Tapestry, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended June 27, 2020, a 52-week year. Although the request identifies “2019 Q4,” this filing is the annual report for fiscal 2020; it also reports fourth-quarter results. Tapestry operates Coach, Kate Spade and Stuart Weitzman.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $4.961 billion | $6.027 billion |
| Gross profit / margin | $3.239 billion / 65.3% | $4.054 billion / 67.3% |
| Operating income (loss) / margin | $(550.8) million / (11.1)% | $819.7 million / 13.6% |
| Net income (loss) | $(652.1) million | $643.4 million |
| Diluted EPS | $(2.34) | $2.21 |
| Cash from operating activities | $407.0 million | $792.4 million |
| Cash and cash equivalents | $1.426 billion | $969.2 million |
| Total debt | Approximately $2.30 billion | $1.603 billion |
- Sales fell 17.7%; management attributed the decline primarily to Covid-19-related store closures and weaker demand. E-commerce increased but did not offset the retail and wholesale declines.
- Reported results include major impairment and restructuring charges. Excluding items affecting comparability, operating income was $438.4 million versus $951.0 million, and net income was $271.2 million versus $748.7 million. Adjusted diluted EPS was $0.97 versus $2.57; these are non-GAAP measures.
- Cash provided by investing activities was $44.3 million, including proceeds from investment maturities and sales; capital expenditures were $205.4 million. Cash provided by financing activities was $5.9 million, including a $700 million revolver draw, largely offset by dividends and share repurchases.
- At year-end, cash, short-term investments and undrawn revolver capacity totaled $1.634 billion. Working capital was $811.0 million, down from $1.639 billion. Operating lease liabilities were $2.189 billion.
Material changes and segment results
- Coach sales declined 17.4% to $3.526 billion; operating income fell to $589.4 million from $1.148 billion.
- Kate Spade sales declined 15.9% to $1.150 billion; the segment reported an operating loss of $99.3 million versus income of $165.4 million.
- Stuart Weitzman sales declined 26.5% to $286.2 million; reported operating loss was $621.4 million, including substantial impairment charges.
- Reported gross margin decreased 2.0 percentage points. Adjusted gross margin was 67.7% in both years; adjusted operating margin declined to 8.8% from 15.8%.
- Fiscal 2020 included $210.7 million of Stuart Weitzman goodwill impairment and $267.0 million of brand intangible impairment, both fully impairing those balances. The Company also recorded $267.7 million of store-asset impairments and $104.0 million of inventory-reserve increases.
- Store count at year-end was 1,509, down from 1,540. The Company expected further modest fleet reductions, with a greater emphasis on digital channels.
Outlook, management commentary and risks
- Management provided no forward financial guidance, citing uncertainty about Covid-19’s duration and financial effects. It warned that renewed closures, weaker consumer spending, inventory pressure and supply-chain disruption could further harm sales, cash flow and liquidity.
- The Acceleration Program is intended to improve consumer focus, digital capability and organizational efficiency. Tapestry reported $87 million of fiscal 2020 charges, expected total pre-tax charges of $185–$200 million, and estimated approximately $300 million in gross annual run-rate savings, including $200 million projected for fiscal 2021. These are estimates, not guaranteed outcomes.
- The Company suspended its quarterly dividend beginning in fiscal Q4 2020 and suspended share repurchases. The credit-facility amendment restricts both during the covenant-relief period. The Company drew $700 million of its $900 million revolver in March 2020.
- The amendment requires at least $700 million of available liquidity through October 2, 2021 and provides leverage-covenant relief through the certificate for the quarter ending July 3, 2021. It also imposes other restrictions; a ratings trigger could require subsidiary guarantees and collateral.
- Management cited substantial debt, long-term lease commitments, competition, fashion and brand risks, foreign-exchange and trade-policy exposure, cybersecurity, and reliance on global suppliers and distribution. Kate Spade’s valuation had relatively limited headroom over carrying value, so weaker-than-expected results could prompt further impairment.
- Leadership changed after year-end: Jide Zeitlin resigned as CEO, chair and director effective July 20, 2020; Joanne Crevoiserat became interim CEO and Andrea Shaw Resnick interim CFO.
- The auditor issued unqualified opinions on the financial statements and internal controls. Management also concluded internal control over financial reporting was effective as of June 27, 2020.
Important facts for investors to verify
- Whether sales, margins and cash generation recover as stores reopen, and how digital performance develops.
- Progress toward Acceleration Program savings, restructuring charges and planned store exits.
- Liquidity and covenant compliance, revolver availability, debt maturities and the ability to manage lease obligations.
- Whether Kate Spade’s financial performance supports the carrying values of its goodwill and brand assets, and whether other assets require impairment.
- Timing and conditions for any resumption of dividends or share repurchases, and the effects of leadership changes on execution.