Tapestry, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2020, ended December 28, 2019; comparable periods ended December 29, 2018. Tapestry owns Coach, Kate Spade and Stuart Weitzman. Figures are in U.S. dollars; financial statements are unaudited.
Key financial results
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $1,816.0 million | $1,800.8 million | $3,173.9 million | $3,182.0 million |
| Gross profit / margin | $1,209.7 million / 66.6% | $1,203.5 million / 66.8% | $2,124.2 million / 66.9% | $2,138.6 million / 67.2% |
| Operating income / margin | $363.1 million / 20.0% | $376.5 million / 20.9% | $414.7 million / 13.1% | $538.8 million / 16.9% |
| Net income | $298.8 million | $254.8 million | $318.8 million | $377.1 million |
| Diluted EPS | $1.08 | $0.88 | $1.13 | $1.29 |
- Cash flow: Six-month operating cash flow was $561.7 million, versus $599.3 million. Capital expenditures were $122.2 million. Cash and cash equivalents declined $72.3 million to $896.9 million.
- Liquidity and debt: Cash plus short-term investments totaled approximately $1.17 billion. The company reported $1.60 billion of long-term debt, net, and no borrowings on its $900 million revolving facility, which matures in October 2024. Reported available liquidity was $2.07 billion. Separately, operating lease liabilities were $2.23 billion.
- Capital returns: The company repurchased $300 million of shares in the first six months; it made no repurchases in Q2 and had $600 million remaining under its repurchase program at quarter-end. Six-month dividend payments were $194.0 million.
- Other: The company expects fiscal 2020 capital expenditures of approximately $300 million. It recorded $75.6 million of first-quarter store-asset impairment charges. Adoption of lease accounting added substantial lease assets and liabilities to the balance sheet; prior-year balance-sheet figures were not restated.
Material changes and segment performance
- Q2 sales increased 0.8%; six-month sales declined 0.3%. Q2 reported operating income fell 3.6%, while net income rose 17.2%, principally reflecting a lower effective tax rate (15.8% versus 30.7%). Excluding specified items, Q2 net income declined 2.1% and diluted EPS increased to $1.10 from $1.07.
- For the first six months, reported operating income fell 23.0% and net income fell 15.5%. Excluding specified items, operating income declined 7.5% and net income declined 7.6%. The filing attributes the lower reported results partly to $75.6 million of impairments and higher organization-related and integration costs; non-GAAP results are company-defined supplemental measures.
- Coach: Q2 sales rose 1.7% and operating income rose 2.3%. Six-month sales rose 1.2%; adjusted operating income increased, supported by sales growth, though reported operating income was affected by impairments.
- Kate Spade: Q2 sales were nearly flat, but operating income fell 23.1%, with weaker gross margin and higher expenses. Six-month sales declined 2.4% and operating income fell 54.4%; comparable sales were down about 9%, primarily due to North American store traffic.
- Stuart Weitzman: Q2 sales declined 6.6%, mainly on lower wholesale demand. Six-month sales fell 7.7%, and the reported operating loss widened to $9.7 million from $7.8 million.
Outlook, risks and unusual items
- Coronavirus: The filing reports mainland China store closures and traffic declines beginning in January 2020. Management estimated a second-half fiscal 2020 impact of approximately $200–$250 million in net sales and $0.35–$0.45 in diluted EPS, based on conditions then observed. It warned the impact could be worse if disruption deepened or spread; duration and wider effects were uncertain, and the disruption was expected to materially adversely affect results.
- Other business risks: Management cited pressured brick-and-mortar traffic, promotional competition, foreign-exchange and macroeconomic volatility, Hong Kong unrest, U.S.-China tariffs, and uncertainty around trade arrangements. It expected tariffs to have a modest fiscal 2020 gross-margin impact. Stuart Weitzman supply-chain and wholesale-demand challenges continued.
- Impairments and brand sensitivity: Store strategy changes led to first-quarter property-and-equipment and lease-asset impairments. Management said Kate Spade and Stuart Weitzman goodwill valuations had less headroom than Coach’s and that weaker-than-expected profitability could trigger further impairment testing or charges.
- Integration and leadership: The company estimated a further $5–$10 million of pre-tax integration charges for the remainder of fiscal 2020, mostly expected to be cash charges. CEO Victor Luis departed in September 2019 and Chairman Jide Zeitlin became CEO. The filing also disclosed ERP and lease-accounting system/process changes; management stated disclosure controls were effective.
- Contingencies: Routine legal proceedings were pending; management did not expect their aggregate outcome to materially affect financial position, results or cash flows. Standby letters of credit, surety bonds and bank guarantees totaled $34.1 million.
Key facts for investors to verify
- Whether China-related disruption and its estimated sales and EPS impacts developed as management anticipated.
- Whether Kate Spade’s comparable-sales and margin pressure, and Stuart Weitzman’s wholesale and operating-loss trends, improved or persisted.
- How much of reported earnings and cash flow was affected by impairments, restructuring/integration, taxes and working-capital timing; compare GAAP results with the company’s non-GAAP reconciliations.
- The capacity to sustain dividends, repurchases, capital spending and debt service given operating lease obligations, business disruption and available liquidity.
- Whether store cash-flow assumptions, particularly for Kate Spade and Stuart Weitzman, support carrying values and avoid further impairment charges.