Business context and reporting period
This is Coach, Inc.’s unaudited Form 10-Q for the 13-week third quarter and nine months ended March 28, 2015, compared with periods ended March 29, 2014. The filing does not identify the registrant as Tapestry, Inc.; it identifies Coach, Inc. (the company later known as Tapestry). Fiscal 2015 was scheduled to end June 27, 2015.
Coach sells luxury accessories and lifestyle products through North America and International segments. Its stated strategy was a multiyear brand transformation, including elevated products, reduced promotions, store upgrades and closures, and broader lifestyle-category growth.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net sales | $929.3 million | $1,099.6 million | $3,187.5 million | $3,670.0 million |
| Gross profit / margin | $665.5 million / 71.6% | $781.3 million / 71.1% | $2,220.9 million / 69.7% | $2,590.6 million / 70.6% |
| Operating income / margin | $124.0 million / 13.3% | $262.7 million / 23.9% | $579.2 million / 18.2% | $1,020.3 million / 27.8% |
| Net income | $88.1 million | $190.7 million | $390.7 million | $706.1 million |
| Diluted EPS | $0.32 | $0.68 | $1.41 | $2.51 |
For Q3, sales fell 15.5% (12.5% excluding currency effects), net income fell 53.8%, and diluted EPS fell 53.6%. For the nine months, sales fell 13.1% (11.3% excluding currency), net income fell 44.7%, and diluted EPS fell 43.7%. North America was the principal source of sales weakness: Q3 segment sales declined 23.9%, while International sales declined 2.9% as reported but rose 3.9% excluding currency effects.
Q3 reported SG&A was $541.5 million, up 4.4%; excluding $22.5 million of transformation charges, it was approximately flat year over year. Nine-month SG&A was $1,641.7 million, up 4.5%; excluding transformation and acquisition-related costs, it declined slightly. Nine-month effective tax rate was 32.5%, versus 30.9%.
Cash flow, debt and liquidity
For the first nine months, operating cash flow was $750.8 million, compared with $669.3 million. Investing cash outflow was $18.2 million, versus $673.9 million, reflecting investment portfolio proceeds; financing provided $469.3 million, versus a $593.2 million outflow. Cash and cash equivalents increased $1,190.1 million to $1,782.0 million. The period included $896.7 million of net proceeds from long-term debt issuance. Dividends paid were $278.6 million; no shares were repurchased.
At March 28, 2015, cash was $1,782.0 million, short-term investments $239.2 million, and total investments $638.9 million. Reported debt carrying value was $896.7 million: a $300 million term loan and $600 million of 4.250% senior notes, net of discount, plus $7.5 million current term-loan debt. The company reported $2,896.4 million of total available liquidity, including cash, specified investments and undrawn facilities. About 58% of cash and short-term investments were held outside the U.S.; repatriation could incur taxes.
Material changes and unusual items
- The transformation plan generated $22.5 million of Q3 pretax charges and $79.7 million for the nine months; nine-month acquisition-related costs were $3.5 million. Management reported nine-month adjusted diluted EPS of $1.61 versus GAAP $1.41; these are company-presented non-GAAP measures.
- Management attributed North American comparable-store sales weakness (23% decline) mainly to lower traffic amid reduced promotions; restricted access to the outlet internet site also weighed on comparable sales. North America had closed a net 61 retail stores since the prior-year quarter.
- In March 2015, Coach issued $600 million of 4.250% unsecured notes due 2025 and amended its credit agreement to include a $300 million term loan and a $700 million revolving facility maturing in 2020. No known defaults were reported.
- After quarter-end, on May 4, 2015, Coach completed its approximately $530 million cash acquisition of Stuart Weitzman, funded with cash on hand including debt proceeds. Additional earnout payments may total up to $44 million over three years, subject to revenue targets. The acquisition is not included in the quarter’s operating results.
- The company expected approximately $100 million of additional transformation charges during the remainder of FY2015 and into FY2016, within an approximately $300 million total plan. It also expected about $250 million of further Hudson Yards joint-venture investment and approximately $190 million of direct headquarters build-out capital expenditures over the remaining construction period.
Outlook, risks and contingencies
Management said transformation execution remained on plan, but highlighted weak and inconsistent global retail traffic, promotional competition, uncertainty in consumer spending, and macroeconomic and geopolitical volatility in China and Southeast Asia. It anticipated a FY2015 effective tax rate of approximately 32%, with possible fourth-quarter variability, and FY2015 capital expenditures of $275–$300 million excluding Hudson Yards-related spending. The filing provides no clear numerical full-year sales or earnings guidance.
Other cited risks include execution of the transformation and Stuart Weitzman integration, foreign exchange, changing consumer preferences, cost control, access to capital, and headquarters-project disruption or cost overruns. Coach said routine pending legal matters were not expected to have a material effect. The filing also notes that adverse market conditions or weaker results could prompt asset impairment charges.
Most important facts for investors to verify
- Confirm the issuer and reporting period: the supplied filing is Coach, Inc.’s Q3 FY2015 10-Q, not a filing under the Tapestry, Inc. name.
- Track whether North American traffic and comparable-store sales stabilize, and whether reduced promotions and the elevated product mix improve margins without further eroding sales.
- Assess the pace and full cost of transformation actions, store closures, and planned store and headquarters investments.
- Verify the Stuart Weitzman acquisition’s purchase accounting, integration performance, funding impact, and any earnout obligations in subsequent filings.
- Monitor debt service, liquidity availability, offshore cash access and repatriation costs, and compliance with debt covenants.
- Compare subsequent results with management’s approximately 32% tax-rate and $275–$300 million capital-expenditure expectations.