Idea of the Week: Fund your luxury purchases with 5+% yields from Coach!

• Dominant high-margin anchor: Group’s performance is anchored by the powerhouse Coach brand, which delivers decent revenue growth over the years, supported by strong mid-30% margins.

• Strategic reset underway for Kate Spade: Product mix being streamlined to prioritise higher-margin products to stabilise the brand positioning, without materially draining group liquidity.

• Strong cash generation and liquidity: Tapestry produces consistent, healthy cash flows, supported by a significant available liquidity of USD$3.1 billion.

• Fortress balance sheet and strong debt coverage: The group maintains an ultra-conservative 1.2x gross leverage ratio–well below its long-term target of 2.5x. EBITDA interest coverage is robust at 24x. 

• Good value on long-term notes: The 2035 notes offer an attractive 5.5% coupon, which represents a 32-67 bps yield pickup over peers and ~90 bps yield spread compared to US treasuries. 

With US interest rates declining, it can be challenging to find decent income from a solid issuer. In this article, we review an interesting company offering decent income over a long timeframe (10 years). 

Company Profile: 

Tapestry is a major player in “affordable luxury”, anchored by its operating segments of Coach and Kate Spade. Following the sale of the Stuart Weitzman footwear brand in August 2025, the group has further simplified its portfolio to focus on its core handbag and leather goods franchise, where operating profits are stronger. As of 27 December 2025, the group directly operates 1,291 stores globally across the Coach, Kate Spade, and Tapestry names, reflecting a direct-to-consumer distribution model where the group sells a meaningful portion of products through its own retail network.

Strategically, Tapestry is focused on building lifetime customers, particularly among younger cohorts: roughly two-thirds of new customers are Gen Z and Millennials. This model is designed to bring consumers into the brand early and retain them as spending power increases, supporting demand durability over time.   

In this article, we review Tapestry’s latest financial year ending 30 June 2025 (FY2025) and its latest 2Q2026 (ended 27 December 2025). We will also explain why we believe Tapestry’s bonds are suitable for investors seeking to secure yields of 5% or more (USD) with a long-term investment horizon.  

Growing revenue with improving profitability 

Tapestry’s latest earnings (2Q26) demonstrate how desirability for its brands is translating into strong profitability, which creates a vital “safety cushion” for its bondholders. Overall revenue rose 13% year-on-year (YoY) to USD$2.5 billion. Operating profit surged 45% YoY to USD$716.4 million, on the back of operational efficiencies, with operating margin improving to 28.6% (up from 19.3% in 1Q26). Likewise, net profit of USD$561.3 million rose 80.8% YoY, with net profit margin improving to 22.4% (compared to 16.1% in 1Q26). Importantly, profits rose significantly faster than sales– a sign of strong operational leverage, where a company’s profits grow much faster than its sales because it is managing its expenses with extreme discipline. 

This surge in profitability is part of a multi-year trend supported by the group’s “pricing power” and stringent cost management, as seen in Chart 1 below. Management’s decision to raise full-year guidance following these results signals a continuation of this trend. We believe that this continuation of revenue growth and increased profitability is a testament to the strength of Tapestry’s brands.

Chart 1: Translating brand desirability into bottom-line strength

Coach: The group’s revenue and profit anchor  

At the heart of Tapestry’s success is Coach, the “crown jewel” that generates over 75% of the group’s revenue and serves as its rock-solid earnings anchor. As seen in chart 2 below, revenue has trended steadily higher, supported by brand demand and pricing. Average selling price rose at a mid-teens YoY pace in 2Q26, pointing to continued pricing power, resulting in higher revenue. 

This pricing power flows through to earnings stability. Strong revenue has led to strong operating margins, with this metric averaging 31.5% over the past 5 years (see chart 3 below). Coach’s earnings resilience stems from its “Accessible Luxury” positioning. By sitting below traditional European houses (see Table 1 below), the brand captures a wider addressable market while maintaining significant pricing power over mass-market peers. Management utilises a multi-stage customer funnel–using lower-ticket entry points like small leather goods and fragrances to acquire younger Gen Z and Millennial shoppers. This strategy builds early brand affinity, driving long-term “trade up” behaviour into higher-ticket leather goods as consumer purchasing power matures. 

Historically, this positioning has cushioned margins during economic stress. Through both the 2008 Financial Crisis and the 2020 pandemic, Coach maintained robust operating margins ranging from 16% to 30%+ (see Chart 3 below). Do note that Coach’s trough operating margins during economic stress are significantly higher than its luxury peers’ average (around 12%).   

 Looking ahead, we expect Coach to remain the primary revenue anchor for Tapestry. In our view, we expect operating margins to stabilise, with scope for improvement as management continues to execute on its strategy. For bondholders, Coach’s outsized earnings contribution alongside an expected stabilisation in margins translates to stability in Tapestry’s cash generation.

Table 1: Price range of different luxury players  

Chart 2: Coach’s Dominant Share of Total Sales  

Chart 3: The Profit Driver: Coach’s Critical Role in Operating Earnings 

Kate Spade: A drag on earnings, but will not materially affect cash flows  

Compared to the “crown jewel” that is Coach, Kate Spade remains the turnaround story for Tapestry. Over the past few years, the brand has faced declining revenues and weaker operating income (see chart 4 below), reflecting both product and pricing challenges. Historically, Kate Spade has relied heavily on discounting and flash sales to clear inventory, which has pressured operating margins and, over time, diluted brand perception. Furthermore, performance has also been held back by a mix skewed toward lower-margin categories (e.g., nylon bags and apparel) compared to higher-return leather goods. 

In response, management is resetting the brand, with two clear priorities: 1) reduce reliance on promotions, and 2) tilt the mix toward full-price leather goods. If executed well, this should improve revenue quality and profitability, with a pathway back toward historical operating margins in the high single-digit to low-double-digit range. 

Crucially for the bond story, we do not expect this reset to be capital-intensive. Management’s FY26 capital expenditure (capex) guidance of ~US$200m (~3% of revenue) is for the corporate level, covering store optimisation and digital investments across all brands, including Kate Spade. This implies that management would not use massive amounts of cash to support this transition. That said, execution risk is meaningful, and any recovery will likely take time to show up in the group’s financial results. Also, faster-than-expected progress at Kate Spade would provide incremental earnings diversification, contributing to stronger support for longer-term credit strength.

Chart 4: Kate Spade’s operational missteps impacting top and bottom line