Business context and reporting period
This filing is Coach, Inc.’s unaudited Form 10-Q for the 13 weeks ended September 26, 2015, the first quarter of fiscal 2016. The company later became Tapestry, Inc.; the filing reports Coach, not a company then named Tapestry. Coach’s business included North America and International operations, and the Stuart Weitzman footwear brand acquired in May 2015.
Financial performance
| Metric | Quarter ended Sep. 26, 2015 | Comparable 2014 quarter | Change |
|---|---|---|---|
| Net sales | $1,030.3 million | $1,038.8 million | Down 0.8%; up 3.2% excluding currency effects |
| Gross profit / margin | $696.5 million / 67.6% | $715.4 million / 68.9% | Down 2.6%; margin down 130 bps |
| Operating income / margin | $141.4 million / 13.7% | $179.8 million / 17.3% | Down 21.4% |
| Net income | $96.4 million | $119.1 million | Down 19.1% |
| Diluted EPS | $0.35 | $0.43 | Down 19.6% |
| Operating cash flow | $8.0 million | $138.9 million | Down $130.9 million |
GAAP results included $23.6 million of operating charges in fiscal 2016: $12.6 million for the Coach transformation plan and $11.0 million for Stuart Weitzman acquisition-related costs and purchase accounting. Excluding these items, operating income was $165.0 million and diluted EPS was $0.41; comparable prior-year figures were $216.9 million and $0.53. These are company-presented non-GAAP measures, not substitutes for GAAP results.
Segments and material changes
- North America sales fell 11.5% to $561.0 million; comparable store sales declined 9.5%, primarily on lower traffic. The company cited lower outlet Internet activity and wholesale shipments as additional pressures.
- International sales fell 3.2% reported to $369.0 million, but rose 5.6% excluding currency effects. Europe, Japan, and mainland China contributed growth; Hong Kong and Macau were weaker amid reduced tourist traffic.
- Stuart Weitzman contributed $87.5 million of sales and $7.7 million of operating income. It was not included in the prior-year comparison.
- Coach-brand sales declined 9.2%. The overall reported sales decline was partly offset by the newly acquired Stuart Weitzman business.
- Gross margin pressure reflected foreign exchange, higher outlet mix of elevated products and associated costs, and Stuart Weitzman’s lower margin profile. SG&A rose 3.6% to $555.1 million, with marketing and advertising spending higher.
Cash, debt, and liquidity
- Cash and cash equivalents were $966.0 million at quarter-end, down from $1,291.8 million at fiscal year-end. Short-term investments were $310.2 million and long-term investments were $480.4 million; the latter includes a $371.6 million Hudson Yards joint-venture investment.
- Cash decreased $325.8 million during the quarter. Investing activities used $220.4 million, including $69.5 million of capital expenditures and $51.4 million invested in the Hudson Yards joint venture. Financing activities used $110.7 million, including $93.3 million in dividends.
- Debt principal totaled $900 million: a $300 million term loan and $600 million of 4.25% senior notes due in 2025. Balance-sheet debt, net of note discount and issuance costs, was $890.6 million. No revolving-facility borrowings were outstanding; $700 million remained available under the revolving facility.
- Management reported total available liquidity of $2.129 billion under its stated calculation, including cash, selected investments and available credit facilities. Approximately 65% of cash and short-term investments was held outside the U.S.; the company said those earnings were intended to be permanently reinvested, and repatriation could incur taxes.
- The quarterly dividend declared was $0.3375 per common share. The company reported no share repurchases and no remaining availability under its repurchase program.
Outlook, risks, and unusual items
- Management said execution of the multi-year Coach transformation plan remained on plan. It expected approximately $35 million of additional pretax transformation charges during the remainder of fiscal 2016; total expected plan charges were about $325 million, of which $290 million had been incurred by quarter-end.
- The company did not provide a specific revenue or earnings forecast in the supplied filing text. It described global consumer traffic and discretionary spending as weak and inconsistent, with risks from emerging-market slowdowns, currency volatility, MERS-related effects on Asian tourism, and geopolitical events in Greater China.
- Management cited brand relevance, fashion trends, competition, transformation execution, cost control, foreign exchange, and acquisition benefits as key risks. The filing said legal proceedings were routine and were not expected to have a material effect; it reported no material change to previously disclosed risk factors.
- Coach expected to invest about $158 million more in the Hudson Yards joint venture and about $175 million more directly in its new headquarters build-out over the remaining construction period. These are significant planned cash requirements.
- The quarter’s cash use should be interpreted in light of seasonality: Coach builds inventory in the first fiscal quarter ahead of holiday sales, and management cautioned that the quarter’s results and cash flows are not necessarily indicative of the full fiscal year.
Important facts for investors to verify
- Confirm the reporting entity and period: Coach, Inc., fiscal Q1 2016 ended September 26, 2015—not a filing under the later Tapestry name.
- Track North America comparable-store trends, traffic, and the impact of reduced outlet promotions, alongside international performance excluding currency effects.
- Assess earnings and margins using both GAAP results and the company’s adjustments, including the nature and recurrence of transformation and acquisition-related charges.
- Monitor operating cash flow, seasonal inventory and working-capital movements, and the timing and scale of Hudson Yards and headquarters spending.
- Review debt covenant compliance, cash held abroad and potential repatriation taxes, the Stuart Weitzman earnout, and delivery of the expected transformation benefits.