If you think that the upper classes are immune to recession, think again. In 2023, it seems the world is facing a new kind of economic downturn that targets the wealthy more than the rest. It’s called a richcession, and it could spell trouble for many luxury stocks.
A “richcession” is the term coined to describe a recession that disproportionately impacts higher-income groups. For example, consider the widespread layoffs in big-tech engineering jobs earlier this year as those companies scrambled to cut costs.
This type of targeted economic downturn could have a significant impact on the luxury retail sector, as well, which depends on the spending power of more upscale consumers. One of the stocks that could come under pressure is Tapestry Inc. (TPR), the parent company of brands like Coach and Kate Spade.
Tapestry’s Disappointing Results and Weak Outlook
Late last week, Tapestry reported quarterly revenue below estimates, and issued a 2024 outlook that fell short of expectations. The company blamed the weak performance on supply chain disruptions, labor shortages, a strong dollar, and lower consumer demand in some key markets - including North America.
After its poorly received earnings report, the stock extended its already uninspiring price action, and is now down about 13% year-to-date. However, that huge bear gap on the chart below wasn't earnings-related - it was prompted by the Aug. 10 news of Tapestry's $8.5 billion acquisition of rival Capri (CPRI), which owns luxury brands like Versace, Michael Kors, and Jimmy Choo.
Looking ahead, there are more reasons to be concerned about Tapestry that go beyond the company taking on an $8 billion bridge loan in a high interest rate environment (as a point of comparison, TPR's market cap is $7.69 billion).
Notably, the company is expecting continued strength out of China, a key revenue growth driver, to help offset weaker trends in North America - but recent economic data out of the mainland has surprised to the downside.
And despite the recent share price decline, TPR still doesn't offer a particularly compelling valuation. The stock's price-to-earnings ratio is 8.92, based on trailing 12 months earnings of $3.71. Its price-to-sales ratio of 1.18, price-to-cash flow ratio of 7.17, and price-to-book ratio of 3.52 all exceed the industry average. And while the annual dividend of $1.20 per share yields 3.47%, that payout could be at risk if Tapestry's fundamentals remain weak.
The company's good standing with analysts could also be at risk. The mean target price for TPR’s stock is $50.67, implying expected upside of more than 50% from current levels, and 10 out of 13 analysts call the stock a “Strong Buy.” If Tapestry continues to underperform, downgrades and price-target cuts could prompt more selling.
Conclusion: Tapestry Stock Could Get Even Cheaper
Overall, TPR looks unappealing at current levels. Given the weak forecast for sales, signs of economic turmoil in the key market of China, a substantial new debt load with the Capri acquisition, and significant share price underperformance, it's tough to find any reason to recommend this stock right now - and in fact, it's quite possible that bullish analysts may soon start to jump ship, too.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
