Tapestry, Inc. — Form 10-Q Summary
Reporting period: The filing covers the fiscal third quarter ended April 2, 2022, and the nine months ended that date. Both third quarters compared were 13 weeks. Although the request metadata says “2021 Q3,” the filing is for fiscal 2022 Q3; the prior-year comparison ended March 27, 2021. Amounts are in U.S. dollars.
Business context and financial performance
Tapestry operates Coach, Kate Spade and Stuart Weitzman. Third-quarter sales growth was driven mainly by North American retail and e-commerce, while Covid-related disruption weighed on Greater China.
| Metric | Q3 FY2022 | Q3 FY2021 | First 9 months FY2022 | First 9 months FY2021 |
|---|---|---|---|---|
| Net sales | $1,437.5m (+12.9%) | $1,273.3m | $5,059.6m (+22.5%) | $4,130.9m |
| Gross profit / margin | $1,005.1m / 69.9% | $911.9m / 71.6% | $3,531.2m / 69.8% | $2,915.8m / 70.6% |
| Operating income / margin | $169.5m / 11.8% | $116.7m / 9.2% | $927.3m / 18.3% | $708.3m / 17.1% |
| Net income | $122.7m | $91.7m | $667.5m | $634.4m |
| Diluted EPS | $0.46 | $0.32 | $2.42 | $2.25 |
| Operating cash flow | Not separately presented | Not separately presented | $616.4m | $944.6m |
Q3 sales increased 14.0% at constant currency. Coach sales were $1,072.4m, Kate Spade $301.5m and Stuart Weitzman $63.6m. For the nine months, all three brands grew sales; Coach remained the largest contributor. Q3 GAAP operating income and EPS benefited from lower prior-year comparison charges. Excluding disclosed comparability items, Q3 operating income was $175.8m versus $182.9m and diluted EPS was $0.51 versus $0.51. Nine-month adjusted operating income was $959.0m versus $822.8m, and adjusted diluted EPS was $2.68 versus $2.23. These are company-presented non-GAAP measures.
Liquidity, debt and capital allocation
- At April 2, 2022, cash and cash equivalents were $806.0m and short-term investments were $267.0m. Total current assets were $2,558.6m and current liabilities $1,733.3m.
- Debt was $1,600.0m principal: $400.0m current and $1,200.0m long-term before unamortized discounts and issuance costs. There were no borrowings on the $900.0m revolving facility. The filing reported total available liquidity of $1,973.0m, including cash, short-term investments and the undrawn facility.
- Nine-month financing cash outflow was $1,468.3m, including $1,249.8m of share repurchases, $202.8m of dividends and $500.0m of debt repayments, partly offset by $498.5m of net debt issuance proceeds. Cash declined by $1,201.7m over the period.
- Inventories rose to $913.0m from $734.8m at fiscal year-end. Management attributed the cash use from inventory partly to higher receipts and in-transit goods amid supply-chain constraints.
Material changes, outlook and risks
- Gross margin fell 170 basis points in Q3 and 80 basis points for the nine-month period, primarily reflecting higher freight costs and unfavorable channel/geographic mix; duties also pressured Kate Spade. The company reported $62.9m of incremental freight costs in Q3 and $142.6m for nine months versus the prior-year periods.
- Covid-related restrictions and reduced demand in Greater China adversely affected Q3 performance, with management expecting near-term disruption to continue. Manufacturing restrictions, port congestion, container availability and higher freight costs remained risks; logistics challenges were expected to persist through fiscal 2022 and into fiscal 2023.
- Management said production had improved after shifting some sourcing and adjusting merchandising, and expected to meet anticipated demand. This expectation remains subject to supply-chain and logistics uncertainty.
- The Acceleration Program is expected to incur total pre-tax charges of approximately $215m–$220m and be substantially complete by fiscal year-end. The company reported approximately $200m of gross run-rate savings achieved in fiscal 2021 and remained on track for $300m; approximately $10m of additional program charges were expected in fiscal Q4. Management also forecast fiscal 2022 capital expenditures and cloud-computing implementation costs of approximately $180m. The filing does not provide clear full-year revenue or EPS guidance.
- In the second quarter, Tapestry issued $500m of 3.050% notes due 2032 and tendered $500m of its 2025 and 2027 notes, recording a $53.7m debt-extinguishment loss.
- After quarter-end, the company authorized an additional $1.50bn share-repurchase program, on top of $350.2m remaining authorization. It also replaced its revolving facility with a $1.25bn revolver and a $500m term loan, both maturing in 2027; the term-loan proceeds were intended partly to repay the $400m notes due in 2022.
- Other cited uncertainties include inflation, foreign-exchange and geopolitical volatility, tariffs and duties, and the expired U.S. Generalized System of Preferences program. Management said legal proceedings were routine and not expected in aggregate to have a material effect. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether Greater China demand and store operations recover, and whether supply-chain disruptions and elevated freight costs ease as expected.
- Whether sales growth converts into sustainable margins, given lower reported gross margin and Q3 adjusted operating income versus the prior-year period.
- Inventory levels, operating cash-flow conversion and liquidity after substantial repurchases, dividends and debt payments.
- Execution of the $300m savings target and the associated remaining Acceleration Program charges.
- Completion and funding of the post-quarter credit refinancing and planned maturity repayment, alongside the scale and pace of further share repurchases.