Tapestry's Earnings Surge Signals Strong Growth Ahead

Tapestry, Inc. (NYSE: TPR), the luxury goods conglomerate behind brands like Coach and Kate Spade, is poised to deliver another round of positive earnings revisions, according to analysts at Morgan Stanley. Recent financial updates and strategic moves suggest the company is on a path to outperform expectations in fiscal 2025, driven by operational excellence, margin expansion, and brand resilience.

The Case for EPS Revisions: Operational Strength and Margin Gains

Tapestry’s third-quarter fiscal 2025 results marked a turning point, with diluted EPS reaching $1.03 (non-GAAP)—a 27% year-over-year increase and a 15% beat over analyst estimates. This outperformance led the company to raise its full-year 2025 EPS guidance to $5.00, up from the prior range of $4.85–$4.90. The revision reflects a high-teens percentage growth compared to the prior year’s EPS of $4.24.

Key drivers of this momentum include:
1. Brand Dominance: Coach delivered 15% constant currency revenue growth, fueled by double-digit handbag sales and a focus on Gen Z/Millennial customers.
2. Margin Expansion: Gross margins hit a 15-year high of 76.1% in Q3, up 140 basis points year-over-year, due to cost efficiencies and pricing power.
3. Share Repurchases: A $2 billion Accelerated Share Repurchase (ASR) program reduced the diluted share count, adding $0.10 per share to EPS.
4. Tax Benefits: A favorable tax rate of 17%–18% contributed an $0.08 per share boost.

Morgan Stanley’s Bullish Take: A "Scarce Positive Revision Story"

Morgan Stanley recently upgraded Tapestry to Overweight from Equal-weight, citing its $5.00 EPS guidance as evidence of a “scarce positive revision story” in the retail sector. Analysts raised their price target to $90 (from $75), emphasizing three key factors:
1. Coach’s Global Momentum: The brand’s 10% revenue growth in North America and 35% surge in Europe highlight its cross-border appeal.
2. Tariff Resilience: Tapestry’s low China sourcing (reliant on Vietnam and Cambodia) insulates it from U.S. tariffs, while its pricing power mitigates inflationary pressures.
3. De-Risking: The planned sale of Stuart Weitzman eliminates a drag on performance and aligns with Morgan Stanley’s preference for streamlined portfolios.

The firm also projects $5.65 EPS for 2026, a 7% premium to consensus, driven by margin expansion to ~22% and sustained Coach growth.

Risks and Considerations

While Tapestry’s trajectory is robust, challenges remain:
- Macroeconomic Uncertainties: Consumer spending trends and inflation could pressure luxury demand.
- Brand Diversification: Kate Spade and Stuart Weitzman posted declines in Q3, though the latter’s sale addresses this concern.
- Currency Fluctuations: A 50-basis-point headwind from dollar strength is factored into guidance, though further appreciation could complicate results.

Conclusion: A Strong Foundation for Long-Term Value

Tapestry’s revised $5.00 EPS guidance reflects a company transforming itself into a lean, high-margin luxury player. With $1.3 billion in adjusted free cash flow and a $2 billion shareholder return commitment, management is capitalizing on operational discipline and brand strength. Morgan Stanley’s Overweight rating and $90 price target (implying 20% upside from current levels) underscore the stock’s appeal.

The data speaks clearly: Tapestry’s 15-year high margins, Coach-led growth, and strategic execution position it to outperform peers. For investors seeking quality in the luxury sector, this is a story worth watching closely.