Tapestry

Tapestry's fiscal 2026 fourth-quarter sales rose 9% as Coach's 15% increase offset Kate Spade's 7% decline. Tapestry's non-GAAP gross margin rose 180 basis points to 78.1% and its non-GAAP operating margin improved 250 basis points to 19.3%. Non-GAAP EPS rose to $1.32 from $1.04.

Why it matters: Tapestry's Amplify growth plan to acquire customers through upgraded marketing and stores, and to lead with leather goods while expanding into other categories, continues to deliver stellar results for Coach (87% of sales) but less tangible progress for Kate Spade (13%). Sales growth and operating margin easily surpassed our estimates of 7% and 17.3%, respectively. Through its efforts to raise Coach's prices while expanding sales, we think Tapestry will maintain long-term operating margins at around 22%-23% with mid-single-digit annual sales growth.

The bottom line: We expect to lift our $88 fair value estimate on narrow-moat Tapestry's shares by a high-single-digit percentage. However, shares (up 40% over the past year before a 15% post-earnings decline) reflect overly aggressive expectations for sales and profit growth in a competitive space. Investors were seemingly disappointed by the fiscal 2027 outlook even though it exceeds our expectations. The firm expects high single-digit sales growth for Coach, well below fiscal 2026's 24% but above our 6% estimate. Moreover, EPS guidance of $7.80-$7.90 exceeds our $7.41 forecast. Coach had 10% sales growth in North America, slower than in prior quarters, and guidance suggests further slowing in fiscal 2027. Although investors may have expected more, we forecast long-term mid-single-digit percentage sales growth for Coach in North America.

Between the lines: Kate Spade's sales are expected to decline again in fiscal 2027. Although a turnaround remains elusive, the brand has minimal impact on our valuation, as we project that Coach will generate nearly all of Tapestry's operating income for at least the next 10 years.

After a stellar fiscal 2026 for Coach, Tapestry raised its dividend for fiscal 2027 by 16% and expects to repurchase another $1.35 billion in shares. Although this capital return plan is more aggressive than our forecast, we believe it can be easily funded given expected free cash flow and a manageable net debt of $1.2 billion at the end of fiscal 2026. We appreciate Tapestry's willingness to return capital to shareholders rather than pursue a risky acquisition, and we maintain our Standard Capital Allocation Rating.

We raise our fair value estimate to $96 per share from $88 after Tapestry released strong fiscal 2026 fourth-quarter results and offered fiscal 2027 guidance.

Tapestry's quarterly sales rose 9% as a 15% increase from Coach offset Kate Spade’s 7% decline. The firm’s non-GAAP gross margin rose 180 basis points to 78.1% and its non-GAAP operating margin improved 250 basis points to 19.3%. Sales growth and operating margin easily surpassed our estimates of 7% and 17.3%, respectively.

We have lifted our estimates based on Tapestry’s momentum and guidance. For fiscal 2027, we forecast Coach’s sales growth will slow to 8.9% from a sky-high 23.5% in fiscal 2026, but this is still impressive growth for a brand with nearly $7 billion in revenue in fiscal 2026. Meanwhile, we forecast Kate Spade’s sales will fall 9% in fiscal 2027 after declines of 10% in each of the previous two fiscal years. Overall, for Tapestry, we forecast 6.3% sales growth (up from 5.5% previously) and $7.94 in EPS (from $7.41) in fiscal 2027. Based on our estimates, our valuation implies price/earnings of 12 times and enterprise value/EBITDA of 9 times.

Coach’s fiscal 2026 segment operating margin of 36.8% (including a tariff refund benefit) was its best in many years. With continuing momentum, we project another strong margin of 35.4% in fiscal 2027. In the long run, we assume the brand produces an operating margin of 33%. We believe Coach’s profitability is permanently higher than in the past, but it competes in a very crowded space, so we assume some moderation from the fiscal 2026 level.

We forecast Kate Spade’s long-term segment operating margin will improve to 12.5%. The brand had a loss in fiscal 2026 and has not produced a double-digit operating margin since fiscal 2022, but efforts to improve merchandising and reduce discounting are ongoing. We anticipate some success from these efforts, but we do not expect the brand to reach Coach’s profitability due to its lack of pricing power in the crowded affordable accessories space.

As sales shift rapidly to digital channels, we expect only moderate store additions over the next decade. We anticipate little or no store growth in North America but some expansion in China and other international territories. At the end of fiscal 2036, we forecast Tapestry will operate just over 1,083 Coach stores (up from 973 at the end of fiscal 2026) and just under 400 Kate Spade locations (326 at fiscal 2026).

We assign a Narrow Morningstar Economic Moat Rating to Tapestry for intangible brand asset strength. Although Tapestry owns both Coach and Kate Spade, our moat rating is based solely on Coach.

As evidence of its competitive edge, Tapestry’s adjusted returns on invested capital (including goodwill) typically exceed our estimated weighted average cost of capital of about 10%. Specifically, the five-year historical average was 17%, and we forecast an even stronger 28% over the next decade.

