Tapestry, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, the 13 weeks ended September 28, 2019; compared with the 13 weeks ended September 29, 2018. Results are unaudited. Tapestry operates Coach, Kate Spade and Stuart Weitzman.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $1,357.9 million | $1,381.2 million | Down 1.7% |
| Gross profit / margin | $914.5 million / 67.3% | $935.1 million / 67.7% | Margin down 40 bps |
| Operating income / margin | $51.6 million / 3.8% | $162.3 million / 11.7% | Down 68.2% |
| Net income | $20.0 million | $122.3 million | Down 83.6% |
| Diluted EPS | $0.07 | $0.42 | Down $0.35 |
| Operating cash flow | $5.7 million | $(19.1) million | Improved $24.8 million |
Gross margin was 67.3%; SG&A was $862.9 million, or 63.5% of sales, versus $772.8 million, or 56.0%, a year earlier. Interest expense, net, was $12.3 million; other expense was $12.7 million, primarily reflecting higher foreign-exchange losses. The effective tax rate was 24.8%, compared with 15.5%.
Management’s non-GAAP presentation excluded ERP implementation, organization-related and integration costs, and impairment charges. On that basis, operating income was $166.5 million versus $185.8 million, net income was $113.9 million versus $141.6 million, and diluted EPS was $0.40 versus $0.48. The company said the current-quarter items reduced net income by $93.9 million, or $0.33 per diluted share; these adjusted measures are supplemental, not GAAP results.
Segments and material changes
- Coach: Sales rose 0.5% to $965.9 million; reported operating income fell to $199.5 million from $235.1 million. Excluding specified items, operating income increased to $241.4 million from $237.1 million. Comparable sales increased about 1%; Hong Kong protests reduced comparable sales by about 100 basis points.
- Kate Spade: Sales fell 6.1% to $305.5 million, with comparable sales down about 16%, primarily due to weaker North American traffic. Reported operating loss was $7.2 million, versus income of $44.7 million; adjusted operating income declined to $19.3 million from $46.7 million.
- Stuart Weitzman: Sales fell 9.0% to $86.5 million, mainly as wholesale demand remained affected by prior supply-chain and production challenges. Reported operating loss widened to $19.3 million from $17.7 million.
Reported results included $75.6 million of store-asset impairment charges, plus $14.5 million of ERP costs and $24.8 million of organization-related and integration costs affecting operating income. The company attributed impairment triggers to a changed approach to evaluating certain flagship stores, store closures and investment in digital capabilities.
Cash, debt and liquidity
- Cash and cash equivalents were $522.1 million at September 28, 2019, down from $969.2 million at June 29; short-term investments were $266.3 million.
- Cash flow from investing was $(73.6) million, including $71.9 million of capital expenditures. Financing cash outflow was $(377.4) million, including $267.0 million of share repurchases and $96.8 million of dividends. Cash declined by $447.1 million during the quarter.
- Long-term debt, net, was $1,597.3 million; no borrowings were outstanding under the $900 million revolving facility at quarter-end. The facility was replaced on October 24, 2019 with a new $900 million facility maturing October 24, 2024.
- Adoption of lease accounting added $2,057.1 million of operating lease right-of-use assets and $2,294.3 million of operating lease liabilities to the September 28 balance sheet. Total lease liabilities, including finance leases, were $2,300.2 million.
- Available liquidity, as presented by the company, was $1,688.4 million, including cash, short-term investments and the undrawn revolving facility. Approximately 62% of cash and short-term investments were held outside the United States.
Outlook, risks and unusual items
- The company forecast fiscal 2020 capital expenditures of approximately $300 million and expected another $10–15 million of pre-tax integration charges for the remainder of fiscal 2020, with most expected to be cash charges. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Management cited uncertain global consumer spending, pressured retail traffic, promotional competition, foreign-exchange volatility, trade tensions and tariffs, Hong Kong unrest, Brexit uncertainty and possible effects on discretionary demand. Tariffs were expected to have a modest gross-margin impact in fiscal 2020; further trade tensions could affect growth with Chinese consumers.
- Stuart Weitzman’s supply-chain challenges continued to weigh on wholesale demand. Management noted that weaker profitability could lead to further impairment testing, particularly for Kate Spade and Stuart Weitzman, whose fiscal 2019 goodwill valuation cushions were more limited than Coach’s.
- CEO Victor Luis departed effective September 3, 2019, and Chairman Jide Zeitlin became CEO. The ERP implementation was described as substantially complete. Management reported disclosure controls were effective; it said there were no material changes to previously disclosed risk factors.
- Routine legal proceedings were disclosed; management did not expect their aggregate outcome to materially affect the company’s business or financial statements. The quarter included repurchases of 11.9 million shares for $267.0 million at an average $25.18 per share; $600 million remained under the authorization.
Key facts for investors to verify
- Whether sales, traffic and margins stabilize at Kate Spade and whether Stuart Weitzman resolves its supply and wholesale-demand issues.
- How much of the sharp GAAP earnings decline reflects recurring operating performance versus impairment and other excluded costs; also assess the ongoing usefulness of management’s non-GAAP adjustments.
- Whether cash generation and liquidity remain adequate after substantial repurchases and dividends, planned capital spending and lease commitments.
- Whether the fiscal 2020 capital-expenditure and integration-cost expectations, tariff impacts and store impairment assumptions change in later filings.
- How the new revolving facility terms, lease-adjusted leverage and potential brand-intangible impairment exposure develop.