Business context and reporting period
This filing is Coach, Inc.’s Form 10-K for the 52-week fiscal year ended July 1, 2017—not a 2016 Q4 filing for Tapestry, Inc. Tapestry was not the registrant’s name in this report. Coach operated the Coach and Stuart Weitzman brands; Kate Spade was acquired after year-end, on July 11, 2017.
Fiscal 2016, the comparison period, included 53 weeks, which affects year-over-year comparisons.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $4.488 billion | $4.492 billion |
| Gross profit / margin | $3.081 billion / 68.6% | $3.051 billion / 67.9% |
| SG&A | $2.294 billion (51.1% of sales) | $2.398 billion (53.4%) |
| Operating income / margin | $787.4 million / 17.5% | $653.5 million / 14.5% |
| Net income / margin | $591.0 million / 13.2% | $460.5 million / 10.3% |
| Diluted EPS | $2.09 | $1.65 |
| Operating cash flow | $853.8 million | $758.6 million |
At July 1, 2017, cash and cash equivalents were $2.673 billion, investments were $485.8 million, working capital was $3.200 billion, total assets were $5.832 billion, and total debt was $1.580 billion. Capital expenditures were $283.1 million. Dividends declared were $1.35 per share.
Material changes versus the prior period
- Reported sales were nearly flat, down 0.1%. Excluding the extra week in FY2016, FY2017 sales increased 1.8%.
- Operating income rose 20.5% and net income rose 28.3%; the lower effective tax rate (22.1%, versus 26.5%) and reduced restructuring and acquisition-related charges contributed. Excluding specified non-GAAP items, operating income increased 4.6%, net income 10.4%, and diluted EPS was $2.15 versus $1.98.
- North America sales fell 2.0%, including lower wholesale sales following the decision to close about 25% of wholesale doors and reduce promotional participation. Comparable sales increased 3.1%, primarily on improved conversion.
- International sales increased 0.7%; growth in Europe and Greater China was partly offset by declines in Japan and South Korea. Stuart Weitzman sales increased 8.4%, while its reported operating income declined to $20.6 million from $32.5 million.
- Operating cash flow increased by $95.2 million. Investing cash flow was positive $593.0 million, supported by proceeds from the Hudson Yards investment and former headquarters sales; financing cash flow was positive $369.5 million, including senior-note proceeds.
Outlook, commentary, risks and unusual items
- Management described weak and inconsistent retail traffic, promotional pressure, constrained discretionary spending, currency volatility, and uncertainty related to Brexit and geopolitical and economic conditions. It planned to monitor conditions and adjust operating strategies and costs.
- FY2018 capital expenditures were expected to be approximately $325 million. The Operational Efficiency Plan had $10–15 million of remaining charges expected in FY2018.
- Following the Kate Spade acquisition, management estimated FY2018 integration costs of $150–200 million, including approximately $60 million of severance and related costs and $45 million of acquisition-related expenses. Integration plans were still being developed.
- The acquisition was for approximately $2.4 billion in cash. Coach borrowed $1.1 billion under term-loan facilities after year-end to fund part of the purchase. The acquisition and related borrowing are not reflected in the July 1, 2017 balance sheet. Coach also had a $900 million undrawn revolving facility at fiscal year-end.
- Other notable items: Coach recorded $14.2 million of store-asset impairment charges in FY2017; recognized a $35.2 million reversal of the Stuart Weitzman contingent earnout accrual; and entered a 20-year headquarters lease with approximately $1.05 billion of total commitment. Operating lease obligations totaled $2.459 billion at year-end.
- Key risks include acquisition integration and increased leverage, execution of technology and efficiency initiatives, brand relevance and fashion demand, promotional and inventory pressure, international and currency exposure, cybersecurity, and potential store impairments. Management reported no material pending legal proceedings in the aggregate and effective disclosure and internal financial-reporting controls.
Most important facts for investors to verify
- Confirm the applicable issuer and period: this is Coach, Inc. FY2017, despite the request metadata identifying Tapestry and 2016 Q4.
- Assess underlying growth using the 52-week comparison and the company’s reconciliations of non-GAAP results; FY2016 included an extra week.
- Track Kate Spade integration spending, realized synergies, acquired-business performance, and the effect of post-year-end borrowing on leverage and interest expense.
- Monitor North America wholesale and comparable-store trends, International performance—particularly Japan and South Korea—and Stuart Weitzman profitability.
- Review cash generation, planned capital expenditures, dividends, debt covenants and maturities, and the substantial operating-lease commitments.