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MarketScreener Homepage  >  Equities  >  Nyse  >  Tapestry Inc    TPR

TAPESTRY INC (TPR)
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TAPESTRY : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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08/16/2018 | 10:32pm CEST
The following discussion of the Company's financial condition and results of
operations should be read together with the Company's consolidated financial
statements and notes thereto, 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
The fiscal years ended June 30, 2018 and July 1, 2017 were each 52-week periods,
and the fiscal year ended July 2, 2016 was a 53-week period.
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, the brands
that make up our house give 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.
Prior to fiscal 2018, the Company had three reportable segments: North America
(Coach brand), International (Coach brand) and Stuart Weitzman. Beginning in
fiscal 2018 and as a result of the Kate Spade acquisition, the Company aligned
its reportable segments with the new structure of its business. As a result, 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,

      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, 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 through Stuart Weitzman operated stores, including the Internet,

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.
Fiscal 2019 Strategic Initiatives
The company is focused first and foremost on execution in fiscal 2019. The goal
is to deliver strong revenue and operating income growth in fiscal 2019, while
making the right strategic investments to support our long-term vision.
Specifically, in fiscal 2019, the Company intends to:
• Capture the full benefit of multi-brand structure and synergies


• Fuel brand innovation by accelerating product newness across all brands

• Drive global growth with an emphasis on the Chinese consumer

• Advance our digital and data analytic capabilities



Recent Developments
Stuart Weitzman Production Challenges
During the third quarter of fiscal 2018, Stuart Weitzman results were negatively
impacted by supply chain operational challenges including production delays,
which caused lower than expected sales, as the brand was not prepared for the
level of complexity and new development as it transitions to a new creative
vision. The Company added infrastructure and capacity to support this vision
with quality and on-time deliveries. The Company expects to experience some
negative impacts through the Fall/Winter Season in fiscal 2019.
Impact of Tax Legislation
On December 22, 2017, H.R.1, formerly known as the Tax Cuts and Jobs Act (the
"Tax Legislation") was enacted. The Tax Legislation significantly revises the
U.S. tax code by (i) lowering the U.S. federal statutory income tax rate from
35% to 21%, (ii) implementing a territorial tax system, (iii) imposing a
one-time transition tax on deemed repatriated earnings of foreign subsidiaries
("Transition Tax"), (iv) requiring current inclusion of global intangible low
taxed income ("GILTI") of certain earnings of controlled foreign corporations in
U.S. federal taxable income, (v) creating the base erosion anti-abuse tax
("BEAT"),

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(vi) implementing bonus depreciation that will allow for full expensing of
qualified property, (vii) enacting a beneficial rate to be applied against
Foreign Derived Intangible Income ("FDII") and (viii) limiting deductibility of
interest and executive compensation expense, among other changes. Notable
changes include the following:
•      The Company expects to receive the full benefit of the rate reduction in

fiscal 2019, as compared with the partial rate reduction during fiscal

2018 based on the pro-rated number of days the new rate applied in fiscal

2018. In the current year, the U.S federal statutory income tax rate was

approximately 28%, which is expected to decline to 21% in fiscal 2019.

• Foreign earnings that may exist after December 31, 2017 will generally be

eligible for a 100% dividends received exemption, however companies may be

subject to the alternative BEAT and GILTI tax provisions which could

increase the global effective tax rate. Conversely, Companies may be

eligible for a reduced rate to the extent their earnings qualify as FDII,

which would reduce their global effective tax rate. These tax provisions

are expected to impact the Company in fiscal year 2019. Based on current

facts and circumstances the Company believes that GILTI is the tax

provision most likely to apply. Under GILTI, a portion of the Company's

foreign earnings will be subject to U.S. taxation. To the extent a

company's foreign operations are subject to GILTI and there is an existing

outside basis difference in the Company's foreign investments that exists

within the reporting period, the Company may need to record a deferred tax

liability for some portion of the anticipated additional tax resulting

from future GILTI inclusions. Outside-basis difference is generally

defined as the difference between an entity's financial statement carrying

       amount and the tax basis of the parent's investment in that entity's
       stock. Outside basis differences typically arise from things such as the
       entity earning income, that has yet to be distributed to the parent
       company, or from purchase accounting adjustments not recognized for tax
       purposes. For companies subject to GILTI, the Financial Accounting
       Standards Board ("FASB") has indicated that companies are allowed to
       record tax associated with GILTI as a period cost in the period the
       earnings are included on the U.S. tax return. The Company has chosen to
       adopt this policy.


•      The Tax Legislation includes, what many believe, is an unintended
       consequence that results in certain leasehold improvements, being
       ineligible for bonus depreciation. The Company has estimated fiscal year
       2018 depreciation expense based on how the law was drafted, with no
       consideration of the perceived legislative intent. The Company has
       estimated its capital expenditures by class to estimate depreciation
       expense for purposes of calculating the rate change adjustment of our

deferred tax balance. If Tax Legislation for QIP is adjusted in fiscal

       2019 or beyond, it will impact the rate change adjustment, which in turn
       will impact the Company's estimated annual effective tax rate in the year
       the legislation is revised.

• At this time, it is unknown whether certain states in which the Company

       operates will conform to the Tax Legislation or adopt an alternative
       regime. The Company continues to monitor developments; at this time all
       material aspects of its provision for income tax for the fiscal year ended

June 30, 2018 are recorded based on recent guidance or its historical

       approach to state tax expense.


•      Other provisions of the new legislation that are not applicable to the

Company until fiscal 2019 include, but are not limited to, the provisions

limiting deductibility of interest and executive compensation expense.

Based on current facts and circumstances, we do not anticipate the impact

of these provisions to be material to the overall financial statements.



Integration and Acquisition Costs
During the first quarter of fiscal 2018, the Company completed its acquisition
of Kate Spade & Company. During the third quarter of fiscal 2018, the Company
completed its acquisition of certain distributors for the Coach and Stuart
Weitzman brands and obtained operational control of the Kate Spade Joint
Ventures. The operating results of the respective entities have been
consolidated in the Company's operating results commencing on the date of each
acquisition. As a result, the Company incurred charges related to the
integration and acquisition of the businesses. These charges are primarily
associated with purchase price accounting adjustments, acquisition costs,
inventory-related charges, contractual payments and organization-related
expenses. The Company currently estimates that it will incur approximately
$50-60 million in pre-tax charges, of which approximately $5-10 million are
expected to be non-cash charges, in fiscal 2019. Refer to Note 4, "Integration
and Acquisition Costs," and "GAAP to Non-GAAP Reconciliation," herein, for
further information.
Strategic Repositioning of Coach Brand in North America Department Stores
In the beginning of fiscal 2017, the Company implemented a deliberate and
strategic decision to elevate Coach's positioning in the channel by limiting
participation in promotional events and closing approximately 25% of its
wholesale doors during fiscal 2017.
Operational Efficiency Plan
During the fourth quarter of fiscal 2016, the Company announced a series of
operational efficiency initiatives focused on creating an agile and scalable
business model (the "Operational Efficiency Plan"). The significant majority of
the charges under

