Executive Summary / Key Takeaways

• Tapestry, Inc. ($TPR) has demonstrated operational resilience and strategic execution, particularly highlighted by the robust performance of its flagship Coach brand, driving overall top and bottom-line growth that has consistently exceeded expectations.
• Coach's success is fueled by a focused brand-building strategy targeting Gen Z and Millennials, innovative product platforms like Tabby and the New York family, and effective omnichannel execution, leading to significant AUR gains and strong customer acquisition/retention.
• The company's differentiated digital transformation and agile supply chain provide tangible competitive advantages, enabling efficient operations, enhanced customer engagement, and flexibility in navigating dynamic market conditions and potential trade impacts.
• Despite macroeconomic volatility and the termination of the planned Capri acquisition, Tapestry maintains a strong financial position with expanding margins, robust free cash flow generation, and a commitment to disciplined capital allocation, including significant share repurchases.
• While the Kate Spade brand undergoes a strategic reset under new leadership to reignite growth, and the Stuart Weitzman brand is slated for divestiture, the core strength of Coach and the underlying operational platform position Tapestry for continued organic growth and value creation, supported by a prudent fiscal year 2025 outlook.

A House of Brands Forging Ahead

Tapestry, Inc. stands as a prominent house of iconic accessories and lifestyle brands, uniting Coach, kate spade new york, and Stuart Weitzman. Each brand maintains a unique identity while leveraging collective strengths in innovation, authenticity, and differentiated customer experiences across global channels. This structure, established with the company's transformation from Coach, Inc. in 2017, underpins its strategic approach to the dynamic luxury market. The company's "future speed" growth strategy, introduced in fiscal 2023, centers on building lasting customer relationships, fueling innovation, delivering compelling omnichannel experiences, and powering global growth.

The competitive landscape for Tapestry is diverse, ranging from accessible luxury peers like Capri Holdings (CPRI) to high-end conglomerates such as LVMH (LVMUY) and Kering (PPRUY), and focused heritage brands like Burberry (BURBY). While competitors like LVMH and Kering command higher market share and profitability margins due to their ultra-luxury positioning and brand prestige, Tapestry competes effectively in the accessible luxury space by emphasizing value, innovation, and emotional connection. Coach, in particular, has demonstrated an ability to significantly outpace industry growth and take market share, even as the broader category has experienced slowdowns. The company's strategic focus on the Gen Z and Millennial consumer cohort, who are expected to drive a significant portion of category consumption by 2030, positions it favorably against rivals who may be more focused on traditional luxury buyers.

A key differentiator for Tapestry lies in its robust digital transformation and omnichannel capabilities. The company's investments in technology and data analytics have resulted in a highly effective direct-to-consumer model that includes strong e-commerce platforms and engaging physical retail experiences. This integrated approach allows for real-time consumer understanding and agility, enhancing customer acquisition and retention. Digital channels have consistently shown high single-digit growth and operate at accretive margins, providing an operational efficiency edge compared to competitors with less advanced digital integration. Furthermore, the company's agile and diversified supply chain, built over decades, provides a structural advantage in navigating disruptions and managing costs, supporting its ability to deliver craftsmanship and value globally.

Performance Reflecting Strategic Strength

Tapestry's recent financial performance underscores the effectiveness of its core strategies, particularly the resurgence of the Coach brand. For the third quarter of fiscal 2025, the company reported net sales of $1.58 billion, a 6.9% increase (8.4% constant currency) compared to the prior year, outpacing expectations. This growth was significantly driven by Coach, which saw net sales increase by 12.9% to $1.29 billion (14.6% constant currency). This performance contributed to a consolidated gross profit of $1.21 billion, with the gross margin expanding by 140 basis points to 76.1%, the highest quarterly gross margin in over 15 years, primarily due to net pricing improvements and operational outperformance.

Operating income for the quarter rose 24.2% to $253.7 million, resulting in an operating margin of 16.0%. Excluding items affecting comparability, operating income increased 38.0 million to $277.3 million, with operating margin expanding by 140 basis points to 17.5%. This margin expansion was largely attributable to the strength in gross margin. Net income for the quarter was $203.3 million, leading to diluted EPS of $0.95, a 58.3% increase year-over-year and significantly exceeding guidance. For the first nine months of fiscal 2025, net sales reached $5.29 billion, up 4.1% (4.5% constant currency), with gross profit increasing 7.5% to $3.97 billion, driving a 240 basis point expansion in gross margin to 75.2%. Operating income for the nine-month period was $998.5 million, up 10.3%, with operating margin expanding to 18.9%. Net income for the nine months was $700.3 million, resulting in diluted EPS of $3.12.

The company maintains a solid liquidity position. As of March 29, 2025, cash and cash equivalents stood at $1.04 billion, with total borrowings of $2.7 billion, resulting in net debt of $1.6 billion. The gross debt to adjusted EBITDA ratio was 1.6 times, well within the company's long-term target of below 2.5 times.

