TAPESTRY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 27,
2021
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June 27,
2020
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(millions)
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(unaudited)
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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1,651.7
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$
|
1,426.3
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Short-term investments
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7.5
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|
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8.1
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Trade accounts receivable, less allowances for credit losses of $3.6 and $15.9, respectively
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240.6
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193.3
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Inventories
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700.3
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736.9
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Prepaid expenses
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65.0
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57.5
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Income tax receivable
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152.9
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46.0
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Other current assets
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78.6
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85.0
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Total current assets
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2,896.6
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2,553.1
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Property and equipment, net
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673.8
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775.2
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Operating lease right-of-use assets
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1,555.2
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1,757.0
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Goodwill
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1,300.2
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1,301.1
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Intangible assets
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1,374.7
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1,379.4
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Deferred income taxes
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58.8
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55.9
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Other assets
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106.7
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102.5
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Total assets
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$
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7,966.0
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$
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7,924.2
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current Liabilities:
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Accounts payable
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$
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409.5
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$
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130.8
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Accrued liabilities
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508.1
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|
|
410.5
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Current portion of operating lease liabilities
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354.6
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388.8
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Accrued income taxes
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18.9
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|
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100.5
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|
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Current debt
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—
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|
711.5
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Total current liabilities
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1,291.1
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1,742.1
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Long-term debt
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1,590.0
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1,587.9
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Long-term operating lease liabilities
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1,576.3
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1,799.8
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Deferred income taxes
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118.0
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155.1
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Long-term income taxes payable
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131.3
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144.0
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Other liabilities
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244.3
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218.9
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Total liabilities
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4,951.0
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5,647.8
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See Note 16 on commitments and contingencies
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Stockholders' Equity:
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Preferred stock: (authorized 25.0 million shares; $0.01 par value per share) none issued
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—
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—
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Common stock: (authorized 1.0 billion shares; $0.01 par value per share) issued and outstanding - 278.8 million and 276.2 million shares, respectively
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2.8
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2.8
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Additional paid-in-capital
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3,442.3
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3,358.5
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Retained earnings (accumulated deficit)
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(358.3)
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(992.7)
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Accumulated other comprehensive income (loss)
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(71.8)
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(92.2)
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Total stockholders' equity
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3,015.0
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2,276.4
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Total liabilities and stockholders' equity
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$
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7,966.0
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$
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7,924.2
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See accompanying Notes.
TAPESTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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Three Months Ended
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Nine Months Ended
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March 27,
2021
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March 28,
2020
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March 27,
2021
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March 28,
2020
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(millions, except per share data)
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(millions, except per share data)
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(unaudited)
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(unaudited)
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Net sales
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$
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1,273.3
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$
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1,072.7
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$
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4,130.9
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$
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4,246.6
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Cost of sales
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361.4
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456.5
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1,215.1
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1,506.2
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Gross profit
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911.9
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616.2
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2,915.8
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2,740.4
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Selling, general and administrative expenses
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795.2
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824.0
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2,207.5
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2,533.5
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Impairment of goodwill and intangible assets
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—
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477.7
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—
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477.7
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Total selling, general and administrative expenses
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795.2
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1,301.7
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2,207.5
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3,011.2
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Operating income (loss)
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116.7
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(685.5)
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708.3
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(270.8)
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Interest expense, net
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16.9
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13.5
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55.0
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39.8
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Other expense (income)
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4.4
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6.0
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(1.8)
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12.8
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Income (loss) before provision for income taxes
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95.4
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(705.0)
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655.1
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(323.4)
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Provision for income taxes
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3.7
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(27.9)
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20.7
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34.9
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Net income (loss)
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$
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91.7
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$
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(677.1)
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$
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634.4
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$
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(358.3)
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Net income (loss) per share:
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Basic
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$
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0.33
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$
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(2.45)
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$
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2.29
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$
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(1.28)
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Diluted
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$
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0.32
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$
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(2.45)
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$
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2.25
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$
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(1.28)
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Shares used in computing net income (loss) per share:
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Basic
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278.2
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276.1
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277.5
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279.4
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Diluted
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285.6
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276.1
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281.5
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279.4
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Cash dividends declared per common share
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$
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—
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$
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0.3375
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$
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—
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$
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1.0125
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See accompanying Notes.
TAPESTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
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Three Months Ended
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Nine Months Ended
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March 27,
2021
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March 28,
2020
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March 27,
2021
|
|
March 28,
2020
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(millions)
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(millions)
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(unaudited)
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(unaudited)
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Net income (loss)
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$
|
91.7
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|
$
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(677.1)
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$
|
634.4
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$
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(358.3)
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Other comprehensive income (loss), net of tax:
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Unrealized gains (losses) on cash flow hedging derivatives, net
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2.2
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1.2
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(3.1)
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6.5
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Foreign currency translation adjustments
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(23.6)
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(12.9)
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23.5
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(18.3)
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Other
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—
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—
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—
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(1.7)
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Other comprehensive income (loss), net of tax
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(21.4)
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(11.7)
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20.4
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(13.5)
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Comprehensive income (loss)
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$
|
70.3
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$
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(688.8)
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$
|
654.8
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$
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(371.8)
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See accompanying Notes.
TAPESTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Nine Months Ended
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March 27,
2021
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March 28,
2020
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(millions)
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(unaudited)
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CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
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Net income (loss)
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$
|
634.4
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|
$
|
(358.3)
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|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
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Depreciation and amortization
|
167.2
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|
194.9
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|
Provision for bad debt
|
—
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|
|
16.8
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|
Share-based compensation
|
46.7
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|
47.0
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Acceleration Program charges
|
6.1
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|
—
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|
Organization-related and integration activities
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—
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|
15.2
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Impairment charges
|
45.8
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|
|
697.6
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Changes to lease related balances, net
|
(103.3)
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|
26.1
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Deferred income taxes
|
(27.9)
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|
|
(33.3)
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Gain on sale of building
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(13.2)
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—
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Gain on deferred purchase price
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(12.5)
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—
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Other non-cash charges, net
|
20.0
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|
4.7
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|
Changes in operating assets and liabilities:
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Trade accounts receivable
|
(49.3)
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|
75.2
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|
Inventories
|
63.9
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|
|
(171.6)
|
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Accounts payable
|
275.0
|
|
|
(18.5)
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Accrued liabilities
|
7.6
|
|
|
(31.2)
|
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Other liabilities
|
(10.2)
|
|
|
(37.6)
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Other assets
|
(105.7)
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|
|
19.1
|
|
Net cash provided by operating activities
|
944.6
|
|
|
446.1
|
|
CASH FLOWS USED IN INVESTING ACTIVITIES
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|
|
|
|
|
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Proceeds from sale of building
|
23.9
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
(0.5)
|
|
|
(212.4)
|
|
Proceeds from maturities and sales of investments
|
1.9
|
|
|
316.1
|
|
Purchases of property and equipment
|
(68.9)
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|
|
(172.9)
|
|
|
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|
|
|
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Net cash used in investing activities
|
(43.6)
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|
|
(69.2)
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CASH FLOWS USED IN FINANCING ACTIVITIES
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|
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Dividend payments
|
—
|
|
|
(287.1)
|
|
Repurchase of common stock
|
—
|
|
|
(300.0)
|
|
|
|
|
|
|
|
|
|
|
|
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Proceeds from share-based awards
|
37.8
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|
|
1.7
|
|
|
|
|
|
Repayment of short-term debt
|
(11.5)
|
|
|
—
|
|
Repayment of revolving credit facility
|
(700.0)
|
|
|
—
|
|
|
|
|
|
Taxes paid to net settle share-based awards
|
(6.9)
|
|
|
(14.7)
|
|
|
|
|
|
|
|
|
|
Payments of finance lease liabilities
|
(0.6)
|
|
|
(0.6)
|
|
Payment of deferred purchase price
|
(7.4)
|
|
|
(2.4)
|
|
Net cash used in financing activities
|
(688.6)
|
|
|
(603.1)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
13.0
|
|
|
(0.4)
|
|
Net decrease in cash and cash equivalents
|
225.4
|
|
|
(226.6)
|
|
Cash and cash equivalents at beginning of period
|
1,426.3
|
|
|
969.2
|
|
Cash and cash equivalents at end of period
|
$
|
1,651.7
|
|
|
$
|
742.6
|
|
Supplemental information:
|
|
|
|
Cash paid for income taxes, net
|
$
|
218.2
|
|
|
$
|
80.5
|
|
Cash paid for interest
|
$
|
56.3
|
|
|
$
|
50.4
|
|
Noncash investing activity - property and equipment obligations
|
$
|
14.6
|
|
|
$
|
22.4
|
|
See accompanying Notes.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. NATURE OF OPERATIONS
Tapestry, Inc. (the "Company") is a leading New York-based house of modern luxury accessories and lifestyle brands. Tapestry owns the Coach, Kate Spade and Stuart Weitzman brands. The Company’s primary product offerings, manufactured by third-party suppliers, include women’s and men’s bags, small leather goods, footwear, ready-to-wear including outerwear, watches, weekend and travel accessories, scarves, eyewear, fragrance, jewelry and other lifestyle products.
The Coach segment includes global sales of Coach products to customers through Coach operated stores, including the Internet and concession shop-in-shops, and sales to wholesale customers and through independent third party distributors.
The Kate Spade segment includes global sales primarily of kate spade new york brand products to customers through Kate Spade operated stores, including the Internet, sales to wholesale customers, through concession shop-in-shops and through independent third party distributors.
The Stuart Weitzman segment includes global sales of Stuart Weitzman brand products primarily through Stuart Weitzman operated stores, including the Internet, sales to wholesale customers and through numerous independent third party distributors.
2. BASIS OF PRESENTATION AND ORGANIZATION
Interim Financial Statements
These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and are unaudited. In the opinion of management, such condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial position, results of operations, comprehensive income (loss) and cash flows of the Company for the interim periods presented. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") have been condensed or omitted from this report as is permitted by the SEC's rules and regulations. However, the Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading. This report should be read in conjunction with the audited consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended June 27, 2020 ("fiscal 2020") and other filings filed with the SEC.
The results of operations, cash flows and comprehensive income for the nine months ended March 27, 2021 are not necessarily indicative of results to be expected for the entire fiscal year, which will end on July 3, 2021 ("fiscal 2021").
Fiscal Periods
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to June 30. Fiscal 2021 will be a 53-week period. Fiscal 2020, ended on June 27, 2020, was a 52-week period. The third quarter of fiscal 2021 ended on March 27, 2021 and the third quarter of fiscal 2020 ended on March 28, 2020, both of which were 13-week periods.
Covid-19 Pandemic
The outbreak of a novel strain of coronavirus continues to impact a significant majority of the regions in which we operate. In March 2020, the outbreak was labeled a global pandemic by the World Health Organization. National, state and local governments responded to the Covid-19 pandemic in a variety of ways, including, but not limited to, declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), requiring individuals to stay at home, and in most cases, ordering non-essential businesses to close or limit operations. The Company had temporarily closed the majority of its directly operated stores globally for some period of time to help reduce the spread of Covid-19 during fiscal 2020. The vast majority of the Company's stores re-opened for either in-store or pick-up service and have continued to operate since then, however, some store locations have experienced temporary re-closures or are operating under tighter restrictions in compliance with local government regulation. Many of the Company's wholesale and licensing partners also closed their bricks and mortar stores as required by government orders during the third and fourth quarters of fiscal 2020, and while the majority of stores have reopened, they have also been subject to temporary re-closures and tighter capacity restrictions operating in compliance with the rules of certain local governments.
The global Covid-19 pandemic is continuously evolving and the extent to which this impacts the Company - including unforeseen increased costs to the Company's business - will depend on future developments, which are highly uncertain and cannot be predicted, including the ultimate duration, severity and geographic resurgence of the virus and the success of actions to contain the virus, including variants of the novel strain, or treat its impact, among others. As the full magnitude of the effects on the Company's business is difficult to predict at this time, the Covid-19 pandemic has and is expected to continue to have a
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
material adverse impact on the Company's business, financial condition, results of operations and cash flows for the foreseeable future. The Company believes that cash flows from operations, access to the credit and capital markets and our credit lines, on-hand cash and cash equivalents and our investments provide adequate funds to support our operating, capital, and debt service requirements for the remainder of fiscal 2021 and beyond. There can be no assurance, however, that any such capital will be available to the Company on acceptable terms or at all. The Company could experience other potential adverse impacts as a result of the Covid-19 pandemic, including, but not limited to, further charges from adjustments to the carrying amount of goodwill and other intangible assets, long-lived asset impairment charges, reserves for uncollectible accounts receivable and reserves for the realizability of inventory. In addition, the negative impacts of the Covid-19 pandemic could result in the establishment of additional valuation allowances in certain jurisdictions.
In response to the Covid-19 pandemic, the Company took actions to reinforce its liquidity and financial flexibility. Specific actions included: suspending its quarterly dividend and all share repurchases, actively reducing non-essential SG&A expense, reducing its corporate and retail workforce, temporarily reducing corporate compensation, tightly managing inventory and reducing capital expenditures. During the second quarter of fiscal 2021, compensation resumed normal levels.
Furthermore, in fiscal 2020, the Company borrowed $700 million under its $900 million definitive credit agreement, as entered into on October 24, 2019 ("Revolving Credit Facility") as a precautionary measure. Of the $700 million borrowed, all was repaid in fiscal 2021.
If stores are required to close again for an extended period of time due to a resurgence of increased infections, the Company's liquidity may be negatively impacted. On May 19, 2020, the Company entered into Amendment No. 1 (the “Amendment”) to the Revolving Credit Facility, which sets forth the modifications pertaining to the leverage ratio financial covenant required. Refer to Note 12, "Debt", for additional information regarding the Company's outstanding notes payable and applicable amendments.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and footnotes thereto. Actual results could differ from estimates in amounts that may be material to the financial statements.
Significant estimates inherent in the preparation of the condensed consolidated financial statements include useful lives and impairments of long-lived tangible and intangible assets; reserves for the realizability of inventory; customer returns, end-of-season markdowns and operational chargebacks; accounting for income taxes (including the impacts of tax legislation) and related uncertain tax positions; accounting for business combinations; the valuation of stock-based compensation awards and related expected forfeiture rates; reserves for restructuring; and reserves for litigation and other contingencies, amongst others.
Share Repurchases
The Company accounts for share repurchases by allocating the repurchase price to common stock and retained earnings. As a result, all repurchased shares are authorized but unissued shares. Under Maryland law, the Company's state of incorporation, there are no treasury shares. The Company accrues for the shares purchased under the share repurchase plan based on the trade date. Purchases of the Company's common stock are executed through open market purchases, including through a purchase agreement under Rule 10b5-1. The Company may terminate or limit the share repurchase program at any time.
Principles of Consolidation
These unaudited interim condensed consolidated financial statements include the accounts of the Company and all 100% owned and controlled subsidiaries. All intercompany transactions and balances are eliminated in consolidation.
3. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820)" ("ASU 2018-13"), which is intended to improve the effectiveness of fair value disclosures. The ASU removes or modifies certain disclosure requirements related to fair value information, as well as adds new disclosure requirements for Level 3 fair value measurements. The Company adopted ASU 2018-13 as of the beginning of Fiscal 2021. The adoption of ASU 2018-13 did not have a material impact on the Company's condensed consolidated financial statements and notes thereto.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)" ("ASU 2018-15"), which is intended to clarify the accounting for implementation costs of cloud computing arrangements which are deemed to be a service contract rather than a software license. The Company adopted ASU 2018-15 as
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
of the beginning of Fiscal 2021 on a prospective basis. The adoption of ASU 2018-15 did not have a material impact on the Company's condensed consolidated financial statements and notes thereto.
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), and subsequent clarifying updates, which requires companies to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. The standard requires upfront recognition of an allowance for credit losses expected to be incurred over an asset's contractual life based on relevant information about past events, current conditions, and supportable forecasts impacting its ultimate collectability. The Company adopted ASU 2016-13 as of the beginning of Fiscal 2021 using the modified retrospective basis. The adoption of ASU 2016-13 did not have a material impact on the Company’s condensed consolidated financial statements and notes thereto.
Recently Issued Accounting Pronouncements
The Company has considered all new accounting pronouncements and have concluded that there are no new pronouncements that may have a material impact on our results of operations, financial condition or cash flows based on current information.
4. REVENUE
The Company recognizes revenue primarily from sales of the products of its brands through retail and wholesale channels, including the Internet. The Company also generates revenue from royalties related to licensing its trademarks, as well as sales in ancillary channels. In all cases, revenue is recognized upon the transfer of control of the promised products or services to the customer, which may be at a point in time or over time. Control is transferred when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized is the amount of consideration to which the Company expects to be entitled, including estimation of sale terms that may create variability in the consideration. Revenue subject to variability is constrained to an amount which will not result in a significant reversal in future periods when the contingency that creates variability is resolved.
The Company recognizes revenue in its retail stores, including concession shop-in-shops, at the point-of-sale when the customer obtains physical possession of the products. Internet revenue from sales of products ordered through the Company's e-commerce sites is recognized upon delivery and receipt of the shipment by its customers and includes shipping and handling charges paid by customers. Retail and Internet revenues are recorded net of estimated returns, which are estimated by developing an expected value based on historical experience. Payment is due at the point of sale.
Gift cards issued by the Company are recorded as a liability until redeemed by the customer, at which point revenue is recognized. The Company also uses historical information to estimate the amount of gift card balances that will never be redeemed and recognizes that amount as revenue over time in proportion to actual customer redemptions if the Company does not have a legal obligation to remit unredeemed gift cards to any jurisdiction as unclaimed property.
The Company recognizes revenue within the wholesale channel at the time title passes and risk of loss is transferred to customers, which is generally at the point of shipment of products but may occur upon receipt of the shipment by the customer in certain cases. Payment is generally due 30 to 90 days after shipment. Wholesale revenue is recorded net of estimates for returns, discounts, end-of-season markdowns, cooperative advertising allowances and other consideration provided to the customer. Discounts are based on contract terms with the customer, while cooperative advertising allowances and other consideration may be based on contract terms or negotiated on a case-by-case basis. Returns and markdowns generally require approval from the Company and are estimated based on historical trends, current season results and inventory positions at the wholesale locations, current market and economic conditions as well as, in select cases, contractual terms. The Company's historical estimates of these variable amounts have not differed materially from actual results.
The Company recognizes licensing revenue over time during the contract period in which licensees are granted access to the Company's trademarks. These arrangements require licensees to pay a sales-based royalty and may include a contractually guaranteed minimum royalty amount. Revenue for contractually guaranteed minimum royalty amounts is recognized ratably over the license year and any excess sales-based royalties are recognized as earned once the minimum royalty threshold is achieved. Payments from the customer are generally due quarterly in an amount based on the licensee's sales of goods bearing the licensed trademarks during the period, which may differ from the amount of revenue recorded during the period thereby generating a contract asset or liability. Contract assets and liabilities and contract costs related to the licensing arrangements are immaterial as the licensing business represents approximately 1% of total net sales in the nine months ended March 27, 2021.
The Company has elected not to disclose the remaining performance obligations that are unsatisfied as of the end of the period related to contracts with an original duration of one year or less or variable consideration related to sales-based royalty
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
arrangements. There are no other contracts with transaction price allocated to remaining performance obligations other than future minimum royalties as discussed above, which are not material.
Other elections made by the Company include (i) assuming no significant financing component exists for any contract with a duration of one year or less, (ii) accounting for shipping and handling as a fulfillment activity within SG&A expense regardless of the timing of the shipment in relation to the transfer of control and (iii) excluding sales and value added tax from the transaction price.
Disaggregated Net Sales
The following table disaggregates the Company's net sales into geographies that depict how economic factors may impact the revenues and cash flows for the periods presented. Each geography presented includes net sales related to the Company's directly operated channels, global travel retail business and to wholesale customers, including distributors, in locations within the specified geographic area.
