Tapestry, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2021, ended December 26, 2020. The quarter was 13 weeks; fiscal 2021 is a 53-week year. Comparisons are with the periods ended December 28, 2019. Figures are unaudited and in U.S. dollars.
Business context and results
Tapestry owns Coach, Kate Spade and Stuart Weitzman. COVID-19 continued to restrict store operations and disrupt consumer demand, while e-commerce and sales in mainland China provided offsets. The company said the pandemic was expected to materially adversely affect its business, financial condition, results and cash flows for the foreseeable future.
| Metric | Q2 FY2021 | Q2 FY2020 | First six months FY2021 | First six months FY2020 |
|---|---|---|---|---|
| Net sales | $1,685.4 million | $1,816.0 million | $2,857.6 million | $3,173.9 million |
| Gross margin | 69.6% | 66.6% | 70.1% | 66.9% |
| Operating income | $389.4 million | $363.1 million | $591.6 million | $414.7 million |
| Net income | $311.0 million | $298.8 million | $542.7 million | $318.8 million |
| Diluted EPS | $1.11 | $1.08 | $1.94 | $1.13 |
| Operating cash flow | Not provided separately for the quarter | Not provided separately for the quarter | $746.3 million | $561.7 million |
Q2 sales fell 7.2% (8.4% in constant currency), while operating income rose 7.3%. Gross margin expanded 300 basis points and operating margin increased to 23.1% from 20.0%. For the six months, sales declined 10.0% (10.8% in constant currency), while operating income increased 42.7% and operating margin rose to 20.7% from 13.1%. Lower promotional activity and reduced SG&A helped margins despite lower sales.
Q2 segment sales were Coach $1,225.3 million (down 3.5%), Kate Spade $375.6 million (down 12.7%) and Stuart Weitzman $84.5 million (down 26.9%). Coach operating income increased to $412.0 million; Kate Spade operating income declined to $58.8 million; Stuart Weitzman reported $11.9 million of operating income. E-commerce gains and mainland China growth partly offset store weakness. Stuart Weitzman was additionally affected by fleet optimization.
Cash, debt and liquidity
- At December 26, cash and cash equivalents were $1,642.6 million and short-term investments were $9.2 million. Current assets were $2,877.2 million versus current liabilities of $1,533.1 million.
- Six-month operating cash flow was $746.3 million. Cash increased $216.3 million to $1,642.6 million. Investing activities used $25.8 million, including $49.7 million of capital expenditures; financing activities used $518.9 million, chiefly repayment of $500 million under the revolving facility.
- Quarter-end debt was $1,789.3 million carrying value: $200 million under the revolving facility and $1,589.3 million of long-term senior notes, net of discounts and issuance costs. The remaining $200 million revolver borrowing was repaid January 25, 2021. The $900 million facility was then undrawn, subject to its terms.
- Reported available liquidity at quarter-end was $2,351.8 million, including cash, short-term investments and $700 million available under the revolver. Operating lease liabilities totaled $2,019.3 million.
- The company suspended dividends and share repurchases beginning in Q4 FY2020; no shares were repurchased and no dividends were declared in the reported periods.
Outlook, management commentary and risks
- Management did not provide detailed fiscal 2021 guidance, citing pandemic uncertainty and limited visibility. It expected operating cash flows, cash, investments and access to credit to support fiscal 2021 and beyond, while cautioning that financing might not be available on acceptable terms.
- The Acceleration Program targets approximately $300 million in gross annual run-rate savings, including $200 million in fiscal 2021. The company remained on track with that target and expected total pre-tax program charges of $185–$200 million through substantial completion by the end of fiscal 2022. It anticipated another $50–$65 million of charges, mostly cash, primarily in the remainder of fiscal 2021.
- Fiscal 2021 capital expenditures were expected to be approximately $135 million. The company reported 18 net store closures in the first half, a net decrease of 84 stores versus the prior year.
- COVID-related risks include renewed closures or capacity limits, lower discretionary spending, supply-chain disruption, port congestion and higher freight costs. Kate Spade inventory aboard two cargo ships experienced delays and possible loss or damage, which could affect second-half fiscal 2021 sales if mitigation is unsuccessful.
- Other material risks include execution of the Acceleration Program, brand and fashion trends, competition, foreign exchange and trade duties, cyber and privacy incidents, and potential impairment of assets. Kate Spade’s fiscal 2020 impairment-test fair value exceeded carrying value by a relatively narrow margin; management said weaker-than-expected profitability could trigger an interim or annual impairment test.
- The company recorded a $95 million six-month tax benefit associated primarily with a CARES Act net operating loss carryback claim. Accordingly, the 3.0% six-month GAAP effective tax rate and $542.7 million GAAP net income include a significant tax-related benefit. Management’s non-GAAP six-month net income, excluding specified items, was $483.8 million; non-GAAP measures are supplemental and not GAAP results.
- A putative class action related to the 2017 Kate Spade acquisition remains pending. Tapestry indemnifies the named former directors, disputes the allegations and says the potential loss cannot currently be estimated.
Important facts for investors to verify
- Whether subsequent results show sustained sales recovery, particularly in stores and at Kate Spade and Stuart Weitzman, and whether digital and China growth continue.
- How much reported margin and earnings improvement reflects durable cost and promotional changes versus temporary wage subsidies, rent concessions, tax benefits or other unusual items.
- Progress against the $300 million savings target, expected restructuring charges and planned capital expenditures.
- Post-quarter debt, cash and revolver availability, and compliance with amended facility liquidity and leverage requirements.
- The eventual impact of pandemic-related closures, shipping delays and the cargo-ship inventory incidents, as well as any goodwill or intangible-asset impairment indicators.
- Developments in the Kate Spade acquisition litigation and any material change in the company’s ability to estimate potential losses.