Tapestry, Inc. — Form 10-Q Summary
Period clarification: The filing covers Tapestry’s third quarter of fiscal 2019, the 13 weeks ended March 30, 2019, and the nine months then ended. Although the request metadata says “2018 Q3,” the filing period is fiscal 2019 Q3. Fiscal 2019 was scheduled to end June 29, 2019. Figures are unaudited and in U.S. dollars unless noted.
Business context
Tapestry owns Coach, Kate Spade and Stuart Weitzman. It sells accessories, footwear, apparel and related lifestyle products through company-operated stores and online channels, wholesale customers, distributors and licensing arrangements. During fiscal 2019, the company also acquired certain Kate Spade and Stuart Weitzman distributor assets in Asia and Australia.
Financial performance
| Metric | Three months ended March 30, 2019 | Nine months ended March 30, 2019 |
|---|---|---|
| Net sales | $1,331.4 million; +0.7% reported, +2.3% excluding currency effects | $4,513.4 million; +2.7% reported, +3.6% excluding currency effects |
| Gross profit / margin | $915.9 million / 68.8%, versus $907.6 million / 68.6% | $3,054.5 million / 67.7%, versus $2,846.7 million / 64.8% |
| Operating income / margin | $105.8 million / 7.9%, versus $159.0 million / 12.0% | $644.2 million / 14.3%, versus $483.6 million / 11.0% |
| Net income | $117.4 million, versus $140.3 million | $494.5 million, versus $185.8 million |
| Diluted EPS | $0.40, versus $0.48 | $1.70, versus $0.65 |
Quarterly SG&A rose 8.2% to $810.1 million, or 60.8% of sales versus 56.6%. Operating income fell 33.4%; lower net interest expense and a tax benefit partly offset the operating decline. The quarterly effective tax rate was (23.4)%, reflecting additional U.S. Treasury guidance and a tax benefit; the prior-year quarter rate was 1.3%.
For the nine months, the effective tax rate declined to 18.6% from 56.2%, primarily reflecting the lower U.S. federal statutory rate and prior-year transition-tax effects, partly offset by GILTI. Excluding items identified by management, nine-month diluted EPS was $1.97 versus $2.03; quarterly diluted EPS was $0.42 versus $0.54. These are company-defined non-GAAP measures and should be considered alongside GAAP results.
Brands and material comparisons
- Coach: Quarterly sales declined 0.4% reported but rose 1.3% excluding currency; nine-month sales increased 1.7%. Nine-month operating income increased 2.7% to $848.9 million.
- Kate Spade: Quarterly sales increased 4.4%; nine-month sales increased 6.4%. Nine-month GAAP operating income was $140.1 million, compared with a $55.8 million loss a year earlier. Comparable sales remained pressured: down 8% for the nine months, with lower traffic and conversion, partly offset by e-commerce growth.
- Stuart Weitzman: Quarterly sales grew 1.7%, but the operating loss widened to $13.6 million. Nine-month sales rose 1.1%, while the segment moved from $19.7 million operating income to a $20.8 million loss. Management cited supply-chain-related wholesale weakness, foreign currency and higher expenses.
Quarterly reported operating margin declined despite slightly higher sales, as higher SG&A—including ERP implementation and integration costs—more than offset gross profit growth. Nine-month reported earnings improved sharply year over year, but the comparison is affected by substantial prior-year Kate Spade acquisition and integration charges and tax-legislation charges. On management’s non-GAAP basis, nine-month operating income fell 5.2% to $724.6 million and net income fell 1.8% to $573.3 million.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $602.2 million, versus $586.5 million. Inventory used $123.1 million of cash, compared with a $12.0 million source in the prior-year period; management attributed the increase mainly to higher in-transit inventory.
- Investing cash outflow was $477.7 million, including $184.2 million of capital expenditures and net investment purchases. Prior-year investing outflow was $2.08 billion, primarily due to the Kate Spade acquisition.
- Financing cash outflow was $287.3 million, primarily from $292.8 million of dividends. Cash and cash equivalents declined $168.1 million during the nine months to $1,075.3 million.
- At March 30, 2019, short-term investments were $262.0 million; current assets were $2.66 billion and current liabilities $996.6 million. Inventory was $811.1 million, up from $673.8 million at June 30, 2018.
- Long-term debt, net, was $1.60 billion, comprising senior notes due 2022, 2025 and 2027, plus other obligations. No borrowings were outstanding under the $900 million revolving facility. The filing reported $2.24 billion of total available liquidity, including cash, short-term investments and the undrawn facility.
- Approximately 74% of cash and short-term investments were held outside the United States. The company expected to pay the remaining $155.9 million of transition tax from fiscal 2021 through fiscal 2025.
Outlook, commentary and risks
The filing provides no specific full-year revenue or earnings guidance. Management expected fiscal 2019 capital expenditures of $300–$325 million and estimated another $25–$35 million of pre-tax integration and acquisition charges for the remainder of the year, most expected to be cash charges. Management said operating cash flow, available cash, investments and credit access should fund foreseeable operating, capital and debt-service needs, while noting future transactions or adverse conditions could require additional capital.
- Management described global consumer spending and retail traffic as uncertain, with a promotional environment, uneven demand across regions and channels, and macroeconomic and geopolitical risks.
- New tariffs on certain Chinese-made imports were assessed as likely to have minimal impact given sourcing diversity; proposed additional tariffs could have a more significant effect if enacted. Management also cited trade tensions as a risk to growth with Chinese consumers.
- Management noted volatility in North American customer spending, believed to involve resellers ahead of changes to Chinese e-commerce laws, alongside stronger local demand in China.
- Stuart Weitzman continued to face the trailing effects of production delays and supply-chain complexity. Management reported sales growth in the second and third fiscal quarters after investments in talent, infrastructure and manufacturing capacity, but warned that further deterioration could trigger impairment testing. The brand’s fair value exceeded carrying value by about 15% at the prior fiscal-year assessment.
- ERP implementation continued; supply-chain functions for Coach and Stuart Weitzman were expected to follow in early fiscal 2020. Management said controls were being monitored during the system transition and reported disclosure controls effective as of March 30, 2019.
- On May 9, 2019, after quarter-end, the board authorized up to $1.0 billion of share repurchases, subject to market conditions; the company could terminate or limit the program. No shares were repurchased during the reported quarter, and no availability remained under the prior program at March 30.
- The company reported routine legal proceedings and did not expect their aggregate outcome to materially affect its business or consolidated financial statements. It reported no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether sales momentum and margin trends persist, particularly Coach’s modest growth, Kate Spade’s comparable-store weakness and Stuart Weitzman’s recovery.
- How much quarterly and year-to-date performance depends on tax benefits, acquisition-related comparisons, ERP costs and other adjustments; reconcile GAAP results with the company’s non-GAAP measures.
- Whether higher inventory and in-transit goods convert into sales and cash without additional markdowns or working-capital pressure.
- Progress on Stuart Weitzman production and supply-chain remediation, and the potential for impairment if profitability underperforms expectations.
- Execution and control risks from the ERP rollout, as well as the actual impact of tariffs, trade tensions and consumer-demand changes.
- The timing and funding of the announced $1.0 billion repurchase authorization, alongside dividends, capital spending, debt service and transition-tax payments.