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|
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|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
North America
|
|
Greater China(1)
|
|
Other Asia(2)
|
|
Other(3)
|
|
Total
|
|
(millions)
|
Three Months Ended March 27, 2021
|
|
|
|
|
|
|
|
|
|
Coach
|
$
|
515.1
|
|
|
$
|
247.6
|
|
|
$
|
163.8
|
|
|
$
|
37.0
|
|
|
$
|
963.5
|
|
Kate Spade
|
184.8
|
|
|
13.0
|
|
|
35.8
|
|
|
18.8
|
|
|
252.4
|
|
Stuart Weitzman
|
26.6
|
|
|
24.9
|
|
|
0.8
|
|
|
5.1
|
|
|
57.4
|
|
Total
|
$
|
726.5
|
|
|
$
|
285.5
|
|
|
$
|
200.4
|
|
|
$
|
60.9
|
|
|
$
|
1,273.3
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 28, 2020
|
|
|
|
|
|
|
|
|
|
Coach
|
$
|
427.6
|
|
|
$
|
103.7
|
|
|
$
|
193.8
|
|
|
$
|
47.4
|
|
|
$
|
772.5
|
|
Kate Spade
|
181.4
|
|
|
8.9
|
|
|
41.1
|
|
|
18.1
|
|
|
249.5
|
|
Stuart Weitzman
|
28.7
|
|
|
10.6
|
|
|
4.5
|
|
|
6.9
|
|
|
50.7
|
|
Total
|
$
|
637.7
|
|
|
$
|
123.2
|
|
|
$
|
239.4
|
|
|
$
|
72.4
|
|
|
$
|
1,072.7
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 27, 2021
|
|
|
|
|
|
|
|
|
|
Coach
|
$
|
1,724.4
|
|
|
$
|
686.4
|
|
|
$
|
514.1
|
|
|
$
|
139.3
|
|
|
$
|
3,064.2
|
|
Kate Spade
|
660.8
|
|
|
40.2
|
|
|
105.8
|
|
|
61.6
|
|
|
868.4
|
|
Stuart Weitzman
|
94.8
|
|
|
78.2
|
|
|
3.6
|
|
|
21.7
|
|
|
198.3
|
|
Total
|
$
|
2,480.0
|
|
|
$
|
804.8
|
|
|
$
|
623.5
|
|
|
$
|
222.6
|
|
|
$
|
4,130.9
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 28, 2020
|
|
|
|
|
|
|
|
|
|
Coach
|
$
|
1,751.3
|
|
|
$
|
451.0
|
|
|
$
|
622.0
|
|
|
$
|
184.0
|
|
|
$
|
3,008.3
|
|
Kate Spade
|
761.8
|
|
|
34.8
|
|
|
125.2
|
|
|
63.6
|
|
|
985.4
|
|
Stuart Weitzman
|
137.7
|
|
|
62.7
|
|
|
16.4
|
|
|
36.1
|
|
|
252.9
|
|
Total
|
$
|
2,650.8
|
|
|
$
|
548.5
|
|
|
$
|
763.6
|
|
|
$
|
283.7
|
|
|
$
|
4,246.6
|
|
(1) Greater China includes mainland China, Taiwan, Hong Kong SAR and Macao SAR.
(2) Other Asia includes Japan, Australia, New Zealand, South Korea, Thailand and other countries within Asia.
(3) Other sales primarily represents sales in Europe, the Middle East and royalties related to licensing.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
Deferred Revenue
Deferred revenue results from cash payments received or receivable from customers prior to the transfer of the promised goods or services, and is generally comprised of unredeemed gift cards, net of breakage which has been recognized. Additional deferred revenue may result from sales-based royalty payments received or receivable which exceed the revenue recognized during the contractual period. The balance of such amounts as of March 27, 2021 and June 27, 2020 was $34.4 million and $28.1 million, respectively, which were primarily recorded within Accrued liabilities on the Company's Condensed Consolidated Balance Sheets and are generally expected to be recognized as revenue within a year. For the nine months ended March 27, 2021, net sales of $9.6 million were recognized from amounts recorded as deferred revenue as of June 27, 2020. For the nine months ended March 28, 2020, net sales of $11.3 million were recognized from amounts recorded as deferred revenue as of June 29, 2019.
5. INTEGRATION
The Company did not incur integration costs during the three and nine months ended March 27, 2021.
During the three and nine months ended March 28, 2020, the Company incurred integration costs of $3.4 million and $11.6 million. The charges recorded in Cost of sales for the nine months ended March 28, 2020 were $5.6 million. There were no charges recorded for the three months ended March 28, 2020. Of the amount recorded to Cost of sales for the nine months ended March 28, 2020, $4.3 million was recorded in the Stuart Weitzman segment, $1.2 million was recorded in the Kate Spade segment and $0.1 million was recorded in the Coach segment, respectively. The charges recorded to SG&A expenses for the three and nine months ended March 28, 2020 were $3.4 million and $6.0 million, respectively. Of the amount recorded to SG&A expenses, $2.9 million and $6.9 million was recorded within Corporate, $0.2 million and a reduction of expense of $1.9 million was recorded in the Stuart Weitzman segment, $0.3 million and $1.1 million was recorded in the Kate Spade segment and $0.0 million and a reduction of expense of $0.1 million was recorded in the Coach segment, respectively. Of the total costs of $3.4 million, a reduction of expense of $0.1 million were non-cash charges. Of the total costs of $11.6 million, $3.8 million were non-cash charges related to inventory charges, organization-related costs and purchase accounting adjustments.
A summary of the integration charges for the three and nine months ended March 28, 2020 is as follows:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 28, 2020
|
|
|
(millions)
|
Purchase accounting adjustments(1)
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
|
|
|
|
Inventory-related charges(2)
|
|
—
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
Other(3)
|
|
3.4
|
|
|
5.9
|
|
Total
|
|
$
|
3.4
|
|
|
$
|
11.6
|
|
(1) Purchase accounting adjustments primarily relate to the short-term impact of the amortization of fair value adjustments.
(2) Inventory-related charges primarily relate to inventory reserves.
(3) Other primarily relates to share-based compensation, severance charges, professional fees and asset write-offs.
6. RESTRUCTURING ACTIVITIES
Acceleration Program
The Company has implemented a strategic growth plan after undergoing a review of its business under its multi-year growth agenda. This multi-faceted, multi-year strategic growth plan (the "Acceleration Program") reflects: (i) actions to streamline the Company's organization; (ii) select store closures as the Company optimizes its fleet (including store closure costs incurred as the Company exits certain regions in which it currently operates); and (iii) professional fees and compensation costs incurred as a result of the development and execution of the Company's comprehensive strategic initiatives aimed at increasing profitability. Under the Acceleration Program, the Company now expects to incur total pre-tax charges of approximately $205 - $220 million. Charges expected related to the Acceleration Program increased modestly due to additional professional fees and performance-based compensation. The Acceleration Program is expected to be substantially complete by the end of fiscal 2022.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
Under the Acceleration Program, the Company incurred charges of $20.4 million and $68.7 million during the three and nine months ended March 27, 2021, respectively, all of which was recorded within SG&A expenses. Of the $20.4 million and $68.7 million recorded within SG&A expenses, $11.4 million and $44.5 million was recorded within Corporate, $4.7 million and $21.2 million was recorded within the Coach segment, $0.9 million and $4.3 million was recorded within the Kate Spade segment and $3.4 million and a reduction of expense of $1.3 million was recorded within the Stuart Weitzman segment, respectively. A summary of charges and related liabilities under the Acceleration Program is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Organization-Related(1)
|
|
Store Closure(2)
|
|
Other(3)
|
|
Total
|
|
(millions)
|
Fiscal 2020 charges
|
$
|
44.7
|
|
|
$
|
32.3
|
|
|
$
|
10.0
|
|
|
$
|
87.0
|
|
Cash payments
|
(15.8)
|
|
|
(11.0)
|
|
|
(7.1)
|
|
|
(33.9)
|
|
Non-cash charges
|
(4.0)
|
|
|
(20.8)
|
|
|
—
|
|
|
(24.8)
|
|
Liability balance as of June 27, 2020
|
$
|
24.9
|
|
|
$
|
0.5
|
|
|
$
|
2.9
|
|
|
$
|
28.3
|
|
Fiscal 2021 charges
|
$
|
16.2
|
|
|
$
|
7.8
|
|
|
$
|
44.7
|
|
|
$
|
68.7
|
|
Cash payments
|
(35.1)
|
|
|
(8.3)
|
|
|
(27.5)
|
|
|
(70.9)
|
|
Non-cash charges
|
—
|
|
|
0.3
|
|
|
(6.4)
|
|
|
(6.1)
|
|
Liability balance as of March 27, 2021
|
$
|
6.0
|
|
|
$
|
0.3
|
|
|
$
|
13.7
|
|
|
$
|
20.0
|
|
(1) Organization-related charges, recorded within SG&A expenses, primarily relates to severance and other related costs.
(2) Store closure charges represent lease termination penalties, removal or modification of lease assets and liabilities, establishing inventory reserves, accelerated depreciation and severance.
(3) Other charges, recorded within SG&A, primarily relates to professional fees incurred related to the Acceleration Program.
The Company expects to incur approximately $50 - $65 million in additional charges under the Acceleration Program, of which the majority is estimated to be cash.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Interim Impairment Assessment
The Company performs its annual impairment assessment of goodwill as well as brand intangibles at the beginning of the fourth quarter of each fiscal year or if an event occurs that would more likely than not reduce the fair value below its carrying amount.
No events occurred during the three months ended March 27, 2021 that would more likely than not reduce the fair value below its carrying value.
During the three months ended March 28, 2020, profitability trends continued to decline from those that were expected for the Stuart Weitzman brand. This reduction in cash flows for the three months ended March 28, 2020 and expected future cash flows was exacerbated by the Covid-19 pandemic, which resulted in a decline in sales driven by full and partial closures of a significant portion of our stores globally. As a result of these macroeconomic conditions, the Company concluded that a triggering event had occurred during the third quarter of fiscal year 2020, resulting in the need to perform a quantitative interim impairment assessment over the Company’s Stuart Weitzman reporting unit and indefinite-lived brand intangible assets. The assessment concluded that the fair values of the Stuart Weitzman reporting unit and indefinite-lived brand intangible asset as of March 28, 2020 did not exceed their respective carrying values.
Accordingly, during the three months ended March 28, 2020, the Company recorded a goodwill impairment charge of $210.7 million related to the Stuart Weitzman reporting unit, resulting in a full impairment. The Company also recorded an impairment charge of $267.0 million related to the Stuart Weitzman indefinite-lived brand, resulting in a full impairment. The goodwill and brand intangible impairment charges were recorded within total SG&A expenses on the Company's Condensed Consolidated Statement of Operations for the three and nine months ended March 28, 2020.
The estimated fair value of the Stuart Weitzman reporting unit was based on a weighted average of the income and market approaches. The income approach is based on estimated discounted future cash flows, while the market approach is based on earnings multiples of selected guideline companies. The approach, which qualifies as level 3 in the fair value hierarchy, incorporated a number of significant assumptions and judgments, including, but not limited to, estimated future cash flows, discount rates, income tax rates, terminal growth rates and valuation multiples derived from comparable publicly traded companies. In considering the excess of the fair value over its carrying value for the Coach and Kate Spade reporting units and indefinite-lived brand intangibles, management did not perform an interim assessment for these reporting units during the three months ended March 28, 2020.
Goodwill
The change in the carrying amount of the Company’s goodwill by segment is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coach
|
|
Kate Spade
|
|
Stuart Weitzman(1)
|
|
Total
|
|
(millions)
|
Balance at June 27, 2020
|
$
|
661.7
|
|
|
$
|
639.4
|
|
|
$
|
—
|
|
|
$
|
1,301.1
|
|
|
|
|
|
|
|
|
|
Foreign exchange impact
|
(2.5)
|
|
|
1.6
|
|
|
—
|
|
|
(0.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 27, 2021
|
$
|
659.2
|
|
|
$
|
641.0
|
|
|
$
|
—
|
|
|
$
|
1,300.2
|
|
(1) Amount is net of accumulated goodwill impairment charges of $210.7 million as of March 27, 2021 and June 27, 2020.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
Intangible Assets
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 27, 2021
|
|
June 27, 2020
|
|
Gross
Carrying
Amount
|
|
Accum.
Amort.
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accum.
Amort.
|
|
Net
|
|
(millions)
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
100.5
|
|
|
$
|
(35.7)
|
|
|
$
|
64.8
|
|
|
$
|
100.6
|
|
|
$
|
(31.0)
|
|
|
$
|
69.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
1,309.9
|
|
|
—
|
|
|
1,309.9
|
|
|
1,309.8
|
|
|
—
|
|
|
1,309.8
|
|
Total intangible assets
|
$
|
1,410.4
|
|
|
$
|
(35.7)
|
|
|
$
|
1,374.7
|
|
|
$
|
1,410.4
|
|
|
$
|
(31.0)
|
|
|
$
|
1,379.4
|
|
As of March 27, 2021, the expected amortization expense for intangible assets is as follows:
|
|
|
|
|
|
|
Amortization Expense
|
|
(millions)
|
Remainder of fiscal 2021
|
$
|
1.7
|
|
Fiscal 2022
|
6.5
|
|
Fiscal 2023
|
6.5
|
|
Fiscal 2024
|
6.5
|
|
Fiscal 2025
|
6.5
|
|
Fiscal 2026
|
6.5
|
|
Fiscal 2027 and thereafter
|
30.6
|
|
Total
|
$
|
64.8
|
|
The expected amortization expense above reflects remaining useful lives ranging from approximately 9.1 to 11.3 years for customer relationships.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
8. STOCKHOLDERS' EQUITY
A reconciliation of stockholders' equity is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
Common
Stock
|
|
Common Stock
|
|
Additional
Paid-in-
Capital
|
|
Retained Earnings / (Accumulated Deficit)
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
Stockholders'
Equity
|
|
(millions, except per share data)
|
Balance at June 29, 2019
|
286.8
|
|
|
$
|
2.9
|
|
|
$
|
3,302.1
|
|
|
$
|
291.6
|
|
|
$
|
(83.2)
|
|
|
$
|
3,513.4
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
20.0
|
|
|
—
|
|
|
20.0
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12.8)
|
|
|
(12.8)
|
|
Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes
|
1.0
|
|
|
—
|
|
|
(14.5)
|
|
|
—
|
|
|
—
|
|
|
(14.5)
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
26.8
|
|
|
—
|
|
|
—
|
|
|
26.8
|
|
Repurchase of common stock
|
(11.9)
|
|
|
(0.1)
|
|
|
—
|
|
|
(299.9)
|
|
|
—
|
|
|
(300.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared ($0.3375 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(97.1)
|
|
—
|
|
|
(97.1)
|
Cumulative adjustment from adoption of new accounting standard
|
—
|
|
|
—
|
|
|
—
|
|
|
(48.9)
|
|
|
—
|
|
|
(48.9)
|
|
Balance at September 28, 2019
|
275.9
|
|
|
$
|
2.8
|
|
|
$
|
3,314.4
|
|
|
$
|
(134.3)
|
|
|
$
|
(96.0)
|
|
|
$
|
3,086.9
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
298.8
|
|
|
—
|
|
|
298.8
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11.0
|
|
|
11.0
|
|
Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes
|
0.1
|
|
|
—
|
|
|
2.1
|
|
|
—
|
|
|
—
|
|
|
2.1
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
16.8
|
|
|
—
|
|
|
—
|
|
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared ($0.3375 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(93.2)
|
|
|
—
|
|
|
(93.2)
|
|
Balance at December 28, 2019
|
276.0
|
|
|
$
|
2.8
|
|
|
$
|
3,333.3
|
|
|
$
|
71.3
|
|
|
$
|
(85.0)
|
|
|
$
|
3,322.4
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
(677.1)
|
|
|
—
|
|
|
(677.1)
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11.7)
|
|
|
(11.7)
|
|
Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes
|
0.1
|
|
|
—
|
|
|
(0.5)
|
|
|
—
|
|
|
—
|
|
|
(0.5)
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
13.2
|
|
|
—
|
|
|
—
|
|
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared ($0.3375 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(93.2)
|
|
|
—
|
|
|
(93.2)
|
|
Balance at March 28, 2020
|
276.1
|
|
|
$
|
2.8
|
|
|
$
|
3,346.0
|
|
|
$
|
(699.0)
|
|
|
$
|
(96.7)
|
|
|
$
|
2,553.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
Common
Stock
|
|
Common Stock
|
|
Additional
Paid-in-
Capital
|
|
Retained Earnings / (Accumulated Deficit)
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
Stockholders'
Equity
|
|
(millions, except per share data)
|
Balance at June 27, 2020
|
276.2
|
|
|
$
|
2.8
|
|
|
$
|
3,358.5
|
|
|
$
|
(992.7)
|
|
|
$
|
(92.2)
|
|
|
$
|
2,276.4
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
231.7
|
|
|
—
|
|
|
231.7
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15.7
|
|
|
15.7
|
|
Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes
|
1.2
|
|
|
—
|
|
|
(8.3)
|
|
|
—
|
|
|
—
|
|
|
(8.3)
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
14.6
|
|
|
—
|
|
|
—
|
|
|
14.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 26, 2020
|
277.4
|
|
|
$
|
2.8
|
|
|
$
|
3,364.8
|
|
|
$
|
(761.0)
|
|
|
$
|
(76.5)
|
|
|
$
|
2,530.1
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
311.0
|
|
|
—
|
|
|
311.0
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26.1
|
|
|
26.1
|
|
Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes
|
0.4
|
|
|
—
|
|
|
6.1
|
|
|
—
|
|
|
—
|
|
|
6.1
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
17.4
|
|
|
—
|
|
|
—
|
|
|
17.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 26, 2020
|
277.8
|
|
|
$
|
2.8
|
|
|
$
|
3,388.3
|
|
|
$
|
(450.0)
|
|
|
$
|
(50.4)
|
|
|
$
|
2,890.7
|
|
Net income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
91.7
|
|
|
—
|
|
|
91.7
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(21.4)
|
|
|
(21.4)
|
|
Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes
|
1.0
|
|
|
—
|
|
|
32.9
|
|
|
—
|
|
|
—
|
|
|
32.9
|
|
Share-based compensation
|
—
|
|
|
—
|
|
|
21.1
|
|
|
—
|
|
|
—
|
|
|
21.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 27, 2021
|
278.8
|
|
|
$
|
2.8
|
|
|
$
|
3,442.3
|
|
|
$
|
(358.3)
|
|
|
$
|
(71.8)
|
|
|
$
|
3,015.0
|
|
The components of accumulated other comprehensive income (loss) ("AOCI"), as of the dates indicated, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses) on Cash
Flow
Hedging Derivatives(1)
|
|
Unrealized Gains
(Losses) on Available-
for-Sale Investments
|
|
Cumulative
Translation
Adjustment
|
|
Other
|
|
Total
|
|
(millions)
|
Balances at June 29, 2019
|
$
|
(4.5)
|
|
|
$
|
(0.5)
|
|
|
$
|
(79.9)
|
|
|
$
|
1.7
|
|
|
$
|
(83.2)
|
|
Other comprehensive income (loss) before reclassifications
|
(1.7)
|
|
|
—
|
|
|
(18.3)
|
|
|
—
|
|
|
(20.0)
|
|
Less: amounts reclassified from accumulated other comprehensive income to earnings
|
(8.2)
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
|
(6.5)
|
|
Net current-period other comprehensive income (loss)
|
6.5
|
|
|
—
|
|
|
(18.3)
|
|
|
(1.7)
|
|
|
(13.5)
|
|
Balances at March 28, 2020
|
$
|
2.0
|
|
|
$
|
(0.5)
|
|
|
$
|
(98.2)
|
|
|
$
|
—
|
|
|
$
|
(96.7)
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 27, 2020
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
(93.3)
|
|
|
$
|
—
|
|
|
$
|
(92.2)
|
|
Other comprehensive income (loss) before reclassifications
|
(6.1)
|
|
|
—
|
|
|
23.5
|
|
|
—
|
|
|
17.4
|
|
Less: amounts reclassified from accumulated other comprehensive income to earnings
|
(3.0)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.0)
|
|
Net current-period other comprehensive income (loss)
|
(3.1)
|
|
|
—
|
|
|
23.5
|
|
|
—
|
|
|
20.4
|
|
Balances at March 27, 2021
|
$
|
(2.0)
|
|
|
$
|
—
|
|
|
$
|
(69.8)
|
|
|
$
|
—
|
|
|
$
|
(71.8)
|
|
(1) The ending balances of AOCI related to cash flow hedges are net of tax of $0.3 million and ($0.4) million as of March 27, 2021 and March 28, 2020, respectively. The amounts reclassified from AOCI are net of tax of less than $0.1 million and $4.1 million as of March 27, 2021 and March 28, 2020, respectively.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
9. LEASES
The Company leases retail space, office space, warehouse facilities, distribution centers, storage space, machinery, equipment and certain other items under operating leases. The Company's leases have initial terms ranging from 1 to 20 years and may have renewal or early termination options ranging from 1 to 10 years. These leases may also include rent escalation clauses or lease incentives in the form of construction allowances and rent reduction. In determining the lease term used in the lease right-of-use ("ROU") asset and lease liability calculations, the Company considers various factors such as market conditions and the terms of any renewal or termination options that may exist. When deemed reasonably certain, the renewal and termination options are included in the determination of the lease term and calculation of the lease ROU asset and lease liability. The Company is typically required to make fixed minimum rent payments, variable rent payments primarily based on performance (i.e., percentage-of-sales-based payments), or a combination thereof, directly related to its ROU asset. The Company is also often required, by the lease, to pay for certain other costs including real estate taxes, insurance, common area maintenance fees, and/or certain other costs, which may be fixed or variable, depending upon the terms of the respective lease agreement. To the extent these payments are fixed, the Company has included them in calculating the lease ROU assets and lease liabilities.
