Tapestry, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2020, the 13 weeks ended March 28, 2020; nine-month results cover the period ended March 28, 2020. The filing metadata’s “2019 Q3” label does not match the filing’s stated reporting period. Tapestry operates Coach, Kate Spade and Stuart Weitzman.
Financial performance
| Metric | Quarter ended Mar. 28, 2020 | Prior-year quarter | Nine months ended Mar. 28, 2020 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $1,072.7 million | $1,331.4 million | $4,246.6 million | $4,513.4 million |
| Gross profit / margin | $616.2 million / 57.4% | $915.9 million / 68.8% | $2,740.4 million / 64.5% | $3,054.5 million / 67.7% |
| Operating income (loss) / margin | $(685.5) million / (63.9)% | $109.8 million / 8.2% | $(270.8) million / (6.4)% | $648.6 million / 14.4% |
| Net income (loss) | $(677.1) million | $117.4 million | $(358.3) million | $494.5 million |
| Diluted EPS | $(2.45) | $0.40 | $(1.28) | $1.70 |
- Sales and margins: Quarterly sales fell 19.4%; nine-month sales fell 5.9%. Excluding specified unusual items, quarterly gross margin was 67.1% versus 69.2% a year earlier, and nine-month gross margin was 67.1% versus 67.9%.
- Unusual charges: The quarter included $477.7 million of Stuart Weitzman goodwill and brand impairments, plus store-asset and inventory-related charges. Total impairment-related items affecting comparability were $653.9 million in quarterly operating results. Excluding specified items, the quarter produced an operating loss of $31.6 million and net loss of $75.8 million; these non-GAAP measures are supplemental, not substitutes for GAAP results.
- Cash flow: Nine-month operating cash flow was $446.1 million, down from $602.8 million. Investing activities used $69.2 million; financing activities used $603.1 million, including $300.0 million for share repurchases and $287.1 million for dividends. Cash declined $226.6 million during the period.
- Liquidity and debt: At March 28, cash was $742.6 million and short-term investments were $155.6 million. Debt was $1.599 billion, including $1.587 billion long-term. The company also reported $2.256 billion of lease liabilities. It had a $900 million revolving facility with no borrowings outstanding at quarter-end; it drew $700 million on March 30, after the reporting date.
- Capital spending and shareholder returns: Nine-month capital expenditures were $172.9 million. Fiscal 2020 capital expenditures were expected to be approximately $200–$225 million. The quarterly dividend was suspended beginning in fiscal Q4, and share repurchases were suspended for the foreseeable future.
Material changes and business drivers
- COVID-19-related store closures and reduced wholesale activity drove a sharp quarterly sales decline. Most mainland China stores had reopened by quarter-end; North American and European stores, and some Asia-Pacific stores, were closed in March. E-commerce remained operational, subject to distribution-center conditions.
- Quarterly sales fell across all three brands: Coach 20.0%, Kate Spade 11.2%, and Stuart Weitzman 40.4%. Coach remained profitable at the segment operating level; Kate Spade recorded a $91.3 million segment loss, and Stuart Weitzman recorded a $530.7 million loss, heavily affected by impairments.
- For the first nine months, Coach sales declined 5.2%, Kate Spade 4.8%, and Stuart Weitzman 16.8%. Excluding impairment and other specified items, nine-month operating income was $508.2 million, compared with $729.0 million in the prior-year period.
- Lease accounting adoption brought operating right-of-use assets and lease liabilities onto the balance sheet; prior-year balance-sheet comparisons are not directly comparable on this basis.
Outlook, management commentary and risks
- Management said the pandemic had materially adversely affected, and was expected to continue affecting, operations, cash flows and liquidity. It did not provide quantified sales or earnings guidance; the duration and severity of impacts were uncertain.
- Management described actions to preserve liquidity and reduce costs, including tighter inventory and capital-spending controls, lower non-essential expenses and compensation, and workforce reductions. The filing anticipates approximately $55–$70 million in pre-tax charges for broader corporate and retail workforce actions, primarily cash severance, beginning in fiscal Q4 2020 and expected to be completed by fiscal 2021.
- The $700 million revolver draw was a precautionary liquidity measure. Management warned that a prolonged disruption could threaten compliance with the facility’s leverage-ratio covenant. It was seeking an amendment; failure to comply could trigger default and potentially accelerate both revolver and senior-note obligations. Management stated it expected it could repay some or all of the draw if an amendment were unavailable.
- Other cited risks include further impairment or inventory-reserve charges, lower discretionary spending and store traffic, supply-chain disruptions, foreign-exchange volatility, trade tensions and tariffs, and uncertainty around rent relief and other costs. Kate Spade had a relatively limited cushion between estimated fair value and carrying value at its fiscal 2019 impairment test.
- Routine legal proceedings were not expected by management to have a material aggregate effect. The filing reported disclosure controls as effective as of March 28, 2020.
Important facts for investors to verify
- Current store reopening status, e-commerce performance, wholesale demand and the pace of sales recovery by brand and geography.
- Cash use, inventory levels and realizability, available borrowing capacity, and compliance with or amendment of the revolver covenant following the $700 million draw.
- Whether further impairments or inventory, receivable and lease-asset reserves are required, especially for Kate Spade and Stuart Weitzman.
- Actual delivery of planned cost reductions, workforce restructuring charges, and fiscal 2020 capital expenditures.
- Timing and conditions for any restoration of the dividend or share repurchases; both were suspended at the time of the filing.