Buyback Wednesdays – Tapestry’s $1.5 Billion Buyback Plan

We are seeing a sea of red in markets today with the Dow Jones down more than 800 points (2.56%) and the Nasdaq down more than 400 points (3.62%) as I write this. In a challenging market environment, consumer staples and consumer defensive names sometimes help investors ride out volatility while sectors like consumer discretionary tend to take a harder hit. That belief was challenged today with Target (TGT) losing more than a fourth of its market cap following disappointing results with significant gross margin compression. We saw something similar from Walmart (WMT) where comparable same store sales improved 4% but bottom line profitability was hurt by higher input and transportation costs. Costco (COST) is also down 12% today in sympathy.

I was doing some research on another specialty retailer yesterday that reported results last month and suffered a similar hit to margins and profitability as described by Target and Walmart. I read through their earnings conference call transcript and came away with the conclusion that these challenges are likely to persist for a few quarters and it will be better off waiting on the investment. In this environment, it is interesting that the company that is at the top of our stock buybacks list today is Tapestry, the parent company of luxury brands Coach, Kate Spade and Stuart Weitzman.

Tapestry might be able to ride out this high input costs environment because of its best in class gross margin that exceeds 70% and is better than both LVMH (parent of Fendi, Sephora, Dior, Tiffany, Louis Vuitton, etc.) and Capri Holdings (parent of Versace, Jimmy Choo and Michael Kors). Its consumers are also less price sensitive and might be better positioned to accept price increases should the company decided to pass on higher costs to its customers.

The key challenges the company faces is that consumer discretionary is not the best place to be in a downturn or recession. The extra stimulus and bubble money that drove sale growth in the recent past will not drive future growth. Tapestry is coming off five quarters of double digit revenue growth that benefited both from comparisons to pandemic quarters and growth in M1 money supply.

In anticipation of a difficult environment going forward, the company is trading at an astoundingly low forward P/E of 7.76 and a forward EV/EBITDA of 7.17. The company has $2.2 billion of net debt on the balance sheet but more than half that debt ($1.36 billion) is in the form of capital leases. It is therefore not surprising that the company announced a $1.5 billion buyback representing 18.6% of the company’s market cap at announcement. I would much rather the company buy back stock at these levels than increase its 25 cents per share quarterly dividend, which already works out to a yield of over 3%.

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