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this plan were recorded within SG&A expense. These charges were associated with
organizational efficiencies, primarily related to the reduction of corporate
staffing levels globally, as well as accelerated depreciation, mainly associated
with information systems retirement, technology infrastructure charges related
to the initial costs of replacing and updating our core technology platforms,
and international supply chain and office location optimization. The Company
incurred charges life to date of $87.4 million. The plan was completed in fiscal
2018.
Refer to Note 5, "Restructuring Activities," and "GAAP to Non-GAAP
Reconciliation," herein, for further information.
Transformation Plan
During the fourth quarter of fiscal 2014, the Company announced a multi-year
strategic plan with the objective of transforming the Coach brand and
reinvigorating growth (the "Transformation Plan"). Key operational and cost
measures of the Transformation Plan included: (i) the investment in capital
improvements in our stores and wholesale locations to drive comparable sales
improvement; (ii) the optimization and streamlining of our organizational model
as well as the closure of underperforming stores in North America, and select
International stores; (iii) the realignment of inventory levels and mix to
reflect our elevated product strategy and consumer preferences; (iv) the
investment in incremental advertising costs to elevate consumer perception of
the Coach brand, drive sales growth and promote our new strategy, which started
in fiscal 2015; and (v) the significant scale-back of our promotional cadence in
an increased global promotional environment, particularly within our outlet
Internet sales site, which began in fiscal 2014. The Company's execution of
these key operational and cost measures was concluded during fiscal 2016, and we
believe that long-term growth will be realized through these transformational
efforts over time.
Refer to Note 5, "Restructuring Activities," and "GAAP to Non-GAAP
Reconciliation," herein, 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.
Global consumer retail traffic trends remain under pressure. This, along with
other factors, has led to a more promotional environment in the fragmented
retail industry due to increased competition and a desire to offset traffic
declines with increased levels of conversion. Further declines in traffic could
result in store impairment charges if expected future cash flows of the related
asset group do not exceed the carrying value.
After strong economic performance in calendar 2017 and the first half of 2018,
including improvements in the labor market as well as modest growth in overall
consumer spending, the U.S. economic outlook has improved and moderate economic
growth is expected to continue in the next year. Several organizations that
monitor the world's economy, including the International Monetary Fund, observed
economic strengthening across the majority of the globe recently and are
projecting continued economic strengthening over the next year, but anticipate
that the growth will be inconsistent among different markets. It is still,
however, too early to understand what kind of sustained impact these trends or
changes in trade agreements and tax legislation will have on consumer
discretionary spending.
Risk of volatility or a worsening of the macroeconomic environment remains due
to political uncertainty and potential changes to international trade
agreements. The Trump Administration recently announced that the U.S. is
beginning the process to impose duties related to Chinese made imported
products. Certain of the Company's offerings are included in this proposal,
however the Company believes that there will be minimal impact given the
diversity of its sourcing activities.
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." On March 29, 2017, the U.K. triggered Article 50 of the Lisbon Treaty
formally starting negotiations with the E.U. The U.K. and E.U. announced in
March 2018 an agreement in principle to transitional provisions under which E.U.
law would remain in force in the U.K. until the end of December 2020, but this
remains subject to the successful conclusion of a final withdrawal agreement
between the parties. In the absence of such an agreement, there would be no
transitional provisions and a "hard" Brexit would occur on March 29, 2019.
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.
Furthermore, refer to Part I, Item 1 - "Business" for additional discussion on
our expected store openings and closures within each of our segments. For a
detailed discussion of significant risk factors that have the potential to cause
our actual results to differ materially from our expectations, refer to Part I,
Item 1A - "Risk Factors".

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FISCAL 2018 COMPARED TO FISCAL 2017
The following table summarizes results of operations for fiscal 2018 compared to
fiscal 2017. All percentages shown in the tables below and the related
discussion that follows have been calculated using unrounded numbers.
                                                           Fiscal Year Ended
                                  June 30, 2018               July 1, 2017                 Variance
                                                   (millions, except per share data)
                                              % of                       % of
                               Amount      net sales      Amount      net sales      Amount          %
Net sales                    $ 5,880.0        100.0 %   $ 4,488.3        100.0 %   $ 1,391.7        31.0  %
Gross profit                   3,853.9         65.5       3,081.1         68.6         772.8        25.1
SG&A expenses                  3,183.1         54.1       2,293.7         51.1         889.4        38.8
Operating income                 670.8         11.4         787.4         17.5        (116.6 )     (14.8 )
Interest expense, net             74.0          1.3          28.4          0.6          45.6       160.8
Income before provision for
income taxes                     596.8         10.2         759.0         16.9        (162.2 )     (21.4 )
Provision for income taxes       199.3          3.4         168.0          3.7          31.3        18.6
Net income                       397.5          6.8         591.0         13.2        (193.5 )     (32.7 )
Net income per share:
   Basic                     $    1.39$    2.11$   (0.72 )     (33.9 )%
   Diluted                   $    1.38$    2.09$   (0.71 )     (34.1 )%


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 fiscal 2018 and fiscal 2017 reflect the impact of the
Operational Efficiency Plan, Integration and Acquisition costs and the impact of
the new Tax Legislation in fiscal 2018, as noted in the following tables. Refer
to "Non-GAAP Measures" herein for further discussion on the Non-GAAP measures.
Fiscal 2018 Items

                                                                               June 30, 2018
                                                                                                                                   Non-GAAP Basis
                            GAAP Basis                                          Integration &                                        (Excluding
                           (As Reported)      Operational Efficiency Plan        Acquisition         Impact of Tax Legislation         Items)
                                                                     (millions, except per share data)
Gross profit             $       3,853.9     $                 -             $       (116.4 )      $                 -             $     3,970.3
SG&A expenses                    3,183.1                    19.5                      185.2                          -                   2,978.4
Operating income                   670.8                   (19.5 )                   (301.6 )                        -                     991.9
Income before provision
for income taxes                   596.8                   (19.5 )                   (301.6 )                        -                     917.9
Provision for income
taxes                              199.3                    (6.2 )                   (130.7 )                    178.2                     158.0
Net income                         397.5                   (13.3 )                   (170.9 )                   (178.2 )                   759.9
Diluted net income per
share                               1.38                   (0.05 )                    (0.58 )                    (0.62 )                    2.63

In fiscal 2018 the Company incurred charges as follows: • Operational Efficiency Plan - Total charges of $19.5 million primarily

      related to technology infrastructure costs. Refer to the "Executive
      Overview" herein and Note 5, "Restructuring Activities," for further
      information regarding this plan.



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• Integration & Acquisition - Total charges of $301.6 million, primarily

      attributable to the integration and acquisition of Kate Spade, and to a
      lesser extent the acquisition of certain distributors for the Coach and

Stuart Weitzman brands and assumed operational control of the Kate Spade

Joint Ventures. Provision for income taxes includes a one-time benefit of

$40.7 million as a result of the reversal of certain valuation allowances

that relate, in part, to the enactment of Tax Legislation. These charges

include:

• Limited life purchase accounting adjustments

• Professional fees


•           Severance and other costs related to contractual agreements with
            certain Kate Spade executives

• Organizational costs as a result of integration

• Inventory reserves established primarily for the destruction of inventory



Refer to the "Executive Overview" herein and Note 4, "Integration & Acquisitions
Costs," for more information.
•     Impact of Tax Legislation - Total charges of $178.2 million primarily

related to the net impact of the transition tax and re-measurement of

deferred tax balances. Refer to the "Executive Overview" herein and Note

14, "Income Taxes," for further information.



These actions taken together increased the Company's SG&A expenses by $204.7
million, cost of sales by $116.4 million and provision for income taxes by $41.3
million, negatively impacting net income by $362.4 million, or $1.25 per diluted
share.
The following table summarizes the GAAP to Non-GAAP Reconciliation by reportable
segment through operating income for fiscal 2018:
                                                                June 30, 2018
                                                                                                          Non-GAAP Basis
                       GAAP Basis                                                                           (Excluding
                      (As Reported)        Coach        Kate Spade      Stuart Weitzman     Corporate         Items)
                                                                 (millions)
COGS
Integration &
Acquisition(1)                                (4.1 )        (106.5 )              (5.8 )            -
Gross profit        $       3,853.9$     (4.1 )$    (106.5 )   $          (5.8 )   $        -     $     3,970.3

SG&A
Integration &
Acquisition(1)                                 0.5           113.7                 7.8           63.2
Operational
Efficiency Plan                                  -               -                   -           19.5
SG&A                $       3,183.1$      0.5$     113.7     $           7.8     $     82.7$     2,978.4

Operating income    $         670.8     $     (4.6 )$    (220.2 )   $         (13.6 )   $    (82.7 )$       991.9




(1)  During the first quarter of fiscal 2018, the Company completed its

acquisition of Kate Spade & Company. During the third quarter of fiscal

2018, the Company completed its acquisition of certain distributors for the

Coach and Stuart Weitzman brands and obtained operational control of the

Kate Spade Joint Ventures. The operating results of the respective entity

have been consolidated in the Company's operating results commencing on the

     date of each acquisition.




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Fiscal 2017 Items
                                                                        July 1, 2017
                                                                                                             Non-GAAP Basis
                                    GAAP Basis                                           Integration &         (Excluding
                                   (As Reported)      Operational Efficiency Plan         Acquisition            Items)
                                                              (millions, except per share data)
Gross profit                     $       3,081.1     $                 -             $          (2.9 )       $     3,084.0
SG&A expenses                            2,293.7                    24.0                        (1.7 )             2,271.4
Operating income                           787.4                   (24.0 )                      (1.2 )               812.6
Income before provision for
income taxes                               759.0                   (24.0 )                     (10.7 )               793.7
Provision for income taxes                 168.0                    (8.3 )                      (8.1 )               184.4
Net income                                 591.0                   (15.7 )                      (2.6 )               609.3
Diluted net income per share                2.09                   (0.05 )                     (0.01 )                2.15

In fiscal 2017 the Company incurred adjustments as follows: • Operational Efficiency Plan - Total charges of $24.0 million primarily

related to organizational efficiency costs, technology infrastructure costs

and, to a lesser extent, network optimization costs.

