Tapestry, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the 13 weeks ended September 29, 2018; comparative quarter ended September 30, 2017. Results are unaudited. Tapestry operates Coach, Kate Spade and Stuart Weitzman. Prior-year results were not restated for the new revenue standard.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $1,381.2 million | $1,288.9 million |
| Gross profit / margin | $935.1 million / 67.7% | $762.9 million / 59.2% |
| SG&A / percent of sales | $777.4 million / 56.3% | $784.7 million / 60.9% |
| Operating income (loss) / margin | $157.7 million / 11.4% | $(21.8) million / (1.7)% |
| Net income (loss) | $122.3 million | $(17.7) million |
| Diluted EPS | $0.42 | $(0.06) |
| Net cash used in operating activities | $(19.3) million | $(103.8) million |
Sales grew 7.2% reported and 7.5% excluding currency effects. Adjusted, non-GAAP operating income was $181.2 million versus $168.8 million, with a 13.1% margin in both periods. Adjusted diluted EPS was $0.48 versus $0.42. The company’s adjustments exclude ERP implementation and integration/acquisition costs in FY2019, and also Operational Efficiency Plan costs in FY2018; these measures are supplemental, not GAAP results.
Brand and operating trends
- Coach: Sales rose 4.0% to $960.7 million; comparable sales increased 4%. Operating income was $230.9 million, up 11.0%.
- Kate Spade: Sales rose 21.1% to $325.4 million, with growth affected by additional days under Tapestry ownership, new stores and consolidation of China joint ventures. Comparable sales declined 5%; operating income was $44.8 million versus a prior-year loss.
- Stuart Weitzman: Sales declined 1.3% to $95.1 million; operating loss was $18.4 million versus prior-year operating income of $8.9 million. Results reflected supply-chain and production challenges, lower wholesale sales, currency pressure and higher expenses.
Balance sheet, cash flow and liquidity
- At September 29, 2018, cash and cash equivalents were $904.7 million and short-term investments were $158.5 million. Current assets were $2,467.5 million; current liabilities were $899.4 million.
- Debt was $1,600.5 million long-term, net of discount and issuance costs, plus $0.7 million current debt. The company had no borrowings on its $900 million revolving credit facility. Reported total available liquidity, including cash, investments and the undrawn facility, was $1,963.2 million.
- Cash declined $338.7 million during the quarter. Investing activities used $223.0 million, including $55.2 million of capital expenditures and net investment purchases; financing activities used $94.1 million, primarily dividends. Operating cash use improved year over year, but inventory growth used $150.7 million of cash.
- Dividends declared were $0.3375 per share. Approximately 64% of cash and short-term investments were held outside the U.S.
Material changes, outlook and risks
- GAAP operating results improved substantially from the prior-year loss, when $187.5 million of integration and acquisition costs—primarily related to Kate Spade—were recorded. FY2019 quarter integration and acquisition costs were $19.5 million, with a further approximately $40 million of pretax charges expected for the remainder of fiscal 2019; approximately $5–10 million of that estimate is expected to be non-cash. ERP implementation costs were $4.0 million this quarter.
- Management aims for strong revenue and operating-income growth in fiscal 2019, without providing a numeric full-year earnings or sales forecast in this filing. It expects Stuart Weitzman sales growth in Q2 following investments in talent, infrastructure and manufacturing capacity. Fiscal 2019 capital expenditures are expected to be $300–$325 million.
- Management cited pressured retail traffic, promotional competition, uncertain global consumer spending, foreign-exchange and geopolitical risks, and proposed U.S. tariffs on Chinese-made imports (then 10%, with a proposed increase to 25% in January 2019). It expected minimal tariff impact given sourcing diversity.
- Supply-chain execution remains a risk for Stuart Weitzman; management noted the brand’s fair value exceeded carrying value by about 15% at the prior fiscal-year impairment assessment and warned weaker-than-expected profitability could trigger an impairment test or charge.
- The first quarter typically builds inventory ahead of holiday selling, so quarterly cash flow and results may not indicate full-year performance. The company expects adequate liquidity for foreseeable needs, while noting future funding depends on operating performance and market conditions.
- The company expects to pay the remaining approximately $240 million of U.S. transition tax over fiscal 2019–2025. Routine legal proceedings were not expected to have a material adverse effect. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Key facts for investors to verify
- Whether sales growth and improved GAAP margins persist after separating acquisition effects, non-GAAP adjustments and currency movements.
- Kate Spade comparable-sales trends and whether its growth translates into sustained profitability; progress resolving Stuart Weitzman supply-chain issues and restoring margins.
- Inventory levels, seasonal working-capital needs, operating cash generation and planned capital expenditures.
- Actual integration costs versus the approximately $40 million remaining-fiscal-2019 estimate, and execution of the ERP rollout.
- Debt service, transition-tax payments, tariff exposure and any developments affecting Stuart Weitzman impairment risk.