Tapestry, Inc. — Form 10-K Summary
Period clarification: The supplied filing is the annual report for the fiscal year ended June 30, 2018 (52 weeks), not a standalone 2017 Q4 filing. Fiscal 2017, ended July 1, 2017, was also 52 weeks. Tapestry was formerly Coach, Inc.; it changed its name in October 2017 after acquiring Kate Spade.
Business context
Tapestry operates three global brands: Coach, Kate Spade and Stuart Weitzman. Fiscal 2018 reporting reflects the Kate Spade acquisition, completed July 11, 2017, and a new brand-based segment structure. Sales mix was Coach 71.8%, Kate Spade 21.8% and Stuart Weitzman 6.4%.
Financial results
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $5.88 billion | $4.49 billion | +31.0% |
| Gross profit / margin | $3.85 billion / 65.5% | $3.08 billion / 68.6% | Margin down 3.1 percentage points |
| Operating income / margin | $670.8 million / 11.4% | $787.4 million / 17.5% | Income down 14.8% |
| Net income | $397.5 million | $591.0 million | Down 32.7% |
| Diluted EPS | $1.38 | $2.09 | Down 34.1% |
| Operating cash flow | $996.7 million | $853.8 million | Up $142.9 million |
Management’s non-GAAP adjusted results, excluding specified acquisition, integration, restructuring and tax items, were operating income of $991.9 million (16.9% margin) and net income of $759.9 million, or $2.63 diluted EPS. Adjusted FY2017 operating income was $812.6 million (18.1% margin), net income $609.3 million and diluted EPS $2.15. These company-defined non-GAAP measures are supplemental, not substitutes for GAAP.
- Cash and liquidity: Cash and cash equivalents were $1.243 billion, with $6.6 million of short-term investments. Working capital was $1.494 billion. The $900 million revolving facility was undrawn; reported available liquidity was $2.150 billion.
- Debt: Total debt was approximately $1.601 billion, versus $1.580 billion a year earlier; net debt based on cash and cash equivalents was approximately $357 million. Senior notes are due in 2022, 2025 and 2027. The company borrowed and repaid $1.1 billion of term loans during FY2018.
- Cash deployment: Investing activities used $2.165 billion, primarily including $2.376 billion for acquisitions, net of cash acquired, and $267.4 million of capital expenditures. Financing activities used $249.9 million, including $384.1 million in dividends.
- Inventory: $673.8 million, up from $469.7 million, with the increase principally reflecting the acquired Kate Spade business.
Material changes and segment performance
- Consolidated sales growth primarily reflected Kate Spade, which contributed $1.285 billion in reported-period sales, plus Coach growth. Kate Spade was not included in FY2017 results.
- Coach: Sales rose 2.6% to $4.222 billion; operating income rose 4.3% to $1.084 billion. Comparable sales increased 1.5%.
- Kate Spade: Sales were $1.285 billion; comparable sales declined 7.2%, or 2.5% excluding Internet sales. Reported operating loss was $61.9 million; excluding specified non-GAAP charges, operating income was $158.3 million.
- Stuart Weitzman: Sales were nearly flat at $373.8 million. The brand reported an operating loss of $2.6 million, versus $15.5 million operating income in FY2017; comparable adjusted operating income also declined.
- Cash fell by $1.430 billion, compared with a $1.814 billion increase in FY2017. The comparison is affected by major prior-year cash proceeds from the sale of the Hudson Yards investment and former headquarters.
Outlook, risks and unusual items
- For FY2019, management stated a goal of strong revenue and operating-income growth, emphasizing multi-brand synergies, product innovation, growth focused on the Chinese consumer, and digital and data capabilities. The filing does not provide a specific numerical revenue or EPS forecast.
- FY2019 capital expenditures were expected to be $300–$325 million. The company expected $50–$60 million in pre-tax acquisition and integration charges, including $5–$10 million non-cash. ERP and technology work was expected to incur a further $10–$15 million in charges.
- Stuart Weitzman faced production delays and supply-chain challenges that reduced sales. Management expected some negative effects to continue through the Fall/Winter FY2019 season. Its brand reporting unit’s fair value exceeded carrying value by about 15%; management cautioned that weaker-than-expected profitability could lead to impairment testing and a possible charge.
- FY2018 included $301.6 million of integration and acquisition costs and a $266.0 million transition-tax charge, partly offset by deferred-tax remeasurement benefits. The reported effective tax rate was 33.4%; the adjusted rate was 17.2%. Tax estimates were provisional under the applicable SEC guidance.
- Key risks include acquisition integration and synergy execution; fashion and discretionary-spending volatility; promotional pressure and inventory management; international, currency and trade-policy exposure; cybersecurity and ERP implementation; and debt, lease and tax obligations. The company reported $2.768 billion of future minimum operating lease payments and $342.8 million of inventory purchase obligations.
- Management and the auditor reported effective internal control over financial reporting. The company said routine legal proceedings were not expected to have a material aggregate effect.
Most important facts for investors to verify
- Whether Coach and Kate Spade sales trends, including Kate Spade’s comparable-sales performance, improved after FY2018.
- Whether acquisition synergies and integration progress support management’s FY2019 growth objectives, and how reported results compare with adjusted measures.
- Whether Stuart Weitzman resolved production and delivery problems and maintained sufficient impairment headroom.
- How cash generation, capital expenditures, dividends and scheduled debt and transition-tax payments affect liquidity and leverage.
- Whether the final tax treatment and future tax effects differ materially from the FY2018 provisional estimates.