Filing identity and reporting period
The supplied filing is Coach, Inc.’s unaudited Form 10-Q for the quarter ended March 26, 2016, not a Tapestry, Inc. filing for 2015 Q3 as the request metadata indicates. Fiscal 2016 is a 53-week year; the quarter and prior-year comparable quarter were each 13 weeks.
Financial results
| Metric | Quarter ended Mar. 26, 2016 | Nine months ended Mar. 26, 2016 | Prior-year comparable |
|---|---|---|---|
| Net sales | $1,033.1 million; up 11.2% | $3,337.2 million; up 4.7% | $929.3 million; $3,187.5 million |
| Gross profit / margin | $713.0 million / 69.0% | $2,268.6 million / 68.0% | $665.5 million / 71.6%; $2,220.9 million / 69.7% |
| Operating income / margin | $134.3 million / 13.0% | $536.7 million / 16.1% | $124.0 million / 13.3%; $579.2 million / 18.2% |
| Net income | $112.5 million; up 27.6% | $379.0 million; down 3.0% | $88.1 million; $390.7 million |
| Diluted EPS | $0.40; up 26.7% | $1.36; down 3.7% | $0.32; $1.41 |
| Operating cash flow | Not separately presented for the quarter | $509.2 million | $750.8 million for nine months |
Quarterly sales growth reflected $79.2 million from Stuart Weitzman, acquired in May 2015, and higher Coach International sales. Excluding currency effects, quarterly sales rose 12.6%; nine-month sales rose 7.3%. Nine-month Coach-brand sales fell 3.5%, including a 6.3% decline in North America, while International sales increased 2.0% reported and 7.3% excluding currency.
Quarterly gross margin declined 260 basis points, largely from foreign currency effects and the addition of Stuart Weitzman, whose gross margin was lower than Coach’s. For the nine months, operating income fell 7.3%; North America operating income declined 14.8%. Net income benefited from lower income-tax expense, while higher debt-related interest expense partly offset the benefit. Effective tax rates were 12.0% for the quarter and 26.7% for the nine months, versus 28.3% and 32.5%, respectively, in the prior-year periods.
Balance sheet, cash flow, debt and liquidity
At March 26, 2016, cash and cash equivalents were $821.6 million and short-term investments were $460.8 million. Total assets were $4,676.5 million; current assets were $2,265.1 million and current liabilities were $731.5 million. Debt was $15.0 million current and $868.5 million long-term, net of discount and issuance costs; scheduled principal repayments totaled $892.5 million. The $600 million senior notes bear 4.25% interest and mature in 2025. There were no borrowings under the revolving facility.
For the first nine months, operating cash flow was $509.2 million, investing cash flow was negative $674.9 million and financing cash flow was negative $304.6 million; cash decreased $470.2 million. Capital expenditures were $276.4 million, versus $124.5 million in the prior-year period, and dividends paid were $280.7 million. The company reported total available liquidity of $2,166.5 million, including cash, investments and available credit facilities. About 72% of cash and short-term investments were held outside the U.S. and intended to be permanently reinvested.
Material changes and unusual items
- Stuart Weitzman contributed $260.7 million of nine-month sales and $30.7 million of operating income. Reported results include acquisition, integration and purchase-accounting costs.
- Nine-month GAAP operating income included $65.1 million of transformation and acquisition-related adjustments; management’s non-GAAP operating income was $601.8 million versus $662.4 million a year earlier. These non-GAAP measures are supplemental, not substitutes for GAAP results.
- Cash invested in the Hudson Yards joint venture was $118.1 million during the nine months, bringing cumulative investment to $438.3 million. The company expected about $93 million more for the joint venture and about $85 million in additional headquarters construction expenditures.
- The company declared dividends of $1.0125 per share for the nine months, unchanged from the prior-year period. No shares were repurchased during the quarter; the repurchase program had no remaining availability.
Outlook, commentary and risks
Management said execution of the Coach Transformation Plan was on plan through the third quarter and expected about $15 million of additional transformation charges in fiscal fourth quarter. It expected total transformation-plan charges of about $325 million, with $313.3 million incurred through March 26, 2016. The company projected an approximately 28% fiscal 2016 tax rate excluding non-GAAP adjustments. The filing does not provide a clear consolidated revenue or earnings forecast.
On April 26, 2016, after quarter-end, the company announced an Operational Efficiency Plan expected to incur $65–$80 million of pretax charges, substantially complete by fiscal year-end 2017; approximately $55–$65 million was expected to be cash. Management cited weak and uneven global retail traffic, heightened promotions and competition, constrained discretionary spending, currency volatility, economic and geopolitical uncertainty in Greater China, terrorism-related effects in Europe, and slower emerging-market growth. Other risks include execution of brand transformation and efficiency initiatives, fashion and brand relevance, cost control, acquisition benefits, and foreign-exchange exposure. Management stated that pending legal matters were not expected to have a material effect; the filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the filing is the intended document: it is Coach, Inc., fiscal 2016 Q3, not Tapestry, Inc. 2015 Q3.
- Assess underlying Coach-brand performance separately from Stuart Weitzman’s acquired contribution, especially the ongoing North America sales and margin trends.
- Review cash conversion and investment needs, including the decline in operating cash flow, elevated capital expenditures, and remaining Hudson Yards and headquarters commitments.
- Track actual costs and cash payments under the transformation and Operational Efficiency Plans, and distinguish GAAP results from management’s non-GAAP adjustments.
- Monitor the international cash position, debt maturities, floating-rate exposure, and compliance with credit-agreement covenants.