Business context and reporting period
Coach, Inc. (the registrant named in this filing; not Tapestry, Inc.) filed this unaudited Form 10-Q for the fiscal quarter ended December 26, 2015, and the six months then ended. Fiscal 2016 is a 53-week year. The business comprises the Coach brand, reported in North America and International segments, and Stuart Weitzman, acquired in May 2015.
Financial performance
Amounts are in millions of dollars, except per-share data. Comparisons are with the corresponding prior-year periods.
| Metric | Quarter ended Dec. 26, 2015 | Quarter ended Dec. 27, 2014 | Six months ended Dec. 26, 2015 | Six months ended Dec. 27, 2014 |
|---|---|---|---|---|
| Net sales | $1,273.8 | $1,219.4 | $2,304.1 | $2,258.2 |
| Gross profit | $859.1 | $840.0 | $1,555.6 | $1,555.4 |
| Gross margin | 67.4% | 68.9% | 67.5% | 68.9% |
| Operating income | $261.0 | $275.4 | $402.4 | $455.2 |
| Operating margin | 20.5% | 22.6% | 17.5% | 20.2% |
| Net income | $170.1 | $183.5 | $266.5 | $302.6 |
| Diluted EPS | $0.61 | $0.66 | $0.96 | $1.09 |
Quarterly net sales rose 4.5% (6.8% excluding currency effects), but operating income fell 5.2% and net income fell 7.3%. For the six months, sales rose 2.0% (5.1% excluding currency effects), while operating income fell 11.6% and net income fell 11.9%. Net interest expense was $6.3 million for the quarter and $13.0 million for the six months, versus net interest income in the prior-year periods.
Revenue, margins and segment trends
- Quarterly North America sales declined 6.8% to $731.0 million; comparable store sales fell 4.2%, principally due to lower traffic. North America gross margin decreased 280 basis points to 61.2%, reflecting increased promotions, currency and duties, and product mix.
- Quarterly International sales increased 4.0% to $437.3 million, or 9.0% excluding currency effects. Europe and mainland China contributed growth; Hong Kong and Macau remained affected by weaker tourist traffic. International gross margin was 74.9%, down 180 basis points, primarily due to foreign currency.
- Stuart Weitzman contributed $94.0 million of quarterly sales and $181.5 million for the six months. Its quarterly operating income was $18.3 million; six-month operating income was $26.0 million.
- The Coach brand’s quarterly sales declined 3.3% to $1,179.8 million. For the six months, Coach brand sales declined 6.0% to $2,122.6 million.
Reported results included transformation and Stuart Weitzman acquisition-related charges. For the quarter, these reduced net income by $18.3 million, or $0.07 per diluted share; for the six months, by $35.0 million, or $0.12 per diluted share. Excluding these items, diluted EPS was $0.68 for the quarter versus $0.72 a year earlier, and $1.08 for the six months versus $1.25. These are company-presented non-GAAP measures, not substitutes for GAAP results.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $310.0 million, down from $583.6 million. Investing used $545.7 million, including $175.5 million of property and equipment purchases and $86.6 million invested in the Hudson Yards joint venture. Financing used $208.9 million, including $187.0 million of dividends.
- Cash and cash equivalents were $843.8 million at December 26, 2015, down from $1,291.8 million at June 27, 2015. Short-term investments were $493.3 million and long-term investments were $515.1 million. Approximately 63% of cash and short-term investments was held outside the U.S.; the company said it intended to permanently reinvest undistributed earnings in those jurisdictions.
- Total debt on the balance sheet was approximately $887.0 million: $15.0 million current and $872.0 million long-term, net of issuance costs and discount. Contractual future debt repayments totaled $896.2 million. The company had no revolving-facility borrowings and reported $703.8 million of remaining availability under its $1.0 billion credit agreement.
- Management reported total available liquidity of $2,193.2 million, including cash, certain investments and available credit facilities. The $406.8 million Hudson Yards investment was excluded from the liquidity table’s non-current investments.
- Inventories were $438.5 million, down from $485.1 million at June 27, 2015. The declared dividend was $0.3375 per share for the quarter, unchanged from the prior-year quarter.
Outlook, commentary and risks
Management said the transformation plan remained on track and focused on evolving Coach into a global lifestyle brand, expanding internationally and in men’s products, and developing digital channels. The filing provides no clear full-year revenue or EPS guidance. It expected approximately $20 million of additional transformation charges during the remainder of fiscal 2016 and approximately $30 million of aggregate acquisition-related charges for fiscal 2016 associated with Stuart Weitzman. Excluding non-GAAP adjustments, management projected a fiscal 2016 tax rate of about 28%.
Management cited weak and inconsistent global retail traffic, promotional competition, constrained discretionary spending, currency volatility, Greater China economic and geopolitical developments, slower emerging-market growth, and the impact of MERS on Asian tourism as uncertainties. Other risks include execution of the transformation and growth strategies, brand strength, fashion trends, cost control, seasonality and acquisition benefits. The company expected to invest a further approximately $123 million in the Hudson Yards joint venture and approximately $120 million directly in headquarters design and build-out over the remaining construction period. Routine legal proceedings were not expected by management to have a material adverse effect. The company reported no material changes to previously disclosed risk factors.
Transformation-plan charges incurred to date were $303.9 million against an expected aggregate pre-tax total of about $325 million. The company also disclosed that it had no remaining availability in its stock repurchase program and made no share repurchases during the quarter.
Important facts for investors to verify
- Confirm the entity and period: this filing is by Coach, Inc. for fiscal Q2 2016, not a filing identified as Tapestry, Inc.
- Assess whether North America sales, comparable-store performance and margins stabilize, and whether international growth can offset continued weakness.
- Track results excluding transformation and acquisition items alongside GAAP results; verify actual remaining charges against management’s estimates.
- Monitor operating cash flow, capital spending and the Hudson Yards funding commitments, as well as access to and terms of available credit.
- Review foreign-exchange exposure, overseas cash availability and the effects of currency on sales and gross margins.
- Check subsequent filings for changes in the projected tax rate, Stuart Weitzman earnout obligations, debt covenant compliance and legal contingencies.