Tapestry, Inc. — Form 10-Q Summary
Business context and reporting period
Tapestry is a global luxury accessories and lifestyle company comprising Coach, Kate Spade and Stuart Weitzman. This unaudited report covers the 13-week second quarter and six months of fiscal 2022, ended January 1, 2022; comparatives ended December 26, 2020.
Key financial metrics
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $2,141.2m | $1,685.4m | $3,622.1m | $2,857.6m |
| Gross profit / margin | $1,457.4m / 68.1% | $1,173.7m / 69.6% | $2,526.1m / 69.7% | $2,003.9m / 70.1% |
| Operating income / margin | $462.8m / 21.6% | $389.4m / 23.1% | $757.8m / 20.9% | $591.6m / 20.7% |
| Net income | $317.9m | $311.0m | $544.8m | $542.7m |
| Diluted EPS | $1.15 | $1.11 | $1.94 | $1.94 |
| Operating cash flow | Not separately stated | Not separately stated | $668.1m | $746.3m |
Quarterly sales grew 27.0%; Coach sales were $1,525.0m, Kate Spade $500.4m and Stuart Weitzman $115.8m. Management attributed growth primarily to stronger North American store and e-commerce sales. For the six months, sales rose 26.8% and operating income rose 28.1% year over year.
Quarterly gross margin fell 150 basis points, primarily reflecting higher inbound freight and unfavorable channel/geographic mix, partly offset by lower promotional activity. The company reported $69.3m of incremental freight costs in Q2 and $79.7m for the six months versus the prior-year periods. Q2 net income included a $53.7m debt-extinguishment charge and $13.3m of Acceleration Program charges. Excluding items identified by the company, Q2 diluted EPS was $1.33 versus $1.15; these are non-GAAP measures, not substitutes for reported GAAP results.
Liquidity, debt and capital allocation
At January 1, 2022, cash and cash equivalents were $1,257.4m and short-term investments were $390.3m. The company reported total available liquidity of $2,547.7m, including $900m of undrawn revolving credit capacity. Gross principal debt was $1.6bn; the balance sheet reported $400m current debt and $1,189.1m long-term debt, net of discount and issuance costs. No revolver borrowings were outstanding. The revolver requires quarterly compliance with a maximum net leverage ratio of 4.0 to 1.0.
Six-month cash flow included $455.7m used in investing and $952.1m used in financing; cash declined $750.3m. Financing included $750m of share repurchases and $137.5m of dividend payments, partly offset by $498.5m net proceeds from new debt. The company issued $500m of 3.050% notes due 2032 and used proceeds in part to tender $500m of 2025 and 2027 notes, recording the $53.7m extinguishment charge. Operating lease liabilities totaled $1,722.8m.
Outlook, commentary and risks
- Management said it remained on track for $300m of gross run-rate expense savings and expected the Acceleration Program to be substantially complete by fiscal 2022 year-end. Expected total pre-tax program charges were approximately $215m–$220m, with about $15m of additional charges expected in fiscal 2022.
- Fiscal 2022 capital expenditures were expected to be approximately $200m. The filing provides no clear full-year revenue or earnings-per-share guidance.
- COVID-19 restrictions, including China’s zero-COVID policies, could reduce store traffic; manufacturing and logistics disruptions, port congestion and freight inflation remained risks. Vietnam factory restrictions had reduced production capacity earlier in the fiscal year; the company shifted production, adjusted merchandising and used more air freight.
- Other cited exposures include inflation, foreign-exchange and geopolitical volatility, tariffs and trade changes, competition, consumer demand, and the ability to execute brand and digital strategies. Management warned that worsening conditions could affect results, liquidity or asset valuations. Kate Spade’s impairment headroom was comparatively limited; no impairment charges were recorded in the reported periods.
- The company said routine legal proceedings were not expected, in aggregate, to have a material effect. It reported no material changes to previously disclosed risk factors and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales momentum and segment profitability persist as pandemic-related comparisons normalize, particularly in Greater China and North America.
- How freight costs, supply-chain availability and inventory levels affect gross margins and cash conversion.
- Progress toward the $300m savings target, remaining program charges and whether savings translate into sustainable operating-margin improvement.
- Debt repayment needs, covenant headroom and liquidity after substantial repurchases and dividends; $400m of notes were classified as current at quarter-end.
- Whether Kate Spade performance and other assumptions support carrying values of goodwill and indefinite-lived brand assets.