry, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Tapestry Not Exciting?

We’re glad investors have benefited from the price increase, but we're cautious about Tapestry. Here are three reasons why we avoid TPR and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Tapestry’s sales grew at a sluggish 3.6% compounded annual growth rate over the last five years. This was below our standard for the consumer discretionary sector.

2. Weak Constant Currency Growth Points to Soft Demand

In addition to reported revenue, constant currency revenue is a useful data point for analyzing Apparel and Accessories companies. This metric excludes currency movements, which are outside of Tapestry’s control and are not indicative of underlying demand.

Over the last two years, Tapestry’s constant currency revenue averaged 2.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

3. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Tapestry’s revenue to rise by 3%, close to its 3.6% annualized growth for the past five years. This projection doesn't excite us and indicates its newer products and services will not accelerate its top-line performance yet.

Final Judgment

Tapestry’s business quality ultimately falls short of our standards. After the recent rally, the stock trades at 21.1× forward P/E (or $107.60 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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