• Integration & Acquisition - Total charges of $10.7 million, related to

$29.0 million of Stuart Weitzman integration-related costs, which were more

than offset by the reversal of a $35.2 million accrual related to estimated

contingent purchase price payments which were not paid, and $16.9 million

of Kate Spade integration-related costs.



These actions taken together increased the Company's SG&A expenses by $22.3
million, interest expense by $9.5 million and cost of sales by $2.9 million,
negatively impacting net income by $18.3 million, or $0.06 per diluted share.
The following table summarizes the GAAP to Non-GAAP Reconciliation by reportable
segment through operating income for fiscal 2017:
                                                                  July 1, 2017
                                                                                                      Non-GAAP Basis
                               GAAP Basis                                                               (Excluding
                              (As Reported)         Coach         Stuart Weitzman     Corporate(1)        Items)
                                                                  

(millions)

COGS

Integration & Acquisition                                  -                (2.9 )             -
Gross profit                $       3,081.1     $          -     $          (2.9 )   $         -      $     3,084.0

SG&A
Integration & Acquisition                                  -                17.7           (19.4 )
Operational Efficiency Plan                                -                   -            24.0
SG&A                        $       2,293.7     $          -     $          17.7     $       4.6$     2,271.4

Operating income            $         787.4     $          -     $         (20.6 )   $      (4.6 )$       812.6

(1) The Company incurred $9.5 million related to bridge financing fees recorded

in interest expense within Corporate, which is not included in the above

table.



Tapestry, Inc. Summary - Fiscal 2018
Currency Fluctuation Effects
The change in net sales in fiscal 2018 compared to fiscal 2017 has been
presented both including and excluding currency fluctuation effects.

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Net Sales
Net sales in fiscal 2018 increased 31.0% or $1.39 billion to $5.88 billion,
primarily due to the Kate Spade acquisition as well as increased revenues from
Coach. Excluding the effects of foreign currency, net sales increased by 29.6%
or $1.33 billion.
Gross Profit
Gross profit increased 25.1% or $772.8 million to $3.85 billion in fiscal 2018
from $3.08 billion in fiscal 2017. Gross margin for fiscal 2018 was 65.5% as
compared to 68.6% in fiscal 2017. Excluding Non-GAAP charges of $116.4 million
in fiscal 2018 and $2.9 million in fiscal 2017, as discussed in the "GAAP to
Non-GAAP Reconciliation" herein, gross profit increased 28.7% or $886.3 million
to $3.97 billion in fiscal 2018, and gross margin decreased to 67.5% in fiscal
2018 from 68.7% in fiscal 2017. This increase in gross profit is primarily
driven by the acquisition of Kate Spade of $817.6 million and increases in Coach
of $80.6 million, partially offset by decreases in Stuart Weitzman of $11.9
million.
Selling, General and Administrative Expenses
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 related 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.
SG&A expenses increased 38.8% or $889.4 million to $3.18 billion in fiscal 2018
as compared to $2.29 billion in fiscal 2017. As a percentage of net sales, SG&A
expenses increased to 54.1% during fiscal 2018 as compared to 51.1% during
fiscal 2017. Excluding non-GAAP charges of $204.7 million in fiscal 2018 and
$22.3 million in fiscal 2017, SG&A expenses increased 31.1% or $707.0 million
from fiscal 2017; and SG&A expenses as a percentage of net sales remained
relatively consistent at 50.7% in fiscal 2018 compared to 50.6% in fiscal 2017.
This increase is primarily due to the acquisition of Kate Spade of $659.3
million.
Corporate expenses, which are included within SG&A expenses discussed above but
are not directly attributable to a reportable segment, increased 30.2% or $80.8
million to $348.9 million in fiscal 2018 as compared to $268.1 million in fiscal
2017. Excluding non-GAAP charges of $82.7 million and $4.6 million in fiscal
2018 and fiscal 2017, respectively, SG&A expenses increased 1.1% or $2.7 million
to $266.2 million in fiscal 2018 as compared to $263.5 million in fiscal 2017.
Operating Income
Operating income decreased 14.8% or $116.6 million to $670.8 million during
fiscal 2018 as compared to $787.4 million in fiscal 2017. Operating margin was
11.4% in fiscal 2018 as compared to 17.5% in fiscal 2017. Excluding non-GAAP
charges of $321.1 million in fiscal 2018 and $25.2 million in fiscal 2017,
operating income increased 22.1% or $179.3 million to $991.9 million from $812.6
million in fiscal 2017; and operating margin was 16.9% in fiscal 2018 as
compared to 18.1% in fiscal 2017. This increase in operating income is primarily
driven by the acquisition of Kate Spade of $158.3 million and increases in Coach
of $48.8 million.
Interest Expense, net
Interest expense, net totaled $74.0 million in fiscal 2018 as compared to $28.4
million in fiscal 2017, which included $9.5 million related to bridge financing
fees. The increase in interest expense, net is due to the Company's debt
borrowings that occurred to finance the Kate Spade acquisition. Refer to Note
11, "Debt," for further information.
Provision for Income Taxes
The effective tax rate was 33.4% in fiscal 2018 as compared to 22.1% in fiscal
2017. Excluding non-GAAP charges, the effective tax rate was 17.2% in fiscal
2018 as compared to 23.2% in fiscal 2017. The decrease in our effective tax rate
was primarily attributable to the Tax Legislation, which lowered the U.S.
federal statutory income tax, the adoption of ASU No. 2016-09 and the geographic
mix of earnings.
Net Income
Net income decreased 32.7% or $193.5 million to $397.5 million in fiscal 2018 as
compared to $591.0 million in fiscal 2017. Excluding non-GAAP charges, net
income increased 24.7% or $150.6 million to $759.9 million in fiscal 2018 from
$609.3 million in fiscal 2017. This increase was primarily due to higher
operating income, as well as a decrease in the provision for income taxes.
Net Income per Share
Net income per diluted share decreased 34.1% to $1.38 in fiscal 2018 as compared
to $2.09 in fiscal 2017. Excluding non-GAAP charges, net income per diluted
share increased 22.3% or $0.48 to $2.63 in fiscal 2018 from $2.15 in fiscal
2017, due to higher net income partially offset by an increase in shares
outstanding.


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Segment Performance - Fiscal 2018
Coach
                                          Fiscal Year Ended
                      June 30, 2018             July 1, 2017             Variance
                                              (millions)
                                 % of                      % of
                   Amount     net sales      Amount     net sales     Amount      %
Net sales        $ 4,221.5       100.0 %   $ 4,114.7       100.0 %   $ 106.8    2.6 %
Gross profit       2,931.5        69.4       2,855.0        69.4        76.5    2.7
SG&A expenses      1,847.3        43.8       1,815.0        44.1        32.3    1.8
Operating income   1,084.2        25.7       1,040.0        25.3        44.2    4.3


