Tapestry, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2024, the 13 weeks ended September 30, 2023; comparable quarter ended October 1, 2022. Tapestry operates Coach, Kate Spade and Stuart Weitzman.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $1,513.2 million | $1,506.5 million | +0.4%; +1.7% at constant currency |
| Gross profit / margin | $1,097.7 million / 72.5% | $1,054.6 million / 70.0% | +$43.1 million; +250 bps |
| SG&A | $844.5 million / 55.8% of sales | $800.3 million / 53.1% | +$44.2 million |
| Operating income / margin | $253.2 million / 16.7% | $254.3 million / 16.9% | -$1.1 million |
| Net income | $195.0 million | $195.3 million | -$0.3 million |
| Diluted EPS | $0.84 | $0.79 | +$0.05 |
| Operating cash flow | $75.3 million | -$170.4 million | +$245.7 million |
Lower freight costs and net pricing improvements primarily drove the gross-margin increase. Freight expense was approximately $21.2 million lower year over year, adding about 150 bps to gross margin; currency reduced gross margin by about 20 bps. The stronger U.S. dollar reduced sales by $19.2 million and operating margin by about 40 bps.
Coach sales rose 3.4% to $1,157.4 million; Kate Spade sales fell 5.8% to $303.2 million; Stuart Weitzman sales fell 19.4% to $52.6 million. Coach segment operating profit increased to $371.3 million, Kate Spade to $26.6 million, while Stuart Weitzman’s operating loss widened to $8.6 million.
Q1 FY2024 included $26.3 million of Capri acquisition-related pre-tax costs: $19.6 million in SG&A and $6.7 million in interest expense. Excluding these items, operating income was $272.8 million, net income $216.3 million and diluted EPS $0.93. These are company-reported non-GAAP measures; GAAP results are shown above.
Cash, debt and liquidity
- Cash and cash equivalents were $622.1 million at September 30, 2023, down $104.0 million from fiscal year-end; short-term investments were $16.7 million.
- Operating cash flow was positive $75.3 million. Investing used $22.8 million, mainly capital expenditures; financing used $149.4 million, including $80.2 million in dividends, $31.6 million in taxes on net-settled share awards and $31.4 million in debt issuance costs.
- Inventory was $942.5 million, up from $919.5 million at July 1, 2023. Management attributed the smaller cash use from inventory versus the prior-year quarter partly to lower in-transit inventory and freight costs.
- Carrying debt totaled approximately $1.655 billion, including $25.0 million current debt; long-term debt, net, was $1,629.9 million. Cash and short-term investments totaled $638.8 million.
- Committed but undrawn facilities included a $2.0 billion revolver, $6.6 billion bridge facility and $1.4 billion in new term loans. These commitments are not cash on hand and are principally intended to help finance the proposed Capri acquisition. No borrowings were outstanding on these facilities at quarter-end.
- The company reported covenant compliance at quarter-end. Its maximum net leverage covenant is 4.00:1.00 before the Capri acquisition; specified post-close limits step down from 4.75:1.00 to 4.00:1.00 over time.
Material developments, outlook and risks
- On August 10, 2023, Tapestry agreed to acquire Capri Holdings for $57 per share in cash, with expected enterprise value of approximately $8.5 billion. Capri shareholders approved the agreement on October 25, 2023; closing was expected during calendar 2024. Financing is expected to combine new and permanent financing, cash on hand, Capri cash and anticipated future cash flow.
- Tapestry suspended share repurchases in August in connection with the acquisition. No shares were repurchased in the quarter; $800 million remained authorized under its existing program.
- Management expects fiscal 2024 capital expenditures and cloud-computing costs of approximately $200 million. It said available operating cash flow, cash, investments and access to credit should support fiscal 2024 and beyond, while noting financing availability and future performance are not assured. The filing text does not provide a clear full-year sales or earnings guidance figure.
- Management described the macroeconomic environment as challenging and volatile, citing inflation, tighter monetary and fiscal policies, market volatility and geopolitical instability. Consumer spending, foreign exchange, tariffs, competition, fashion trends and seasonal fluctuations may affect results. The company said COVID-19 did not materially affect Q1 FY2024 operations.
- Kate Spade’s fair value exceeded carrying value by about 20% at the fiscal 2023 impairment test. Management noted that weaker-than-expected profitability during fiscal 2024 could prompt an interim or annual impairment test. No impairment charges were recorded in the quarter.
- Routine legal proceedings were not expected by management to have a material aggregate effect. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Capri transaction status, closing conditions, final financing mix, borrowing costs and implications for leverage and covenant headroom.
- Whether Coach’s growth can offset continued sales declines at Kate Spade and Stuart Weitzman, including Stuart Weitzman’s operating losses.
- Whether gross-margin gains from freight and pricing persist, and whether SG&A growth and currency effects pressure operating margins.
- Cash conversion and working-capital trends through the holiday quarter, including inventory, receivables and supplier-finance-program balances.
- Kate Spade’s profitability and impairment headroom, and any changes to fiscal 2024 outlook or capital spending.