Jim Cramer: Why Tapestry Stock is Soaring After FTC Deal Block

Tapestry's Strategic Shift Post-Merger Block

• 🚀 Tapestry's stock has surged dramatically, gaining 148% after the FTC blocked its $8.5 billion acquisition of Capri Holdings in October.
• 💡 Wall Street initially disliked the deal, fearing Tapestry would overextend its balance sheet and derail its operations by acquiring Capri's struggling brands.
• ✅ Following the deal's termination, Tapestry smartly redeemed deal debt and increased its share buyback program to $2.8 billion, significantly boosting earnings per share.

Focus on Core Brands and Divestitures

• 🎯 Tapestry announced a strategic pivot to focus on its core Coach brand and turnaround the Kate Spade brand, selling off the underperforming Steuart Whitesman brand for $105 million.
• 📈 This strategic focus on core assets and divestitures of distractions has been positively received by investors, driving the stock's continued rise.
• 📊 The company has delivered strong financial results, with substantial top and bottom line beats for three consecutive quarters, leading to raised earnings forecasts.

Coach's Dominance and Consumer Value

• 🌟 The Coach brand is experiencing accelerated revenue growth, increasing from 2% to 15% on a constant currency basis over recent quarters.
• 💰 Consumers are seeking high-quality goods at reasonable prices, a niche Coach effectively fills with handbags costing a few hundred dollars, not thousands.
• 🎯 Coach is successfully attracting new loyalists, particularly within the Gen Z demographic, indicating a strong future for Tapestry's largest business segment.

Kate Spade Turnaround and Future Outlook

• ⚠️ The Kate Spade brand has faced declining revenue for eight consecutive quarters, with a 12% drop reported in May.
• 💡 Management is implementing a turnaround strategy for Kate Spade, mirroring Coach's success with improved marketing, targeting younger consumers, and developing new products.
• 💰 A successful turnaround of Kate Spade would represent significant upside potential for Tapestry.

Investment Perspective and Risks

• 📈 Despite the stock's impressive 69% year-to-date gain, it trades at under 22 times earnings estimates with 18% projected earnings growth, suggesting it may not be excessively valued.
• ⚠️ However, given the stock's significant run-up, the upcoming earnings report on August 14th carries high expectations, making the stock inherently risky.
• 💰 Cramer suggests that ideally, a slight miss on earnings could create a buying opportunity at a lower price, but he gives his blessing for small positions if investors believe in Tapestry's management.