Tapestry (TPR) could see its valuation re-rate higher if it fixes rather than sells Kate Spade, proving the company can acquire, integrate and turn around underperforming brands, UBS Securities said in a note Tuesday.
The brokerage argued that a successful turnaround, a point it says few investors are making, would show the market that Tapestry can reinvest its free cash flow at returns well above what buybacks offer, an opportunity UBS believes is not yet priced in.
The investment firm also pointed to Tapestry's AI capabilities, which it called the best in Softlines, as an underappreciated driver of both a potential Kate Spade turnaround and broader long-term growth across the business.
UBS has a buy rating on Tapestry, with a $232 price target.
The company's shares were down 3.2% in Tuesday afternoon trading.
Price: $118.17, Change: $-3.97, Percent Change: -3.25%