Tapestry Stock Drops After Strong Quarter and Raised Outlook

Key Points

• Tapestry delivered a strong third quarter, beating earnings and revenue expectations and raising its full-year outlook, driven by robust demand for its Coach brand.
• Despite the strong results, shares fell following the report, likely due to profit-taking after a significant run, as investors weigh valuation, tariff pressures, and weakness at Kate Spade.
• Wall Street remains bullish, with most analysts expecting further upside, suggesting the recent pullback could present a potential entry point if momentum continues.

Shares of Tapestry Inc. NYSE: TPR have been on a tear, fueled by a string of strong earnings reports.

But after delivering another standout quarter on Thursday and raising its outlook, the stock fell sharply, leaving some investors wondering whether the drop is simply profit-taking or a sign the rally is losing steam.

Tapestry delivered another clear beat in the third quarter, driven by robust demand for its flagship Coach brand, which allowed it to raise guidance. Analysts also remain bullish on the stock, with most expecting additional upside. Still, the sell-off suggests investors may be weighing lingering weakness at Kate Spade, the impact of tariffs, and the stock's valuation following its recent rally.

Coach Remains the Engine Behind Q3 Growth

Tapestry's Q3 results reinforced the company's strength, with earnings and revenue posting solid gains and easily surpassing expectations. Earnings of $1.66 per share rose from $1.03 a year ago and exceeded estimates of $1.31, while revenue of $1.92 billion increased more than 21% and came in nearly $135 million ahead of Wall Street expectations.

"Overall, we delivered another record quarter highlighted by double-digit top and bottom-line gains, demonstrating a differentiated business model built for high quality and long-term growth," Chief Executive Joanne Crevoiserat said in the earnings call.

Coach was once again the clear driver in the quarter, with constant-currency revenue growth of 29% and roughly two million new customers added, well above the prior year. Strength was particularly notable among Gen Z consumers and in its core leather goods category.

"These results speak to the future as they are fueled by proven strategies, intentional investment, exceptional execution, and structural advantages that enable us to consistently connect with consumers across generations and geographies," Crevoiserat said. She added that the company expects "Coach will be a $10 billion brand over time with best-in-class margins."

Raised Outlook Reflects Confidence in Growth

Given the company's outperformance during the quarter, Tapestry increased its full-year outlook, calling for revenue of around $7.95 billion, up from its earlier estimate of more than $7.75 billion. The company now expects EPS to rise by more than 35% year over year to around $6.95, up from earlier guidance of $6.40 to $6.45. It anticipates operating margin expansion of approximately 300 bps, up from 180 bps.

Despite the strong quarter and optimistic outlook, Tapestry shares dropped nearly 13% following the report. The move may have been driven largely by profit-taking, as the stock has had an impressive run. Shares are up more than 230% over the past two years and more than 70% over the past 12 months.

Now, the stock has pulled back from its all-time high above $160 it hit at the end of February, though it remains well above year-ago levels, when it was trading in the $70 to $80 range.

Kate Spade Remains a Drag Despite Progress

Performance at the company's Kate Spade brand may also have weighed on shares following the report, alongside uncertainty about tariffs.

In contrast to the strength at Coach, Kate Spade has been a weak spot that Tapestry has been working to turn around. Revenue declined 11% during the quarter as the company scaled back promotions. While topline trends improved sequentially, results came in slightly below expectations.

Though the company has been making progress on the brand, it continues to expect a modest profit loss due to investments in the brand and tariff-related pressures.

During the quarter, Tapestry said tariffs had a roughly 180-basis-point impact, including a 440-basis-point hit to Kate Spade's gross margin and about a 150-basis-point hit at Coach. Tariffs have been a headwind for retailers and remain an area of uncertainty.

Another factor that may have weighed on sentiment is insider activity. Insiders have not bought shares in the past three months, while more than $25 million has been sold. While that isn't unusual, especially after a strong run, it can still give some investors pause, especially when shares are trading at elevated levels.

Wall Street Remains Bullish on Tapestry Stock

Analysts remain positive on Tapestry stock, which carries a consensus Moderate Buy rating, with 17 of 21 analysts assigning it a Buy and four a Hold.

The 12-month consensus price target is just under $158, suggesting almost 20% upside from current levels. Only two targets indicate downside, at $115 and $126, while the rest range from $138 to $180, with 10 calling for a price of $165 or higher.

On a trailing basis, Tapestry's P/E ratio is about 55X, which is well above the broader retail industry average of around 17X. The stock trades at roughly 20X forward earnings, which is a premium to some peers. Competitor PVH Corp. NYSE: PVH, whose brands include Calvin Klein and Tommy Hilfiger, trades at roughly 7X forward earnings, while Capri Holdings Ltd. NYSE: CPRI, which is behind brands such as Michael Kors and Jimmy Choo, trades closer to 13X.

While some investors may be wondering whether the stock has gotten too pricey, Tapestry’s fundamentals remain strong. For those who expect the momentum to continue, alongside improvements at Kate Spade, the recent pullback could present a good entry point.