Tapestry, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2018, ended December 30, 2017. The quarter was 13 weeks. Amounts are in U.S. dollars; financial statements are unaudited.
Business context
Tapestry operates Coach, Kate Spade and Stuart Weitzman. It acquired Kate Spade on July 11, 2017, and included its results from that date. Accordingly, consolidated year-over-year growth includes Kate Spade and is not a like-for-like comparison. The company reorganized reporting into those three brand segments.
Key financial metrics
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Net sales | $1,785.0m | $1,321.7m | $3,073.9m | $2,359.3m |
| Gross profit / margin | $1,177.4m / 66.0% | $906.2m / 68.6% | $1,941.8m / 63.2% | $1,620.9m / 68.7% |
| Operating income / margin | $346.4m / 19.4% | $277.4m / 21.0% | $324.6m / 10.6% | $443.3m / 18.8% |
| Net income | $63.2m | $199.7m | $45.5m | $317.1m |
| Diluted EPS | $0.22 | $0.71 | $0.16 | $1.13 |
| Operating cash flow | Not presented by quarter | $431.0m | $328.1m |
Q2 sales rose 35.1%, primarily due to Kate Spade, with growth also at Coach and Stuart Weitzman. Q2 GAAP net income fell 68.3%; the reported result includes substantial acquisition/integration costs and the tax-law impact. Excluding the company’s identified items, management reported Q2 diluted EPS of $1.07 versus $0.75 and first-half diluted EPS of $1.49 versus $1.20. These are non-GAAP measures and should be considered alongside GAAP results.
At December 30, 2017, cash and cash equivalents were $2,065.0m, short-term investments $26.8m and long-term investments $27.3m. Current assets were $3,282.3m and current liabilities $1,731.4m. Debt on the balance sheet was approximately $2,688m, including $800.6m current debt and $1,887.5m long-term debt, net of issuance costs. The company also had a $900m undrawn revolving facility; reported total available liquidity was $3,019.1m. After quarter-end, it repaid the $800m and $300m term loans on January 10 and January 24, 2018, respectively.
First-half investing cash outflow was $1,988.5m, primarily reflecting $2,320.2m paid for Kate Spade net of cash acquired. Capital expenditures were $126.5m; dividends paid were $191.0m. Cash declined $607.9m over the six months.
Material changes and segment performance
- Kate Spade contributed $434.7m of Q2 sales and $703.5m for the post-acquisition first-half period. Comparable sales declined 7.3% in Q2 and 6.9% for the first six months, largely reflecting a strategic reduction in Internet flash sales. Excluding identified items, its operating income was $92.0m in Q2 and $113.3m for the six-month post-acquisition period.
- Coach Q2 sales increased 2.2% to $1,229.6m and operating income increased 6.6% to $361.2m. For the first six months, sales were essentially flat at $2,153.3m and operating income declined 2.0% to $559.5m.
- Stuart Weitzman Q2 sales increased 2.1% to $120.7m; first-half sales increased 5.5% to $217.1m. Promotional activity and foreign exchange weighed on gross margin.
- Reported Q2 operating margin fell to 19.4% from 21.0%; first-half margin fell to 10.6% from 18.8%. Management’s adjusted figures showed Q2 operating margin of 23.0% versus 22.3%, but first-half margin of 18.9% versus 20.0%.
Outlook, commentary and risks
- The filing gives no specific full-year sales or EPS guidance. Fiscal 2018 capital expenditures were expected to be approximately $325m. Management estimated another $30–40m of pre-tax Kate Spade integration charges for the remainder of fiscal 2018, including $5–10m of non-cash charges; the Operational Efficiency Plan was expected to incur a further $5–10m and be completed by fiscal year-end.
- The December 2017 tax law generated a $296.5m provisional transition-tax charge, partly offset by deferred-tax remeasurement and the lower statutory rate. The company estimated a total fiscal 2018 transition tax of approximately $315m, payable over eight years, and cautioned that tax estimates could change as additional information and guidance become available.
- Management described retail traffic as inconsistent and competition as contributing to a more promotional environment. It cited constrained discretionary spending, foreign-exchange volatility, geopolitical and trade uncertainty, and risks in major markets. Further traffic declines could trigger store impairment charges.
- Stuart Weitzman’s reporting-unit and indefinite-lived trademark fair values exceeded carrying values by about 20%; management warned that weaker profitability could result in impairment. Routine legal proceedings were not expected to have a material effect. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Kate Spade’s comparable-sales trajectory, integration progress, and the extent to which reported growth reflects acquisition rather than organic performance.
- Reconciliation and sustainability of non-GAAP results, particularly the large acquisition/integration adjustments and tax-law effects.
- Final transition-tax and deferred-tax calculations, including the potential effect of future tax guidance and foreign-earnings analysis.
- Debt and liquidity after the subsequent $1.1bn term-loan repayments, and ongoing interest expense and capital-allocation needs.
- Gross-margin trends amid promotions and currency movements, and the risk of impairment at Stuart Weitzman if expected profitability weakens.