Coach Net Sales increased 2.6% or $106.8 million to $4.22 billion in fiscal
2018. Excluding the favorable impact of foreign currency, net sales increased
1.6% or $63.8 million. This increase was due to an increase in comparable store
sales of $51.0 million or 1.5% compared to fiscal 2017. Excluding the impact of
the Internet, comparable store sales increased 0.8%. This increase in comparable
store sales is primarily led by increases in North America, Japan and Greater
China, primarily due to conversion. These increases were partially offset by
decreases in other parts of Asia, excluding Japan and Greater China. Net sales
attributable to non-comparable stores increased by $43.5 million primarily
driven by new stores in Greater China and Europe, partially offset by declines
in non-comparable stores in North America due to store closures. These increases
were partially offset by lower licensing revenues due to the expiration of the
footwear license at the end of fiscal 2017 and bringing this business in-house.
Coach Gross Profit increased 2.7% or $76.5 million to $2.93 billion in fiscal
2018 from $2.86 billion in fiscal 2017. Gross margin remained flat at 69.4% in
fiscal 2018 as compared to fiscal 2017. Excluding non-GAAP charges of $4.1
million in fiscal 2018, Coach gross profit increased 2.8% or $80.6 million and
gross margin increased 10 basis points to 69.5% in fiscal 2018 from 69.4% in
fiscal 2017 on a non-GAAP basis. Gross margin in fiscal 2018 was not materially
impacted by foreign currency. Excluding the impact of foreign currency in both
periods, gross margin increased 20 basis points. The increase in gross margin
was primarily due to favorable channel mix, partially offset by promotional
activity.
Coach SG&A expenses increased 1.8% or $32.3 million to $1.85 billion in fiscal
2018 as compared to $1.82 billion in fiscal 2017. As a percentage of net sales,
SG&A expenses decreased to 43.8% in fiscal 2018 as compared to 44.1% in fiscal
2017. Excluding non-GAAP charges of $0.5 million in fiscal 2018, SG&A expenses
increased 1.7% or $31.8 million. The $31.8 million increase is primarily due to
higher store-related costs in Europe and Greater China associated with new store
openings, partially offset by lower store-related costs in North America.
Coach Operating Income increased 4.3% or $44.2 million to $1.08 billion in
fiscal 2018, resulting in an operating margin of 25.7%, as compared to $1.04
billion and 25.3%, respectively in fiscal 2017. Excluding non-GAAP charges,
Coach operating income increased 4.7% or $48.8 million to $1.09 billion from
$1.04 billion in fiscal 2017; and operating margin was 25.8% in fiscal 2018 as
compared to 25.3% in fiscal 2017. The increase in operating income was due to an
increase in gross profit, partially offset by higher SG&A expenses.
Kate Spade
                                         Fiscal Year Ended
                   June 30, 2018(1)               July 1, 2017             

Variance

                                             (millions)
                                % of                           % of
                 Amount      net sales        Amount         net sales    Amount   %
Net sales      $ 1,284.7       100.0  %   $     -               - %           NM   NM
Gross profit       711.1        55.4            -               -             NM   NM
SG&A expenses      773.0        60.2            -               -             NM   NM
Operating loss     (61.9 )      (4.8 )          -               -             NM   NM




NM - Not meaningful (1) On July 11, 2017, the Company completed its acquisition of Kate Spade. The

operating results of the Kate Spade brand have been consolidated in the

     Company's operating results commencing on July 11, 2017.



                                       37
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Kate Spade Net Sales totaled $1.28 billion in fiscal 2018. Comparable store
sales for the period declined 7.2% primarily due to the strategic pullback in
Internet flash sales. Excluding the impact of the Internet business, comparable
store sales declined 2.5%.
Kate Spade Gross Profit totaled $711.1 million in fiscal 2018, resulting in a
gross margin of 55.4%. Excluding non-GAAP charges of $106.5 million, gross
profit totaled $817.6 million, resulting in a gross margin of 63.6%.
Kate Spade SG&A Expenses totaled $773.0 million in fiscal 2018. As a percentage
of net sales, SG&A expenses were 60.2% during fiscal 2018. Excluding non-GAAP
charges of $113.7 million, SG&A expenses were $659.3 million, or 51.3% of sales.
Kate Spade Operating Loss totaled $61.9 million in fiscal 2018, resulting in an
operating margin of (4.8)%. Excluding non-GAAP charges, Kate Spade operating
income totaled $158.3 million, resulting in an operating margin of 12.3%.
Stuart Weitzman
                                                 Fiscal Year Ended
                            June 30, 2018            July 1, 2017             Variance
                                                    (millions)
                                       % of                    % of
                         Amount     net sales     Amount    net sales     Amount       %
Net sales               $ 373.8       100.0  %   $ 373.6       100.0 %   $  0.2        -  %
Gross profit              211.3        56.5        226.1        60.5      (14.8 )   (6.5 )
SG&A expenses             213.9        57.2        210.6        56.4       

3.3 1.6 Operating (loss) income (2.6 ) (0.7 ) 15.5 4.2 (18.1 ) NM






NM - Not meaningful
Stuart Weitzman Net Sales increased slightly by $0.2 million to $373.8 million
in fiscal 2018. Excluding the favorable impact of foreign currency, net sales
decreased 1.6% or $5.9 million. This decrease was primarily due to a $20.3
million decrease in wholesale sales primarily due to lower shipments. This was
partially offset by higher sales in the retail business of $15.5 million,
primarily due to the direct ownership of the Northern China distributor and the
impact of net store openings, partially offset by lower comparable store sales.
Stuart Weitzman Gross Profit decreased 6.5% or $14.8 million to $211.3 million
in fiscal 2018 from $226.1 million in fiscal 2017. Gross margin decreased 400
basis points to 56.5% in fiscal 2018 from 60.5% in fiscal 2017. Excluding
non-GAAP charges of $5.8 million in fiscal 2018 and $2.9 million in fiscal 2017,
Stuart Weitzman gross profit decreased 5.2% or $11.9 million to $217.1 million
from $229.0 million in fiscal 2017, and gross margin decreased 320 basis points
to 58.1% in fiscal 2018 from 61.3% in fiscal 2017. The year over year change in
gross margin was negatively impacted by foreign currency rates by 150 basis
points, primarily due to the Euro. Excluding the impact of foreign currency,
there was a decrease in gross margin of 170 basis points primarily due to lower
wholesale margins and the impact of promotional activity.
Stuart Weitzman SG&A Expenses increased 1.6% or $3.3 million to $213.9 million
in fiscal 2018 as compared to $210.6 million in fiscal 2017. As a percentage of
net sales, SG&A expenses increased to 57.2% in fiscal 2018 as compared to 56.4%
in fiscal 2017. Excluding non-GAAP charges of $7.8 million in fiscal 2018 and
$17.7 million in fiscal 2017, SG&A expenses increased 6.8% or $13.2 million to
$206.1 million in fiscal 2018; and SG&A expenses as a percentage of net sales
increased to 55.1% in fiscal 2018 from 51.6% in fiscal 2017. This increase is
primarily due to the direct ownership of the Northern China distributor, timing
of marketing expenses and increased store-related costs partially offset by
reduced employee-related costs.
Stuart Weitzman Operating Income decreased $18.1 million to an operating loss of
$2.6 million in fiscal 2018, resulting in an operating margin of (0.7)%, as
compared to an operating income of $15.5 million and operating margin of 4.2% in
fiscal 2017. Excluding non-GAAP charges, Stuart Weitzman operating income
decreased 69.2% or $25.1 million to $11.0 million from $36.1 million in fiscal
2017; and operating margin was 3.0% in fiscal 2018 as compared to 9.7% in fiscal
2017. The decrease in operating income was due to a decrease in gross profit and
higher SG&A expenses.

                                       38
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FISCAL 2017 COMPARED TO FISCAL 2016
The following table summarizes results of operations for fiscal 2017 compared to
fiscal 2016. All percentages shown in the tables below and the related
discussion that follows have been calculated using unrounded numbers.
                                                           Fiscal Year Ended
                                   July 1, 2017               July 2, 2016                 Variance
                                                   (millions, except per share data)
                                              % of                       % of
                               Amount      net sales      Amount      net sales      Amount          %
Net sales                    $ 4,488.3        100.0 %   $ 4,491.8        100.0 %   $    (3.5 )      (0.1 )%
Gross profit                   3,081.1         68.6       3,051.3         67.9          29.8         1.0
SG&A expenses                  2,293.7         51.1       2,397.8         53.4        (104.1 )      (4.3 )
Operating income                 787.4         17.5         653.5         14.5         133.9        20.5
Interest expense, net             28.4          0.6          26.9          0.6           1.5         5.5
Income before provision for
income taxes                     759.0         16.9         626.6         14.0         132.4        21.1
Provision for income taxes       168.0          3.7         166.1          3.7           1.9         1.2
Net income                       591.0         13.2         460.5         10.3         130.5        28.3
Net Income per share:
Basic                        $    2.11$    1.66$    0.45        27.0  %
Diluted                      $    2.09$    1.65$    0.44        26.7  %



GAAP to Non-GAAP Reconciliation
The Company's reported results are presented in accordance with GAAP. The
reported results during fiscal 2017 and 2016 reflect the impact of the
Operational Efficiency Plan, Stuart Weitzman and Kate Spade Acquisition-Related
Costs and the Transformation Plan, as noted in the following tables.
Fiscal 2017 Items
                                                                                           July 1, 2017
                                                                                                                                                        Non-GAAP Basis
                              GAAP Basis                                              Stuart Weitzman                                                     (Excluding
                             (As Reported)      Operational Efficiency Plan      Acquisition-Related Costs      Kate Spade Acquisition-Related Costs        Items)
                                                                                (millions, except per share data)
Gross profit               $       3,081.1     $                 -             $                (2.9 )         $                       -                $     3,084.0
SG&A expenses                      2,293.7                    24.0                              (9.1 )                               7.4                      2,271.4
Operating income                     787.4                   (24.0 )                             6.2                                (7.4 )                      812.6
Income before provision
for income taxes                     759.0                   (24.0 )                             6.2                               (16.9 )                      793.7
Provision for income taxes           168.0                    (8.3 )                            (1.5 )                              (6.6 )                      184.4
Net income                           591.0                   (15.7 )                             7.7                               (10.3 )                      609.3
Diluted net income per
share                                 2.09                   (0.05 )                            0.03                               (0.04 )                       2.15

In fiscal 2017, the Company incurred pre-tax adjustments as follows: • Operational Efficiency Plan - Total charges of $24.0 million primarily

related to organizational efficiency costs, technology infrastructure costs

and, to a lesser extent, network optimization costs.

