Tapestry, Inc. (formerly Coach, Inc.) — Form 10-Q summary
Reporting period: First quarter of fiscal 2018, the 13 weeks ended September 30, 2017, compared with the 13 weeks ended October 1, 2016. On July 11, 2017, the Company acquired Kate Spade; its results are included from that date. The Company changed its name to Tapestry, Inc. on October 31, 2017. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $1,288.9 | $1,037.6 |
| Gross profit / margin | $764.4 / 59.3% | $714.7 / 68.9% |
| Operating income (loss) / margin | $(21.8) / (1.7)% | $165.9 / 16.0% |
| Net income (loss) | $(17.7) | $117.4 |
| Diluted EPS | $(0.06) | $0.42 |
| Net cash used in operating activities | $(103.8) | $(38.1) |
Sales increased 24.2%, primarily because of Kate Spade. Excluding Kate Spade, sales declined 1.7%; excluding currency effects, reported sales rose 25.2%. Reported gross margin fell 960 basis points, with acquisition-related charges a major factor. Excluding the specified integration, acquisition and operational-efficiency items, operating income was $168.8 versus $176.8, and net income was $119.7 versus $126.0. These are non-GAAP measures; the filing cautions they supplement, not replace, GAAP results.
Brands and material comparisons
- Coach: Sales declined 2.8% to $923.7; comparable sales fell 2.4%. Operating income was $198.3, down 14.6%. Management cited traffic and inventory challenges, promotional activity, foreign exchange and shipment timing.
- Kate Spade: Post-acquisition sales were $268.8; comparable sales declined 9.4% (3.0% excluding Internet). Reported operating loss was $134.9, including acquisition and integration charges. Excluding specified items, operating income was $21.3.
- Stuart Weitzman: Sales rose 10.1% to $96.4 and operating income increased to $8.4 from $3.9, primarily reflecting higher wholesale shipments.
Cash, debt and liquidity
- Cash and cash equivalents were $1,373.3 at September 30, down from $2,672.9 at July 1. Short-term investments were $297.6 and long-term investments $70.0.
- Operating cash use was $103.8, including a $156.0 inventory cash outflow, primarily related to holiday-season purchases, including Kate Spade inventory. Capital expenditures were $48.9 in the quarter.
- Investing cash use was $2,221.6, including $2,320.2 net cash paid for Kate Spade. Financing provided $1,022.4, including $1,100.0 of new debt proceeds.
- Debt on the balance sheet totaled $2,688.8, including $800.0 current and $1,888.2 long-term. The $800 million six-month term loan is a near-term maturity; the Company also had $300 million under a three-year term loan and $1.6 billion of senior notes due 2022, 2025 and 2027. The $900 million revolving facility was undrawn.
- Reported available liquidity was $2,640.9, including cash, investments and the undrawn revolver. Approximately 76% of cash and short-term investments was held outside the U.S. in jurisdictions where earnings were intended to be permanently reinvested.
Outlook, commentary and risks
- No full-year sales or earnings guidance is provided in the supplied filing text. Management expects fiscal 2018 capital expenditures of approximately $325 million.
- Management estimated approximately $80 million of additional pre-tax Kate Spade integration charges for the remainder of fiscal 2018, about $35 million expected to be non-cash. A further $5–10 million of Operational Efficiency Plan charges was expected in fiscal 2018.
- Management described global retail traffic as weak and inconsistent, with increased promotions, constrained discretionary spending and macroeconomic uncertainty. Risks cited include competition, fashion and brand execution, foreign exchange, geopolitical and economic conditions, and acquisition integration and synergy realization.
- The first quarter is typically a seasonal inventory build ahead of holiday sales; management cautioned that quarterly results and cash flows are not necessarily indicative of the full year. The Company also noted possible impairment risk for Stuart Weitzman assets if profitability trends weaken.
- Routine legal proceedings were not expected by management to have a material adverse effect. Standby letters of credit and bank guarantees totaled $17.5 million.
Important facts for investors to verify
- Whether Kate Spade integration delivers expected benefits and how much of the projected remaining $80 million in charges is incurred.
- Repayment or refinancing of the $800 million six-month term loan and subsequent interest expense and leverage.
- Whether Coach and Kate Spade comparable-sales trends and gross margins stabilize amid promotional pressure and weak traffic.
- Seasonal inventory conversion, operating cash flow and progress against the $325 million fiscal 2018 capital-expenditure estimate.
- Potential effects of foreign-held cash, currency movements, lease commitments and any deterioration in Stuart Weitzman profitability on liquidity or impairment assessments.