Tapestry, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 29, 2019 (52 weeks). The filing is a fiscal 2019 annual report, not a standalone 2018 fourth-quarter filing; it includes fourth-quarter results.
Business context
Tapestry operates the Coach, Kate Spade and Stuart Weitzman brands, selling luxury accessories and lifestyle products through stores, e-commerce, wholesale and licensing. Coach accounted for 70.9% of fiscal 2019 sales, Kate Spade 22.7% and Stuart Weitzman 6.4%. Kate Spade was acquired in July 2017; the company continued acquiring distributor operations and taking direct control of selected international markets during fiscal 2019.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $6,027.1 million | $5,880.0 million | +2.5%; +3.6% excluding currency effects |
| Gross profit / margin | $4,053.7 million / 67.3% | $3,848.5 million / 65.5% | Margin +1.8 percentage points |
| Operating income / margin | $814.1 million / 13.5% | $670.8 million / 11.4% | +21.4% |
| Net income | $643.4 million | $397.5 million | +61.8% |
| Diluted EPS | $2.21 | $1.38 | +60.6% |
| Net cash from operations | $791.7 million | $996.7 million | −$205.0 million |
Reported earnings comparisons were materially affected by special items and tax effects. Excluding disclosed adjustments, operating income was $945.4 million, down 4.7%; net income was $748.7 million, down 1.5%; and diluted EPS was $2.57, down 2.2%. FY2019 adjustments included $94.4 million of integration and acquisition costs, $36.9 million of ERP implementation costs and a $9.2 million net tax-legislation charge.
Fourth quarter: Net sales were $1,513.7 million versus $1,483.7 million in FY2018 Q4. Gross profit was $999.2 million versus $1,001.8 million; net income was $148.9 million versus $211.7 million; diluted EPS was $0.51 versus $0.73.
Segments and material changes
- Coach: Sales rose 1.2% to $4,270.9 million; comparable sales increased 2%. Operating income rose 2.8% to $1,148.4 million. Improved product costing supported gross margin, partly offset by promotional activity.
- Kate Spade: Sales increased 6.4% to $1,366.8 million, helped by new stores and newly controlled international businesses. Comparable sales fell 7%, reflecting weaker traffic and conversion. Reported operating income was $165.7 million, compared with a $22.7 million loss in FY2018; excluding adjustments, operating income fell 5.5% to $186.5 million.
- Stuart Weitzman: Sales rose 4.2% to $389.4 million, but reported operating loss widened to $51.2 million from $0.3 million. Supply-chain and production challenges, foreign exchange and higher operating costs weighed on results. Management said the brand returned to sales growth after investment in talent, infrastructure and manufacturing capacity.
Cash, debt and liquidity
- Cash and cash equivalents were $969.2 million; short-term investments were $264.6 million. Working capital was $1,638.8 million.
- Total debt was approximately $1.6 billion, principally senior notes due 2022, 2025 and 2027. The $900 million revolving credit facility was undrawn at year-end. Management reported total available liquidity of $2,133.8 million, including cash, short-term investments and the facility.
- Operating cash flow was $791.7 million; capital expenditures were $274.2 million. Cash declined $274.2 million during the year. The company paid $390.7 million in dividends and repurchased $100 million of shares.
- Inventory increased to $778.3 million from $673.8 million. Management attributed the operating cash-flow decline largely to working-capital movements, including higher inventory and tax-payment timing.
Outlook, risks and unusual items
- Fiscal 2020 priorities include product innovation, global growth with emphasis on Chinese consumers, digital and data capabilities, and using the multi-brand structure. The company expected approximately $300 million of capital expenditures, $30–$40 million of ERP-related charges and $20–$30 million of integration and acquisition charges.
- Management expected announced China tariffs to have a modest gross-margin impact in FY2020, while warning that further trade tensions could affect costs and growth with Chinese consumers. The filing also cites uncertain global demand, pressured retail traffic, promotional activity, currency movements and Brexit uncertainty.
- Kate Spade comparable sales weakness and Stuart Weitzman operational challenges are key execution concerns. Although no goodwill or brand-asset impairment was recorded, estimated fair value exceeded carrying value by only about 21% for the Kate Spade reporting unit and 11% for Stuart Weitzman; management said weaker profitability could prompt future impairment testing.
- The ERP rollout was substantially completed, with remaining Coach and Stuart Weitzman supply-chain functions implemented at the start of FY2020. The company identified implementation disruption and system risks. Adoption of the new lease standard was expected to add approximately $2.2–$2.4 billion of assets and liabilities to the balance sheet.
- Contractual obligations included $2,611.3 million of operating lease payments and $155.9 million of remaining transition-tax payments. Management said pending legal matters were not expected to have a material aggregate effect. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether reported earnings growth translates into sustained underlying performance: adjusted operating income, net income and EPS all declined year over year.
- Whether Kate Spade can stabilize comparable sales and improve profitability, and whether Stuart Weitzman can resolve supply-chain and margin pressures.
- How inventory levels, cash conversion and promotional activity develop, given lower operating cash flow and higher year-end inventory.
- The actual cost and margin effects of China tariffs, foreign exchange and other trade changes versus management’s FY2020 expectations.
- Debt-service and capital-return capacity alongside lease commitments, planned capital spending, dividends and the authorized $1 billion share-repurchase program.