The Company calculates lease ROU assets and lease liabilities as the present value of fixed lease payments over the reasonably certain lease term beginning at the commencement date. As the rate implicit in the Company's leases is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of lease payments. The incremental borrowing rate is based on the information available at the lease commencement date, including the lease term, currency, country, Company specific risk premium and adjustments for collateral.
For operating leases, fixed lease payments are recognized as operating lease cost on a straight-line basis over the lease term. For finance leases and impaired operating leases, the ROU asset is depreciated on a straight-line basis over the remaining lease term, along with recognition of interest expense associated with accretion of the lease liability. For leases with a lease term of 12 months or less ("short-term lease"), any fixed lease payments are recognized on a straight-line basis over such term, and are not recognized on the Condensed Consolidated Balance Sheets. Variable lease cost for both operating and finance leases, if any, is recognized as incurred.
The Company acts as sublessor in certain leasing arrangements, primarily related to a sublease of a portion the Company's leased headquarters space as well as certain retail locations. Fixed sublease payments received are recognized on a straight-line basis over the sublease term.
ROU assets, along with any other related long-lived assets, are periodically evaluated for impairment.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The following table summarizes the ROU assets and lease liabilities recorded on the Company's Condensed Consolidated Balance Sheets as of March 27, 2021 and June 27, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 27,
2021
|
|
June 27,
2020
|
|
Location Recorded on Balance Sheet
|
|
|
(millions)
|
|
|
Assets:
|
|
|
|
|
|
|
Operating leases
|
|
$
|
1,555.2
|
|
|
$
|
1,757.0
|
|
|
Operating lease right-of-use assets
|
Finance leases
|
|
2.7
|
|
|
3.3
|
|
|
Property and equipment, net
|
Total lease assets
|
|
$
|
1,557.9
|
|
|
$
|
1,760.3
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Operating leases:
|
|
|
|
|
|
|
Current lease liabilities
|
|
$
|
354.6
|
|
|
$
|
388.8
|
|
|
Current lease liabilities
|
Long-term lease liabilities
|
|
1,576.3
|
|
|
1,799.8
|
|
|
Long-term lease liabilities
|
Total operating lease liabilities
|
|
$
|
1,930.9
|
|
|
$
|
2,188.6
|
|
|
|
Finance leases:
|
|
|
|
|
|
|
Current lease liabilities
|
|
$
|
0.9
|
|
|
$
|
0.9
|
|
|
Accrued liabilities
|
Long-term lease liabilities
|
|
3.7
|
|
|
4.4
|
|
|
Other liabilities
|
Total finance lease liabilities
|
|
$
|
4.6
|
|
|
$
|
5.3
|
|
|
|
|
|
|
|
|
|
|
Total lease liabilities
|
|
$
|
1,935.5
|
|
|
$
|
2,193.9
|
|
|
|
The following table summarizes the composition of net lease costs, primarily recorded within SG&A expenses on the Company's Condensed Consolidated Statements of Operations for the three and nine months March 27, 2021 and March 28, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 27, 2021
|
|
March 28, 2020
|
|
March 27, 2021
|
|
March 28, 2020
|
|
|
(millions)
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.6
|
|
|
$
|
0.6
|
|
Interest on lease liabilities(1)
|
|
0.1
|
|
|
0.2
|
|
|
0.4
|
|
|
0.5
|
|
Total finance lease cost
|
|
0.3
|
|
|
0.4
|
|
|
1.0
|
|
|
1.1
|
|
Operating lease cost
|
|
87.3
|
|
|
107.3
|
|
|
263.2
|
|
|
324.6
|
|
Short-term lease cost
|
|
24.6
|
|
|
3.5
|
|
|
37.7
|
|
|
7.1
|
|
Variable lease cost(2)
|
|
32.6
|
|
|
39.6
|
|
|
89.9
|
|
|
151.7
|
|
Operating lease right-of-use impairment
|
|
46.2
|
|
|
27.9
|
|
|
48.3
|
|
|
63.7
|
|
Less: sublease income
|
|
(6.0)
|
|
|
(4.5)
|
|
|
(15.2)
|
|
|
(15.2)
|
|
Total net lease cost
|
|
$
|
185.0
|
|
|
$
|
174.2
|
|
|
$
|
424.9
|
|
|
$
|
533.0
|
|
(1) Interest on lease liabilities is recorded within Interest expense, net on the Company's Condensed Consolidated Statement of Operations.
(2) Rent concessions negotiated related to Covid-19 are recorded in variable lease expense.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The following table summarizes certain cash flow information related to the Company's leases for the nine months March 27, 2021 and March 28, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
March 27, 2021
|
|
March 28,
2020
|
|
|
(millions)
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
376.8
|
|
|
$
|
322.8
|
|
Operating cash flows from finance leases
|
|
0.4
|
|
|
0.5
|
|
Financing cash flows from finance leases
|
|
0.6
|
|
|
0.6
|
|
Non-cash transactions:
|
|
|
|
|
Right-of-use assets obtained in exchange for operating lease liabilities
|
|
49.0
|
|
|
184.7
|
|
Right-of-use assets obtained in exchange for finance lease liabilities
|
|
—
|
|
|
—
|
|
Additionally, the Company did not have future payment obligations related to executed lease agreements for which the related lease has not yet commenced as of March 27, 2021.
10. EARNINGS PER SHARE
Basic net income per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted net income per share is calculated similarly but includes potential dilution from the exercise of stock options and restricted stock units and any other potentially dilutive instruments, only in the periods in which such effects are dilutive under the treasury stock method.
The following is a reconciliation of the weighted-average shares outstanding and calculation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 27,
2021
|
|
March 28,
2020
|
|
March 27,
2021
|
|
March 28,
2020
|
|
(millions, except per share data)
|
Net income (loss)
|
$
|
91.7
|
|
|
$
|
(677.1)
|
|
|
$
|
634.4
|
|
|
$
|
(358.3)
|
|
|
|
|
|
|
|
|
|
Weighted-average basic shares
|
278.2
|
|
|
276.1
|
|
|
277.5
|
|
|
279.4
|
|
Dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities(1)
|
7.4
|
|
|
—
|
|
|
4.0
|
|
|
—
|
|
Weighted-average diluted shares
|
285.6
|
|
|
276.1
|
|
|
281.5
|
|
|
279.4
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.33
|
|
|
$
|
(2.45)
|
|
|
$
|
2.29
|
|
|
$
|
(1.28)
|
|
Diluted
|
$
|
0.32
|
|
|
$
|
(2.45)
|
|
|
$
|
2.25
|
|
|
$
|
(1.28)
|
|
(1) There was no dilutive effect for the three and nine months ended March 28, 2020 as the impact of these items would be anti-dilutive as a result of the net loss incurred during the period.
Earnings per share amounts have been calculated based on unrounded numbers. Options to purchase shares of the Company's common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive and therefore not included in the computation of diluted net income per common share. In addition, the Company has outstanding restricted stock unit awards that are issuable only upon the achievement of certain performance goals. Performance-based restricted stock unit awards are included in the computation of diluted shares only to the extent that the underlying performance conditions (i) are satisfied as of the end of the reporting period or (ii) would be considered satisfied if
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
the end of the reporting period were the end of the related contingency period and the result would be dilutive under the treasury stock method. As of March 27, 2021 and March 28, 2020, there were 8.7 million and 17.6 million, respectively, of additional shares issuable upon exercise of anti-dilutive options and contingent vesting of performance-based restricted stock unit awards, which were excluded from the diluted share calculations.
11. SHARE-BASED COMPENSATION
The following table shows the share-based compensation expense and the related tax benefits recognized in the Company's Condensed Consolidated Statements of Operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
March 27,
2021
|
|
March 28,
2020
|
|
March 27,
2021
|
|
March 28,
2020
|
|
(millions)
|
Share-based compensation expense(1)
|
$
|
21.1
|
|
|
$
|
13.2
|
|
|
$
|
53.1
|
|
|
$
|
56.8
|
|
Income tax benefit related to share-based compensation expense
|
4.2
|
|
|
2.9
|
|
|
10.0
|
|
|
11.8
|
|
(1) During the three and nine months ended March 27, 2021, the Company incurred $3.3 million and $6.4 million of share-based compensation expense related to its Acceleration Program. During the three and nine months ended March 28, 2020, the Company incurred $0.0 million and $9.8 million of share-based compensation expense related to its organization-related and integration activities, respectively.
Stock Options
A summary of stock option activity during the nine months ended March 27, 2021 is as follows:
|
|
|
|
|
|
|
|
|
Number of
Options
Outstanding
|
|
|
|
(millions)
|
|
|
Outstanding at June 27, 2020
|
15.0
|
|
|
|
Granted
|
1.5
|
|
|
|
Exercised
|
(1.2)
|
|
|
|
Forfeited or expired
|
(1.3)
|
|
|
|
Outstanding at March 27, 2021
|
14.0
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the nine months ended March 27, 2021 and March 28, 2020 was $7.09 and $3.83, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model and the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 27,
2021
|
|
March 28,
2020
|
Expected term (years)
|
5.1
|
|
5.1
|
Expected volatility
|
48.8
|
%
|
|
37.6
|
%
|
Risk-free interest rate
|
0.3
|
%
|
|
1.5
|
%
|
Dividend yield
|
—
|
%
|
|
6.4
|
%
|
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
Service-based Restricted Stock Unit Awards ("RSUs")
A summary of service-based RSU activity during the nine months ended March 27, 2021 is as follows:
|
|
|
|
|
|
|
|
|
Number of
Non-vested RSUs
|
|
|
|
(millions)
|
|
|
Non-vested at June 27, 2020
|
4.9
|
|
|
|
Granted
|
4.7
|
|
|
|
Vested
|
(1.6)
|
|
|
|
Forfeited
|
(0.5)
|
|
|
|
Non-vested at March 27, 2021
|
7.5
|
|
|
|
The weighted-average grant-date fair value of share awards granted during the nine months ended March 27, 2021 and March 28, 2020 was $15.96 and $21.34, respectively.
Performance-based Restricted Stock Unit Awards ("PRSUs")
A summary of PRSU activity during the nine months ended March 27, 2021 is as follows:
|
|
|
|
|
|
|
|
|
Number of
Non-vested PRSUs
|
|
|
|
(millions)
|
|
|
Non-vested at June 27, 2020
|
0.8
|
|
|
|
Granted
|
0.9
|
|
|
|
Change due to performance condition achievement
|
—
|
|
|
|
Vested
|
(0.2)
|
|
|
|
Forfeited
|
(0.1)
|
|
|
|
Non-vested at March 27, 2021
|
1.4
|
|
|
|
The PRSU awards included in the non-vested amount are based on certain Company-specific financial metrics. The effect of the change due to performance condition on the non-vested amount is recognized at the conclusion of the performance period, which may differ from the date on which the award vests.
The weighted-average grant-date fair value per share of PRSU awards granted during the nine months ended March 27, 2021 and March 28, 2020 was $16.71 and $21.30, respectively.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
12. DEBT
The following table summarizes the components of the Company’s outstanding debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 27,
2021
|
|
June 27,
2020
|
|
(millions)
|
Current debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility
|
$
|
—
|
|
|
$
|
700.0
|
|
Note Payable
|
—
|
|
|
11.5
|
|
Total current debt
|
$
|
—
|
|
|
$
|
711.5
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
4.250% Senior Notes due 2025
|
$
|
600.0
|
|
|
$
|
600.0
|
|
3.000% Senior Notes due 2022
|
400.0
|
|
|
400.0
|
|
4.125% Senior Notes due 2027
|
600.0
|
|
|
600.0
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
1,600.0
|
|
|
1,600.0
|
|
Less: Unamortized discount and debt issuance costs on Senior Notes
|
(10.0)
|
|
|
(12.1)
|
|
Total long-term debt, net
|
$
|
1,590.0
|
|
|
$
|
1,587.9
|
|
During the three and nine months ended March 27, 2021, the Company recognized interest expense related to its debt of $17.3 million and $56.6 million, respectively. During the three-month and nine-month periods ended March 28, 2020, the Company recognized interest expense related to its debt of $16.7 million and $50.2 million, respectively.
Revolving Credit Facility
On October 24, 2019, the Company entered into a definitive credit agreement whereby Bank of America, N.A., as administrative agent, the other agents party thereto, and a syndicate of banks and financial institutions have made available to the Company a $900.0 million revolving credit facility, including sub-facilities for letters of credit, with a maturity date of October 24, 2024. The Revolving Credit Facility may be used to finance the working capital needs, capital expenditures, permitted investments, share purchases, dividends and other general corporate purposes of the Company and its subsidiaries (which may include commercial paper back-up). Letters of credit and swing line loans may be issued under the Revolving Credit Facility as described below.
Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to, at the Borrowers’ option, either (a) an alternate base rate (which is a rate equal to the greatest of (i) the Prime Rate in effect on such day, (ii) the Federal Funds Effective Rate in effect on such day plus ½ of 1% or (iii) the Adjusted LIBO Rate for a one month Interest Period on such day plus 1% or (b) a rate based on the rates applicable for deposits in the interbank market for U.S. Dollars or the applicable currency in which the loans are made plus, in each case, an applicable margin. The applicable margin will be determined by reference to a grid, as defined in the Credit Agreement, based on the ratio of (a) consolidated debt plus operating lease liability to (b) consolidated EBITDAR. Additionally, the Company pays a commitment fee at a rate determined by the reference to the aforementioned pricing grid.
On May 19, 2020, the Company entered into Amendment No. 1 (the “Amendment”) to the Revolving Credit Facility under the terms of the Amendment, during the period from the Effective Date until October 2, 2021, the Company must maintain available liquidity of $700 million (with available liquidity defined as the sum of unrestricted cash and cash equivalents and available commitments under credit facilities, including the Revolving Credit Facility). Following the period from the Effective Date until the compliance certificate is delivered for the fiscal quarter ending July 3, 2021 (the “Covenant Relief Period”), the Company must comply on a quarterly basis with a maximum net leverage ratio of 4.0 to 1.0. In addition, the Amendment provides that during the Covenant Relief Period, if any two of the Company’s three credit ratings are non-investment grade, the Revolving Credit Facility will be guaranteed by the Company’s material domestic subsidiaries and will be subject to liens on accounts receivable, inventory and intellectual property, in each case subject to customary exceptions. The Amendment also contains negative covenants that limit the ability of the Company and its subsidiaries to, among other things, incur certain debt, incur certain liens, dispose of assets, make investments, loans or advances, and engage in share buybacks during the Covenant Relief Period. An increased interest rate will be applicable during the Covenant Relief Period when the Company’s gross leverage ratio exceeds 4.0 to 1.0. The $900 million aggregate commitment amount under the revolving credit facility remains unchanged. There were no outstanding borrowings on the Revolving Credit Facility as of March 27, 2021.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
4.250% Senior Notes due 2025
On March 2, 2015, the Company issued $600.0 million aggregate principal amount of 4.250% senior unsecured notes due April 1, 2025 at 99.445% of par (the “2025 Senior Notes”). Interest is payable semi-annually on April 1 and October 1 beginning October 1, 2015. Prior to January 1, 2025 (90 days prior to the scheduled maturity date), the Company may redeem the 2025 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the 2025 Senior Notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon that would have been payable in respect of the 2025 Senior Notes calculated as if the maturity date of the 2025 Senior Notes was January 1, 2025 (not including any portion of payments of interest accrued to the date of redemption), discounted to the redemption date on a semi-annual basis at the Adjusted Treasury Rate (as defined in the indenture for the 2025 Senior Notes) plus 35 basis points, plus, in the case of each of (1) and (2), accrued and unpaid interest to the redemption date. On and after January 1, 2025 (90 days prior to the scheduled maturity date), the Company may redeem the 2025 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to 100% of the principal amount of the 2025 Senior Notes to be redeemed, plus accrued and unpaid interest to the redemption date.
3.000% Senior Notes due 2022
On June 20, 2017, the Company issued $400.0 million aggregate principal amount of 3.000% senior unsecured notes due July 15, 2022 at 99.505% of par (the "2022 Senior Notes"). Interest is payable semi-annually on January 15 and July 15 beginning January 15, 2018. Prior to June 15, 2022 (one month prior to the scheduled maturity date), the Company may redeem the 2022 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the 2022 Senior Notes to be redeemed or (2) as determined by a Quotation Agent, the sum of the present values of the remaining scheduled payments of principal and interest thereon that would have been payable in respect of the 2022 Senior Notes calculated as if the maturity date of the 2022 Senior Notes was June 15, 2022 (not including any portion of payments of interest accrued to the date of redemption), discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as defined in the Prospectus Supplement) plus 25 basis points, plus, in the case of each of (1) and (2), accrued and unpaid interest to the redemption date.
4.125% Senior Notes due 2027
On June 20, 2017, the Company issued $600.0 million aggregate principal amount of 4.125% senior unsecured notes due July 15, 2027 at 99.858% of par (the "2027 Senior Notes"). Interest is payable semi-annually on January 15 and July 15 beginning January 15, 2018. Prior to April 15, 2027 (the date that is three months prior to the scheduled maturity date), the Company may redeem the 2027 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the 2027 Senior Notes to be redeemed or (2) as determined by a Quotation Agent, the sum of the present values of the remaining scheduled payments of principal and interest thereon that would have been payable in respect of the 2027 Senior Notes calculated as if the maturity date of the 2027 Senior Notes was April 15, 2027 (not including any portion of payments of interest accrued to the date of redemption), discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as defined in the Prospectus Supplement) plus 30 basis points, plus, in the case of each of (1) and (2), accrued and unpaid interest to the redemption date.
At March 27, 2021, the fair value of the 2025, 2022 and 2027 Senior Notes was approximately $650.7 million, $409.8 million, and $653.0 million, respectively, based on external pricing data, including available quoted market prices of these instruments, and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as a Level 2 measurement within the fair value hierarchy. At June 27, 2020, the fair value of the 2025, 2022 and 2027 Senior Notes was approximately $576.6 million, $393.4 million and $565.0 million, respectively.
Note Payable
As a result of taking operational control of the Kate Spade Joint Ventures in China, the Company had an outstanding Note Payable of $11.5 million as of June 27, 2020, to the other partner of the Kate Spade Joint Ventures. The Note Payable was fully repaid as of March 27, 2021.
13. FAIR VALUE MEASUREMENTS
The Company categorizes its assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. The three levels of the hierarchy are defined as follows:
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for substantially the full term of the asset or liability.