• Stuart Weitzman Acquisition-Related Costs - Total income of $6.2 million,

      primarily attributable to the reversal of an accrual of $35.2 million
      related to estimated contingent purchase price payments which were not
      paid, offset by integration-related costs.

• Kate Spade Acquisition-Related Costs - Total charges of $16.9 million, of

      which $9.5 million is related to bridge financing fees and recorded in
      interest expense and $7.4 million is related to professional fees.



                                       39
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These actions taken together increased the Company's SG&A expenses by $22.3
million, interest expense by $9.5 million and cost of sales by $2.9 million,
negatively impacting net income by $18.3 million, or $0.06 per diluted share.
The following table summarizes GAAP to Non-GAAP charges by reportable segment
through operating income for fiscal 2017:
                                                                  July 1, 2017
                                                                                                      Non-GAAP Basis
                               GAAP Basis                                                               (Excluding
                              (As Reported)         Coach         Stuart Weitzman     Corporate(1)        Items)
                                                                   (millions)
COGS
Stuart Weitzman
Acquisition-Related Costs                                  -                (2.9 )             -
Gross profit                $       3,081.1     $          -     $          (2.9 )   $         -      $     3,084.0

SG&A
Stuart Weitzman
Acquisition-Related Costs                                  -                17.7           (26.8 )
Kate Spade
Acquisition-Related Costs                                  -                   -             7.4
Operational Efficiency Plan                                -                   -            24.0
SG&A                        $       2,293.7     $          -     $          17.7     $       4.6$     2,271.4

Operating income            $         787.4     $          -     $         (20.6 )   $      (4.6 )$       812.6

(1) The Company incurred $9.5 million related to bridge financing fees recorded

     in interest expense within Corporate, which is not included in the above
     table.


Fiscal 2016 Items
                                                                                 July 2, 2016
                                                                                                                                   Non-GAAP Basis
                                GAAP Basis       Transformation and                                         Stuart Weitzman          (Excluding
                               (As Reported)        Other Actions       Operational Efficiency Plan    Acquisition-Related Costs       Items)
                                                                       (millions, except per share data)
Gross profit                 $       3,051.3   $               -       $                 -           $                (1.1 )       $     3,052.4
SG&A expenses                        2,397.8                44.1                      43.9                            34.0               2,275.8
Operating income                       653.5               (44.1 )                   (43.9 )                         (35.1 )               776.6
Income before provision for
income taxes                           626.6               (44.1 )                   (43.9 )                         (35.1 )               749.7
Provision for income taxes             166.1               (10.7 )                   (10.3 )                         (10.9 )               198.0
Net income                             460.5               (33.4 )                   (33.6 )                         (24.2 )               551.7
Diluted net income per share            1.65               (0.12 )                   (0.12 )                         (0.09 )                1.98


In fiscal 2016, the Company incurred pre-tax charges as follows: • Transformation and Other Actions - Total charges of $44.1 million primarily

due to organizational efficiency costs, lease termination charges and

accelerated depreciation as a result of store renovations within North

America and select international stores.

• Operational Efficiency Plan - Total charges of $43.9 million primarily

related to organizational efficiency costs and, to a lesser extent, network

optimization costs.

• Stuart Weitzman Acquisition-Related Costs - Total charges of $35.1 million

related to the acquisition of Stuart Weitzman Holdings LLC, of which $27.6

million is primarily related to charges attributable to contingent payments

and integration-related activities and $7.5 million is related to the

limited life impact of purchase accounting, primarily due to the

amortization of the fair value of the order backlog asset, distributor

      relationships and inventory step-up.



                                       40
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These actions taken together increased the Company's SG&A expenses by $122.0
million and cost of sales by $1.1 million, negatively impacting net income by
$91.2 million, or $0.33 per diluted share. The following table summarizes GAAP
to Non-GAAP charges by reportable segment through operating income for fiscal
2016:
                                                                  July 2, 2016
                                                                                                     Non-GAAP Basis
                               GAAP Basis                                                              (Excluding
                              (As Reported)         Coach         Stuart Weitzman      Corporate         Items)
                                                                   (millions)
COGS
Integration & Acquisition                                  -                (1.1 )             -
Gross profit                $       3,051.3     $          -     $          (1.1 )   $         -     $     3,052.4

SG&A
Transformation and Other
Actions                                                    -                   -            44.1
Stuart Weitzman
Acquisition-Related Costs                                  -                14.6            19.4
Operational Efficiency Plan                                -                   -            43.9
SG&A                        $       2,397.8     $          -     $          

14.6 $ 107.4$ 2,275.8


Operating income            $         653.5     $          -     $         

(15.7 ) $ (107.4 )$ 776.6



Tapestry, Inc. Summary - Fiscal 2017
Currency Fluctuation Effects
The change in net sales in fiscal 2017 has been presented both including and
excluding currency fluctuation effects.
Net Sales
Net sales in fiscal 2017 decreased slightly by 0.1% to $4.49 billion, with no
material impact from foreign currency. Net sales in fiscal 2016 includes the
favorable impact of the 53rd week in fiscal 2016, which resulted in incremental
net sales of $84.4 million. Excluding the impact of the 53rd week in fiscal
2016, net sales increased by $80.9 million or 1.8%. This was due to an increase
in both Coach and Stuart Weitzman.
Gross Profit
Gross profit increased 1.0% or $29.8 million to $3.08 billion in fiscal 2017
from $3.05 billion in fiscal 2016. Gross margin for fiscal 2017 was 68.6% as
compared to 67.9% in fiscal 2016. Excluding Non-GAAP charges of $2.9 million in
fiscal 2017 and $1.1 million in fiscal 2016, gross profit increased 1.0% or
$31.6 million to $3.08 billion from $3.05 billion in fiscal 2016, and gross
margin was 68.7% in fiscal 2017 as compared to 68.0% in fiscal 2016, an increase
of 70 basis points.
Selling, General and Administrative Expenses
SG&A expenses decreased 4.3% or $104.1 million to $2.29 billion in fiscal 2017
as compared to $2.40 billion in fiscal 2016. As a percentage of net sales, SG&A
expenses decreased to 51.1% during fiscal 2017 as compared to 53.4% during
fiscal 2016. Excluding non-GAAP charges of $22.3 million in fiscal 2017 and
$122.0 million in fiscal 2016, SG&A expenses decreased 0.2% or $4.4 million from
fiscal 2016; and SG&A expenses as a percentage of net sales remained relatively
consistent at 50.6% in fiscal 2017 compared to 50.7% in fiscal 2016.
Corporate expenses, which are included within SG&A expenses discussed above but
are not directly attributable to a reportable segment, decreased 33.6% or $135.3
million to $268.1 million in fiscal 2017 as compared to $403.4 million in fiscal
2016. This decrease was primarily attributable due to lower non-GAAP charges
incurred by the Company in fiscal 2017 as compared to fiscal 2016. Excluding
non-GAAP charges, Corporate expenses decreased by $32.5 million to $263.5
million. This decrease is primarily due to lower employee costs related to
headcount and litigation costs, partially offset by higher occupancy costs.
Operating Income
Operating income increased 20.5% or $133.9 million to $787.4 million during
fiscal 2017 as compared to $653.5 million in fiscal 2016. Operating margin
increased to 17.5% as compared to 14.5% in fiscal 2016. Excluding non-GAAP
charges of $25.2 million in fiscal 2017 and $123.1 million in fiscal 2016,
operating income increased 4.6% or $36.0 million to $812.6 million from $776.6
million in fiscal 2016; and operating margin was 18.1% in fiscal 2017 as
compared to 17.3% in fiscal 2016.

