Magnitude of Tapestry pullback is surprising, says Bernstein's Aneesha Sherman

Key Concepts

• De minimis tariff exemption
• Tariff headwinds and mitigation efforts
• Consumer demand and pricing power
• Trade-down risk
• Retail earnings and guidance
• Management credibility
• Long-term investment strategy

Tapestry (TPR) Analysis

• Stock Reaction: Anisha Sherman of Bernstein expresses surprise at the magnitude of the stock's pullback after earnings. The stock was up 74% year-to-date before the pullback.
• Buy Rating: Bernstein maintains a buy rating on Tapestry.
• Guidance Impact: The lower guidance was primarily due to the de minimis tariff exemption ending sooner than expected.
• De Minimis Exemption: Tapestry utilized this exemption to ship goods under $800 with essentially zero tariff. The return of the full tariff (weighted average of 30%) caused a $0.20 dip in EPS.
• Non-Fundamental Reason: Sherman emphasizes that the guidance reduction is due to a non-fundamental reason.
• Brand Momentum: Coach experienced double-digit growth for the third consecutive quarter, indicating strong consumer demand.
• Fundamental Grower: Despite the tariff impact, Tapestry is considered a fundamental grower.

Retail Earnings and Tariff Impact

• Isolated Issue: The de minimis exemption issue is considered isolated to specific companies utilizing it.
• Tariff Headwinds: A new round of tariffs, slightly higher than previous ones, is expected to create additional tariff headwinds for retailers.
• Mitigation Efforts: Retailers have been actively mitigating tariff impacts through various strategies:
  • Big box retailers are aggressively negotiating with suppliers.
  • Off-price retailers are selectively choosing vendors.
  • Brands are shifting supply mix and implementing pricing strategies.
• Impact Visibility: The impact of these mitigation efforts is starting to become visible.

Investment Strategy Ahead of Retail Prints

• Demand and Pricing Power: Invest in companies with strong consumer demand and pricing power, such as Coach.
• Trade-Down Risk: Avoid retailers that are undifferentiated and susceptible to market share loss due to consumers trading down.
• Differentiation: Differentiation is key to maintaining consumer loyalty and avoiding trade-down.

Ross Stores (ROST) and TJX Companies (TJX) Analysis

• Ross Stores:
  • Fundamentally a good stock, but not significantly underappreciated.
  • Positive Print Potential: Ross Stores pulled their guidance last quarter due to uncertainty. There's a good chance they will reinstate the guidance, boosting confidence.
  • New CEO: The new CEO needs to build credibility, making a positive surprise more likely.
  • Short-Term Buy: Recommended as a short-term buy leading into the earnings print.
• TJX Companies:
  • Rock Solid: Considered a rock-solid name for long-term investment.
  • Immune to Market Reactions: TJX trades broadly and benefits from both trade-down and higher-income consumers.
  • Management Quality: TJX has excellent management.
  • Long-Term Preference: Preferred over Ross Stores for long-term investment.

Athletic Apparel (Nike)

• Nike (NKE):
  • Coming Out of Slump: Nike is recovering after being beaten down for the past two years.
  • Estimate Reduction: Estimates have been significantly reduced, making the multiple appear expensive.
  • Positive Direction: As Nike posts more positive results, it is expected to drive multiple expansion.
  • Long-Term Buy: Recommended as a long-term investment.

Conclusion

The key takeaways are to focus on companies with strong brands, pricing power, and effective tariff mitigation strategies. While short-term opportunities exist with companies like Ross Stores, long-term investments should prioritize companies like TJX and Nike, which demonstrate resilience, strong management, and the ability to navigate market fluctuations. The de minimis tariff exemption issue is a specific headwind for certain companies, but broader tariff impacts are being actively managed by retailers.