Level 3 — Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. The Company does not have any Level 3 investments.
The following table shows the fair value measurements of the Company’s financial assets and liabilities at March 27, 2021 and June 27, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
|
|
March 27,
2021
|
|
June 27,
2020
|
|
March 27,
2021
|
|
June 27,
2020
|
|
|
|
|
|
(millions)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents(1)
|
$
|
594.9
|
|
|
$
|
569.4
|
|
|
$
|
8.1
|
|
|
$
|
0.3
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits(2)
|
—
|
|
|
—
|
|
|
0.7
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
—
|
|
|
—
|
|
|
6.8
|
|
|
7.4
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
|
Inventory-related instruments(3)
|
—
|
|
|
—
|
|
|
0.7
|
|
|
2.8
|
|
|
|
|
|
Intercompany loan and payable hedges(3)
|
—
|
|
|
—
|
|
|
1.2
|
|
|
0.1
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Inventory-related instruments(3)
|
—
|
|
|
—
|
|
|
1.7
|
|
|
1.3
|
|
|
|
|
|
Intercompany loan and payable hedges(3)
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Cash equivalents consist of money market funds and time deposits with maturities of three months or less at the date of purchase. Due to their short-term maturity, management believes that their carrying value approximates fair value.
(2)Short-term investments are recorded at fair value, which approximates their carrying value, and are primarily based upon quoted vendor or broker priced securities in active markets.
(3)The fair value of these hedges is primarily based on the forward curves of the specific indices upon which settlement is based and includes an adjustment for the counterparty’s or Company’s credit risk.
Refer to Note 12, "Debt," for the fair value of the Company's outstanding debt instruments.
Non-Financial Assets and Liabilities
The Company’s non-financial instruments, which primarily consist of goodwill, intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written-down to and recorded at fair value, considering market participant assumptions.
During the three months ended March 28, 2020, the Company recorded a full impairment of $267.0 million to the Stuart Weitzman indefinite-lived brand intangibles, and a full impairment of $210.7 million to goodwill pertaining to the Stuart Weitzman reporting unit. Refer to Note 7, "Goodwill and Other Intangible Asset" for further information.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
During the three and nine months ended March 27, 2021, the Company recorded $12.6 million of impairment charges to reduce the carrying amount of certain store assets within property and equipment, net to their estimated fair values. During the three and nine months ended March 27, 2021, the Company recorded $46.2 million and $48.3 million, respectively, of impairment charges to reduce the carrying amount of certain operating lease right-of-use assets to their estimated fair values.
During the three and nine months ended March 28, 2020, the Company recorded $46.7 million and $86.5 million of impairment charges to reduce the carrying amount of certain store assets within property and equipment, net to their estimated fair values. During the three and nine months ended March 28, 2020, the Company recorded $27.9 million and $63.7 million of impairment charges to reduce the carrying amount of certain operating lease right-of-use assets to their estimated fair values.
The fair value of store assets were determined based on Level 3 measurements. Inputs to these fair value measurements included estimates of the amounts and the timing of the stores' net future discounted cash flows based on historical experience, current trends and market conditions.
14. INVESTMENTS
The following table summarizes the Company’s U.S. dollar-denominated investments, recorded within the Company's Condensed Consolidated Balance Sheets as of March 27, 2021 and June 27, 2020:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 27, 2021
|
|
June 27, 2020
|
|
Short-term
|
|
Long-term
|
|
Total
|
|
Short-term
|
|
Long-term
|
|
Total
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits(1)
|
$
|
0.7
|
|
|
$
|
—
|
|
|
$
|
0.7
|
|
|
$
|
0.7
|
|
|
$
|
—
|
|
|
$
|
0.7
|
|
Other
|
6.8
|
|
|
0.1
|
|
|
6.9
|
|
|
7.4
|
|
|
0.1
|
|
|
7.5
|
|
Total Investments
|
$
|
7.5
|
|
|
$
|
0.1
|
|
|
$
|
7.6
|
|
|
$
|
8.1
|
|
|
$
|
0.1
|
|
|
$
|
8.2
|
|
(1)These securities have original maturities greater than three months and are recorded at fair value.
15. INCOME TAXES
The Company's effective tax rate for the nine months ended March 27, 2021 was 3.1%, as compared to (10.8)% for the nine months ended March 28, 2020. The effective tax rate for the current year was impacted by the geographic mix of earnings and the benefit from the net operating loss ("NOL") carryback claim recognized under the Coronavirus Aid, Relief and Economic Security ("CARES") Act during the nine months ended March 27, 2021. The negative effective tax rate recorded for the nine months ended March 28, 2020 was primarily attributable to tax expense being recorded on an overall operating loss for the period. Additionally, the effective tax rate for the nine months ended March 28, 2020 was impacted by certain trade name and goodwill impairments that were non-deductible for tax purposes and the decline in net sales from Covid-19. On March 27, 2020, H.R. 748, known as the CARES Act, was enacted. The provisions of the Act most applicable to the Company are the modification to allow for a five-year carryback of net operating losses and the technical amendment allowing businesses to claim an immediate deduction for costs associated with qualified improvement property.
16. COMMITMENTS AND CONTINGENCIES
Letters of Credit
The Company had standby letters of credit, surety bonds and bank guarantees totaling $42.0 million and $33.3 million outstanding at March 27, 2021 and June 27, 2020, respectively. The agreements, which expire at various dates through calendar 2025, primarily collateralize the Company's obligation to third parties for duty, leases, insurance claims and materials used in product manufacturing. The Company pays certain fees with respect to these instruments that are issued.
Other
The Company had other contractual cash obligations as of March 27, 2021 related to debt repayments. Refer to Note 12, "Debt," for further information.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The Company is involved in various routine legal proceedings as both plaintiff and defendant incident to the ordinary course of its business, including proceedings to protect Tapestry's intellectual property rights, litigation instituted by persons alleged to have been injured by advertising claims or upon premises within the Company’s control, litigation involving contractual disputes and litigation with present or former employees.
As part of Tapestry Inc.’s policing program for its intellectual property rights, from time to time, the Company files lawsuits in the U.S. and abroad alleging acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, copyright infringement, unfair competition, trademark dilution and/or state or foreign law claims. At any given point in time, Tapestry may have a number of such actions pending. These actions often result in seizure of counterfeit merchandise and/or out of court settlements with defendants. From time to time, defendants will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of Tapestry’s intellectual properties.
Although the Company’s litigation as a defendant is routine and incidental to the conduct of Tapestry’s business, as well as for any business of its size, such litigation can result in large monetary awards, such as when a civil jury is allowed to determine compensatory and/or punitive damages.
The Company believes that the outcome of all such pending routine legal proceedings in the aggregate will not have a material effect on the Company's business or condensed consolidated financial statements.
In addition to such routine legal proceedings, a putative class action complaint was filed in the Delaware Court of Chancery on May 7, 2020, naming the former chief executive officer and director of Kate Spade & Company and the other former directors of Kate Spade & Company, which the Company acquired on July 11, 2017 (the “Acquisition”), as defendants, and captioned Butler v. Leavitt, et al., C.A. No. 2020-0343-JTL. The complaint asserted claims on behalf of former Kate Spade & Company shareholders alleging breaches of fiduciary duty in connection with the Acquisition, including with respect to the defendants’ decision to pursue the Acquisition and Kate Spade & Company’s disclosures to stockholders in connection with the Acquisition. Under the terms of the agreement pursuant to which the Company acquired Kate Spade & Company, the Company was required to indemnify the defendants under this claim. The Company filed a motion to dismiss the complaint with prejudice, which was granted by the Delaware Court of Chancery on February 9, 2021. The matter, which has been concluded, did not have a material effect on the Company’s business or condensed consolidated financial statements.
17. SEGMENT INFORMATION
The Company has three reportable segments:
•Coach - Includes global sales of Coach brand products to customers through Coach operated stores, including the Internet and concession shop-in-shops, sales to wholesale customers and through independent third party distributors.
•Kate Spade - Includes global sales primarily of kate spade new york brand products to customers through Kate Spade operated stores, including the Internet, sales to wholesale customers, through concession shop-in-shops and through independent third party distributors.
•Stuart Weitzman - Includes global sales of Stuart Weitzman brand products to customers primarily through Stuart Weitzman operated stores, including the Internet, sales to wholesale customers and through numerous independent third party distributors.
In deciding how to allocate resources and assess performance, the Company's chief operating decision maker regularly evaluates the sales and operating income of these segments. Operating income is the gross margin of the segment less direct expenses of the segment.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The following table summarizes segment performance for the three and nine months ended March 27, 2021 and March 28, 2020:
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|
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|
|
|
|
|
|
|
|
|
|
|
Coach
|
|
Kate
Spade
|
|
Stuart Weitzman
|
|
Corporate(1)
|
|
|
|
Total
|
|
(millions)
|
Three Months Ended March 27, 2021
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
963.5
|
|
|
$
|
252.4
|
|
|
$
|
57.4
|
|
|
$
|
—
|
|
|
|
|
$
|
1,273.3
|
|
Gross profit
|
718.0
|
|
|
160.2
|
|
|
33.7
|
|
|
—
|
|
|
|
|
911.9
|
|
Operating income (loss)
|
251.4
|
|
|
(8.7)
|
|
|
(17.5)
|
|
|
(108.5)
|
|
|
|
|
116.7
|
|
Income (loss) before provision for income taxes
|
251.4
|
|
|
(8.7)
|
|
|
(17.5)
|
|
|
(129.8)
|
|
|
|
|
95.4
|
|
Depreciation and amortization expense(3)
|
32.1
|
|
|
14.1
|
|
|
5.4
|
|
|
14.9
|
|
|
|
|
66.5
|
|
Additions to long-lived assets(4)
|
5.4
|
|
|
0.8
|
|
|
0.9
|
|
|
12.1
|
|
|
|
|
19.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 28, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
772.5
|
|
|
$
|
249.5
|
|
|
$
|
50.7
|
|
|
$
|
—
|
|
|
|
|
$
|
1,072.7
|
|
Gross profit(2)
|
475.7
|
|
|
122.5
|
|
|
18.0
|
|
|
—
|
|
|
|
|
616.2
|
|
Operating income (loss)
|
38.1
|
|
|
(91.3)
|
|
|
(530.7)
|
|
|
(101.6)
|
|
|
|
|
(685.5)
|
|
Income (loss) before provision for income taxes
|
38.1
|
|
|
(91.3)
|
|
|
(530.7)
|
|
|
(121.1)
|
|
|
|
|
(705.0)
|
|
Depreciation and amortization expense(3)
|
42.0
|
|
|
42.1
|
|
|
487.5
|
|
|
13.6
|
|
|
|
|
585.2
|
|
Additions to long-lived assets(4)
|
21.5
|
|
|
19.2
|
|
|
3.0
|
|
|
7.0
|
|
|
|
|
50.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 27, 2021
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
3,064.2
|
|
|
$
|
868.4
|
|
|
$
|
198.3
|
|
|
$
|
—
|
|
|
|
|
$
|
4,130.9
|
|
Gross profit
|
2,251.0
|
|
|
547.4
|
|
|
117.4
|
|
|
—
|
|
|
|
|
2,915.8
|
|
Operating income (loss)
|
933.4
|
|
|
73.3
|
|
|
(5.6)
|
|
|
(292.8)
|
|
|
|
|
708.3
|
|
Income (loss) before provision for income taxes
|
933.4
|
|
|
73.3
|
|
|
(5.6)
|
|
|
(346.0)
|
|
|
|
|
655.1
|
|
Depreciation and amortization expense(3)
|
80.4
|
|
|
35.8
|
|
|
10.8
|
|
|
42.2
|
|
|
|
|
169.2
|
|
Additions to long-lived assets(4)
|
25.1
|
|
|
9.4
|
|
|
2.2
|
|
|
32.2
|
|
|
|
|
68.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 28, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
3,008.3
|
|
|
$
|
985.4
|
|
|
$
|
252.9
|
|
|
$
|
—
|
|
|
|
|
$
|
4,246.6
|
|
Gross profit(2)
|
2,030.6
|
|
|
576.4
|
|
|
133.4
|
|
|
—
|
|
|
|
|
2,740.4
|
|
Operating income (loss)
|
620.4
|
|
|
(30.6)
|
|
|
(540.4)
|
|
|
(320.2)
|
|
|
|
|
(270.8)
|
|
Income (loss) before provision for income taxes
|
620.4
|
|
|
(30.6)
|
|
|
(540.4)
|
|
|
(372.8)
|
|
|
|
|
(323.4)
|
|
Depreciation and amortization expense(3)
|
121.1
|
|
|
84.1
|
|
|
505.2
|
|
|
39.8
|
|
|
|
|
750.2
|
|
Additions to long-lived assets(4)
|
66.2
|
|
|
54.5
|
|
|
13.3
|
|
|
38.9
|
|
|
|
|
172.9
|
|
(1) Corporate, which is not a reportable segment, represents certain costs that are not directly attributable to a brand. These costs primarily include administration and certain information systems expense.
(2) Gross profit reflects charges recorded within Cost of sales of $61.9 million within the Coach segment, $32.3 million within the Kate Spade segment and $9.8 million within the Stuart Weitzman segment for the three and nine months ended March 28, 2020 as a result of establishing inventory reserves directly related to the expected impact of Covid-19 on the Company's future sales projections. The non-cash portion of these charges are presented within Impairment charges on the Condensed Consolidated Statement of Cash Flows.
(3) Depreciation and amortization expense includes $1.7 million and $2.0 million of Acceleration Program costs for the three and nine months ended March 27, 2021 and $0.0 million and $0.2 million of integration costs recorded within the Kate Spade segment for the three and nine months ended March 28, 2020, respectively. Depreciation and amortization expense
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
includes impairment charges of $11.9 million for Coach, $21.0 million for Kate Spade and $482.4 million for Stuart Weitzman for the three months ended March 28, 2020, as a result of impairment of Stuart Weitzman intangible assets as well as store impairments due to the Covid-19 pandemic. Depreciation and amortization expense includes impairment charges of $31.4 million for Coach, $33.0 million for Kate Spade and $490.7 million for Stuart Weitzman for the nine months ended March 28, 2020. Refer to Note 7, "Goodwill and Other Intangible Assets" and Note 13, "Fair Value Measurements," for further information. Depreciation and amortization expense for the segments includes an allocation of expense related to assets which support multiple segments.
(4) Additions to long-lived assets for the reportable segments primarily includes store assets as well as assets that support a specific brand. Corporate additions include all other assets which include a combination of Corporate assets, as well as assets that may support all segments. As such, depreciation expense for these assets may be subsequently allocated to a reportable segment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results of operations should be read together with the Company's condensed consolidated financial statements and notes to those financial statements included elsewhere in this document. When used herein, the terms "the Company," "Tapestry," "we," "us" and "our" refer to Tapestry, Inc., including consolidated subsidiaries. References to "Coach," "Stuart Weitzman," "Kate Spade" or "kate spade new york" refer only to the referenced brand.
EXECUTIVE OVERVIEW
Tapestry is a leading New York-based house of modern luxury accessories and lifestyle brands. Tapestry is powered by optimism, innovation and inclusivity. Our brands are approachable and inviting and create joy every day for people around the world. Defined by quality, craftsmanship and creativity, our house of brands gives global audiences the opportunity for exploration and self-expression. Tapestry is comprised of the Coach, Kate Spade and Stuart Weitzman brands, all of which have been part of the American landscape for over 25 years.
The Company has three reportable segments:
•Coach - Includes global sales of Coach products to customers through Coach operated stores, including the Internet and concession shop-in-shops, and sales to wholesale customers and through independent third party distributors.
•Kate Spade - Includes global sales primarily of kate spade new york brand products to customers through Kate Spade operated stores, including the Internet, sales to wholesale customers, through concession shop-in-shops and through independent third party distributors.
•Stuart Weitzman - Includes global sales of Stuart Weitzman brand products primarily to customers through Stuart Weitzman operated stores, including the Internet, sales to wholesale customers and through numerous independent third party distributors.
Each of our brands is unique and independent, while sharing a commitment to innovation and authenticity defined by distinctive products and differentiated customer experiences across channels and geographies. Our success does not depend solely on the performance of a single channel, geographic area or brand.
Acceleration Program
The guiding principle of the Company’s multi-year growth agenda under the Acceleration Program is to better meet the needs of each of its brands' unique customers by:
•Sharpening our Focus on the Consumer: Operating with a clearly defined purpose and strategy for each brand and an unwavering focus on the consumer at the core of everything we do
•Leveraging Data and Leading with a Digital-First Mindset: Building significant data and analytics capabilities to drive decision-making and increase efficiency; Offering immersive customer experiences across our e-commerce and social channels to meet the needs of consumers who are increasingly utilizing digital platforms to engage with brands; Rethinking the role of stores with an intent to optimize our fleet
•Transforming into a Leaner and More Responsive Organization: Moving with greater agility, simplifying internal processes and empowering teams to act quickly to meet the rapidly changing needs of the consumer
In the third fiscal quarter, the Company made meaningful progress against its previously announced Acceleration Program to sharpen its focus on the consumer, leverage data to lead with a digital-first mindset and transform into a leaner and more responsive organization:
•Recruited approximately 700,000 new customers through our e-commerce channels in North America, a meaningful increase versus prior year, as we continue to meet consumers where they choose to shop and leverage social media platforms to build awareness and drive engagement, notably with Millennial and Gen Z consumers;
•Delivered an increase in purchase frequency versus prior year through enhanced and consistent brand experiences across touchpoints and reactivated lapsed customers across brands;
•Achieved significant growth in China compared to both FY20 and FY19 through integrated, comprehensive brand-building strategies, bringing innovative product, marketing, and experiences to Chinese consumers; Drove revenue gains with Chinese consumers globally compared to pre-pandemic levels;
•Effectively reduced stock keeping unit ("SKU") counts by 30% to 50% and improved assortment productivity, resulting in more focused product messaging and compelling offerings, which in turn, contributed to stronger overall average unit retail ("AUR") and gross margin through higher initial markups ("IMU") and lower promotional activity;
•Utilized data and analytics tools across Tapestry’s platform to provide us with a deeper understanding of customer behavior through measurement, enabling a ‘test-and-learn’ environment that empowers our teams to more quickly respond to changes in consumer preferences and demand as well as scale opportunities across brands;
•Continued to enhance the flexibility of our operating model, through a streamlined organizational structure and optimized global fleet, with 49 net closures year-to-date, representing a net decrease of 94 stores from the prior year; Remain on track to achieve gross run-rate savings of $300 million, including gross savings of $200 million in fiscal 2021.
Recent Developments
Covid-19 Pandemic
The Covid-19 virus has impacted regions all around the world, resulting in restrictions and shutdowns implemented by national, state, and local authorities. Consequently, the spread of Covid-19 has caused significant global business disruptions. As a result of the widespread impact of Covid-19, Tapestry had temporarily closed the majority of its directly operated stores globally for some period of time to help reduce the spread of Covid-19. The vast majority of the Company's stores re-opened for either in-store or pick-up service and they have continued to operate since then, however, some store locations have experienced temporary re-closures or are operating under tighter restrictions in compliance with local government regulation. Many of the Company's wholesale and licensing partners also closed their bricks and mortar stores as required by government orders during the third and fourth quarters of fiscal 2020, and while the majority of stores have reopened, they have also been subject to temporary re-closures and tighter capacity restrictions operating in compliance with the rules of certain local governments. However, there is still uncertainty around the duration of these disruptions and the possibility of other effects on the business. We will continue to monitor the rapidly evolving situation pertaining to the Covid-19 outbreak, including guidance from international and domestic authorities. In these circumstances, the Company will need to make adjustments to our operating plan. Refer to Part II, Item 1A. "Risk Factors" herein and as disclosed in our Quarterly Report on Form 10-Q for the quarterly period ended December 26, 2020.
In response to the challenges that Covid-19 has imposed on our business, the Company implemented the following actions to mitigate these headwinds:
•Re-opened stores as quickly as possible, while following governmental and public health guidelines.
•Driving with a digital-first mindset for all brands. Implemented practices designed to support the continued operations of our e-commerce platforms and distribution centers remain operational across all major regions.