                                       41
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Provision for Income Taxes
The effective tax rate was 22.1% in fiscal 2017, as compared to 26.5% in fiscal
2016. Excluding non-GAAP charges, the effective tax rate was 23.2% in fiscal
2017, as compared to 26.4% in fiscal 2016. The decrease in our effective tax
rate was primarily attributable to the geographical mix of earnings and the U.S.
income earned on foreign investments.
Net Income
Net income increased 28.3% or $130.5 to $591.0 million in fiscal 2017 as
compared to $460.5 million in fiscal 2016. Excluding non-GAAP charges, net
income increased 10.4% or $57.5 million to $609.3 million in fiscal 2017 from
$551.7 million in fiscal 2016. This increase was primarily due to higher
operating income.
Earnings per Share
Net income per diluted share increased 26.7% to $2.09 in fiscal 2017 as compared
to $1.65 in fiscal 2016. Excluding non-GAAP charges, net income per diluted
share increased 9.1% or $0.17 to $2.15 in fiscal 2017 from $1.98 in fiscal 2016,
due to higher net income. The impact of the 53rd week in fiscal 2016 contributed
approximately $0.07 to net income per diluted share.
Segment Performance - Fiscal 2017
Coach
                                            Fiscal Year Ended
                      July 1, 2017              July 2, 2016              Variance
                                               (millions)
                                 % of                      % of
                   Amount     net sales      Amount     net sales     Amount        %
Net sales        $ 4,114.7       100.0 %   $ 4,147.1       100.0 %   $ (32.4 )   (0.8 )%
Gross profit       2,855.0        69.4       2,848.9        68.7         6.1      0.2
SG&A expenses      1,815.0        44.1       1,824.5        44.0        (9.5 )   (0.5 )
Operating income   1,040.0        25.3       1,024.4        24.7        15.6      1.5


Coach Net Sales decreased 0.8% or $32.4 million to $4.11 billion in fiscal 2017.
Net sales for the Coach brand was not materially impacted by foreign currency.
Excluding the impact of the 53rd week in fiscal 2016 of $77.0 million, net sales
increased $44.6 million or 1.1% in fiscal 2017. This increase was due to an
increase in comparable store sales of $44.1 million or 1.2% when comparing to
fiscal 2016, which was driven by higher conversion. Excluding the impact of the
Internet, comparable store sales increased 1.5%. Net sales attributable to
non-comparable stores increased by $29.5 million primarily driven by new stores
in Greater China and Europe. These increases were offset by lower sales to
wholesale customers of $41.6 million due to the Company's strategic decision to
elevate the Coach's brand positioning in the channel, specifically in North
America, by limiting participation in promotional events and closing
approximately 25% of its wholesale doors by the end of fiscal 2017.
Coach Gross Profit increased 0.2% or $6.1 million to $2.86 billion in fiscal
2017. Excluding the 53rd week in fiscal 2016, gross profit increased by $55.1
million. Gross margin increased 70 basis points to 69.4% in fiscal 2017 from
68.7% in fiscal 2016, which was not materially impacted by the year over year
change in foreign currency rates. This increase was due to improved costing and
product mix which was offset by promotional activity.
Coach SG&A Expenses remained relatively consistent with a slight decrease of
0.5% or $9.5 million to $1.82 billion in fiscal 2017. As a percentage of net
sales, SG&A expenses increased to 44.1% in fiscal 2017 as compared to 44.0% in
fiscal 2016.
Coach Operating Income increased 1.5% or $15.6 million to $1.04 billion in
fiscal 2017 reflecting lower SG&A expenses of $9.5 million coupled with an
increase in gross profit of $6.1 million. Operating margin increased 60 basis
points to 25.3% in fiscal 2017 from 24.7% during the same period in the prior
year.

                                       42
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Stuart Weitzman
                                                 Fiscal Year Ended
                            July 1, 2017            July 2, 2016             Variance
                                                    (millions)
                                      % of                    % of
                         Amount    net sales     Amount    net sales     Amount       %
Net sales               $ 373.6       100.0 %   $ 344.7       100.0 %   $ 28.9       8.4  %
Gross profit              226.1        60.5       202.4        58.7       23.7      11.7
SG&A expenses             210.6        56.4       169.9        49.3      

40.7 24.0 Operating income (loss) 15.5 4.2 32.5 9.4 (17.0 ) (52.2 )



Stuart Weitzman Net Sales increased 8.4% or $28.9 million to $373.6 million in
fiscal 2017, which was not materially impacted by changes in foreign currency.
Fiscal 2016 included net sales of $7.4 million as a result of the 53rd week.
This increase was primarily due to $35.2 million in the retail channel due to
the acquisition of the Stuart Weitzman Canadian distributor in the fourth
quarter of fiscal 2016, positive comparable store sales and net store openings.
This was partially offset by lower wholesale net sales of $7.0 million. Prior
year wholesale net sales included shipments into the Canadian distributor. Since
the end of the fiscal 2016, Stuart Weitzman opened a net 6 new stores.
Stuart Weitzman Gross Profit increased 11.7% or $23.7 million to $226.1 million
in fiscal 2017. Gross profit in the 53rd week of fiscal 2016 was $4.0 million.
Gross margin increased 180 basis points to 60.5% in fiscal 2017 from 58.7% in
fiscal 2016. Excluding non-GAAP charges of $2.9 million in fiscal 2017 and $1.1
million in fiscal 2016, gross profit increased 12.5% or $25.5 million to $229.0
million, resulting in a gross margin of 61.3% in fiscal 2017 as compared to
59.1% in fiscal 2016. The increase in gross margin is primarily attributable to
a shift in channel mix.
Stuart Weitzman SG&A Expenses increased 24.0% or $40.7 million to $210.6 million
in fiscal 2017. As a percentage of net sales, SG&A expenses increased to 56.4%
in fiscal 2017 as compared to 49.3% in fiscal 2016. Excluding non-GAAP charges
of $17.7 million in fiscal 2017 and $14.6 million in fiscal 2016, SG&A expenses
increased 24.3% or $37.6 million to $192.9 million; and SG&A expenses as a
percentage of net sales increased to 51.6% in fiscal 2017 compared to 45.0% in
fiscal 2016. This increase is due to increased investments in stores and
increased marketing expenses.
Stuart Weitzman Operating Income decreased $17.0 million to $15.5 million in
fiscal 2017, resulting in an operating margin of 4.2%, compared to an operating
income of $32.5 million and operating margin of 9.4% in fiscal 2016. Excluding
non-GAAP charges as discussed in the "GAAP to Non-GAAP Reconciliation" herein,
which reflect acquisition and integration-related costs, Stuart Weitzman
operating income totaled $36.1 million in fiscal 2017, resulting in an operating
margin of 9.7%. This compared to Stuart Weitzman operating income of $48.2
million in fiscal 2016, resulting in an operating margin of 14.0%.

                                       43
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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 fiscal 2018, fiscal 2017 and
fiscal 2016 reflect certain items, including the impact of Integration and
Acquisition costs for acquired companies by Tapestry, the Operational Efficiency
Plan, the impact of the Tax Legislation enacted in the second quarter of fiscal
2018 and the Transformation Plan. 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.
Comparable store sales, which is a non-GAAP measure, reflects sales performance
at stores that have been open for at least 12 months, and includes sales from
the Internet. In certain instances, orders placed via the Internet are fulfilled
by a physical store; such sales are recorded by the physical store. The Company
excludes new locations, including newly acquired stores, from the comparable
store base for the first twelve months of operation. Comparable store sales have
not been adjusted for store expansions. Kate Spade comparable store sales have
been calculated using this methodology by comparing current period sales to
sales during the equivalent pre-acquisition period.
Furthermore, the Company's sales and earnings per diluted share results are
presented both including and excluding the impact of the 53rd week in fiscal
year 2016.
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 primary internal financial reporting excluded these
items. In addition, the compensation committee of the Company's Board will use
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 increases and decreases in
operating results for the Company, the Coach segment and the Stuart Weitzman
segment 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
revenue results by translating current period revenue in local currency using
the prior year period's monthly average currency conversion rate.
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, U.S.
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, refer to Item 6. "Selected
Financial Data," and the Results of Operations section within Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" herein.

