Tapestry, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the third quarter of fiscal 2024, ended March 30, 2024 (13 weeks), and the nine months ended that date. This does not match the request metadata’s “2023 Q3” label. Unless stated otherwise, amounts below are in millions of U.S. dollars.
Business context and reporting period
Tapestry operates Coach, Kate Spade and Stuart Weitzman. The filing compares the quarter ended March 30, 2024 with the quarter ended April 1, 2023, and the corresponding nine-month periods. Fiscal 2024 ends June 29, 2024.
Financial results
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Net sales | $1,482.4 | $1,509.5 | $5,080.1 | $5,041.4 |
| Gross profit / margin | $1,107.4 / 74.7% | $1,098.3 / 72.8% | $3,698.3 / 72.8% | $3,542.2 / 70.3% |
| Operating income / margin | $204.3 / 13.8% | $226.3 / 15.0% | $905.1 / 17.8% | $898.8 / 17.8% |
| Net income | $139.4 | $186.7 | $656.7 | $711.9 |
| Diluted EPS | $0.60 | $0.78 | $2.82 | $2.93 |
| Operating cash flow | Not separately provided | Not separately provided | $999.6 | $574.8 |
Q3 sales declined 1.8% year over year, but were down only 0.2% at constant currency. Nine-month sales rose 0.8% reported and 1.8% at constant currency. In Q3, Coach sales increased 0.1%, while Kate Spade declined 5.6% and Stuart Weitzman declined 17.8%. For the nine months, Coach sales grew 3.6%; Kate Spade and Stuart Weitzman fell 5.9% and 12.8%, respectively.
Gross margin improved 190 basis points in Q3 and 250 basis points year to date, primarily due to lower freight costs, pricing and, for the nine-month period, favorable geographic mix. Lower freight costs benefited gross margin by approximately 100 basis points in Q3 and 140 basis points year to date. Reported Q3 operating income fell 9.8% and net income fell 25.3%; excluding acquisition-related items, operating income rose to $239.3 and net income to $190.1. Year-to-date reported operating income was nearly flat, while net income fell 7.8%; excluding acquisition-related items, operating income was $988.0 and net income was $783.1.
Q3 acquisition-related charges totaled $67.9, including $35.0 of SG&A and $32.9 of financing-related interest charges; the net-income impact was $50.7, or $0.21 per diluted share. Nine-month charges totaled $166.6, including $82.9 of SG&A and $83.7 of interest expense; the net-income impact was $126.4, or $0.54 per diluted share. These are management-presented non-GAAP adjustments and should be considered alongside GAAP results.
Cash, debt and liquidity
- Nine-month operating cash flow was $999.6; capital expenditures and cloud-computing implementation costs were $88.4. Investing activities used $486.1, chiefly reflecting purchases of investments, partly offset by maturities and sales. Financing activities provided $5,733.6, primarily from acquisition-related note issuance.
- At March 30, 2024, cash and cash equivalents were $6,975.1 and short-term investments were $442.9. Current debt was $25.0 and long-term debt, net, was $7,673.7. The filing reports a net debt position of $280.7 after cash and short-term investments.
- The large cash and debt increases primarily reflect approximately $6.1 billion of senior notes issued to finance the proposed Capri acquisition; the proceeds were being held in cash and short-term investments pending closing. The $2.0 billion revolving facility and $1.4 billion acquisition term-loan facilities had no borrowings outstanding, leaving $3.4 billion of stated availability. The company reported compliance with debt covenants at quarter-end.
- Dividends paid in the nine-month period were $240.9. Share repurchases were suspended in August 2023 in connection with the proposed Capri acquisition; none were made during the nine months.
Outlook, commentary and risks
- Management expected fiscal 2024 capital expenditures and cloud-computing costs of approximately $140.0. The supplied filing does not provide clear full-year revenue or earnings guidance.
- Management described the macroeconomic environment as challenging and volatile, with discretionary consumer demand, currency movements, geopolitical conditions and inflation-related policies among the factors to monitor. Red Sea shipping disruptions modestly increased transit times and costs; management did not anticipate a material business impact at that time. COVID-19 did not materially affect the nine-month results.
- The proposed acquisition of Capri is for $57 per share in cash, with expected enterprise value of approximately $8.5 billion and a previously stated expected 2024 closing. On April 22, 2024, after quarter-end, the FTC sued to block the transaction. Tapestry said it believes the claims are without merit and intends to defend the lawsuit. U.S. regulatory approval remained outstanding; approvals had been received in other countries.
- If the Capri transaction does not close by the specified deadline, the acquisition notes are subject to special mandatory redemption at 101% of principal plus accrued interest, subject to the terms described in the filing. The acquisition and its financing therefore remain material execution and cost risks.
- Management cautioned that Kate Spade’s fiscal 2023 valuation headroom was relatively limited: fair value exceeded carrying value by approximately 20% for its reporting unit and 40% for its indefinite-lived brand. Weaker-than-expected profitability could prompt an impairment test and potentially an impairment charge.
- Other disclosed risks include consumer and fashion trends, competition, brand execution, foreign currency, trade duties, cybersecurity, legal proceedings and the ability to realize acquisition synergies. The company reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Track the FTC litigation, regulatory process and any change to the Capri transaction timetable or financing plans.
- Distinguish reported earnings from results excluding acquisition-related charges, and monitor the continuing interest burden from acquisition financing.
- Assess whether Coach’s growth can offset continued sales weakness at Kate Spade and Stuart Weitzman, including the risk of a Kate Spade impairment.
- Review the use and liquidity of the acquisition-related cash proceeds, debt levels, covenant compliance and the terms of any note redemption if the transaction fails to close.
- Compare the approximately $140.0 fiscal 2024 capital expenditure and cloud-cost estimate with actual spending and cash generation.