•Reduced capital expenditures through optimization of our fleet and prioritizing investment in digital.
•Continue to drive SG&A savings, including actions taken under the Acceleration Program, through the reduction of corporate and retail workforce, right-sizing of marketing expenses, reduction of fixed costs such as rent as well as procurement savings, including reducing external third party services.
•Did not pay out bonuses under the Annual Incentive Plan for fiscal year 2020, eliminated merit salary increases for all employees and temporarily reduced compensation for the Board of Directors and corporate employees above a certain salary threshold. During the second quarter of fiscal 2021, compensation resumed normal levels.
•Tightly managed inventories by reflowing product introductions and cancelling inventory receipts as well as planned reduction of SKUs.
•Drew down $700 million from its $900 million Revolving Credit Facility to add to cash balances, all of which was repaid during fiscal 2021.
•Suspended its quarterly cash dividend and share repurchase program beginning in the fourth quarter of fiscal 2020.
The Company will continue to consider near-term exigencies and the long-term financial health of the business as clear steps are taken to mitigate the consequences of the Covid-19 pandemic.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in response to the Covid-19 pandemic. The CARES Act contains numerous tax provisions, such as refundable payroll tax credits, deferral of the employer portion of certain payroll taxes, net operating loss carrybacks, modifications to net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. Additionally, on December 27, 2020, the Covid-19 stimulus package was signed into law, which contained enhancements to certain tax credits
enacted under the CARES Act. Certain provisions impacted the results of the Company. Refer to Note 15, "Income Taxes" for additional information on these provisions.
Since March 2020, the governments of numerous countries in which we operate have issued relief packages in response to Covid-19. These packages include, amongst other things, extended filing deadlines, wage subsidies, social security relief, rent relief and deferred tax payments. The Company is seeking select relief under these provisions where eligible. The Company has to make certain judgements in interpretation of the law and/or await guidance from the local authorities.
Acceleration Program
The Company has implemented a strategic growth plan after undergoing a review of its business under the Acceleration Program and expects to incur certain costs reflecting: (i) actions to streamline the Company's organization; (ii) select store closures as the Company optimizes its fleet (including store closure costs incurred as the Company exits certain regions in which it currently operates); and (iii) professional fees and compensation costs incurred as a result of the development and execution of the Company's comprehensive strategic initiatives aimed at increasing profitability. Including charges taken in fiscal 2020, the Company now expects to incur total pre-tax charges of approximately $205 - $220 million related to the Acceleration Program. Charges expected related to the Acceleration Program increased modestly due to additional professional fees and performance-based compensation. The Acceleration Program is expected to be substantially complete by the end of fiscal 2022. Refer to Note 6, "Restructuring Activities," and the "GAAP to Non-GAAP Reconciliation," herein, for further information. The Company estimates that it will realize approximately $300 million in gross run rate expense savings from these initiatives, including $200 million projected for fiscal 2021.
Impairment
During the third quarter of fiscal 2021, the Company recorded $45.8 million of impairment charges related to lease right-of-use assets, which were primarily driven by the continued impacts of Covid-19. Refer to Note 13, "Fair Value Measurements" for further information.
Current Trends and Outlook
The environment in which we operate is subject to a number of different factors driving global consumer spending. Consumer preferences, macroeconomic conditions, foreign currency fluctuations and geopolitical events continue to impact overall levels of consumer travel and spending on discretionary items, with inconsistent patterns across channels and geographies.
As previously noted, Covid-19 was officially declared a global pandemic by the World Health Organization in March 2020. The disruptions related to Covid-19 have materially adversely impacted our operations, cash flow, and liquidity. The virus has impacted regions all around the world, resulting in restrictions and shutdowns implemented by national, state, and local authorities. These requirements have resulted in full and partial store closures globally, causing a significant reduction in sales starting in the third quarter of fiscal 2020. While the vast majority of the Company's stores reopened for either in-store or curb-side service and have continued to operate since then, some store locations have experienced temporary re-closures or are operating under tighter restrictions in compliance with local government regulation, and other stores may be required to close again for an extended period of time due to the possibility of a resurgence of increased infections. Covid-19 may also cause disruptions in the Company’s supply chain, resulting in facility closures, labor instability, potential inability to source raw materials and disrupted operating procedures in attempts to curb the spread of Covid-19 within our third-party manufacturers, distribution centers, and other vendors.
In addition, the Company has been experiencing delays as a result of port congestion, vessel availability and container shortages for imported products, which has resulted in longer lead times or increased inbound freight costs. These issues are expected to be exacerbated by the disruption in the Suez Canal in March 2021, resulting in a modest impact to the Company. Furthermore, the Kate Spade brand had inventory on the Maersk Essen and One Apus cargo ships, which experienced weather related incidents that resulted in delays of inventory receipts, as well as some loss of product. The Company was able to mitigate the impact of these incidents through various actions, resulting in an immaterial impact to the Company.
The Biden Administration may enact additional stimulus legislation or support public health policies, including the widespread distribution of vaccines, which may mitigate the impact of the pandemic. Furthermore, during the third quarter of fiscal 2021, the Biden Administration proposed an infrastructure plan that includes provisions to increase the U.S. corporate tax rate from 21% to 28%, increase the U.S. taxation of our international business operations and impose a global minimum tax. While the proposal is not finalized, if passed as currently communicated, it would have an adverse impact on our tax rate and financial results.
Several organizations that monitor the world’s economy, including the International Monetary Fund, observed that the outbreak of the Covid-19 pandemic has negatively shocked the global economy and may have a sustained negative impact on the global economic growth as compared to pre-pandemic estimates. However, economic data for the end of calendar 2020
leading into the beginning of 2021 has indicated stronger-than-projected momentum, resulting in upward revisions of estimated growth. Nevertheless, the global economy still faces lingering concerns pertaining to uncertainties around Covid-19 that might hinder expected growth rates and progress. Thus, the revisions to estimated growth are heavily dependent on continued strong multilateral cooperation to bring the pandemic under control, including funding and support from local policymakers to make strategic investments that aid economic activity.
Furthermore, currency volatility, political instability and potential changes to trade agreements or duty rates may contribute to a worsening of the macroeconomic environment or adversely impact our business. Continued increases in trade tensions could impact the Company's ability to grow its business, particularly with the Chinese consumer globally. Since fiscal 2019, the U.S. and China have both imposed tariffs on the importation of certain product categories into the respective country. There continues to be a possibility under the Biden Administration of increases in tariffs on goods imported into the U.S. from China, Vietnam, Spain, or other countries.
Additional macroeconomic impacts include but are not limited to the United Kingdom ("U.K.") voting to leave the European Union ("E.U."), commonly known as "Brexit." The U.K. officially terminated its membership of the E.U. on January 31, 2020 under the terms of a withdrawal agreement concluded between the U.K. and E.U. and concluded the transition phase on December 31, 2020. On December 24, 2020, the U.K. and E.U. announced an agreement on their future relationship. This includes, but is not limited to, the free movement of U.K. and E.U. originating products. However, products originating outside the U.K. and E.U. going to and coming from the E.U. will be subject to tariffs beginning on January 1, 2021. The Company does not expect Brexit to materially impact our business.
As part of our efforts to improve our working capital efficiency, we have worked with certain suppliers to revisit terms and conditions, including the extension of payment terms. As an alternative to our payment terms, available to certain suppliers is a voluntary supply chain finance (“SCF”) program that enables our suppliers to sell their receivables from the Company to a global financial institution on a non-recourse basis at a rate that leverages our credit rating. We do not have the ability to refinance or modify payment terms to the global financial institution through the SCF program. No guarantees are provided by the Company or any of our subsidiaries under the SCF program.
We will continue to monitor these trends and evaluate and adjust our operating strategies and cost management opportunities to mitigate the related impact on our results of operations, while remaining focused on the long-term growth of our business and protecting the value of our brands.
For a detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, see Part II, Item 1A. "Risk Factors" herein and as disclosed in our Quarterly Report on Form 10-Q for the quarterly period ended December 26, 2020.
THIRD QUARTER FISCAL 2021 COMPARED TO THIRD QUARTER FISCAL 2020
The following table summarizes results of operations for the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020. All percentages shown in the table below and the discussion that follows have been calculated using unrounded numbers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 27, 2021
|
|
March 28, 2020
|
|
Variance
|
|
(millions, except per share data)
|
|
Amount
|
|
% of
net sales
|
|
Amount
|
|
% of
net sales
|
|
Amount
|
|
%
|
Net sales
|
$
|
1,273.3
|
|
|
100.0
|
%
|
|
$
|
1,072.7
|
|
|
100.0
|
%
|
|
$
|
200.6
|
|
|
18.7
|
%
|
Gross profit
|
911.9
|
|
|
71.6
|
|
|
616.2
|
|
|
57.4
|
|
|
295.7
|
|
|
48.0
|
|
SG&A expenses
|
795.2
|
|
|
62.5
|
|
|
1,301.7
|
|
|
NM
|
|
(506.5)
|
|
|
(38.9)
|
|
Operating income (loss)
|
116.7
|
|
|
9.2
|
|
|
(685.5)
|
|
|
(63.9)
|
|
|
802.2
|
|
|
NM
|
Interest expense, net
|
16.9
|
|
|
1.3
|
|
|
13.5
|
|
|
1.3
|
|
|
3.4
|
|
|
25.4
|
|
Other expense (income)
|
4.4
|
|
|
0.4
|
|
|
6.0
|
|
|
0.6
|
|
|
(1.6)
|
|
|
(25.5)
|
|
Provision for income taxes
|
3.7
|
|
|
0.3
|
|
|
(27.9)
|
|
|
(2.6)
|
|
|
31.6
|
|
|
NM
|
Net income (loss)
|
91.7
|
|
|
7.2
|
|
|
(677.1)
|
|
|
(63.1)
|
|
|
768.8
|
|
|
NM
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.33
|
|
|
|
|
$
|
(2.45)
|
|
|
|
|
$
|
2.78
|
|
|
NM
|
Diluted
|
$
|
0.32
|
|
|
|
|
$
|
(2.45)
|
|
|
|
|
$
|
2.77
|
|
|
NM
|
NM - Not meaningful
GAAP to Non-GAAP Reconciliation
The Company’s reported results are presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The reported results during the third quarter of fiscal 2021 and fiscal 2020 reflect the costs attributable to the Acceleration Program, Impairment charges, ERP system implementation efforts and Organization-related and Integration costs, as noted in the following tables. Refer to "Non-GAAP Measures" herein for further discussion on the Non-GAAP measures.
Third Quarter Fiscal 2021 Items
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|
|
|
|
|
|
|
|
Three Months Ended March 27, 2021
|
|
|
|
|
|
|
|
Items Affecting Comparability
|
|
|
|
GAAP Basis
(As Reported)
|
|
|
|
|
|
Acceleration Program
|
|
|
|
Impairment
|
|
Non-GAAP Basis
(Excluding Items)
|
|
(millions, except per share data)
|
Coach
|
718.0
|
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
718.0
|
|
Kate Spade
|
160.2
|
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
160.2
|
|
Stuart Weitzman
|
33.7
|
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
33.7
|
|
Gross profit(1)
|
$
|
911.9
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
$
|
911.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coach
|
466.6
|
|
|
|
|
|
|
4.7
|
|
|
|
|
20.4
|
|
|
441.5
|
|
Kate Spade
|
168.9
|
|
|
|
|
|
|
0.9
|
|
|
|
|
19.3
|
|
|
148.7
|
|
Stuart Weitzman
|
51.2
|
|
|
|
|
|
|
3.4
|
|
|
|
|
6.1
|
|
|
41.7
|
|
Corporate
|
108.5
|
|
|
|
|
|
|
11.4
|
|
|
|
|
—
|
|
|
97.1
|
|
SG&A expenses
|
$
|
795.2
|
|
|
|
|
|
|
$
|
20.4
|
|
|
|
|
$
|
45.8
|
|
|
$
|
729.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coach
|
251.4
|
|
|
|
|
|
|
(4.7)
|
|
|
|
|
(20.4)
|
|
|
276.5
|
|
Kate Spade
|
(8.7)
|
|
|
|
|
|
|
(0.9)
|
|
|
|
|
(19.3)
|
|
|
11.5
|
|
Stuart Weitzman
|
(17.5)
|
|
|
|
|
|
|
(3.4)
|
|
|
|
|
(6.1)
|
|
|
(8.0)
|
|
Corporate
|
(108.5)
|
|
|
|
|
|
|
(11.4)
|
|
|
|
|
—
|
|
|
(97.1)
|
|
Operating income (loss)
|
$
|
116.7
|
|
|
|
|
|
|
$
|
(20.4)
|
|
|
|
|
$
|
(45.8)
|
|
|
$
|
182.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
3.7
|
|
|
|
|
|
|
(3.2)
|
|
|
|
|
(9.8)
|
|
|
16.7
|
|
Net income (loss)
|
$
|
91.7
|
|
|
|
|
|
|
$
|
(17.2)
|
|
|
|
|
$
|
(36.0)
|
|
|
$
|
144.9
|
|
Net income (loss) per diluted common share
|
$
|
0.32
|
|
|
|
|
|
|
$
|
(0.06)
|
|
|
|
|
$
|
(0.13)
|
|
|
$
|
0.51
|
|
(1)Adjustments within Gross profit are recorded within Cost of sales.
In the third quarter of fiscal 2021 the Company incurred charges as follows:
•Acceleration Program - Total charges incurred under the Acceleration Program are primarily professional fees incurred as a result of the development and execution of the Company's comprehensive strategic initiatives, as well as actions to streamline the Company's organization, which include severance. Refer to the "Executive Overview" herein and Note 6, "Restructuring Activities," for further information.
•Impairment - Total charges are primarily due to impairment charges on lease right-of-use ("ROU") assets. Refer to the "Executive Overview" herein and Note 13, "Fair Value Measurements," for further information.
These actions taken together increased the Company's SG&A expenses by $66.2 million and reduced Provision for income taxes by $13.0 million, negatively impacting Net income by $53.2 million or $0.19 per diluted share.
Third Quarter Fiscal 2020 Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 28, 2020
|
|
|
|
Items Affecting Comparability
|
|
|
|
GAAP Basis
(As Reported)
|
|
ERP Implementation
|
|
|
|
Organization-related & Integration costs
|
|
Impairment
|
|
Non-GAAP Basis
(Excluding Items)
|
|
(millions, except per share data)
|
Coach
|
475.7
|
|
|
—
|
|
|
|
|
—
|
|
|
(61.9)
|
|
|
537.6
|
|
Kate Spade
|
122.5
|
|
|
—
|
|
|
|
|
—
|
|
|
(32.3)
|
|
|
154.8
|
|
Stuart Weitzman
|
18.0
|
|
|
—
|
|
|
|
|
—
|
|
|
(9.8)
|
|
|
27.8
|
|
Gross profit(1)
|
$
|
616.2
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
$
|
(104.0)
|
|
|
$
|
720.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coach
|
437.6
|
|
|
—
|
|
|
|
|
—
|
|
|
16.4
|
|
|
421.2
|
|
Kate Spade
|
213.8
|
|
|
—
|
|
|
|
|
0.3
|
|
|
41.5
|
|
|
172.0
|
|
Stuart Weitzman
|
548.7
|
|
|
—
|
|
|
|
|
0.2
|
|
|
485.8
|
|
|
62.7
|
|
Corporate
|
101.6
|
|
|
2.8
|
|
|
|
|
2.9
|
|
|
—
|
|
|
95.9
|
|
SG&A expenses
|
$
|
1,301.7
|
|
|
$
|
2.8
|
|
|
|
|
$
|
3.4
|
|
|
$
|
543.7
|
|
|
$
|
751.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coach
|
38.1
|
|
|
—
|
|
|
|
|
—
|
|
|
(78.3)
|
|
|
116.4
|
|
Kate Spade
|
(91.3)
|
|
|
—
|
|
|
|
|
(0.3)
|
|
|
(73.8)
|
|
|
(17.2)
|
|
Stuart Weitzman
|
(530.7)
|
|
|
—
|
|
|
|
|
(0.2)
|
|
|
(495.6)
|
|
|
(34.9)
|
|
Corporate
|
(101.6)
|
|
|
(2.8)
|
|
|
|
|
(2.9)
|
|
|
—
|
|
|
(95.9)
|
|
Operating income (loss)
|
$
|
(685.5)
|
|
|
$
|
(2.8)
|
|
|
|
|
$
|
(3.4)
|
|
|
$
|
(647.7)
|
|
|
$
|
(31.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
(27.9)
|
|
|
(0.7)
|
|
|
|
|
(2.5)
|
|
|
(49.4)
|
|
|
24.7
|
|
Net income (loss)
|
$
|
(677.1)
|
|
|
$
|
(2.1)
|
|
|
|
|
$
|
(0.9)
|
|
|
$
|
(598.3)
|
|
|
$
|
(75.8)
|
|
Net income (loss) per diluted common share
|
$
|
(2.45)
|
|
|
$
|
(0.01)
|
|
|
|
|
$
|
—
|
|
|
$
|
(2.17)
|
|
|
$
|
(0.27)
|
|
(1)Adjustments within Gross profit are recorded within Cost of sales.
In the third quarter of fiscal 2020, the Company incurred the following:
•ERP Implementation - Total charges represent technology implementation costs.
•Organization-related and Integration costs - Total charges represent integration costs primarily related to professional fees. Refer to Note 5, "Integration," for more information regarding integration costs.
•Impairment - Total charges are primarily due to impairment charges on the indefinite-lived brand intangible asset and goodwill for Stuart Weitzman, impairment charges on property and equipment assets and lease ROU assets, as well as increases in inventory reserves. Refer to Note 7, "Goodwill and Other Intangible Assets," Note 13, "Fair Value Measurements," and Note 17, "Segment Information," for further information.
These actions taken together increased the Company's SG&A expenses by $549.9 million, Cost of sales by $104.0 million and reduced Provision for income taxes by $52.6 million, negatively impacting Net income by $601.3 million or $2.18 per diluted share.
Tapestry, Inc. Summary – Third Quarter of Fiscal 2021
Currency Fluctuation Effects
The change in net sales and gross margin for the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020 has been presented both including and excluding currency fluctuation effects. All percentages shown in the tables below and the discussion that follows have been calculated using unrounded numbers.
Net Sales
The Company has provided comparisons to certain fiscal year 2019 results, which the Company believes is useful to investors and others in evaluating the Company’s results, due to the significant impact of the Covid-19 pandemic on the Company’s operations and financial results, notably in the second half of fiscal year 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Variance
|
|
|
|
|
|
March 27,
2021
|
|
March 28,
2020
|
|
Amount
|
|
%
|
|
Constant Currency Change
|
|
% Change versus FY19
|
|
(millions)
|
|
|
|
|
Coach
|
$
|
963.5
|
|
|
$
|
772.5
|
|
|
$
|
191.0
|
|
|
24.7
|
%
|
|
21.6
|
%
|
|
(0.2)
|
%
|
Kate Spade
|
252.4
|
|
|
249.5
|
|
|
2.9
|
|
|
1.2
|
|
|
0.2
|
|
|
(10.2)
|
|
Stuart Weitzman
|
57.4
|
|
|
50.7
|
|
|
6.7
|
|
|
12.9
|
|
|
9.3
|
|
|
(32.7)
|
|
Total Tapestry
|
$
|
1,273.3
|
|
|
$
|
1,072.7
|
|
|
$
|
200.6
|
|
|
18.7
|
|
|
16.0
|
|
|
(4.4)
|
|
Net sales in the third quarter of fiscal 2021 increased 18.7% or $200.6 million to $1.27 billion. Excluding the effects of foreign currency, net sales increased by 16.0% or $172.0 million.
•Coach Net Sales increased 24.7% or $191.0 million to $963.5 million in the third quarter of fiscal 2021. Excluding the impact of foreign currency, net sales increased 21.6% or $166.8 million. This increase in net sales is primarily attributed to an increase of $157.3 million in net global retail sales driven by higher global e-commerce sales and store sales in mainland China, partially offset by lower store sales in North America, Other Asia, including Japan, and Europe, due to the impact of Covid-19. This increase in net sales is also partially attributed to an $8.3 million increase in wholesale sales.