                                       44
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FINANCIAL CONDITION
Cash Flows - Fiscal 2018 Compared to Fiscal 2017
                                                         Fiscal Year Ended
                                                       July 1,        July 1,
                                                         2018          2017          Change
                                                                    (millions)
Net cash provided by operating activities            $    996.7$   853.8$    142.9
Net cash (used in) provided by investing
activities                                             (2,164.8 )       593.0       (2,757.8 )
Net cash (used in) provided by financing
activities                                               (249.9 )       369.5         (619.4 )
Effect of exchange rate changes on cash and cash
equivalents                                               (11.5 )        (2.4 )         (9.1 )
Net (decrease) increase in cash and cash
equivalents                                          $ (1,429.5 )   $ 

1,813.9 $ (3,243.4 )



The Company's cash and cash equivalents decreased by $1.43 billion in fiscal
2018 compared to an increase of $1.81 billion in fiscal 2017, as discussed
below.
Net cash provided by operating activities
Net cash provided by operating activities increased $142.9 million primarily due
to changes in operating assets and liabilities of $265.7 million and lower
non-cash charges of $70.7 million, partially offset by lower net income of
$193.5 million.
The $265.7 million increase in changes in our operating asset and liability
balances was primarily driven by changes in other liabilities, inventories,
accrued liabilities and other assets, partially offset by changes in accounts
payable, as follows:
•      Other liabilities changed by $211.1 million. They were a source of cash of

$157.7 million in fiscal 2018 compared to a use of cash of $53.4 million

in fiscal 2017, primarily driven by an increase in the Company's long-term

income tax payable as a result of the Transition Tax.

• Inventories changed by $50.4 million. They were a source of cash of $30.4

million in fiscal 2018 as compared to a use of cash of $20.0 million in

fiscal 2017, primarily driven by Kate Spade inventory balances as a result

of heightened focus on inventory management.

• Accrued liabilities changed by $33.2 million. They were a use of cash of

$16.9 million in fiscal 2018 as compared to a use of cash of $50.1 million

in fiscal 2017, primarily driven by the timing of employee-related costs.

• Other assets changed by $32.9 million. They were a source of cash of $80.9

million in fiscal 2018 as compared to a source of cash of $48.0 million in

       fiscal 2017, primarily driven by timing of income tax payments.


•      Accounts payable changed by $85.7 million. They were a use of cash of

$77.3 million in fiscal 2018 as compared to a source of cash in fiscal

       2017 of $8.4 million, primarily driven by the timing of Kate Spade and
       Coach inventory payments.


Net cash (used in) provided by investing activities
Net cash used in investing activities was $2.16 billion in fiscal 2018 compared
to a source of cash of $593.0 million in fiscal 2017, resulting in a $2.76
billion increase in net cash used in investing activities.
The $2.16 billion use of cash in fiscal 2018 is primarily due to the $2.38
billion purchase of Kate Spade and other acquisitions, net of cash acquired, and
capital expenditures of $267.4 million. This use of cash was partially offset by
net cash proceeds from maturities and sales of investments of $478.4 million.
The $593.0 million source of cash in fiscal 2017 primarily consisted of proceeds
from the sale of the Company's equity method investment in Hudson Yards of
$680.6 million, the sale of our prior headquarters of $126.0 million and net
proceeds from maturities and sales of investments of $67.7 million in fiscal
2017, which was partially offset by capital expenditures of $283.1 million.
Net cash (used in) provided by financing activities
Net cash used in financing activities was $249.9 million in fiscal 2018 as
compared to a source of cash of $369.5 million in fiscal 2017, resulting in a
net decrease in cash of $619.4 million.
The $249.9 million of cash used in fiscal 2018 was primarily due to dividend
payments of $384.1 million which were partially offset by proceeds from
share-based awards of $165.7 million. The Company also borrowed and repaid debt
of $1.10 billion within the fiscal year.
The $369.5 million of cash proceeds in fiscal 2017 was primarily due the net
proceeds from the issuance of debt of $712.2 million, partially offset by
dividend payments of $378.0 million.

                                       45
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Cash Flows - Fiscal 2017 Compared to Fiscal 2016

                                                         Fiscal Year Ended
                                                       July 1,       July 2,
                                                        2017          2016         Change
                                                                   (millions)
Net cash provided by operating activities            $   853.8$   758.6$    95.2
Net cash provided by (used in) investing
activities                                               593.0        (810.0 )     1,403.0
Net cash provided by (used in) financing
activities                                               369.5        (384.9 )       754.4
Effect of exchange rate changes on cash and cash
equivalents                                               (2.4 )         3.5          (5.9 )
Net increase (decrease) in cash and cash
equivalents                                          $ 1,813.9     $  

(432.8 ) $ 2,246.7



The Company's cash and cash equivalents increased by $1.81 billion in fiscal
2017 compared to a decrease of $432.8 million in fiscal 2016, as discussed
below.
Net cash provided by operating activities
Net cash provided by operating activities increased $95.2 million primarily due
to higher net income of $130.5 million and higher non-cash charges of $98.5
million, partially offset by changes in operating assets and liabilities of
$133.8 million.
The $133.8 million decline in changes in our operating asset and liability
balances was primarily driven by changes in other liabilities, accrued
liabilities and inventories, partially offset by changes in accounts payable and
other assets. Other liabilities were a use of cash of $53.4 million in fiscal
2017 compared to a source of cash of $49.5 million in fiscal 2016, primarily
driven by changes in tax liabilities (including the expiration of statutes
during the quarter), partially offset by higher store-related liabilities in
fiscal 2016. Accrued liabilities were a use of cash of $50.1 million in fiscal
2017 as compared to a source of cash of $30.1 million in fiscal 2016, primarily
driven by changes in derivative positions due to foreign currency fluctuations
and timing of other operating payments. Inventories were a use of cash of $20.0
million in fiscal 2017 as compared to a source of cash of $40.7 million in
fiscal 2016, primarily driven by increased inventory purchases. Accounts payable
were a source of cash of $8.4 million in fiscal 2017 as compared to a use of
cash in fiscal 2016 of $48.4 million, primarily driven by timing of inventory
payments and other expenses. Other assets were a source of cash of $48.0 million
in fiscal 2017 as compared to a use of cash of $6.3 million in fiscal 2016,
primarily driven by lower prepaid assets when compared to prior year.
Net cash provided by (used in) investing activities
Net cash provided by investing activities was $593.0 million in fiscal 2017
compared to a use of cash of $810.0 million in fiscal 2016. The $1.40 billion
increase in net cash was primarily due to proceeds from the sale of the
Company's equity method investment in Hudson Yards of $680.6 million in fiscal
2017, the impact of net cash proceeds from maturities and sales of investments
of $67.7 million in fiscal 2017, compared to net purchases of investments of
$238.8 million in fiscal 2016. This increase is also due to the absence of an
equity method investment in fiscal 2017 as compared to a $140.3 million
investment in fiscal 2016. Furthermore, in fiscal 2017, the Company received
proceeds from the sale of its prior headquarters of $126.0 million. The Company
spent $283.1 million on capital expenditures in fiscal 2017 as compared to
$396.4 million in fiscal 2016.
Net cash provided by (used in) financing activities
Net cash provided by financing activities was $369.5 million in fiscal 2017 as
compared to a use of cash of $384.9 million in fiscal 2016. This net increase of
$754.4 million was primarily due to the net proceeds of the issuance of Senior
Notes in fiscal 2017 of $997.2 million, partially offset by the repayment of
long-term debt of $285.0 million.


                                       46
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Working Capital and Capital Expenditures
As of June 30, 2018, in addition to our cash flows from operations, our sources
of liquidity and capital resources were comprised of the following:
                                              Sources of         Outstanding       Total Available
                                               Liquidity        Indebtedness         Liquidity(1)
                                                                   (millions)
Cash and cash equivalents(1)                $     1,243.4     $             -     $        1,243.4
Short-term investments(1)                             6.6                   -                  6.6
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                                       $     3,750.0$       1,600.0$        2,150.0





(1)  As of June 30, 2018, approximately 73% of our cash and short-term

investments were held outside the United States. Before the Tax Legislation,

the Company considered the earnings of its non-U.S. subsidiaries to be

indefinitely reinvested, and accordingly, recorded no deferred income taxes

on these earnings. In fiscal 2018, we have analyzed our global working

capital and cash requirements, and the potential tax liabilities associated

with repatriation, and have determined that we will likely repatriate some

portion of available foreign cash in the foreseeable future. See Note 14,

"Income Taxes" for more information.

