Tapestry, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2022, the 13 weeks ended October 2, 2021. Comparisons are with the 13 weeks ended September 26, 2020. Amounts are in U.S. dollars.
Business and financial performance
Tapestry operates the Coach, Kate Spade and Stuart Weitzman brands, selling through retail, e-commerce, wholesale and licensing channels. Net sales were $1.481 billion, up 26.3% year over year (24.7% excluding currency effects) and 9.1% above the first quarter of fiscal 2020.
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $1,480.9 million | $1,172.2 million |
| Gross profit / margin | $1,068.7 million / 72.2% | $830.2 million / 70.8% |
| Operating income / margin | $295.0 million / 19.9% | $202.2 million / 17.3% |
| Net income | $226.9 million | $231.7 million |
| Diluted EPS | $0.80 | $0.83 |
| Operating cash flow | $21.8 million | $90.0 million |
Gross margin rose 140 basis points, reflecting lower promotional activity and higher average unit retail, partly offset by unfavorable geographic mix and higher inbound freight. SG&A was $773.7 million, or 52.2% of sales, versus $628.0 million, or 53.6%. Excluding Acceleration Program charges, operating income was $307.1 million and diluted EPS was $0.82.
Coach generated sales of $1,114.9 million and operating income of $365.7 million; Kate Spade sales were $299.5 million and operating income was $37.2 million. Stuart Weitzman sales were $66.5 million and its operating loss was $1.5 million. Sales increased across all three brands; growth was led by retail and e-commerce, with North America particularly strong.
Cash, debt and liquidity
- Cash and cash equivalents were $1,252.6 million at October 2, 2021, down from $2,007.7 million at fiscal year-end. Short-term investments were $402.6 million, compared with $8.1 million.
- Cash declined $755.1 million during the quarter. Investing activities used $428.4 million, primarily reflecting $402.9 million of investment purchases and $33.4 million of capital expenditures. Financing activities used $346.2 million, including $250.0 million for share repurchases and $69.6 million for dividends.
- Operating cash flow was $21.8 million; working-capital outflows included inventory of $84.8 million and accrued liabilities of $140.3 million.
- Debt principal totaled $1.6 billion: $400 million due in 2022, $600 million due in 2025 and $600 million due in 2027. The company had no revolving-credit-facility borrowings. Cash plus short-term investments exceeded debt principal by approximately $55 million, before lease liabilities.
- Reported available liquidity was $2.555 billion, including $1.253 billion cash, $402.6 million short-term investments and $900 million available under the revolving facility. The facility requires compliance with a maximum net leverage ratio of 4.0 to 1.0 following the covenant relief period.
Changes, outlook and risks
- GAAP net income and diluted EPS declined year over year despite higher sales and operating income. The prior-year quarter included a $91.7 million CARES Act tax benefit, principally from an NOL carryback; excluding disclosed comparability items, net income increased to $235.1 million from $160.8 million.
- Management said it remained on track for $300 million of gross run-rate savings in fiscal 2022, after achieving approximately $200 million in fiscal 2021. The Acceleration Program is expected to be substantially complete by fiscal year-end; total pretax charges are expected to be approximately $205–$220 million, with $15–$30 million of additional fiscal 2022 charges anticipated.
- Fiscal 2022 capital expenditures are expected to be approximately $220 million. The filing does not provide a clear full-year revenue, profit or EPS forecast.
- COVID-19 restrictions and outbreaks continued to affect stores and supply chains. Vietnam manufacturing restrictions reduced production capacity during the quarter; management expected a return to full capacity during fiscal 2022, but timing was uncertain. Port congestion, container shortages, logistics delays and elevated air and ocean freight costs were expected to persist through fiscal 2022.
- Management cited consumer-spending and travel uncertainty, inflation, foreign-exchange and geopolitical volatility, tariffs and possible tax changes. A renewed decline in store traffic or prolonged supply constraints could adversely affect results. Kate Spade’s fiscal 2021 impairment-test fair values exceeded carrying values by relatively narrower margins than Coach’s; weaker-than-expected profitability could prompt an impairment test.
- After quarter-end, the board authorized an additional $1.0 billion share repurchase program, incremental to $350 million remaining under the existing authorization. The company repurchased $250 million of shares in the quarter.
- The company reported routine legal proceedings and did not expect their aggregate outcome to materially affect its business or financial statements. No material risk-factor changes from the fiscal 2021 Form 10-K were reported.
Important facts for investors to verify
- Whether supply-chain capacity and freight costs recover as management expected, and how they affect inventory, margins and sales availability.
- Whether reported sales and margin momentum continues after accounting for currency, pandemic-related comparisons and the prior-year tax benefit.
- Progress toward the $300 million gross run-rate savings target, the remaining restructuring charges and the expected $220 million capital-spending level.
- Cash generation and working-capital trends, the 2022 note repayment, and compliance with the revolving-credit-facility leverage covenant.
- The pace and price of buybacks under the expanded authorization, alongside dividends and investment needs.