•Kate Spade Net Sales increased 1.2% or $2.9 million to $252.4 million in the third quarter of fiscal 2021. Excluding the impact of foreign currency, net sales increased 0.2% or $0.4 million. This increase is primarily due to an increase of $12.8 million in net global retail sales driven by higher global e-commerce sales and store sales in mainland China, partially offset by lower store sales in Other Asia, including Japan, and North America. This increase in net sales was partially offset by a decline of $12.1 million in wholesale sales, primarily due to lower wholesale shipments and a strategic pullback in disposition.
•Stuart Weitzman Net Sales increased 12.9% or $6.7 million to $57.4 million in the third quarter of fiscal 2021. Excluding the impact of foreign currency, net sales increased 9.3% or $4.7 million. This increase was primarily due to a net increase of $5.4 million in the retail business, which is attributed to an increase in store sales in mainland China and an increase in global e-commerce sales, partially offset by store closures related to fleet optimization under the Acceleration Program.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 27, 2021
|
|
March 28, 2020
|
|
Variance
|
|
(millions)
|
|
Amount
|
|
% of Net Sales
|
|
Amount
|
|
% of Net Sales
|
|
Amount
|
|
%
|
Coach
|
$
|
718.0
|
|
|
74.5
|
%
|
|
$
|
475.7
|
|
|
61.6
|
%
|
|
$
|
242.3
|
|
|
50.9
|
%
|
Kate Spade
|
160.2
|
|
|
63.5
|
|
|
122.5
|
|
|
49.1
|
|
|
37.7
|
|
|
30.8
|
|
Stuart Weitzman
|
33.7
|
|
|
58.9
|
|
|
18.0
|
|
|
35.4
|
|
|
15.7
|
|
|
87.7
|
|
Tapestry
|
$
|
911.9
|
|
|
71.6
|
|
|
$
|
616.2
|
|
|
57.4
|
|
|
$
|
295.7
|
|
|
48.0
|
|
Gross profit increased 48.0% or $295.7 million to $911.9 million in the third quarter of fiscal 2021 from $616.2 million in the third quarter of fiscal 2020. Gross margin for the third quarter of fiscal 2021 was 71.6% as compared to 57.4% in the third quarter of fiscal 2020. Excluding items affecting comparability of $104.0 million in the third quarter of fiscal 2020 as discussed in the "GAAP to non-GAAP Reconciliation" herein, gross profit increased 26.6% or $191.7 million to $911.9 million from $720.2 million in the third quarter of fiscal 2020. Excluding items affecting comparability, gross margin increased 450 basis points to 71.6% compared to 67.1% in the third quarter of fiscal 2020, and on a constant currency basis, gross margin increased 440 basis points from the third quarter of fiscal 2020.
The Company includes inbound product-related transportation costs from our service providers within Cost of sales. The Company, similar to some companies, includes certain transportation-related costs due to our distribution network in SG&A expenses rather than in Cost of sales; for this reason, our gross margins may not be comparable to that of entities that include all costs related to their distribution network in Cost of sales.
•Coach Gross Profit increased 50.9% or $242.3 million to $718.0 million in the third quarter of fiscal 2021 from $475.7 million in the third quarter of fiscal 2020. Gross margin increased to 74.5% in the third quarter of fiscal 2021 from 61.6% in the third quarter of fiscal 2020. Excluding items affecting comparability of $61.9 million in the third quarter of fiscal 2020, gross profit increased 33.6% or $180.4 million to $718.0 million from $537.6 million in the third quarter of fiscal 2020. Excluding items affecting comparability, gross margin increased 490 basis points to 74.5% from 69.6% in the third quarter of fiscal 2020, and on a constant currency basis gross margin increased 510 basis points from the third quarter of fiscal 2020. This increase in gross margin was primarily due to reduced promotional activity.
•Kate Spade Gross Profit increased 30.8% or $37.7 million to $160.2 million in the third quarter of fiscal 2021 from $122.5 million in the third quarter of fiscal 2020. Gross margin increased to 63.5% in the third quarter of fiscal 2021 from 49.1% in the third quarter of fiscal 2020. Excluding items affecting comparability of $32.3 million in the third quarter of fiscal 2020, gross profit increased 3.5% or $5.4 million to $160.2 million from $154.8 million in the third quarter of fiscal 2020. Excluding items affecting comparability, gross margin increased 150 basis points to 63.5% from 62.0% in the third quarter of fiscal 2020. Kate Spade gross margin was not materially impacted by foreign currency. This increase in gross margin was primarily due to a strategic pullback in disposition and reduced promotional activity.
•Stuart Weitzman Gross Profit increased 87.7% or $15.7 million to $33.7 million during the third quarter of fiscal 2021 from $18.0 million in the third quarter of fiscal 2020. Gross margin increased to 58.9% in the third quarter of fiscal 2021 from 35.4% in the third quarter of fiscal 2020. Excluding items affecting comparability of $9.8 million in the third quarter of fiscal 2020, Stuart Weitzman gross profit increased 21.5% or $5.9 million to $33.7 million from $27.8 million in the third quarter of fiscal 2020. Excluding items affecting comparability, gross margin increased 420 basis points to 58.9% from 54.7% in the third quarter of fiscal 2020, and on a constant currency basis gross margin increased 30 basis points from the third quarter of fiscal 2020.
Selling, General and Administrative Expenses ("SG&A")
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 27, 2021
|
|
March 28, 2020
|
|
Variance
|
|
(millions)
|
|
Amount
|
|
% of Net Sales
|
|
Amount
|
|
% of Net Sales
|
|
Amount
|
|
%
|
Coach
|
$
|
466.6
|
|
|
48.4
|
%
|
|
$
|
437.6
|
|
|
56.6
|
%
|
|
$
|
29.0
|
|
|
6.6
|
%
|
Kate Spade
|
168.9
|
|
|
66.9
|
|
|
213.8
|
|
|
85.7
|
|
|
(44.9)
|
|
|
(21.0)
|
|
Stuart Weitzman
|
51.2
|
|
|
89.4
|
|
|
548.7
|
|
|
NM
|
|
(497.5)
|
|
|
(90.7)
|
|
Corporate
|
108.5
|
|
|
NA
|
|
101.6
|
|
|
NA
|
|
6.9
|
|
|
6.8
|
|
Tapestry
|
$
|
795.2
|
|
|
62.5
|
|
|
$
|
1,301.7
|
|
|
NM
|
|
$
|
(506.5)
|
|
|
(38.9)
|
|
SG&A expenses decreased 38.9% or $506.5 million to $795.2 million in the third quarter of fiscal 2021 as compared to $1.30 billion in the third quarter of fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 62.5% during the third quarter of fiscal 2021. Excluding items affecting comparability of $66.2 million and $549.9 million in the third quarter of fiscal 2021 and fiscal 2020, respectively, SG&A expenses decreased 3.0% or $22.8 million to $729.0 million from $751.8 million in the third quarter of fiscal 2020. SG&A as a percentage of sales decreased to 57.3% as compared to 70.1% during the third quarter of fiscal 2020. This decrease in SG&A expenses includes actions taken as part of the Acceleration Program partially offset by an increase in accrued Annual Incentive Plan expenses.
•Coach SG&A Expenses decreased 6.6% or $29.0 million to $466.6 million in the third quarter of fiscal 2021 as compared to $437.6 million in the third quarter of fiscal 2020. SG&A expenses as a percentage of net sales decreased to 48.4% during the third quarter of fiscal 2021 from 56.6% during the third quarter of fiscal 2020. Excluding items affecting comparability of $25.1 million and $16.4 million in the third quarter of fiscal 2021 and fiscal 2020, respectively, SG&A expenses increased 4.8% or $20.3 million to $441.5 million during the third quarter of fiscal 2021; and SG&A expenses as a percentage of net sales decreased to 45.8% in the third quarter of fiscal 2021 from 54.5% in the third quarter of fiscal 2020. This increase in SG&A expenses is primarily due to an increase in digital marketing spend and e-commerce related operational and selling costs in support of higher e-commerce sales, partially offset by a decline in compensation costs.
•Kate Spade SG&A Expenses decreased 21.0% or $44.9 million to $168.9 million in the third quarter of fiscal 2021 as compared to $213.8 million in the third quarter of fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 66.9% during the third quarter of fiscal 2021 as compared to 85.7% during the third quarter of fiscal 2020. Excluding items affecting comparability of $20.2 million and $41.8 million in the third quarter of fiscal 2021 and fiscal 2020, respectively, SG&A expenses decreased 13.5% or $23.3 million to $148.7 million during the third quarter of fiscal 2021; and SG&A expenses as a percentage of net sales decreased to 58.9% in the third quarter of fiscal 2021 from 68.9% in the third quarter of fiscal 2020. This decrease in SG&A expenses is primarily due to a decline in occupancy costs, compensation costs and depreciation expense, partially offset by an increase in e-commerce related operational and selling costs in support of higher e-commerce sales.
•Stuart Weitzman SG&A Expenses decreased 90.7% or $497.5 million to $51.2 million in the third quarter of fiscal 2021 as compared to $548.7 million in the third quarter of fiscal 2021. As a percentage of net sales, SG&A expenses decreased to 89.4% during the third quarter of fiscal 2021. Excluding items affecting comparability of $9.5 million and $486.0 million in the third quarter of fiscal 2021 and fiscal 2020, respectively, SG&A expenses decreased 33.5% or $21.0 million to $41.7 million during the third quarter of fiscal 2021 from $62.7 million during the third quarter of fiscal 2020; and SG&A expenses as a percentage of net sales decreased to 72.8% in the third quarter of fiscal 2021. This decrease is primarily due to higher bad debt reserves in prior year due to Covid-19, as well as a decline in occupancy and compensation costs, mainly as a result of fleet optimization under the Acceleration Program.
•Corporate expenses, which are included within SG&A expenses discussed above but are not directly attributable to a reportable segment, increased 6.8% or $6.9 million to $108.5 million in the third quarter of fiscal 2021 as compared to $101.6 million in the third quarter of fiscal 2020. Excluding items affecting comparability of $11.4 million and $5.7 million in the third quarter of fiscal 2021 and fiscal 2020, respectively, SG&A expenses increased 1.3% or $1.2 million to $97.1 million in the third quarter of fiscal 2021 as compared to $95.9 million in the third quarter of fiscal 2020. This increase in SG&A expenses was primarily driven by an increase in accrued Annual Incentive Plan expenses partially offset by lower variable occupancy costs.
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 27, 2021
|
|
March 28, 2020
|
|
Variance
|
|
(millions)
|
|
Amount
|
|
% of Net Sales
|
|
Amount
|
|
% of Net Sales
|
|
Amount
|
|
%
|
Coach
|
$
|
251.4
|
|
|
26.1
|
%
|
|
$
|
38.1
|
|
|
4.9
|
%
|
|
$
|
213.3
|
|
|
NM
|
Kate Spade
|
(8.7)
|
|
|
(3.4)
|
|
|
(91.3)
|
|
|
(36.6)
|
|
|
82.6
|
|
|
90.5
|
|
Stuart Weitzman
|
(17.5)
|
|
|
(30.5)
|
|
|
(530.7)
|
|
|
NM
|
|
513.2
|
|
|
(96.7)
|
|
Corporate
|
(108.5)
|
|
|
NA
|
|
(101.6)
|
|
|
NA
|
|
(6.9)
|
|
|
(6.8)
|
|
Tapestry
|
$
|
116.7
|
|
|
9.2
|
|
|
$
|
(685.5)
|
|
|
(63.9)
|
|
|
$
|
802.2
|
|
|
NM
|
Operating income increased $802.2 million to $116.7 million in the third quarter of fiscal 2021 as compared to an operating loss of $685.5 million in the third quarter of fiscal 2020. Operating margin was 9.2% in the third quarter of fiscal 2021 as compared to (63.9)% in the third quarter of fiscal 2020. Excluding items affecting comparability of $66.2 million and $653.9 million in the third quarter of fiscal 2021 and fiscal 2020, respectively, operating income increased $214.5 million to $182.9 million in the third quarter of fiscal 2021 from an operating loss of $31.6 million in the third quarter of fiscal 2020; and operating margin increased to 14.4% in the third quarter of fiscal 2021 as compared to (2.9)% in the third quarter of fiscal 2020.
•Coach Operating Income increased $213.3 million to $251.4 million in the third quarter of fiscal 2021, resulting in an operating margin of 26.1%, as compared to $38.1 million and 4.9%, respectively, in the third quarter of fiscal 2020. Excluding items affecting comparability, Coach operating income increased $160.1 million to $276.5 million from $116.4 million in the third quarter of fiscal 2020; and operating margin was 28.7% in the third quarter of fiscal 2021 as compared to 15.1% in the third quarter of fiscal 2020. This increase in operating income was due to higher gross profit, partially offset by higher SG&A expenses.
•Kate Spade Operating Loss decreased 90.5% or $82.6 million to $8.7 million in the third quarter of fiscal 2021, resulting in an operating margin of (3.4)%, as compared to an operating loss of $91.3 million and operating margin of (36.6)% in the third quarter of fiscal 2020. Excluding items affecting comparability, Kate Spade operating income increased $28.7 million to $11.5 million from an operating loss of $17.2 million in the third quarter of fiscal 2020; and operating margin was 4.6% in the third quarter of fiscal 2021 as compared to (6.9)% in the third quarter of fiscal 2020. This increase in operating income was due to lower SG&A expenses and higher gross profit.
•Stuart Weitzman Operating Loss decreased 96.7% or $513.2 million to $17.5 million in the third quarter of fiscal 2021, resulting in an operating margin of (30.5)%, as compared to an operating loss of $530.7 million in the third quarter of fiscal 2020. Excluding items affecting comparability, Stuart Weitzman operating loss decreased 77.2% or $26.9 million to $8.0 million, resulting in an operating margin of (13.9)%, as compared to operating loss of $34.9 million in the third quarter of fiscal 2020. This decrease in operating loss was due to lower SG&A expenses and higher gross profit.
Interest Expense, net
Interest expense, net increased 25.4% or $3.4 million to $16.9 million in the third quarter of fiscal 2021 as compared to $13.5 million in the third quarter of fiscal 2020. The increase in interest expense, net is mainly due to lower interest income.
Other Expense (Income)
Other expense decreased 25.5% or $1.6 million to $4.4 million in the third quarter of fiscal 2021 as compared to $6.0 million in the third quarter of fiscal 2020. The decrease in other expense is related to a decrease in foreign exchange losses.
Provision for Income Taxes
The effective tax rate was 3.8% in the third quarter of fiscal 2021 as compared to 4.0% in the third quarter of fiscal 2020. Excluding items affecting comparability, the effective tax rate was 10.3% in the third quarter of 2021 as compared to (48.2)% in the third quarter of fiscal 2020. The increase in our effective tax rate was primarily attributable to the geographic mix of earnings and the tax provision for the third quarter of fiscal 2020 being based on an operating loss due to a decline in net sales from Covid-19.
Net Income (Loss)
Net income increased $768.8 million to $91.7 million in the third quarter of fiscal 2021 as compared to net loss of $677.1 million in the third quarter of fiscal 2020. Excluding items affecting comparability, net income increased $220.7 million to a net income of $144.9 million in the third quarter of fiscal 2021 as compared to a net loss of $75.8 million in the third quarter of fiscal 2020. This increase was primarily due to higher operating income.
Net Income (Loss) per Share
Net income per diluted share increased $2.77 to $0.32 in the third quarter of fiscal 2021 as compared to net loss per diluted share of $2.45 in the third quarter of fiscal 2020. Excluding items affecting comparability, net income per diluted share increased $0.78 to $0.51 in the third quarter of fiscal 2021 as compared to net loss per diluted share of $0.27 in the third quarter of fiscal 2020. This change was primarily due to higher net income.
FIRST NINE MONTHS FISCAL 2021 COMPARED TO FIRST NINE MONTHS FISCAL 2020
The following table summarizes results of operations for the first nine months of fiscal 2021 compared to the first nine months of fiscal 2020. All percentages shown in the table below and the discussion that follows have been calculated using unrounded numbers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
March 27, 2021
|
|
March 28, 2020
|
|
Variance
|
|
(millions, except per share data)
|
|
|
|
Amount
|
|
% of
net sales
|
|
Amount
|
|
% of
net sales
|
|
Amount
|
|
%
|
Net sales
|
$
|
4,130.9
|
|
|
100.0
|
%
|
|
$
|
4,246.6
|
|
|
100.0
|
%
|
|
$
|
(115.7)
|
|
|
(2.7)
|
%
|
Gross profit
|
2,915.8
|
|
|
70.6
|
|
|
2,740.4
|
|
|
64.5
|
|
|
175.4
|
|
|
6.4
|
|
SG&A expenses
|
2,207.5
|
|
|
53.4
|
|
|
3,011.2
|
|
|
70.9
|
|
|
(803.7)
|
|
|
(26.7)
|
|
Operating income (loss)
|
708.3
|
|
|
17.1
|
|
|
(270.8)
|
|
|
(6.4)
|
|
|
979.1
|
|
|
NM
|
Interest expense, net
|
55.0
|
|
|
1.3
|
|
|
39.8
|
|
|
0.9
|
|
|
15.2
|
|
|
38.2
|
|
Other expense (income)
|
(1.8)
|
|
|
—
|
|
|
12.8
|
|
|
0.3
|
|
|
(14.6)
|
|
|
NM
|
Provision for income taxes
|
20.7
|
|
|
0.5
|
|
|
34.9
|
|
|
0.8
|
|
|
(14.2)
|
|
|
(40.9)
|
|
Net income (loss)
|
634.4
|
|
|
15.4
|
|
|
(358.3)
|
|
|
(8.4)
|
|
|
992.7
|
|
|
NM
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
2.29
|
|
|
|
|
$
|
(1.28)
|
|
|
|
|
$
|
3.57
|
|
|
NM
|
Diluted
|
$
|
2.25
|
|
|
|
|
$
|
(1.28)
|
|
|
|
|
$
|
3.53
|
|
|
NM
|
NM - Not meaningful
GAAP to Non-GAAP Reconciliation
The Company’s reported results are presented in accordance with GAAP. The reported results during the first nine months of fiscal 2021 and fiscal 2020 reflect the impact of the costs attributable to the CARES Act Tax Impact, the Acceleration Program, Impairment charges, ERP system implementation efforts and Organization-related and Integration costs, as noted in the following tables. Refer to "Non-GAAP Measures" herein for further discussion on the Non-GAAP measures.
First Nine Months of Fiscal 2021 Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 27, 2021
|
|
|
|
Items Affecting Comparability
|
|
|
|
GAAP Basis
(As Reported)
|
|
CARES Act Tax Impact
|
|
|
|
Acceleration Program
|
|
Impairment
|
|
Non-GAAP Basis
(Excluding Items)
|
|
(millions, except per share data)
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
Coach
|
2,251.0
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
2,251.0
|
|
Kate Spade
|
547.4
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
547.4
|
|
Stuart Weitzman
|
117.4
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
117.4
|
|
Gross profit(1)
|
$
|
2,915.8
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,915.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A expenses
|
|
|
|
|
|
|
|
|
|
|
|
Coach
|
1,317.6
|
|
|
—
|
|
|
|
|
21.2
|
|
|
20.4
|
|
|
1,276.0
|
|
Kate Spade
|
474.1
|
|
|
—
|
|
|
|
|
4.3
|
|
|
19.3
|
|
|
450.5
|
|
Stuart Weitzman
|
123.0
|
|
|
—
|
|
|
|
|
(1.3)
|
|
|
6.1
|
|
|
118.2
|
|
Corporate
|
292.8
|
|
|
—
|
|
|
|
|
44.5
|
|
|
—
|
|
|
248.3
|
|
SG&A expenses
|
$
|
2,207.5
|
|
|
$
|
—
|
|
|
|
|
$
|
68.7
|
|
|
$
|
45.8
|
|
|
$
|
2,093.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
Coach
|
933.4
|
|
|
—
|
|
|
|
|
(21.2)
|
|
|
(20.4)
|
|
|
975.0
|
|
Kate Spade
|
73.3
|
|
|
—
|
|
|
|
|
(4.3)
|
|
|
(19.3)
|
|
|
96.9
|
|
Stuart Weitzman
|
(5.6)
|
|
|
—
|
|
|
|
|
1.3
|
|
|
(6.1)
|
|
|
(0.8)
|
|
Corporate
|
(292.8)
|
|
|
—
|
|
|
|
|
(44.5)
|
|
|
—
|
|
|
(248.3)
|
|
Operating income (loss)
|
$
|
708.3
|
|
|
$
|
—
|
|
|
|
|
$
|
(68.7)
|
|
|
$
|
(45.8)
|
|
|
$
|
822.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
20.7
|
|
|
(95.0)
|
|
|
|
|
(15.4)
|
|
|
(9.8)
|
|
|
140.9
|
|
Net income (loss)
|
$
|
634.4
|
|
|
$
|
95.0
|
|
|
|
|
$
|
(53.3)
|
|
|
$
|
(36.0)
|
|
|
$
|
628.7
|
|
Net income (loss) per diluted common share
|
$
|
2.25
|
|
|
$
|
0.27
|
|
|
|
|
$
|
(0.15)
|
|
|
$
|
(0.10)
|
|
|
$
|
2.23
|
|
(1)Adjustments within Gross profit are recorded within Cost of sales.
