Tapestry, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2019, ended December 29, 2018. The quarter was 13 weeks. Comparisons are with the periods ended December 30, 2017. Tapestry owns Coach, Kate Spade and Stuart Weitzman. Amounts are in U.S. dollars; financial statements are unaudited.
Key financial results
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $1,800.8 million | $1,785.0 million | $3,182.0 million | $3,073.9 million |
| Gross profit / margin | $1,203.5 million / 66.8% | $1,176.2 million / 65.9% | $2,138.6 million / 67.2% | $1,939.1 million / 63.1% |
| Operating income / margin | $380.7 million / 21.1% | $346.4 million / 19.4% | $538.4 million / 16.9% | $324.6 million / 10.6% |
| Net income | $254.8 million | $63.2 million | $377.1 million | $45.5 million |
| Diluted EPS | $0.88 | $0.22 | $1.29 | $0.16 |
| Operating cash flow | Not separately provided | Not separately provided | $599.0 million | $431.0 million |
Q2 sales increased 0.9% year over year, or 1.7% excluding currency effects. For the first half, sales rose 3.5%, or 4.1% excluding currency. The reported earnings comparisons are substantially affected by prior-year acquisition and tax charges. On the company’s non-GAAP basis, Q2 diluted EPS was $1.07 in both periods; first-half diluted EPS was $1.55 versus $1.49.
Liquidity, cash flow and debt
- At December 29, 2018, cash and cash equivalents were $1,237.0 million and short-term investments were $258.2 million. Current assets were $2,828.5 million and current liabilities were $1,081.1 million.
- Long-term debt, net, was $1,601.0 million; current debt was $0.7 million. Senior notes total $1.6 billion principal, with maturities in 2022, 2025 and 2027. The $900 million revolving credit facility had no borrowings outstanding.
- Six-month operating cash flow of $599.0 million was offset by $405.5 million of investing outflows and $187.8 million of financing outflows. Capital expenditures were $116.4 million and dividends paid were $194.9 million. Cash decreased by $6.4 million over the period.
- Management expects fiscal 2019 capital expenditures of $300–$325 million and believes cash, operating flows, investments and credit availability will fund foreseeable requirements. Approximately 59% of cash and short-term investments were held outside the U.S.
Material changes and segment performance
- Coach: Q2 sales increased 1.5% (2.4% excluding currency); operating income increased 2.8% to $378.5 million. First-half sales rose 2.6%, with operating income up 5.8% to $609.4 million. Comparable sales improved, with e-commerce contributing.
- Kate Spade: Q2 sales declined 1.4%; comparable sales fell 11%, partly offset by new and acquired stores. Q2 operating income was $89.2 million versus $54.8 million, but excluding specified charges it declined 5.8%. First-half sales rose 7.2%, while comparable sales fell 9%; reported operating income recovered to $134.0 million from a prior-year loss, but adjusted operating income increased only 5.9%.
- Stuart Weitzman: Q2 sales rose 2.5%, but operating income fell 48.6% to $11.2 million. First-half operating results moved to a $7.2 million loss from $30.7 million of income. Supply-chain disruption, lower wholesale margins, currency and increased expenses weighed on results.
- Gross margin and reported operating income improved year over year, but adjusted operating income was down 2.2% in Q2 and up just 0.5% for the first half. In Q2, adjusted operating margin fell to 22.3% from 23.0%.
Outlook, commentary and risks
- Management’s fiscal 2019 priorities include revenue and operating-income growth, capturing multi-brand synergies, product innovation, growth focused on Chinese consumers, and digital and data capabilities. The filing does not provide a specific numerical revenue or earnings forecast.
- The company expects another $45–$55 million of pre-tax integration and acquisition charges for the remainder of fiscal 2019, mostly cash charges. It recorded $34.7 million in such charges in the first half. ERP implementation is continuing; Kate Spade finance and supply-chain systems were planned for the third quarter, with Coach and Stuart Weitzman supply-chain systems to follow in early fiscal 2020.
- Consumer traffic remains pressured and retail is promotional. Management cited uncertain global growth, currency and geopolitical risks, trade tensions, Brexit uncertainty, and near-term volatility in some North American customer purchasing. It said tariffs on Chinese-made imports were expected to have minimal impact due to sourcing diversity, while warning that trade tensions could affect growth with Chinese consumers.
- Stuart Weitzman’s production challenges caused delays and weaker wholesale sales; management reported a return to sales growth in Q2 after investment in talent, infrastructure and manufacturing capacity. Continued weakness could also increase impairment risk: the brand reporting unit’s fair value exceeded carrying value by about 15% at the prior fiscal-year assessment. No impairment was recorded in this quarter.
- Tax legislation continues to affect results. The company recorded $34.1 million of fiscal 2019 tax-related charges, primarily associated with the transition tax; it expects $248.1 million of remaining transition-tax payments through fiscal 2025. The six-month GAAP effective tax rate was 26.4%, versus 83.8% a year earlier, reflecting different tax items and periods.
- Routine legal proceedings were not expected by management to have a material effect. The filing reported no material change to previously disclosed risk factors. The company adopted new revenue guidance in fiscal 2019; adoption reduced reported operating income by $2.4 million for the first half compared with the amounts that would have applied without adoption.
Important facts for investors to verify
- Whether underlying operating performance supports growth: reported comparisons are affected by prior-year Kate Spade acquisition costs and tax charges; review GAAP and reconciled non-GAAP results together.
- Whether Kate Spade’s comparable-sales declines and Stuart Weitzman’s margin and supply-chain pressures improve, and whether Coach’s growth continues.
- Whether the remaining integration charges, ERP rollout, and $300–$325 million capital-spending plan stay within management expectations.
- How inventory, receivables and seasonal working-capital movements affect cash generation; first-half cash flow is not necessarily indicative of the full fiscal year.
- Progress on transition-tax payments, trade and currency exposure, and Stuart Weitzman impairment headroom.