Business context and reporting period
The filing is Coach, Inc.’s unaudited Form 10-Q for the quarter ended December 31, 2016, the second quarter of fiscal 2017 (13 weeks), and the six months then ended. The business comprised Coach’s North America and International segments, Stuart Weitzman, and smaller licensing/disposition channels. The filing identifies Coach, Inc. as the registrant; it does not identify Tapestry, Inc. as the registrant.
Financial performance
| Metric | Three months ended Dec. 31, 2016 | Six months ended Dec. 31, 2016 |
|---|---|---|
| Net sales | $1,321.7 million; +3.8% year over year | $2,359.3 million; +2.4% |
| Gross profit / margin | $906.2 million / 68.6%, versus 67.4% | $1,620.9 million / 68.7%, versus 67.5% |
| Operating income / margin | $277.4 million / 21.0%, versus $261.0 million / 20.5% | $443.3 million / 18.8%, versus $402.4 million / 17.5% |
| Net income | $199.7 million, +17.4% | $317.1 million, +19.0% |
| Diluted EPS | $0.71, versus $0.61 | $1.13, versus $0.96 |
| Operating cash flow | Not provided separately for the quarter | $328.1 million, versus $310.0 million |
Net interest expense was $5.1 million for the quarter and $10.8 million for six months. Effective tax rates were 26.6% and 26.7%, respectively, lower than the comparable prior-year rates of 33.2% and 31.6%. Management attributed the decrease mainly to geographic earnings mix and foreign tax credits. The declared dividend was $0.3375 per share for the quarter.
Liquidity, debt and cash flows
At December 31, 2016, cash and cash equivalents were $1,309.7 million; short- and long-term investments totaled $636.3 million. Current assets were $2,765.7 million and current liabilities $715.2 million. Debt was $600 million principal amount of 4.250% senior notes due 2025 (carrying value $591.6 million); the $300 million term loan had been prepaid in August 2016, and the $700 million revolving facility was undrawn. The company reported $2,692 million of total available liquidity, including cash, investments and available facilities. About 54% of cash and short-term investments were held outside the U.S. and intended to be permanently reinvested; repatriation could incur taxes.
Six-month investing cash flow was positive $599.8 million, principally reflecting Hudson Yards investment-sale proceeds of $680.6 million and $126.0 million of proceeds from the former headquarters sale. Financing cash flow was negative $467.0 million, including $285.0 million of debt repayment and $188.5 million of dividend payments. These transactions materially contributed to the increase in cash; investing proceeds should not be viewed as recurring operating cash generation.
Material changes versus the prior comparable period
- Quarterly revenue growth included Coach brand growth of 2.0% and Stuart Weitzman growth of 25.7%; excluding currency effects, total sales increased 3.4%.
- North America quarterly sales rose 1.8%, supported by comparable-store sales growth, while wholesale sales fell $18.3 million as Coach reduced promotional participation and planned to close about 25% of wholesale doors from fiscal 2016 year-end levels.
- International quarterly sales increased 2.5%; growth in Europe and mainland China was partly offset by weaker Hong Kong/Macau tourist traffic and South Korea. Stuart Weitzman quarterly sales growth reflected, in part, the prior-year acquisition of the Canadian distributor.
- Gross margin improved, mainly from Coach product mix and lower costs. Reported operating income growth was 6.3% for the quarter and 10.2% for six months; excluding specified items, management reported growth of 3.3% and 4.7%, respectively.
- Stuart Weitzman operating income declined 27.3% for the quarter and 29.3% for six months, despite higher sales, as selling and other growth-investment costs weighed on margins.
Outlook, commentary, risks and unusual items
- The filing gives no specific full-year revenue, profit or EPS guidance. Management described weak and inconsistent retail traffic, promotional competition, constrained discretionary spending, geopolitical and economic uncertainty, and foreign-exchange volatility.
- Management planned continued investment in store environments and digital capabilities and continued North American wholesale-door rationalization. The Operational Efficiency Plan was expected to be substantially completed by fiscal year-end 2017; approximately $25 million of incremental charges were estimated. Stuart Weitzman fiscal 2017 acquisition-related costs were expected to total about $20 million.
- Fiscal 2017 included $10.8 million of Operational Efficiency Plan charges and $17.0 million of acquisition-related costs in the first six months. Prior-year comparisons included transformation and acquisition-related charges. Non-GAAP results exclude specified items and are supplemental to GAAP results.
- The Hudson Yards transaction generated approximately $707 million of purchase price before transaction costs, including amounts due to the developer; a $28.8 million gain is to be amortized over the 20-year lease. The new headquarters lease commitment was approximately $1.05 billion. Sale of the former headquarters generated $126.0 million and no material gain or loss.
- The Stuart Weitzman acquisition earnout’s fair value was $32.9 million. Revenue targets were not achieved in calendar 2015 or 2016; a potential remaining payment depends on subsequent targets and the agreement’s catch-up provisions.
- Management said Stuart Weitzman’s goodwill and indefinite-lived trademark fair values had limited headroom over carrying values (less than 20% and less than 5%, respectively); weaker profitability or market multiples could trigger impairment. Routine legal matters were not expected by management to have a material effect. No material risk-factor changes were reported.
Important facts for investors to verify
- Confirm the issuer identity and period: the supplied filing is for Coach, Inc., fiscal Q2 2017, not a filing naming Tapestry, Inc.
- Assess recurring performance separately from Hudson Yards and former-headquarters sale proceeds, and from restructuring and acquisition-related adjustments.
- Track Coach wholesale-door reductions, promotional intensity, comparable-store trends and the extent to which reported growth reflects currency, store additions or acquisitions.
- Monitor Stuart Weitzman profitability, remaining earnout conditions and impairment headroom.
- Review the long-term headquarters lease obligations, overseas cash tax implications, and execution of the efficiency plan and associated costs.