Tapestry, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months of fiscal 2023, ended December 31, 2022. Comparatives are the corresponding periods ended January 1, 2022. The company owns Coach, kate spade new york and Stuart Weitzman. Figures are unaudited; dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $2,025.4 | $2,141.2 | $3,531.9 | $3,622.1 |
| Gross profit / margin | $1,389.3 / 68.6% | $1,457.4 / 68.1% | $2,443.9 / 69.2% | $2,526.1 / 69.7% |
| Operating income / margin | $418.2 / 20.6% | $462.8 / 21.6% | $672.5 / 19.0% | $757.8 / 20.9% |
| Net income | $329.9 | $317.9 | $525.2 | $544.8 |
| Diluted EPS | $1.36 | $1.15 | $2.14 | $1.94 |
| Operating cash flow | Not separately presented | Not separately presented | $462.4 | $668.1 |
Q2 sales fell 5.4% year over year, or 1.6% excluding currency effects. For the six-month period, sales declined 2.5% as reported but rose 1.3% on a constant-currency basis. Reported Q2 net income and EPS benefited from the absence of the prior-year $53.7 million debt-extinguishment charge. Excluding prior-year comparability items, Q2 net income declined 10.3% and diluted EPS increased 2.2%; six-month net income declined 12.9% and diluted EPS was down 0.1%.
Segments and principal changes
- Coach: Q2 sales were $1,449.7, down 4.9% reported and 0.6% in constant currency; Greater China sales were down $47.6 amid Covid-related disruption. Q2 operating income was $453.2, down 4.2%.
- Kate Spade: Q2 sales were $490.3, down 2.0% reported but up 0.2% in constant currency. Operating income declined 17.6% to $69.0, with margin falling to 14.1% from 16.7%.
- Stuart Weitzman: Q2 sales declined 26.2% to $85.4; operating income fell to $0.7 from $13.3. For the six months, the segment recorded an operating loss of $4.4.
- Q2 consolidated gross margin rose 0.5 percentage point, with lower freight costs (+130 basis points) offset in part by unfavorable currency translation (-100 basis points). Over six months, gross margin declined 0.5 point; currency reduced it by approximately 90 basis points, partly offset by freight savings.
- Q2 SG&A declined 2.4% in dollars but increased as a share of sales to 47.9% from 46.5%. Six-month SG&A was broadly flat in dollars but rose to 50.2% of sales from 48.8%.
Balance sheet, debt and liquidity
- At December 31, 2022, cash and cash equivalents were $830.2 and short-term investments were $16.0, versus $789.8 and $163.4, respectively, at July 2, 2022. Inventory was $975.8, down from $994.2.
- Reported current debt was $25.0 and long-term debt, net, was $1,647.5. The debt schedule reports approximately $1,681.2 of principal debt, including the term loan and senior notes. No borrowings were outstanding on the $1.25 billion revolving credit facility.
- Total available liquidity, including cash, short-term investments and the undrawn revolver, was reported as $2,096.2. The credit facilities mature in May 2027 and include a maximum 4.0-to-1.0 covenant ratio specified in the filing; the company reported no known debt defaults.
- Six-month operating cash flow was $462.4, down $205.7 year over year. Investing activities provided $80.6, including investment maturities and a hedge settlement, partly offset by $108.8 of property and equipment purchases. Financing activities used $504.7, including $300.0 of share repurchases and $144.2 of dividends.
Outlook, management commentary and risks
- The filing does not provide a specific earnings or revenue forecast. Management expected fiscal 2023 capital expenditures and cloud-computing costs of approximately $300 million and said it intended to repurchase approximately $700 million of shares during fiscal 2023. About $1.2 billion remained authorized under the repurchase program at December 31, 2022.
- Management described the macroeconomic environment as challenging and volatile, citing inflation, tighter monetary and fiscal policies, the Ukraine crisis, foreign-exchange volatility and discretionary-spending uncertainty. A stronger U.S. dollar reduced Q2 sales by $80.6 million and diluted EPS by $0.11; the six-month impacts were $135.7 million and $0.20, respectively.
- Covid-related disruption continued to weigh on Greater China results. Some restrictions were lifted in December 2022, but management said the situation remained volatile. Supply-chain and logistics disruption, tariffs, changing consumer demand and foreign exchange remain risks. Freight costs had moderated and management reported lower use of air freight.
- Management said liquidity sources were expected to support operating, capital and debt-service needs, while noting availability of financing and future cash flow cannot be assured. The filing identifies Kate Spade impairment sensitivity: its fiscal 2022 fair value exceeded carrying value by approximately 50%, and weaker-than-expected profitability could prompt an impairment test or charge.
- Routine legal proceedings were disclosed; the company did not expect their aggregate outcome to have a material effect. No material changes to previously reported risk factors or critical accounting policies were identified. The filing reported effective disclosure controls and no material internal-control changes during the quarter.
Most important facts for investors to verify
- Whether Greater China demand and sales recover, and the continuing effects of Covid-related disruption.
- Whether constant-currency sales growth can be sustained and margins can withstand foreign-exchange movements, promotions and cost pressures.
- Stuart Weitzman’s return to profitability and Kate Spade’s operating performance and impairment headroom.
- Cash generation, inventory trends, planned capital spending and the pace of share repurchases and dividends relative to liquidity and debt obligations.
- The effect of evolving U.S. and international minimum-tax rules and other trade or duty changes on future results.