Net cash provided by operating activities for the first nine months of fiscal 2025 was $769.8 million. The company's robust free cash flow generation supports its capital allocation priorities, including significant share repurchases. In fiscal 2025, Tapestry is positioned to return over $2 billion to shareholders through dividends and share buybacks, representing more than 100% of adjusted free cash flow.

Segment Dynamics and Strategic Focus

The Coach brand continues to be the primary engine of Tapestry's growth. Its strong performance is driven by a clear vision to be the world's most inclusive, genuine, and loved fashion brand. Product innovation, particularly within the iconic Tabby family and the newly established New York family (featuring popular styles like the Brooklyn Shoulder bag and Soft Empire Carryall), is resonating strongly with consumers, especially Gen Z and Millennials. These platforms are driving double-digit gains in leather goods and contributing to mid-teens handbag AUR growth. The brand's marketing efforts, focused on emotional storytelling and cultural relevance, are successfully acquiring new customers and improving retention rates among younger cohorts. The "One Coach" strategy, blurring the lines between retail and outlet channels by offering popular full-price items like the Tabby 26 in outlet stores, is also proving successful and informing broader strategic decisions.

In contrast, the Kate Spade brand is currently facing revenue pressure, with net sales declining 12.7% in Q3 FY25. The company acknowledges the need to reset the brand for sustainable long-term growth. Under new leadership, the focus is on streamlining the assortment (reducing handbag styles by over 15% by fall), reducing promotional activity, and accelerating investments in brand building and relevant product innovation. While profit margins have met expectations due to gross margin expansion and expense management, the near-term strategic actions are expected to pressure top-line results. The long-term potential of the brand, with its unique heritage of creativity and joy, remains a key focus for value creation.

The Stuart Weitzman brand has also experienced challenged financial results, with net sales decreasing 17.7% in Q3 FY25. Recognizing the distinct positioning and performance of this brand, Tapestry entered into a definitive agreement on February 16, 2025, to sell the Stuart Weitzman Business to Caleres, Inc. (CAL) for $105 million in cash. The transaction is expected to close in the summer of 2025. This divestiture allows Tapestry to sharpen its focus on the core growth opportunities presented by Coach and the strategic reset underway at Kate Spade.

Outlook and Risk Considerations

Tapestry has raised its fiscal year 2025 outlook, reflecting confidence in its performance trajectory despite the complex external environment. The company now expects revenue of approximately $6.95 billion, representing 4% growth on a reported basis (nearly 4% constant currency), including an expected currency headwind of nearly 50 basis points. This is an increase from previous guidance. Regional expectations include 3% to 4% growth in North America, approximately 30% growth in Europe, low single-digit growth in Greater China, high single-digit gains in Other Asia, and a mid-single-digit decline in Japan (all constant currency).

The outlook assumes operating margin expansion of approximately 100 basis points, driven primarily by continued gross margin expansion from improvements in AUR and AUC. SG&A expenses are expected to increase above the pace of revenue growth due to planned increases in marketing investments. Net interest expense is projected to be approximately $25 million, and the effective tax rate is expected to be around 17.5%. The weighted average diluted share count is forecasted to be approximately 223 million shares, reflecting the impact of share repurchases. This revised outlook translates to expected diluted EPS in the area of $5.00, representing high-teens growth over the prior year and aligning with the original target set at the 2022 Investor Day. The guidance fully incorporates trade policies as of April 10th, with incremental tariffs expected to have an immaterial impact on fiscal 2025 results due to timing and mitigation strategies. Adjusted free cash flow is anticipated to be approximately $1.3 billion, with CapEx and cloud computing costs around $160 million.

While the outlook is positive, several risks warrant consideration. Macroeconomic conditions, currency volatility, and geopolitical instability continue to pose potential headwinds, impacting consumer spending on discretionary items. Changes in international trade agreements and the imposition of new tariffs, particularly on goods manufactured in key sourcing countries like Vietnam and Cambodia, could materially impact results in fiscal 2026 and beyond, although the company is prepared to take mitigating actions. The strategic reset at Kate Spade carries execution risk, and the brand's assets could face impairment if profitability trends decline significantly from expectations. Furthermore, the company is involved in legal proceedings, including securities class actions related to the terminated Capri acquisition attempt, which could result in unfavorable outcomes.

Conclusion

Tapestry, Inc. has demonstrated a compelling ability to execute its strategic vision and deliver strong financial results amidst a challenging global backdrop. The core investment thesis is underpinned by the enduring strength and momentum of the Coach brand, driven by effective brand building, product innovation, and a successful focus on acquiring and retaining younger consumers. The company's differentiated digital capabilities and agile operational platform provide a competitive edge, supporting margin expansion and efficient capital deployment. While challenges remain at Kate Spade and the Stuart Weitzman divestiture marks a portfolio adjustment, Tapestry's financial strength, robust cash flow generation, and commitment to shareholder returns position it favorably. The raised fiscal year 2025 outlook, projecting continued growth and profitability, reinforces confidence in Tapestry's ability to leverage its competitive advantages and drive long-term value creation.