Business Context and Reporting Period
Coach, Inc. Form 10-Q for the 13 weeks ended October 1, 2016, the first quarter of fiscal 2017; comparative quarter ended September 26, 2015. The filing identifies the registrant as Coach, Inc., not Tapestry, Inc. The business comprised Coach North America, Coach International, and Stuart Weitzman.
Financial Results and Liquidity
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $1,037.6 million | $1,030.3 million |
| Gross profit / margin | $714.7 million / 68.9% | $696.5 million / 67.6% |
| Operating income / margin | $165.9 million / 16.0% | $141.4 million / 13.7% |
| Net income | $117.4 million | $96.4 million |
| Diluted EPS | $0.42 | $0.35 |
| Operating cash flow | $(38.1) million | $8.0 million |
| Capital expenditures | $67.6 million | $69.5 million |
Sales rose 0.7% reported but fell 0.6% excluding foreign currency effects. Cash and cash equivalents were $1.0 billion at quarter-end, with short-term investments of $533.2 million and long-term investments of $74.4 million. Debt was $600 million principal amount of 4.250% senior notes, reported net at $591.4 million; the $285 million term loan was repaid during the quarter. No revolving-facility borrowings were outstanding. The company reported total available liquidity of $2.359 billion, including its undrawn credit facilities.
Material Changes Versus Prior Year
- Gross margin increased 130 basis points, primarily from product mix and lower Coach brand costs. SG&A declined 1.1% as reported, but increased 1.1% excluding specified items.
- Reported net income grew 21.7%; excluding specified items, it increased 11.4% to $126.0 million. Adjusted diluted EPS was $0.45 versus $0.41.
- North America sales fell 2.8%, while International sales grew 7.2% reported and 3.4% in constant currency. Stuart Weitzman sales were flat at $87.5 million.
- Operating cash flow was negative, mainly reflecting seasonal inventory investment and cash outflows from accrued liabilities. Investing cash flow was $555.6 million, including $680.6 million of Hudson Yards investment-sale proceeds.
Outlook, Commentary, Risks, and Unusual Items
- Management described global retail traffic as weak and inconsistent, with elevated promotion, constrained discretionary spending, currency volatility, and uncertainty in key markets. The filing provides no specific full-year revenue or earnings guidance.
- The company planned to close about 25% of North America wholesale doors from fiscal 2016 year-end levels and continue investing in shop-in-shop environments. Further Operational Efficiency Plan charges of $20 million to $35 million were expected in fiscal 2017; additional Stuart Weitzman acquisition-related costs of around $20 million were also expected.
- The Hudson Yards transaction generated approximately $707 million before $26 million of transaction costs and a $28.8 million gain to be amortized through SG&A over the 20-year lease. The new headquarters lease commitment was approximately $1.05 billion, including $825.5 million due after fiscal 2021.
- Management noted Stuart Weitzman goodwill/trademark impairment sensitivity: prior-year valuation headroom was limited, and weaker profitability trends or market multiples could prompt an impairment test and possible charge.
- Routine legal proceedings were not expected by management to have a material effect. No material changes to previously disclosed risk factors were reported. The company cited Brexit, geopolitical and economic uncertainty, competition, brand relevance, execution of growth and efficiency plans, and foreign exchange as risks.
Important Facts for Investors to Verify
- Confirm the intended issuer: the supplied filing names Coach, Inc., although the request identifies Tapestry, Inc.
- Assess whether revenue weakness in North America and the wholesale-door rationalization are offset by International growth and improved store performance.
- Separate GAAP results from management’s non-GAAP adjustments, and assess the expected remaining restructuring and Stuart Weitzman costs.
- Review seasonal cash-flow needs, the large headquarters lease obligations, and the timing and use of remaining headquarters-sale proceeds; the filing expected approximately $125 million from the prior headquarters sale by the end of fiscal Q2.
- Monitor Stuart Weitzman performance and impairment headroom, along with the company’s ability to sustain margins amid promotional and macroeconomic pressures.