Tapestry, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended March 27, 2021; the quarter and prior-year comparison were each 13 weeks. The filing covers the third quarter and first nine months of fiscal 2021. Although the request labels this “2020 Q3,” the filing is for fiscal 2021 Q3.
Business context and results
Tapestry owns Coach, Kate Spade and Stuart Weitzman, selling through company-operated stores, e-commerce, wholesale and licensing. Results remained affected by Covid-19, including store restrictions and uneven recovery across regions and channels.
- Quarter: Revenue was $1.273 billion, up 18.7% year over year, or 16.0% excluding currency effects. Compared with fiscal 2019, revenue was down 4.4%.
- First nine months: Revenue was $4.131 billion, down 2.7% year over year and 4.0% excluding currency effects; it was down 8.5% versus fiscal 2019.
- Quarter profit and margins: Gross profit was $911.9 million and gross margin 71.6%, versus $616.2 million and 57.4% a year earlier. Operating income was $116.7 million (9.2% margin), compared with an operating loss of $685.5 million. Net income was $91.7 million; diluted EPS was $0.32.
- Nine-month profit and margins: Gross profit was $2.916 billion and gross margin 70.6%. Operating income was $708.3 million (17.1% margin), versus an operating loss of $270.8 million. Net income was $634.4 million; diluted EPS was $2.25.
- Non-GAAP context: Excluding identified comparability items, quarter operating income was $182.9 million and diluted EPS $0.51; nine-month operating income was $822.8 million and diluted EPS $2.23. These company-defined measures exclude specified items and should be considered alongside GAAP results.
- Brand performance: Quarter revenue was Coach $963.5 million, Kate Spade $252.4 million and Stuart Weitzman $57.4 million. Quarter operating income was $251.4 million for Coach; Kate Spade and Stuart Weitzman recorded operating losses of $8.7 million and $17.5 million. For nine months, Coach operating income was $933.4 million, Kate Spade $73.3 million and Stuart Weitzman recorded a $5.6 million loss.
Cash flow, debt and liquidity
- Cash and cash equivalents were $1.652 billion at March 27, 2021, up from $1.426 billion at fiscal year-end. Short-term investments were $7.5 million.
- Nine-month operating cash flow was $944.6 million, versus $446.1 million a year earlier. The increase reflected stronger earnings and working-capital changes; accounts payable provided $275.0 million of cash, partly reflecting extended supplier payment terms and higher inventory in transit.
- Investing activities used $43.6 million, including $68.9 million of capital expenditures; financing activities used $688.6 million, primarily to repay the $700 million revolving-credit borrowing.
- Debt at period-end comprised $1.6 billion principal amount of senior notes: $400 million due 2022, $600 million due 2025 and $600 million due 2027. There were no revolver borrowings; the $900 million facility remained available. The company reported total available liquidity of $2.559 billion.
- The amended credit facility requires at least $700 million of available liquidity through October 2, 2021 and provides for a maximum net leverage ratio of 4.0 to 1.0 after the specified covenant-relief period. The facility also restricts share buybacks during that period.
- Quarterly dividends and share repurchases remained suspended. The company made no share repurchases in the quarter.
Changes, outlook and notable risks
- The sharp year-over-year profit rebound partly reflects the prior-year period’s major impairments, including full impairment of Stuart Weitzman goodwill and its indefinite-lived brand asset, and Covid-related inventory and store charges. The company recorded $45.8 million of impairment charges among current-period comparability items.
- For the first nine months, the effective tax rate was 3.1%, including a $95.0 million net-income benefit associated with the CARES Act NOL carryback. The company’s non-GAAP reconciliation excludes this tax benefit.
- Management reported stronger Coach results, growth in China and e-commerce, reduced promotions, and a 30%–50% reduction in SKU counts. It cited North American and other regional store weakness, particularly for Kate Spade and Stuart Weitzman over the nine-month period.
- The Acceleration Program is expected to incur total pre-tax charges of approximately $205–$220 million and be substantially complete by fiscal 2022. The company expects $50–$65 million of additional charges and targets $300 million of gross run-rate savings, including $200 million in fiscal 2021. It reported 49 net store closures year to date.
- Fiscal 2021 capital expenditures were expected to be approximately $100 million. The filing provides no specific sales or EPS forecast.
- Risks include further Covid-related closures or restrictions, uncertain consumer demand, supply-chain and shipping delays, higher inbound freight costs, currency and trade-policy changes, and execution of the growth and cost-saving plans. Management also noted Kate Spade’s relatively limited excess fair value over carrying value, making impairment possible if expected profitability declines.
- Management said existing cash, operating cash flow and credit access were expected to support operating, capital and debt-service needs for the remainder of fiscal 2021 and beyond, while noting that future capital availability and performance are not assured. The prior Kate Spade acquisition-related class action was dismissed and concluded without material effect.
Key facts for investors to verify
- Whether sales recovery and margin improvement persist after adjusting for prior-year impairment charges, Covid disruption and currency effects.
- How much operating cash flow is supported by sustainable earnings versus supplier payment timing and other working-capital movements.
- Progress toward the Acceleration Program’s savings targets, remaining charges and planned store optimization.
- Compliance with the amended revolver liquidity and leverage requirements, and the company’s plan for the $400 million notes due in 2022.
- Kate Spade and Stuart Weitzman profitability, and the sensitivity of Kate Spade’s goodwill and brand value to weaker forecasts.
- Effects of renewed Covid restrictions, shipping disruption, tariffs and other trade developments on demand, inventory and costs.