Business context and reporting period
Filing identity: The supplied filing is Coach, Inc.’s Form 10-Q, not a filing under the requested company name Tapestry, Inc. It covers the 13-week third quarter and first nine months of fiscal 2017, ended April 1, 2017; comparisons are with periods ended March 26, 2016. Coach’s fiscal year was scheduled to end July 1, 2017. The interim financial statements are unaudited.
Coach operated the Coach brand across North America and International segments, and the Stuart Weitzman brand as a third reportable segment. The filing describes strategic priorities including brand development, international and digital growth, and building an efficient operating structure.
Financial results and liquidity
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Net sales | $995.2m | $1,033.1m | $3,354.5m | $3,337.2m |
| Gross profit / margin | $705.7m / 70.9% | $713.0m / 69.0% | $2,326.6m / 69.4% | $2,268.6m / 68.0% |
| Operating income / margin | $151.1m / 15.2% | $134.3m / 13.0% | $594.4m / 17.7% | $536.7m / 16.1% |
| Net income | $122.2m | $112.5m | $439.3m | $379.0m |
| Diluted EPS | $0.43 | $0.40 | $1.56 | $1.36 |
- Third-quarter sales declined 3.7% (3.4% excluding currency effects); net income rose 8.7%. For the first nine months, sales increased 0.5% and net income increased 15.9%.
- Q3 Coach-brand sales declined 4.1%; North America declined 5.0% and International declined 4.2%. Stuart Weitzman sales increased 1.1%. Nine-month Stuart Weitzman sales increased 9.6%, while Coach-brand sales declined 0.3%.
- Q3 gross margin improved 190 basis points, while SG&A fell 4.2% to $554.6m. Management attributed operating improvement in part to higher gross margin and lower corporate costs. North America operating income fell 14.7%; Stuart Weitzman operating income fell 19.5%.
- Nine-month operating cash flow was $530.0m, versus $509.2m. Capital expenditures were $192.1m. Cash and cash equivalents rose to $1,394.5m from $859.0m at July 2, 2016.
- At April 1, 2017, short-term investments were $497.4m and long-term investments $104.4m. Debt was $600m principal of 4.250% senior notes due 2025, reported net of issuance costs at $591.8m; the $285m term loan had been prepaid and the $700m revolver was undrawn. Reported available liquidity was $2,743.3m, including cash, investments and unused credit facilities. The quarterly dividend declared was $0.3375 per share.
Material changes, outlook and risks
- Coach deliberately reduced North American wholesale sales by limiting promotions and planned to close about 25% of wholesale doors from fiscal 2016 year-end levels by fiscal 2017 year-end. North America comparable-store sales rose 3.4% in Q3; nine-month comparable-store sales rose 2.7%.
- Management cited weak and inconsistent global retail traffic, promotional competition, constrained discretionary spending, currency volatility, geopolitical and economic uncertainty, and slower tourist traffic in Hong Kong and Macau. These factors could pressure sales, margins and asset values.
- The Operational Efficiency Plan generated $17.2m of charges in the first nine months; actions were expected to be substantially completed by fiscal 2017 year-end, with about $20m of incremental charges estimated. Management expected fiscal 2017 capital expenditures of approximately $300m. No consolidated revenue or earnings guidance was stated in the supplied filing text.
- Hudson Yards and former-headquarters transactions generated substantial investing cash proceeds: $680.6m from the Hudson Yards investment sale and $126.0m from the former headquarters sale. The Hudson Yards transaction resulted in a $28.8m gain to be amortized over the 20-year lease; the new headquarters lease commitment was approximately $1.05bn. These transactions materially contributed to investing cash flow and higher cash balances.
- On May 7, 2017, after quarter-end, Coach agreed to acquire Kate Spade for $18.50 per share in cash, an expected purchase price of approximately $2.4bn, with closing anticipated in calendar Q3 2017 subject to conditions. A $2.1bn, 364-day bridge financing commitment was available if permanent financing was not arranged. Acquisition execution, financing, integration, synergies and potential disruption are material risks.
- Stuart Weitzman’s 2017 contingent earnout revenue target was $425m; targets were not met in 2015 or 2016. The earnout liability was valued at $35.2m, with total payments capped at $44m. Management also warned that further deterioration in Stuart Weitzman sales or profitability could trigger impairment; no impairment was recorded in the reported periods.
- Routine legal proceedings were not expected by management to have a material adverse effect. Credit agreements had covenants, and the filing reported no known defaults. Approximately 56% of cash and short-term investments were held outside the U.S. in jurisdictions where earnings were intended to be permanently reinvested.
Reported results include restructuring and acquisition-related charges. Management also presented non-GAAP results excluding specified items; those measures supplement, and do not replace, GAAP results.
Important facts for investors to verify
- Confirm the requested issuer and period: this source is Coach, Inc., fiscal Q3 2017, rather than Tapestry, Inc., 2016 Q3.
- Track whether comparable-store growth can offset lower wholesale and overall Coach-brand sales, and whether planned wholesale door closures affect future revenue and margins.
- Assess recurring profitability against the filing’s non-GAAP adjustments, including remaining efficiency-plan costs and Stuart Weitzman acquisition-related charges.
- Review the Kate Spade transaction’s final funding, closing conditions, integration costs and realized benefits, alongside resulting leverage and liquidity.
- Monitor Stuart Weitzman performance against the earnout target and impairment sensitivities, as well as the long-term headquarters lease obligations.