Tapestry, Inc. — Form 10-Q Summary
Business context and period. Tapestry owns Coach, Kate Spade and Stuart Weitzman. This unaudited filing covers the 13 weeks ended October 1, 2022, the first quarter of fiscal 2023; the comparable quarter ended October 2, 2021. Fiscal 2023 ends July 1, 2023.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $1,506.5 million | $1,480.9 million | +1.7%; +5.4% at constant currency |
| Gross profit / margin | $1,054.6 million / 70.0% | $1,068.7 million / 72.2% | Profit down 1.3%; margin down 220 bps |
| SG&A | $800.3 million / 53.1% of sales | $773.7 million / 52.2% | Expense up 3.4% |
| Operating income / margin | $254.3 million / 16.9% | $295.0 million / 19.9% | Down 13.8%; margin down 300 bps |
| Net income | $195.3 million | $226.9 million | Down 13.9% |
| Diluted EPS | $0.79 | $0.80 | Down $0.01 |
| Operating cash flow | $(170.4) million | $21.8 million | Down $192.2 million |
| Capital expenditures | $27.3 million | $33.4 million | Down $6.1 million |
Brand results. Coach sales were $1,119.3 million (+0.4% reported; +4.5% constant currency), with operating income of $339.2 million, down 7.2%. Kate Spade sales were $321.9 million (+7.5%; +10.2% constant currency), but operating income fell 37.6% to $23.2 million. Stuart Weitzman sales were $65.3 million, down 1.9% reported and flat at constant currency; its operating loss widened to $5.1 million.
Balance sheet, debt and liquidity
- At October 1, cash and cash equivalents were $526.5 million and short-term investments were $30.6 million, versus $789.8 million and $163.4 million, respectively, at July 2, 2022.
- Balance-sheet debt was $1,678.4 million, including $25.0 million current and $1,653.4 million long-term debt. The $1.25 billion revolving credit facility had no borrowings outstanding; reported available liquidity, including cash and short-term investments, was $1,807.1 million.
- Current assets were $2,387.4 million against current liabilities of $1,308.4 million. Inventory rose to $1,139.8 million from $994.2 million at fiscal year-end.
- Operating lease liabilities totaled $1,556.0 million. The company also had approximately $140.2 million of future lease payments for executed leases not yet commenced.
- Cash fell $263.3 million during the quarter. Operating cash use reflected inventory investment of $181.9 million and other working-capital uses; financing cash use included $94.9 million of share repurchases and $72.7 million of dividends. Investing cash flow was positive $146.8 million, mainly from investment maturities and sales.
Changes, outlook and risks
- Foreign currency reduced reported sales by $55.1 million and gross margin by about 70 basis points; currency benefits to SG&A were approximately $29.0 million. Management estimated a net adverse operating-margin impact of about 70 basis points.
- Incremental freight costs rose $19.9 million year over year and reduced gross margin by approximately 130 basis points. Logistics disruption and elevated freight costs were expected to persist during fiscal 2023.
- Management introduced its “2025 growth strategy,” focused on customer relationships, product innovation, omnichannel experiences and global growth. It cited a more challenging, volatile macroeconomic environment, including inflation, tighter monetary policy, concerns about recession and China’s Covid restrictions.
- The filing gives no full-year revenue or earnings guidance. Management expected fiscal 2023 capital expenditures and cloud-computing implementation costs of approximately $325 million, and intended to repurchase approximately $700 million of shares during fiscal 2023. It stated that cash, operating cash flow and credit access were expected to fund fiscal 2023 and beyond, while noting financing availability was not assured.
- Share repurchases totaled $100 million during the quarter; $1.40 billion remained under the 2022 authorization at October 1. A 1% federal excise tax on repurchases under the Inflation Reduction Act was expected to take effect in fiscal 2024; the company had not determined its impact.
- Other risks include continuing Covid-related disruption, supply-chain constraints, foreign-exchange and interest-rate exposure, tariffs, consumer demand and discretionary spending, and legal and cybersecurity risks. Management reported no material change to previously disclosed risk factors and no impairment charges in the quarter. It cautioned that Kate Spade’s relatively limited fair-value cushion could make impairment testing sensitive to weaker profitability.
- The prior-year quarter included $12.1 million of Acceleration Program charges; the current quarter had no comparability charges. Excluding those prior-year charges, operating income declined 17.2%, net income declined 17.0%, and diluted EPS declined 4.0% to $0.79 from $0.82.
- Routine legal proceedings were described as not expected, in aggregate, to materially affect the business or financial statements. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth can continue to offset currency headwinds, weaker demand or disruption in Greater China.
- Whether freight costs and other supply-chain pressures ease, and whether gross margins recover from 70.0%.
- Whether inventory levels convert to holiday-season sales and cash generation, given the quarter’s inventory build and negative operating cash flow.
- How the planned $700 million of fiscal-year buybacks, dividends and approximately $325 million of capital and cloud-computing spending affect liquidity and leverage.
- Whether Kate Spade’s profitability and Stuart Weitzman’s operating performance improve, and whether macroeconomic or operating trends trigger impairment testing concerns.
- Compliance with the credit-facility covenant, including its maximum 4.0-to-1.0 leverage measure, and the impact of variable-rate borrowing costs if facilities are drawn.