In the first nine months of fiscal 2021 the Company incurred charges as follows:
•CARES Act Tax Impact - Total amount relates to the income tax benefits under the CARES Act, most notably the Net Operating Loss ("NOL") carryback claim. Refer to Note 15, "Income Taxes" for further information.
•Acceleration Program - Total charges incurred under the Acceleration Program are primarily professional fees incurred as a result of the development and execution of the Company's comprehensive strategic initiatives, as well as actions to streamline the Company's organization, which include severance. Refer to the "Executive Overview" herein and Note 6, "Restructuring Activities," for further information.
•Impairment - Total charges are primarily due to impairment charges on lease ROU assets. Refer to the "Executive Overview" herein and Note 13, "Fair Value Measurements," for further information.
These actions taken together increased the Company's SG&A expenses by $114.5 million and decreased Provision for income taxes by $120.2 million, positively impacting Net income by $5.7 million or $0.02 per diluted share.
First Nine Months of Fiscal 2020 Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 28, 2020
|
|
|
|
Items Affecting Comparability
|
|
|
|
GAAP Basis
(As Reported)
|
|
ERP Implementation
|
|
|
|
Organization-related & Integration costs
|
|
Impairment
|
|
Non-GAAP Basis
(Excluding Items)
|
|
(millions, except per share data)
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
Coach
|
2,030.6
|
|
|
—
|
|
|
|
|
(0.1)
|
|
|
(61.9)
|
|
|
2,092.6
|
|
Kate Spade
|
576.4
|
|
|
—
|
|
|
|
|
(1.2)
|
|
|
(32.3)
|
|
|
609.9
|
|
Stuart Weitzman
|
133.4
|
|
|
—
|
|
|
|
|
(4.3)
|
|
|
(9.8)
|
|
|
147.5
|
|
Gross profit(1)
|
$
|
2,740.4
|
|
|
$
|
—
|
|
|
|
|
$
|
(5.6)
|
|
|
$
|
(104.0)
|
|
|
$
|
2,850.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A expenses
|
|
|
|
|
|
|
|
|
|
|
|
Coach
|
1,410.2
|
|
|
—
|
|
|
|
|
(0.1)
|
|
|
57.9
|
|
|
1,352.4
|
|
Kate Spade
|
607.0
|
|
|
—
|
|
|
|
|
1.1
|
|
|
66.7
|
|
|
539.2
|
|
Stuart Weitzman
|
673.8
|
|
|
—
|
|
|
|
|
(1.9)
|
|
|
494.7
|
|
|
181.0
|
|
Corporate
|
320.2
|
|
|
23.6
|
|
|
|
|
27.4
|
|
|
—
|
|
|
269.2
|
|
SG&A expenses
|
$
|
3,011.2
|
|
|
$
|
23.6
|
|
|
|
|
$
|
26.5
|
|
|
$
|
619.3
|
|
|
$
|
2,341.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
Coach
|
620.4
|
|
|
—
|
|
|
|
|
—
|
|
|
(119.8)
|
|
|
740.2
|
|
Kate Spade
|
(30.6)
|
|
|
—
|
|
|
|
|
(2.3)
|
|
|
(99.0)
|
|
|
70.7
|
|
Stuart Weitzman
|
(540.4)
|
|
|
—
|
|
|
|
|
(2.4)
|
|
|
(504.5)
|
|
|
(33.5)
|
|
Corporate
|
(320.2)
|
|
|
(23.6)
|
|
|
|
|
(27.4)
|
|
|
—
|
|
|
(269.2)
|
|
Operating income (loss)
|
$
|
(270.8)
|
|
|
$
|
(23.6)
|
|
|
|
|
$
|
(32.1)
|
|
|
$
|
(723.3)
|
|
|
$
|
508.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
34.9
|
|
|
(5.7)
|
|
|
|
|
(11.9)
|
|
|
(61.5)
|
|
|
114.0
|
|
Net income (loss)
|
$
|
(358.3)
|
|
|
$
|
(17.9)
|
|
|
|
|
$
|
(20.2)
|
|
|
$
|
(661.8)
|
|
|
$
|
341.6
|
|
Net income (loss) per diluted common share
|
$
|
(1.28)
|
|
|
$
|
(0.06)
|
|
|
|
|
$
|
(0.07)
|
|
|
$
|
(2.37)
|
|
|
$
|
1.22
|
|
(1)Adjustments within Gross profit are recorded within Cost of sales.
In the first nine months of fiscal 2020, the Company incurred charges as follows:
•ERP Implementation - Total charges represent technology implementation costs.
•Organization-related and Integration costs - Total charges represent organization-related costs as a result of the departure of the Company's former CEO in September 2019 and integration costs related to inventory, professional fees and share-based compensation. Refer to Note 5, "Integration," for more information regarding integration costs.
•Impairment - Total charges are primarily due to impairment charges on the indefinite-lived brand intangible asset and goodwill for Stuart Weitzman, impairment charges on property and equipment assets and lease ROU assets, as well as increases in inventory reserves. Refer to Note 7, "Goodwill and Other Intangible Assets," Note 13, "Fair Value Measurements," and Note 17, "Segment Information," for further information.
These actions taken together increased the Company's Cost of sales by $109.6 million, increased SG&A expenses by $669.4 million and decreased Provision for income taxes by $79.1 million, negatively impacting Net income by $699.9 million or $2.50 per diluted share.
Tapestry, Inc. Summary – First Nine Months of Fiscal 2021
Currency Fluctuation Effects
The change in net sales and gross margin for the first nine months of fiscal 2021 compared to fiscal 2020 has been presented both including and excluding currency fluctuation effects.
Net Sales
The Company has provided comparisons to certain fiscal year 2019 results, which the Company believes is useful to investors and others in evaluating the Company’s results, due to the significant impact of the Covid-19 pandemic on the Company’s operations and financial results, notably in the second half of fiscal year 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Variance
|
|
|
|
|
|
March 27,
2021
|
|
March 28,
2020
|
|
Amount
|
|
%
|
|
Constant Currency Change
|
|
% Change versus FY19
|
|
(millions)
|
|
|
|
|
Coach
|
$
|
3,064.2
|
|
|
$
|
3,008.3
|
|
|
$
|
55.9
|
|
|
1.9
|
%
|
|
0.4
|
%
|
|
(3.5)
|
%
|
Kate Spade
|
868.4
|
|
|
985.4
|
|
|
(117.0)
|
|
|
(11.9)
|
|
|
(12.4)
|
|
|
(16.1)
|
|
Stuart Weitzman
|
198.3
|
|
|
252.9
|
|
|
(54.6)
|
|
|
(21.6)
|
|
|
(23.1)
|
|
|
(34.8)
|
|
Total Tapestry
|
$
|
4,130.9
|
|
|
$
|
4,246.6
|
|
|
$
|
(115.7)
|
|
|
(2.7)
|
|
|
(4.0)
|
|
|
(8.5)
|
|
Net sales in the first nine months of fiscal 2021 decreased 2.7% or $115.7 million to $4.13 billion. Excluding the effects of foreign currency, net sales decreased by 4.0% or $169.6 million.
•Coach Net Sales increased 1.9% or $55.9 million to $3.06 billion in the first nine months of fiscal 2021. Excluding the impact of foreign currency, net sales increased 0.4% or $10.8 million. This increase in net sales is primarily attributed to a net increase of $5.7 million in net global retail sales driven by higher global e-commerce sales and store sales in mainland China, partially offset by lower store sales in North America, Other Asia, including Japan, and Europe, due to the impact of Covid-19. This increase in net sales is also partially attributed to a $3.1 million increase in wholesale sales.
•Kate Spade Net Sales decreased 11.9% or $117.0 million to $868.4 million in the first nine months of fiscal 2021. Excluding the impact of foreign currency, net sales decreased 12.4% or $121.9 million. This decrease in net sales is driven by a decline of $54.8 million in net global retail sales driven by lower store sales, primarily in North America, due to the impact of the Covid-19, partially offset by an increase in global e-commerce sales. Wholesale sales also declined $65.8 million, primarily due to a strategic pullback in disposition and lower demand as a result of the Covid-19 outbreak.
•Stuart Weitzman Net Sales decreased 21.6% or $54.6 million to $198.3 million in the first nine months of fiscal 2021. Excluding the impact of foreign currency, net sales decreased 23.1% or $58.6 million. This decrease was primarily due to a net decline of $33.7 million in the retail business, which is attributed to store closures related to fleet optimization under the Acceleration Program, as well as a decline in demand as a result of Covid-19. Additionally, wholesale sales decreased $24.9 million, which is primarily due to a decline in demand as a result of Covid-19.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
March 27, 2021
|
|
March 28, 2020
|
|
Variance
|
|
(millions)
|
|
Amount
|
|
% of Net Sales
|
|
Amount
|
|
% of Net Sales
|
|
Amount
|
|
%
|
Coach
|
$
|
2,251.0
|
|
|
73.5
|
%
|
|
$
|
2,030.6
|
|
|
67.5
|
%
|
|
$
|
220.4
|
|
|
10.8
|
%
|
Kate Spade
|
547.4
|
|
|
63.0
|
|
|
576.4
|
|
|
58.5
|
|
|
(29.0)
|
|
|
(5.0)
|
|
Stuart Weitzman
|
117.4
|
|
|
59.2
|
|
|
133.4
|
|
|
52.7
|
|
|
(16.0)
|
|
|
(12.0)
|
|
Tapestry
|
$
|
2,915.8
|
|
|
70.6
|
|
|
$
|
2,740.4
|
|
|
64.5
|
|
|
$
|
175.4
|
|
|
6.4
|
|
Gross profit increased 6.4% or $175.4 million to $2.92 billion during the first nine months of fiscal 2021 from $2.74 billion in the first nine months of fiscal 2020. Gross margin for the first nine months of fiscal 2021 was 70.6% as compared to 64.5% in the first nine months of fiscal 2020. Excluding items affecting comparability of $109.6 million in the first nine months of fiscal 2020, as discussed in the "GAAP to Non-GAAP Reconciliation" herein, gross profit increased 2.3% or $65.8 million to $2.92 billion in the first nine months of fiscal 2021, and gross margin increased to 70.6% from 67.1% in the first nine months of fiscal 2020, and on a constant currency basis, gross margin increased 340 basis points from the first nine months of fiscal 2020.
The Company includes inbound product-related transportation costs from our service providers within Cost of sales. The Company, similar to some companies, includes certain transportation-related costs due to our distribution network in SG&A expenses rather than in Cost of sales; for this reason, our gross margins may not be comparable to that of entities that include all costs related to their distribution network in Cost of sales.
•Coach Gross Profit increased 10.8% or $220.4 million to $2.25 billion in the first nine months of fiscal 2021 from $2.03 billion in the first nine months of fiscal 2020. Gross margin increased 600 basis points to 73.5% in the first nine months of fiscal 2021 from 67.5% in the first nine months of fiscal 2020. Excluding items affecting comparability of $62.0 million in the first nine months of fiscal 2020, Coach gross profit increased 7.6% or $158.4 million to $2.25 billion in the first nine months of fiscal 2021 from $2.09 billion in the first nine months of fiscal 2020. Excluding items affecting comparability, gross margin increased 390 basis points to 73.5% from 69.6% in the first nine months of fiscal 2020, and was not materially impacted by foreign currency. This increase in gross margin is primarily attributed to reduced promotional activity.
•Kate Spade Gross Profit decreased 5.0% or $29.0 million to $547.4 million in the first nine months of fiscal 2021 from $576.4 million in the first nine months of fiscal 2020. Gross margin increased 450 basis points to 63.0% in the first nine months of fiscal 2021 from 58.5% in the first nine months of fiscal 2020. Excluding items affecting comparability of $33.5 million in the first nine months of fiscal 2020, Kate Spade gross profit decreased 10.2% or $62.5 million to $547.4 million in the first nine months of fiscal 2021 from $609.9 million in the first nine months of fiscal 2020. Excluding items affecting comparability, gross margin increased 110 basis points to 63.0% from 61.9% in the first nine months of fiscal 2020, and was not materially impacted by foreign currency. This increase in gross margin was primarily due to favorable channel mix including a strategic pullback in disposition and reduced promotional activity, which was partially offset by the impact of directly operating the footwear business.
•Stuart Weitzman Gross Profit decreased 12.0% or $16.0 million to $117.4 million during the first nine months of fiscal 2021 from $133.4 million in the first nine months of fiscal 2020. Gross margin increased 650 basis points to 59.2% in the first nine months of fiscal 2021 from 52.7% in the first nine months of fiscal 2020. Excluding items affecting comparability of $14.1 million in the first nine months of fiscal 2020, Stuart Weitzman gross profit decreased 20.4% or $30.1 million to $117.4 million in the first nine months of fiscal 2021 compared to $147.5 million in the first nine months of fiscal 2020, and gross margin increased 90 basis points to 59.2% from 58.3% in the first nine months of fiscal 2020. On a constant currency basis, gross margin decreased 110 basis points. This decrease in gross margin was primarily attributed to increased promotional activity partially offset by channel mix.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
March 27, 2021
|
|
March 28, 2020
|
|
Variance
|
|
(millions)
|
|
Amount
|
|
% of Net Sales
|
|
Amount
|
|
% of Net Sales
|
|
Amount
|
|
%
|
Coach
|
$
|
1,317.6
|
|
|
43.0
|
%
|
|
$
|
1,410.2
|
|
|
46.9
|
%
|
|
$
|
(92.6)
|
|
|
(6.6)
|
%
|
Kate Spade
|
474.1
|
|
|
54.6
|
|
|
607.0
|
|
|
61.6
|
|
|
(132.9)
|
|
|
(21.9)
|
|
Stuart Weitzman
|
123.0
|
|
|
62.0
|
|
|
673.8
|
|
|
NM
|
|
(550.8)
|
|
|
(81.7)
|
|
Corporate
|
292.8
|
|
|
NA
|
|
320.2
|
|
|
NA
|
|
(27.4)
|
|
|
(8.5)
|
|
Tapestry
|
$
|
2,207.5
|
|
|
53.4
|
|
|
$
|
3,011.2
|
|
|
70.9
|
|
|
$
|
(803.7)
|
|
|
(26.7)
|
|
SG&A expenses decreased 26.7% or $803.7 million to $2.21 billion in the first nine months of fiscal 2021 as compared to $3.01 billion in the first nine months of fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 53.4% during the first nine months of fiscal 2021 as compared to 70.9% during the first nine months of fiscal 2020. Excluding items affecting comparability of $114.5 million and $669.4 million in the first nine months of fiscal 2021 and 2020, respectively, SG&A expenses decreased 10.6% or $248.8 million from the first nine months of fiscal 2020. Excluding items affecting comparability, SG&A expenses as a percentage of net sales decreased to 50.7% in the first nine months of fiscal 2021 from 55.1% in the first nine months of fiscal 2020. This decrease in SG&A expenses includes actions taken as part of the Acceleration Program as well as benefits from wage subsidies and rent concessions, partially offset by an increase in accrued Annual Incentive Plan expenses.
•Coach SG&A Expenses decreased 6.6% or $92.6 million to $1.32 billion in the first nine months of fiscal 2021 as compared to $1.41 billion in the first nine months of fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 43.0% during the first nine months of fiscal 2021 as compared to 46.9% during the first nine months of fiscal 2020. Excluding items affecting comparability of $41.6 million and $57.8 million in the first nine months of fiscal 2021 and fiscal 2020, respectively, SG&A expenses decreased 5.6% or $76.4 million to $1.28 billion in the first nine months of fiscal 2021; and SG&A expenses as a percentage of net sales decreased to 41.6% in the first nine months of fiscal 2021 from 45.0% in the first nine months of fiscal 2020. This decrease in SG&A expenses was primarily due to a decline in compensation costs, occupancy costs and depreciation expense, partially offset by an increase in digital marketing spend and e-commerce related operational and selling costs in support of higher e-commerce sales.
•Kate Spade SG&A Expenses decreased 21.9% or $132.9 million to $474.1 million in the first nine months of fiscal 2021 from $607.0 million in the first nine months of fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 54.6% during the first nine months of fiscal 2021 as compared to 61.6% during the first nine months of fiscal 2020. Excluding items affecting comparability of $23.6 million and $67.8 million in the first nine months of fiscal 2021 and 2020, respectively, SG&A expenses decreased 16.4% or $88.7 million to $450.5 million in the first nine months of fiscal 2021; and SG&A expenses as a percentage of net sales decreased to 51.9% in the first nine months of fiscal 2021 from 54.7% in the first nine months of fiscal 2020. This decrease in SG&A expenses was due to a decline in compensation costs, occupancy costs and depreciation expense, partially offset by an increase in digital marketing spend and e-commerce related operational and selling costs in support of higher e-commerce sales.
•Stuart Weitzman SG&A Expenses decreased 81.7% or $550.8 million to $123.0 million in the first nine months of fiscal 2021 as compared to $673.8 million in the first nine months of fiscal 2020. As a percentage of net sales, SG&A expenses was 62.0% during the first nine months of fiscal 2021. Excluding items affecting comparability of $4.8 million and $492.8 million in the first nine months of fiscal 2021 and 2020, respectively, SG&A expenses decreased 34.7% or $62.8 million to $118.2 million in the first nine months of fiscal 2021; and SG&A expenses as a percentage of net sales decreased to 59.7% in the first nine months of fiscal 2021. This decrease in SG&A expenses is primarily due to a decline in occupancy and compensation costs mainly as a result of fleet optimization under the Acceleration Program, higher bad debt reserves in prior year due to Covid-19, as well as declines in marketing spend.
•Corporate expenses, which are included within SG&A expenses discussed above but are not directly attributable to a reportable segment, decreased 8.5% or $27.4 million to $292.8 million in the first nine months of fiscal 2021 as compared to $320.2 million in the first nine months of fiscal 2020. Excluding items affecting comparability of $44.5 million and $51.0 million in the first nine months of fiscal 2021 and 2020, respectively, SG&A expenses decreased by 7.8% or $20.9 million to $248.3 million in the first nine months of fiscal 2021 as compared to $269.2 million in the first nine months of fiscal 2020. This decrease in corporate expenses is due to a gain realized on the sale of our corporate office in Hong Kong, a gain realized on the deferred purchase price of the Kate Spade joint venture and lower variable occupancy cost, partially offset by an increase in accrued Annual Incentive Plan expenses.
