Tapestry currently trades at $145.79 and has been a dream stock for shareholders. It’s returned 221% since March 2021, more than tripling the S&P 500’s 70.9% gain. The company has also beaten the index over the past six months as its stock price is up 28.7% thanks to its solid quarterly results.
Is now the time to buy Tapestry, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Tapestry Will Underperform?
We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons there are better opportunities than TPR and a stock we'd rather own.
1. Weak Constant Currency Growth Points to Soft Demand
In addition to reported revenue, constant currency revenue is a useful data point for analyzing Consumer Discretionary - 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 7% 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. 
2. Weak Operating Margin Could Cause Trouble
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Tapestry’s operating margin has shrunk over the last 12 months and averaged 13.3% over the last two years. The company’s profitability was mediocre for a consumer discretionary business and shows it couldn’t pass its higher operating expenses onto its customers.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Tapestry’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We see the value of companies helping consumers, but in the case of Tapestry, we’re out. With its shares topping the market in recent months, the stock trades at 20.7× forward P/E (or $145.79 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 suggest looking at our favorite semiconductor picks and shovels play.
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