Tapestry’s high returns are driven by its strong and improving profitability. In fiscal 2026, it achieved adjusted gross and operating margins of 76.5% and 23.3%, respectively. These high margins are attributable to Coach’s expanding sales and profitability.

Founded in 1941, Coach specializes in women’s handbags and other leather goods. The brand accounted for 86% of Tapestry’s fiscal 2026 revenue and all its operating income. Coach products are sold in about 45 countries, but more than 90% of its sales are generated in North America and Asia. In 2025, the brand had the second-highest share (13.9%) of the US luxury handbag market behind only wide-moat LVMH’s Louis Vuitton (per Euromonitor). Coach merchandise is primarily sold through nearly 1,000 global company-owned stores and its own e-commerce channels. It also has a smaller wholesale operation (13% of fiscal 2026 sales).

We believe the strength of its brand has made Coach one of the largest luxury handbag companies in the world in terms of units and revenue. In fiscal 2026, women’s handbags accounted for 58% of sales. Although many firms design and market handbags, we view Coach as the category leader in the mass premium handbag market in North America and other markets. We believe women see it as a prestige brand and are willing to pay more for its bags despite the widespread availability of competing products. Morningstar evaluates four key attributes of luxury companies: pricing power, conspicuousness of consumption, control over distribution, and investment value. Compared with other luxury brands, we rate Coach’s control over distribution as high, investment value as low, and the other two factors as moderate. We believe it is one of a small number of American brands viewed as a leader in the luxury space.

Further supporting our moat rating, Coach achieves very high gross and segment operating margins. Although their prices are well below those of the most expensive European luxury houses, Coach handbags are generally priced higher than comparable offerings in the affordable luxury segment and carry high profit margins. Other Coach products also command high prices, such as coats that retail for more than $1,000. Fueled by price increases on handbags and greater full-price selling, the Coach segment of Tapestry achieved a 76% average gross margin over the past five fiscal years, and we forecast it will average 77% over the next five. Further, we forecast its segment operating margins to remain in the low to mid-30s. These margins are comparable with those of other competitively advantaged accessories firms, such as narrow-moat Kering. Over the years, we believe Tapestry has lifted Coach’s profitability and brand value through increased control over distribution and pricing. We believe Coach attains high gross margins in a crowded category because consumers view its products as high-quality and fashionable and are willing to pay extra.

Supporting our view of its brand strength, Coach has expanded internationally. Sales of the brand outside North America grew to 39% of total sales in fiscal 2026 from 28% in fiscal 2011 on the strength of organic growth, store openings, distributor acquisitions, and reduced North America distribution. At the end of fiscal 2026, 65% of Coach stores were outside North America.

Coach is expanding in Europe and Asia; large numbers of stores in the latter region are in mainland China, Japan, South Korea, Hong Kong, and Taiwan. Much of Coach’s recent international growth has come from China, where its products have been sold for more than 20 years. Coach acquired its Chinese distributor in 2008 and increased annual sales in Greater China from about $30 million at that time to nearly $1.4 billion in fiscal 2026. We forecast annual Coach sales in Greater China will surpass $2.4 billion in 10 years. We view Coach’s brand strength outside North America as part of its economic moat.

We do not view the Kate Spade brand, acquired in 2017, as a contributor to our narrow moat rating for Tapestry. Kate Spade is dependent on women’s handbags (55% of fiscal 2026 sales), but these and its other products generally carry lower prices than those of Coach. Moreover, Kate Spade’s sales have declined, and the brand has lost share; for example, its share of the US luxury handbag market fell to 5.7% in 2025 from 8.9% in 2016. Tapestry is implementing a turnaround to better control the distribution of Kate Spade products (through store closures and other measures) and reduce markdowns. However, we do not expect the brand to achieve the pricing power of Coach in the foreseeable future.

Tapestry’s intangible brand asset (based on Coach) is its only moat source. We believe the company’s gross margins of above 70% are based on good pricing rather than low production costs. Coach and Kate Spade, like many peer brands, outsource much of their production to factories in Vietnam, China, the Philippines, and other countries, so they have no production cost advantage over others. Further, Coach uses a lot of high-quality leather that is available from a limited number of suppliers, suggesting that it does not have any scale advantage in sourcing. There are no switching costs or network effects in Tapestry’s key categories of women’s handbags, accessories, and shoes.

Coach is one of the share leaders in the desirable category of handbags and other leather goods. Coach bags achieve better pricing than many peers, allowing for luxury-level gross margins above 75%.

Coach’s marketing and merchandise have successfully attracted younger consumers. With its appeal to multiple age groups and prices below those of pure luxury, Coach has a large addressable market.

Tapestry is aggressively returning capital to shareholders through share repurchases and annual dividend increases.

Although Tapestry offers many products, women's handbags and other accessories account for about 85% of its revenue. As such, Tapestry is not very diversified as compared with some luxury brand operators.

Kate Spade has had four consecutive years of declining revenue, and fiscal 2026 is expected to be another down year. The brand’s weakness partially offsets the strength of Coach, and there is no guarantee that Tapestry’s turnaround plan will be successful.

Higher energy and tariff expenses could increase Tapestry’s costs and reduce consumer spending on nonessential consumer goods.