Operating Income (Loss)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
March 27, 2021
|
|
March 28, 2020
|
|
Variance
|
|
(millions)
|
|
Amount
|
|
% of Net Sales
|
|
Amount
|
|
% of Net Sales
|
|
Amount
|
|
%
|
Coach
|
$
|
933.4
|
|
|
30.5
|
%
|
|
$
|
620.4
|
|
|
20.6
|
%
|
|
$
|
313.0
|
|
|
50.4
|
%
|
Kate Spade
|
73.3
|
|
|
8.4
|
|
|
(30.6)
|
|
|
(3.1)
|
|
|
103.9
|
|
|
NM
|
Stuart Weitzman
|
(5.6)
|
|
|
(2.8)
|
|
|
(540.4)
|
|
|
NM
|
|
534.8
|
|
|
99.0
|
|
Corporate
|
(292.8)
|
|
|
NA
|
|
(320.2)
|
|
|
NA
|
|
27.4
|
|
|
8.5
|
|
Tapestry
|
$
|
708.3
|
|
|
17.1
|
|
|
$
|
(270.8)
|
|
|
(6.4)
|
|
|
$
|
979.1
|
|
|
NM
|
Operating income increased $979.1 million to $708.3 million in the first nine months of fiscal 2021 as compared to operating loss of $270.8 million in the first nine months of fiscal 2020. Operating margin was 17.1% in the first nine months of fiscal 2021 as compared to (6.4)% in the first nine months of fiscal 2020. Excluding items affecting comparability of $114.5 million and $779.0 million in the first nine months of fiscal 2021 and fiscal 2020, respectively, operating income increased $314.6 million to $822.8 million from $508.2 million in the first nine months of fiscal 2020; and operating margin was 19.9% in the first nine months of fiscal 2021 as compared to 12.0% in the first nine months of fiscal 2020.
•Coach Operating Income increased 50.4% or $313.0 million to $933.4 million in the first nine months of fiscal 2021, resulting in an operating margin of 30.5%, as compared to $620.4 million and 20.6%, respectively, in the first nine months of fiscal 2020. Excluding items affecting comparability, Coach operating income increased 31.7% or $234.8 million to $975.0 million from $740.2 million in the first nine months of fiscal 2020; and operating margin was 31.8% in the first nine months of fiscal 2021 as compared to 24.6% in the first nine months of fiscal 2020. This increase in operating income was due to an increase in gross profit and lower SG&A expense.
•Kate Spade Operating Income increased $103.9 million to $73.3 million in the first nine months of fiscal 2021, resulting in an operating margin of 8.4%, as compared to operating loss of $30.6 million and (3.1)%, respectively, in the first nine months of fiscal 2020. Excluding items affecting comparability, Kate Spade operating income increased $26.2 million to $96.9 million from $70.7 million in the first nine months of fiscal 2020; and operating margin was 11.2% in the first nine months of fiscal 2021 as compared to 7.2% in the first nine months of fiscal 2020. This increase in operating income was due lower SG&A expenses partially offset by a decrease in gross profit.
•Stuart Weitzman Operating Loss decreased 99.0% or $534.8 million to $5.6 million in the first nine months of fiscal 2021, resulting in an operating margin of (2.8)%, as compared to operating loss of $540.4 million in first nine months of fiscal 2020. Excluding items affecting comparability, Stuart Weitzman operating loss decreased 97.5% or $32.7 million to $0.8 million from $33.5 million in the first nine months of fiscal 2020; and operating margin was (0.4)% in the first nine months of fiscal 2021. This decrease in operating loss was due to lower SG&A expenses, partially offset by a decrease in gross profit.
Interest Expense, net
Interest expense, net increased 38.2% or $15.2 million to $55.0 million in the first nine months of fiscal 2021 as compared to $39.8 million in the first nine months of fiscal 2020. This increase in interest expense, net is due to lower interest income and additional interest expense related to the draw down on the Revolving Credit Facility in the fourth quarter of fiscal 2020.
Other Expense (Income)
Other income increased $14.6 million to income of $1.8 million in the first nine months of fiscal 2021 as compared to expense of $12.8 million in the first nine months of fiscal 2020. This increase in other income is related to an increase in foreign exchange gains.
Provision for Income Taxes
The effective tax rate was 3.1% in the first nine months of fiscal 2021 as compared to (10.8)% in the first nine months of fiscal 2020. Excluding items affecting comparability, the effective tax rate was 18.3% in the first nine months of fiscal 2021 as compared to 25.0% in the first nine months of fiscal 2020. This decrease in our effective tax rate was primarily attributable to geographic mix of earnings and the impact of nondeductible expenses on lower pretax operating income in the first nine months of fiscal 2020.
Net Income (Loss)
Net income increased $992.7 million to $634.4 million in the first nine months of fiscal 2021 as compared to net loss of $358.3 million in the first nine months of fiscal 2020. Excluding items affecting comparability, net income increased $287.1 million to $628.7 million in the first nine months of fiscal 2021 as compared to $341.6 million in the first nine months of fiscal 2020. This increase was primarily due to higher operating income.
Net Income (Loss) per Share
Net income per diluted share increased $3.53 to $2.25 in the first nine months of fiscal 2021 as compared to net loss per diluted share of $1.28 in the first nine months of fiscal 2020. Excluding items affecting comparability, net income per diluted share increased $1.01 to $2.23 in the first nine months of fiscal 2021 from $1.22 in the first nine months of fiscal 2020. This change was primarily due to higher net income.
NON-GAAP MEASURES
The Company’s reported results are presented in accordance with GAAP. The reported gross profit, SG&A expenses, operating income, provision for income taxes, net income and earnings per diluted share in the third quarter and the first nine months of fiscal 2021 and fiscal 2020 reflect certain items, including the impact of ERP Implementation and Organization-related and Integration costs in fiscal 2020, Impairment costs in fiscal 2020 and fiscal 2021, and Acceleration Program costs and CARES Act Tax Impact in fiscal 2021. As a supplement to the Company's reported results, these metrics are also reported on a non-GAAP basis to exclude the impact of these items, along with a reconciliation to the most directly comparable GAAP measures.
The Company has historically reported comparable store sales, which reflects sales performance at stores that have been open for at least 12 months, and includes sales from the Internet. The Company excludes new stores, including newly acquired locations, from the comparable store base for the first twelve months of operation. The Company excludes closed stores from the calculation. Comparable store sales are not adjusted for store expansions. Due to the uncertain business environment resulting from the impact of the Covid-19 pandemic, comparable store sales are not reported for the three and nine months ended March 27, 2021 as the Company does not believe this metric is currently meaningful to the readers of its financial statements for this period.
These non-GAAP performance measures were used by management to conduct and evaluate its business during its regular review of operating results for the periods affected. Management and the Company’s Board utilized these non-GAAP measures to make decisions about the uses of Company resources, analyze performance between periods, develop internal projections and measure management performance. The Company’s internal management reporting excluded these items. In addition, the Human Resources Committee of the Company’s Board uses these non-GAAP measures when setting and assessing achievement of incentive compensation goals.
The Company operates on a global basis and reports financial results in U.S. dollars in accordance with GAAP. Fluctuations in foreign currency exchange rates can affect the amounts reported by the Company in U.S. dollars with respect to its foreign revenues and profit. Accordingly, certain material increases and decreases in operating results for the Company and its segments have been presented both including and excluding currency fluctuation effects. These effects occur from translating foreign-denominated amounts into U.S. dollars and comparing to the same period in the prior fiscal year. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. The Company calculates constant currency results by translating current period Net sales and Cost of sales, in local currency using the prior year period's currency conversion rate. The constant currency gross margin results are reported excluding items affecting comparability.
We believe these non-GAAP measures are useful to investors and others in evaluating the Company’s ongoing operating and financial results in a manner that is consistent with management's evaluation of business performance and understanding how such results compare with the Company’s historical performance. Additionally, we believe presenting certain increases and decreases in constant currency provides a framework for assessing the performance of the Company's business outside the United States and helps investors and analysts understand the effect of significant year-over-year currency fluctuations. We believe excluding these items assists investors and others in developing expectations of future performance.
By providing the non-GAAP measures, as a supplement to GAAP information, we believe we are enhancing investors’ understanding of our business and our results of operations. The non-GAAP financial measures are limited in their usefulness and should be considered in addition to, and not in lieu of, GAAP financial measures. Further, these non-GAAP measures may be unique to the Company, as they may be different from non-GAAP measures used by other companies.
For a detailed discussion on these non-GAAP measures, see Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations."
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
March 27,
2021
|
|
March 28,
2020
|
|
Change
|
|
|
(millions)
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
944.6
|
|
|
$
|
446.1
|
|
|
$
|
498.5
|
|
Net cash used in investing activities
|
|
(43.6)
|
|
|
(69.2)
|
|
|
25.6
|
|
Net cash used in financing activities
|
|
(688.6)
|
|
|
(603.1)
|
|
|
(85.5)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
13.0
|
|
|
(0.4)
|
|
|
13.4
|
|
Net increase/ (decrease) in cash and cash equivalents
|
|
$
|
225.4
|
|
|
$
|
(226.6)
|
|
|
$
|
452.0
|
|
The Company’s cash and cash equivalents increased by $225.4 million in the first nine months of fiscal 2021 as compared to a decrease of $226.6 million in the first nine months of fiscal 2020, as discussed below.
Net cash provided by (used in) operating activities
Net cash provided by operating activities increased $498.5 million due to higher net income of $992.7 million and changes in operating assets and liabilities of $345.9 million, partially off by the impact of non-cash adjustments of $840.1 million.
The $345.9 million increase in changes in operating asset and liability balances were primarily driven by the following:
•Accounts payable were a source of cash of $275.0 million in the first nine months of fiscal 2021 compared to a use of cash of $18.5 million in the first nine months of fiscal 2020, primarily due to the extension of payment terms to certain vendors in addition to higher inventory in transit compared to the prior period.
•Inventories were a source of cash of $63.9 million in the first nine months of fiscal 2021 compared to a use of cash of $171.6 million in the first nine months of fiscal 2020, primarily driven by higher than expected sales, more disciplined inventory management and actions taken to exit certain markets.
•Accrued liabilities were a source of cash of $7.6 million in the first nine months of fiscal 2021 compared to a use of cash of $31.2 million in the first nine months of fiscal 2020, primarily attributed to increased accruals for Annual Incentive Plan payments compared to the prior period and the timing of payments related to other taxes.
•Other liabilities were a use of cash of $10.2 million in the first nine months of fiscal 2021 compared to a use of cash of $37.6 million in the first nine months of fiscal 2020, primarily due to the timing of tax payments.
•Other assets were a use of cash of $105.7 million in the first nine months of fiscal 2021 compared to a source of cash of $19.1 million in the first nine months of fiscal 2020, primarily related to an increase in income tax receivable primarily due to the NOL carryback claim under the CARES Act.
•Trade accounts receivable were a use of cash of $49.3 million in the first nine months of fiscal 2021 compared to a source of cash of $75.2 million in the first nine months of fiscal 2020, primarily driven by a lower balance in the fourth quarter of fiscal 2020 due to impacts from Covid-19.
Net cash used in investing activities
Net cash used in investing activities in the first nine months of fiscal 2021 was $43.6 million as compared to a use of cash of $69.2 million in the first nine months of fiscal 2020, resulting in a $25.6 million decrease in net cash used in investing activities.
The $43.6 million use of cash in the first nine months of fiscal 2021 is primarily due to capital expenditures of $68.9 million partially offset by proceeds from the sale of building of $23.9 million.
The $69.2 million use of cash in the first nine months of fiscal 2020 is primarily due to cash used for purchases of investments of $212.4 million in the nine months of fiscal 2020 and capital expenditures of $172.9 million, partially offset by proceeds from maturities and sales of investments of $316.1 million.
Net cash used in financing activities
Net cash used in financing activities was $688.6 million in the first nine months of fiscal 2021 as compared to a use of cash of $603.1 million in the first nine months of fiscal 2020, resulting in a net increase in use of cash for financing activities of $85.5 million.
The $688.6 million of cash used in the first nine months of fiscal 2021 was primarily due to repayments on the revolving credit facility of $700.0 million and note payable of $11.5 million, partially offset by proceeds from share-based awards of $37.8 million.
The $603.1 million use of cash in the first nine months of fiscal 2020 was primarily due to repurchases of common stock of $300.0 million and dividend payments of $287.1 million.
Working Capital and Capital Expenditures
As of March 27, 2021, in addition to our cash flows from operations, our sources of liquidity and capital resources were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sources of Liquidity
|
|
Outstanding Indebtedness
|
|
Total Available Liquidity(1)
|
|
(millions)
|
Cash and cash equivalents(1)
|
$
|
1,651.7
|
|
|
$
|
—
|
|
|
$
|
1,651.7
|
|
Short-term investments(1)
|
7.5
|
|
|
—
|
|
|
7.5
|
|
|
|
|
|
|
|
Revolving Credit Facility(2)
|
900.0
|
|
|
—
|
|
|
900.0
|
|
|
|
|
|
|
|
3.000% Senior Notes due 2022(3)
|
400.0
|
|
|
400.0
|
|
|
—
|
|
4.250% Senior Notes due 2025(3)
|
600.0
|
|
|
600.0
|
|
|
—
|
|
4.125% Senior Notes due 2027(3)
|
600.0
|
|
|
600.0
|
|
|
—
|
|
|
|
|
|
|
|
Total
|
$
|
4,159.2
|
|
|
$
|
1,600.0
|
|
|
$
|
2,559.2
|
|
(1) As of March 27, 2021, approximately 39% of our cash and short-term investments were held outside the United States. The Company will likely repatriate some portion of available foreign cash in the foreseeable future, and has recorded deferred taxes on certain earnings of non-US subsidiaries that are deemed likely to be repatriated.
(2) In October 2019, the Company entered into a definitive credit agreement whereby Bank of America, N.A., as administrative agent, the other agents party thereto, and a syndicate of banks and financial institutions have made available to the Company a $900.0 million revolving credit facility, including sub-facilities for letters of credit, with a maturity date of October 24, 2024 (the "Revolving Credit Facility"). Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to, at the Borrowers’ option, either (a) an alternate base rate (which is a rate equal to the greatest of (i) the Prime Rate in effect on such day, (ii) the Federal Funds Effective Rate in effect on such day plus ½ of 1% or (iii) the Adjusted LIBO Rate for a one month Interest Period on such day plus 1%) or (b) a rate based on the rates applicable for deposits in the interbank market for U.S. Dollars or the applicable currency in which the loans are made plus, in each case, an applicable margin. The applicable margin will be determined by reference to a grid, defined in the Credit Agreement, based on the ratio of (a) consolidated debt plus operating lease liability to (b) consolidated EBITDAR. Additionally, the Company pays a commitment fee at a rate determined by the reference to the aforementioned pricing grid. On May 19, 2020, the Company entered into Amendment No. 1 (the “Amendment”) to the Revolving Credit Facility. Under the terms of the Amendment, during the period from the Effective Date until October 2, 2021, the Company must maintain available liquidity of $700 million (with available liquidity defined as the sum of unrestricted cash and cash equivalents and available commitments under credit facilities, including the Revolving Credit Facility). Following the period from the Effective Date until the compliance certificate is delivered for the fiscal quarter ending July 3, 2021 (the “Covenant Relief Period”), the Company must comply on a quarterly basis with a maximum net leverage ratio of 4.0 to 1.0. In addition, the Amendment provides that during the Covenant Relief Period, if any two of the Company’s three credit ratings are non-investment grade, the Revolving Credit Facility will be guaranteed by the Company’s material domestic subsidiaries and will be subject to liens on accounts receivable, inventory and intellectual property, in each case subject to customary exceptions. The Amendment also contains negative covenants that limit the ability of the Company and its subsidiaries to, among other things, incur certain debt, incur certain liens, dispose of assets, make investments, loans or advances, and engage in share buybacks during the Covenant Relief Period. An increased interest rate will be applicable during the Covenant Relief Period when the Company’s gross leverage ratio exceeds 4.0 to 1.0. The $900 million aggregate commitment amount under the revolving credit facility remains unchanged. As of March 27, 2021, there were no borrowings outstanding under the Revolving Credit Facility. Refer to Note 12, "Debt," for further information on our existing debt instruments.
(3) In March 2015, the Company issued $600.0 million aggregate principal amount of 4.250% senior unsecured notes due April 1, 2025 at 99.445% of par (the “2025 Senior Notes”). Furthermore, in June 2017, the Company issued $400.0 million aggregate principal amount of 3.000% senior unsecured notes due July 15, 2022 at 99.505% of par (the "2022 Senior
Notes"), and $600.0 million aggregate principal amount of 4.125% senior unsecured notes due July 15, 2027 at 99.858% of par (the "2027 Senior Notes"). Furthermore, the indentures for the 2025 Senior Notes, 2022 Senior Notes and 2027 Senior Notes contain certain covenants limiting the Company’s ability to: (i) create certain liens, (ii) enter into certain sale and leaseback transactions and (iii) merge, or consolidate or transfer, sell or lease all or substantially all of the Company’s assets. As of March 27, 2021, no known events of default have occurred. Refer to Note 12, "Debt," for further information on our existing debt instruments.
We believe that our Revolving Credit Facility is adequately diversified with no undue concentrations in any one financial institution. As of March 27, 2021, there were 12 financial institutions participating in the Revolving Credit Facility, with no one participant maintaining a combined maximum commitment percentage in excess of 14%.
We have the ability to draw on our credit facilities or access other sources of financing options available to us in the credit and capital markets for, among other things, acquisition or integration-related costs, our restructuring initiatives, settlement of a material contingency, or a material adverse business or macroeconomic development, as well as for other general corporate business purposes.
Management believes that cash flows from operations, access to the credit and capital markets and our credit lines, on-hand cash and cash equivalents and our investments will provide adequate funds to support our operating, capital, and debt service requirements for the remainder of fiscal 2021 and beyond. There can be no assurance that any such capital will be available to the Company on acceptable terms or at all. Our ability to fund working capital needs, planned capital expenditures, and scheduled debt payments, as well as to comply with all of the financial covenants under our debt agreements, depends on future operating performance and cash flow. This future operating performance and cash flow are subject to prevailing economic conditions, which is uncertain as a result of Covid-19, and to financial, business and other factors, some of which are beyond the Company's control.
Reference should be made to our most recent Annual Report on Form 10-K and other filings with the SEC for additional information regarding liquidity and capital resources. The Company expects total fiscal 2021 capital expenditures to be approximately $100 million.
Seasonality
The Company's results are typically affected by seasonal trends. During the first fiscal quarter, we build inventory for the holiday selling season. In the second fiscal quarter, working capital requirements are reduced substantially as we generate higher net sales and operating income, especially during the holiday months of November and December. Accordingly, the Company’s net sales, operating income and operating cash flows for the three months ended March 27, 2021 are not necessarily indicative of that expected for the full fiscal 2021. However, fluctuations in net sales, operating income and operating cash flows of the Company in any fiscal quarter may be affected by the timing of wholesale shipments and other events affecting retail sales, including adverse weather conditions or other macroeconomic events.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's significant accounting policies are described in Note 3 to the audited consolidated financial statements in our Annual Report on Form 10-K for fiscal 2020. Our discussion of results of operations and financial condition relies on our condensed consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates which are subject to varying degrees of uncertainty. While we believe that these accounting policies are based on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts.
For a complete discussion of our critical accounting policies and estimates, see the "Critical Accounting Policies and Estimates" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal 2020. As of March 27, 2021, there have been no material changes to any of the critical accounting policies.
The Company performs its annual impairment assessment of goodwill as well as brand intangibles at the beginning of the fourth quarter of each fiscal year. In all fiscal years, the fair values of our Coach brand reporting units significantly exceeded their respective carrying values. The fair values of the Kate Spade brand reporting unit and indefinite-lived brand as of the fiscal 2020 testing date exceeded their respective carrying values by approximately 13% and 35%, respectively. Several factors could impact the Kate Spade brand's ability to achieve expected future cash flows, including continued economic volatility and potential operational challenges related to the Covid-19 pandemic, the reception of new collections in all channels, the success of international expansion strategies including the direct operation of certain previous distributor and joint venture businesses, the optimization of the store fleet productivity, the impact of promotional activity in department stores, and the simplification of certain corporate overhead structures and other initiatives aimed at increasing profitability of the business. Given the relatively
small excess of fair value over carrying value as noted above, if profitability trends decline from those that are expected it is possible that these assets could be impaired.