TAPESTRY, INC. quarterly report, Q2 FY2014

Filing summary

Entity and period: The supplied filing is Coach, Inc.’s unaudited Form 10-Q for the quarter ended December 28, 2013 (fiscal 2014 second quarter), filed February 5, 2014. This does not match the request metadata identifying Tapestry, Inc. and “2013 Q2”; verify the intended issuer and period.

Business context and reporting period

Coach described a strategy to transform from an accessories business into a global lifestyle brand, with priorities including men’s products, international expansion, and digital and omnichannel investment. It reported North America and International segments. The quarter and six-month periods comprised 13 and 26 weeks, respectively.

Financial performance and liquidity

Amounts below are in U.S. dollars; income statement and cash-flow figures are in millions unless stated otherwise.

• Quarterly sales fell 5.6% (2.7% excluding currency); six-month sales declined 3.6% (0.5% excluding currency). North America weakness was partly offset by International growth.
• Quarterly gross margin fell 300 basis points and operating margin fell 430 basis points year over year. Management attributed North America margin pressure mainly to greater promotions and higher average unit costs; International margin was also affected by currency.
• At December 28, cash and cash equivalents were $568.2 million and short- and long-term investments totaled $686.8 million. Current assets were $1,787.7 million versus current liabilities of $702.9 million.
• Total debt was approximately $0.5 million, all current; no revolving borrowings were outstanding at quarter-end. The company had a $700 million revolving facility, with no borrowings outstanding at December 28, 2013.
• For the six months, investing cash outflow was $523.0 million and financing cash outflow was $536.1 million. Cash declined $494.6 million, partly because the company moved cash into investments.

Material changes versus the prior comparable period

• North America quarterly sales decreased 8.6%, including a 13.6% decline in comparable-store sales. International sales increased 1.7% as reported, or 11.3% excluding currency. For the six months, comparable-store sales in North America declined 10.8%.
• Quarterly net income declined 15.7% and diluted EPS declined 13.8%; for the six months, net income declined 10.2% and diluted EPS declined 9.0%.
• Six-month operating cash flow was down $265.5 million, with management citing lower net income and changes in working capital, notably accrued liabilities, inventory, and accounts payable. Inventory was $553.0 million, 12% above the prior-year quarter-end, with management citing sales growth below expectations.
• Coach acquired the remaining 50% of its European joint venture on July 1, 2013, taking direct control of the European retail business. Prior-period Europe results were reclassified into International for comparability.
• Coach sold the Reed Krakoff business on August 30, 2013 for a de minimis cash amount and an 8% preferred equity interest in the buyer. It recorded a $2.7 million loss on the sale. A prior-year restructuring program was substantially completed in the first quarter; $4.9 million of related liabilities remained at December 28, 2013.
• In the first six months, Coach repurchased $349.9 million of stock and paid $189.8 million in dividends. It declared dividends of $0.675 per share, versus $0.600 in the prior-year period.

Outlook, management commentary, risks, and contingencies

• The filing provides no specific full-year revenue or earnings guidance. Management said it expected fiscal 2014 capital expenditures of approximately $280 million and advertising, marketing, and design costs for the full year to exceed fiscal 2013, excluding Reed Krakoff costs.
• Coach expected to invest approximately $400 million in the Hudson Yards office-tower joint venture from the start of fiscal Q3 2014 through fiscal 2016, including an estimated $70–80 million for the remainder of fiscal 2014. It also expected approximately $190 million of capital expenditures over the remaining construction period. The company anticipated drawing on credit facilities in fiscal Q3 and more regularly thereafter.
• Management said liquidity sources were sufficient for the next 12 months and to fund operations, expansion, dividends, and repurchases. About 75% of cash and short-term investments were held outside the U.S. in jurisdictions where earnings were intended to be permanently reinvested.
• Management cited intensified competition and a highly promotional environment in North America, weaker in-store traffic, and reduced Internet traffic after restricting access to its e-factory flash-sales site. Other identified risks included consumer preferences, foreign exchange, economic and political conditions, cost control, seasonality, and execution of transformation plans.
• The company used currency derivatives for hedging, not trading. It expected $8.2 million of net derivative gains in accumulated other comprehensive income to be reclassified into earnings within 12 months; the amount could change with exchange rates.
• Coach reported routine legal proceedings and said their aggregate outcome was not expected to materially affect its business or consolidated financial statements. It reported no material changes to the risk factors in its fiscal 2013 Form 10-K. Management concluded disclosure controls were effective.

Important facts for investors to verify

1. Confirm that Coach, Inc.’s fiscal 2014 Q2 filing is the intended document, given the Tapestry, Inc./2013 Q2 metadata mismatch.
2. Assess whether North American comparable-store sales declines, promotional activity, and margin compression continued after this quarter.
3. Review subsequent cash-flow and inventory trends, particularly whether inventory growth was absorbed by sales.
4. Track the funding, capital requirements, and expected sale of the current headquarters associated with the Hudson Yards project, as well as any increased borrowing.
5. Check subsequent filings for execution of the lifestyle-brand strategy, international growth and currency effects, and the use of the remaining $1.0 billion share-repurchase authorization.