Tapestry, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months of fiscal 2024, ended December 30, 2023. The comparable fiscal 2023 quarter ended December 31, 2022. Amounts are in U.S. dollars unless otherwise stated.
Business context
Tapestry operates Coach, kate spade new york and Stuart Weitzman, selling through company-operated stores and e-commerce, wholesale customers and distributors. Its reported segments are those three brands. The filing is an unaudited quarterly report.
Financial results and liquidity
| Metric | Fiscal Q2 2024 | Fiscal Q2 2023 | First six months 2024 | First six months 2023 |
|---|---|---|---|---|
| Net sales | $2,084.5 million | $2,025.4 million | $3,597.7 million | $3,531.9 million |
| Gross profit / margin | $1,493.2 million / 71.6% | $1,389.3 million / 68.6% | $2,590.9 million / 72.0% | $2,443.9 million / 69.2% |
| Operating income / margin | $447.6 million / 21.5% | $418.2 million / 20.6% | $700.8 million / 19.5% | $672.5 million / 19.0% |
| Net income | $322.3 million | $329.9 million | $517.3 million | $525.2 million |
| Diluted EPS | $1.39 | $1.36 | $2.23 | $2.14 |
- Quarterly revenue and brands: Sales rose 2.9% reported and 3.3% in constant currency. Coach sales increased 6.4% (6.8% constant currency) to $1,541.9 million; Kate Spade declined 6.1% to $460.4 million; Stuart Weitzman declined 3.8% to $82.2 million.
- Six-month brand trends: Coach sales increased 5.1% reported (6.0% constant currency); Kate Spade decreased 6.0%; Stuart Weitzman decreased 10.6%.
- Profitability: Gross margin improvement reflected lower freight costs, pricing and favorable mix. Freight savings were $32.9 million for the quarter and $54.1 million for the six-month period. SG&A increased 7.7% for the quarter and 6.7% for the six months, including acquisition-related charges; excluding those charges, SG&A still increased 4.8% and 4.0%, respectively.
- Acquisition-adjusted results: Excluding Capri-related costs, fiscal Q2 operating income was $475.9 million, net income $376.7 million and diluted EPS $1.63. For the first six months, adjusted operating income was $748.7 million, net income $593.0 million and diluted EPS $2.56. These are company-presented non-GAAP measures, not substitutes for GAAP results.
- Cash flow: Six-month operating cash flow was $901.8 million, versus $462.4 million a year earlier. Investing cash outflow was $655.0 million, including $611.3 million of investment purchases; capital expenditures and cloud-computing costs were $59.1 million. Financing cash inflow was $5.81 billion, primarily from acquisition-related debt issuance.
- Cash, debt and liquidity: At December 30, cash and cash equivalents were $6,833.1 million and short-term investments were $629.2 million. Current and long-term debt totaled approximately $7,739.4 million, implying net debt of approximately $277.1 million against cash and short-term investments. The company reported $3.4 billion of undrawn revolving and acquisition term-loan commitments. It was in compliance with debt covenants at quarter-end.
- Other metrics: Inventory was $824.9 million, down from $919.5 million at fiscal year-end. Dividends paid during the six months were $160.4 million. Share repurchases were suspended in August 2023; none occurred in the six-month period.
Material changes and unusual items
- Net sales increased modestly, while gross and operating margins improved. Coach drove sales growth; Kate Spade and Stuart Weitzman sales declined.
- GAAP net income declined 2.3% in the quarter and 1.5% in the six-month period despite higher operating income. The principal unusual factor was Capri financing and professional costs: $72.4 million pre-tax for the quarter and $98.7 million for the six months. These included interest-related charges and corporate SG&A costs.
- Interest expense rose to $49.2 million in the quarter and $62.5 million for six months, primarily reflecting Capri financing costs and newly issued debt. Excluding items affecting comparability, quarterly and six-month net interest expense was lower than in the prior-year periods.
- Cash and debt rose substantially after Tapestry issued $4.5 billion of U.S.-dollar notes and €1.5 billion of euro notes for the proposed Capri acquisition. The proceeds were held in cash and short-term investments pending the transaction. The company also had $1.4 billion of delayed-draw term-loan commitments.
Outlook, risks and contingencies
- Tapestry expected the Capri acquisition, announced at $57 per share and an approximately $8.5 billion enterprise value, to close during calendar 2024. Capri shareholders approved the agreement; completion remained subject to closing conditions, including regulatory approvals. The filing provides no detailed full-year earnings or revenue guidance. Fiscal 2024 capital expenditures and cloud-computing costs were expected to be approximately $190 million.
- If the acquisition is not completed by the stated deadline, or the merger agreement is terminated or Tapestry stops pursuing the deal, the acquisition notes are subject to mandatory redemption at 101% of principal plus accrued interest. The new notes carry stated coupons ranging from 5.350% to 7.850%.
- Management described the macroeconomic environment as challenging and volatile, citing consumer spending, inflation, currencies, geopolitical conditions and trade duties. Red Sea disruptions could raise transit times and costs; management did not anticipate a material impact at the time of filing.
- Management flagged Kate Spade impairment sensitivity: at the fiscal 2023 testing date, its reporting-unit and indefinite-lived brand fair values exceeded carrying values by approximately 20% and 40%, respectively. Weaker-than-expected profitability could trigger an interim or annual impairment test. Stuart Weitzman reported a $7.2 million operating loss for the first six months.
- The company reported routine legal proceedings and did not expect pending matters, in aggregate, to materially affect its business or financial statements. No material impairment charges were recorded in the periods presented. Management said disclosure controls were effective and there were no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether Capri receives required regulatory approvals and closes on the expected terms and schedule, and the acquisition’s ultimate financing, integration costs and benefits.
- How the acquisition debt affects interest expense, leverage, liquidity and compliance with post-acquisition covenant limits.
- Whether Coach’s growth continues and whether Kate Spade and Stuart Weitzman sales and profitability stabilize, including the risk of Kate Spade impairment.
- Whether gross-margin gains from lower freight costs, pricing and mix persist, and whether rising compensation, occupancy, marketing and corporate costs offset them.
- Whether Red Sea shipping disruption, foreign-exchange movements, consumer weakness, tariffs or other geopolitical developments materially change costs or demand.