Tapestry, Inc. — Form 10-Q Summary
Business context and reporting period
Tapestry owns the Coach, Kate Spade and Stuart Weitzman brands. This unaudited report covers the 13 weeks ended September 26, 2020 (first quarter fiscal 2021), compared with the 13 weeks ended September 28, 2019. The quarter occurred amid the COVID-19 pandemic; most company-operated stores had reopened by quarter-end, but the company warned that disruption could continue.
Financial performance and liquidity
| Metric | Quarter ended Sep. 26, 2020 | Prior-year quarter |
|---|---|---|
| Net sales | $1,172.2 million | $1,357.9 million |
| Gross profit / margin | $830.2 million / 70.8% | $914.5 million / 67.3% |
| Operating income / margin | $202.2 million / 17.3% | $51.6 million / 3.8% |
| Net income | $231.7 million | $20.0 million |
| Diluted earnings per share | $0.83 | $0.07 |
| Cash from operations | $90.0 million | $5.7 million |
Reported earnings include a substantial tax benefit: the effective tax rate was negative 25.0%, primarily reflecting recognition of a CARES Act net operating loss carryback. The company’s non-GAAP net income, excluding identified comparability items, was $160.8 million ($0.58 per diluted share), versus $113.9 million ($0.40) a year earlier. Non-GAAP results are company-defined and should be considered alongside GAAP results.
Cash and cash equivalents were $1,513.9 million; short-term investments were $8.5 million. Debt was approximately $2.3 billion, including $700 million drawn on a $900 million revolving facility and $1.6 billion principal amount of senior notes; a further $11.5 million note payable was classified as current debt. The company reported $1,722.4 million of total available liquidity at quarter-end. On October 30, it repaid $150 million of revolver borrowings.
Operating cash flow improved year over year, with accounts payable providing $135.1 million of cash, primarily due to extended supplier payment terms. Inventory used $57.5 million of cash. Capital expenditures were $26.0 million. No dividend was paid, and no shares were repurchased in the quarter.
Material changes versus the prior comparable period
- Sales declined 13.7% (13.9% excluding currency effects). Coach sales fell 9.4%, Kate Spade 21.3%, and Stuart Weitzman 34.8%; pandemic-related demand weakness and store closures were key factors. E-commerce and mainland China sales provided offsets in some brands.
- Gross margin rose 350 basis points to 70.8%, with reduced promotional activity a key factor. SG&A fell 27.2%, reflecting cost actions, lower variable expenses and the prior-year comparison with substantial impairment and other charges.
- Excluding items identified by management, operating income was $228.8 million versus $166.5 million. Comparability items included $26.6 million of current-quarter Acceleration Program charges and a $91.7 million favorable CARES Act tax impact; the prior-year quarter included ERP, restructuring/integration and impairment charges.
- Cash increased by $87.6 million in the quarter. The prior-year period had a $447.1 million cash decrease, including significant share repurchases and dividend payments.
Outlook, risks and unusual items
- Management provided no specific revenue or earnings guidance in the supplied filing text. It expects fiscal 2021 capital expenditures of approximately $150 million.
- The Acceleration Program is expected to generate approximately $300 million in gross annual run-rate savings, including $200 million projected for fiscal 2021. Total pre-tax charges are estimated at $185–$200 million; approximately $75–$90 million of additional charges were expected, mostly cash and primarily during the remainder of fiscal 2021. The program is expected to be substantially complete by fiscal 2022 year-end.
- The company cited possible renewed store closures, supply-chain disruption, weaker discretionary spending, foreign-exchange volatility and potential further asset impairments as material uncertainties. It noted that Kate Spade’s fair value exceeded carrying value by about 13% at the fiscal 2020 impairment test, making future performance and assumptions important to monitor.
- The revolving facility amendment 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 during the specified covenant period. It also restricts share repurchases during that period. Management stated that existing cash, operating cash flows and financing access should support fiscal 2021 and beyond, while cautioning that financing availability is not assured.
- Routine legal proceedings were not expected by management to have a material effect. The filing reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether the reported earnings improvement is sustainable after separating the CARES Act tax benefit and other non-GAAP adjustments.
- Sales, store traffic and e-commerce trends by brand and region as pandemic conditions evolve.
- Progress toward Acceleration Program savings, remaining restructuring charges and planned capital spending.
- Liquidity, revolver repayments, covenant compliance and the effect of supplier payment-term extensions on operating cash flow.
- Whether Kate Spade’s performance or pandemic-related conditions trigger interim goodwill or intangible-asset impairment testing.