(2) In May 2017, 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 May

30, 2022 (the "Revolving Credit Facility" and collectively with the Term

Loan Facilities, the "Facility"). Borrowings under the 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 47 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 600% of consolidated lease expense to (b)

consolidated EBITDAR. Additionally, the Company pays a commitment fee at a

rate determined by the reference to the aforementioned pricing grid. The

Company had no outstanding borrowings under the Revolving Credit Facility at

     fiscal year-end. Refer to Note 11, "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, 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"), 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 June 30, 2018, no known

events of default have occurred. Refer to Note 11, "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 June 30, 2018,
there were 13 financial institutions participating in the Revolving Credit
Facility, with no one participant maintaining a combined maximum commitment
percentage in excess of 13%. We have no reason to believe at this time that the
participating institutions will be unable to fulfill their obligations to
provide financing in accordance with the terms of the facility in the event we
elect to draw funds in the foreseeable future.
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, our restructuring initiatives, acquisition or integration-related
costs, 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 foreseeable future, our plans for
acquisitions, further business expansion and restructuring-related initiatives.

                                       47
--------------------------------------------------------------------------------

We expect total capital expenditures to be in the range of $300 to $325 million
in fiscal 2019. Future events, such as acquisitions or joint ventures, and other
similar transactions may require additional capital. 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,
dividend payments 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, which in turn are subject to prevailing economic
conditions and to financial, business and other factors, some of which are
beyond the Company's control.
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.
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.
Contractual and Other Obligations
Firm Commitments
As of June 30, 2018, the Company's contractual obligations are as follows:
                                                Fiscal          Fiscal            Fiscal          Fiscal 2024
                                 Total           2019         2020 - 2021       2022 - 2023       and Beyond
                                                                 (millions)
Capital expenditure
commitments                   $     21.5$     21.5     $           -     $           -     $           -
Inventory purchase
obligations                        342.8          342.8                 -                 -                 -
Operating lease obligations      2,768.3          384.8             643.8             528.6           1,211.1
Capital lease obligations            9.7            1.4               2.8               2.8               2.7
Debt repayment                   1,611.4              -              11.4             400.0           1,200.0
Interest on outstanding
debt                               468.6           62.7             125.1             118.5             162.3
Mandatory transition tax
payments(1)                        266.0           43.6              42.4              60.9             119.1
Other                               31.0           14.2              16.0               0.8                 -
Total                         $  5,519.3$    871.0$       841.5
  $     1,111.6$     2,695.2

(1) Mandatory transition tax payments represent our tax obligation incurred in

     connection with the deemed repatriation of previously deferred foreign
     earnings pursuant to the Tax Legislation. These amounts represent the
     Company's best estimate as of June 30, 2018, but may change based on
     refinements to the calculation. Refer to Note 14, "Income Taxes," for
     further information.


Excluded from the above contractual obligations table is the non-current
liability for unrecognized tax benefits of $75.6 million as of June 30, 2018, as
we cannot make a reliable estimate of the period in which the liability will be
settled, if ever. The above table also excludes amounts included in current
liabilities in the Consolidated Balance Sheet at June 30, 2018 as these items
will be paid within one year, certain long-term liabilities not requiring cash
payments and cash contributions for the Company's pension plan.
Off-Balance Sheet Arrangements
In addition to the commitments included in the table above, we have outstanding
letters of credit, surety bonds and bank guarantees of $35.1 million as of
June 30, 2018, primarily serving to collateralize our obligation to third
parties for duty, leases, insurance claims and materials used in product
manufacturing. These letters of credit expire at various dates through 2039.
We do not maintain any other off-balance sheet arrangements, transactions,
obligations, or other relationships with unconsolidated entities that would be
expected to have a material current or future effect on our consolidated
financial statements. Refer to Note 12, "Commitments and Contingencies," for
further information.

                                       48
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect our results of operations, financial
condition and cash flows as well as the disclosure of contingent assets and
liabilities as of the date of the Company's financial statements. Actual results
could differ from estimates in amounts that may be material to the financial
statements. Predicting future events is inherently an imprecise activity and, as
such, requires the use of judgment. Actual results could differ from estimates
in amounts that may be material to the financial statements. The development and
selection of the Company's critical accounting policies and estimates are
periodically reviewed with the Audit Committee of the Board.
The accounting policies discussed below are considered critical because changes
to certain judgments and assumptions inherent in these policies could affect the
financial statements. For more information on the Company's accounting policies,
please refer to the Notes to Consolidated Financial Statements.
Revenue Recognition
Revenue is recognized by the Company when there is persuasive evidence of an
arrangement, delivery has occurred (and risks and rewards of ownership have been
transferred to the buyer), price has been fixed or is determinable, and
collectability is reasonably assured.
Retail store and concession-based shop-in-shop revenues are recognized at the
point-of-sale, which occurs when merchandise is sold in an over-the-counter
consumer transaction. 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 also reduced by an estimate for
returns at the time of sale.
Wholesale revenue is recognized at the time title passes and risk of loss is
transferred to customers. Wholesale revenue is recorded net of estimates of
markdown allowances, returns and discounts. Estimates for markdown reserves are
based on historical trends, actual and forecasted seasonal results, an
evaluation of current economic and market conditions, retailer performance, and,
in certain cases, contractual terms. Returns and allowances require pre-approval
from management and discounts are based on trade terms. The Company reviews and
refines these estimates on a quarterly basis. The Company's historical estimates
of these costs have not differed materially from actual results.
At June 30, 2018, a 10% change in the allowances for estimated uncollectible
accounts, markdowns and returns would not have resulted in a material change in
the Company's reserves and net sales.
Inventories
Substantially all of the Company's inventories are comprised of finished goods,
and are reported at the lower of cost or market. Inventory costs include
material, conversion costs, freight and duties and are primarily determined by
the first-in, first-out method. The Company reserves for inventory, including
slow-moving and aged inventory, based on current product demand, expected future
demand and historical experience. A decrease in product demand due to changing
customer tastes, buying patterns or increased competition could impact the
Company's evaluation of its inventory and additional reserves might be required.
Estimates may differ from actual results due to the quantity, quality and mix of
products in inventory, consumer and retailer preferences and market conditions.
At June 30, 2018, a 10% change in the inventory reserve, would not have resulted
in material change in inventory and cost of sales.
Business Combinations
In connection with an acquisition, the Company records all assets acquired and
liabilities assumed of the acquired business at their acquisition date fair
value, including the recognition of contingent consideration at fair value on
the acquisition date. These fair value determinations require judgment and may
involve the use of significant estimates and assumptions, including assumptions
with respect to future cash inflows and outflows, discount rates, asset lives,
and market multiples, among other items. We may utilize independent third-party
valuation firms to assist in making these fair value determinations. If goodwill
is identified based upon the valuation of an acquired business, the goodwill is
assigned to the reporting units which will benefit from the synergies that
result from the business combination and reported within the segment that such
reporting units comprise. Refer to Note 3, "Acquisitions," for detailed
disclosures related to our acquisitions.

                                       49
--------------------------------------------------------------------------------

Goodwill and Other Intangible Assets
Goodwill and certain other intangible assets deemed to have indefinite useful
lives, including brand intangible assets, are not amortized, but are assessed
for impairment at least annually. Finite-lived intangible assets are amortized
over their respective estimated useful lives and, and along with other
long-lived assets as noted above, are evaluated for impairment periodically
whenever events or changes in circumstances indicate that their related carrying
values may not be fully recoverable. Estimates of fair value for finite-lived
and indefinite-lived intangible assets are primarily determined using discounted
cash flows and the multi-period excess earnings method, respectively, with
consideration of market comparisons. This approach uses significant estimates
and assumptions, including projected future cash flows, discount rates and
growth rates.
The Company generally performs its annual goodwill and indefinite-lived
intangible assets impairment analysis using a quantitative approach. The
quantitative goodwill impairment test identifies the existence of potential
impairment by comparing the fair value of each reporting unit with its carrying
value, including goodwill. If the fair value of a reporting unit exceeds its
carrying value, the reporting unit's goodwill is considered not to be impaired.
If the carrying value of a reporting unit exceeds its fair value, an impairment
charge is recognized in an amount equal to that excess. The impairment charge
recognized is limited to the amount of goodwill allocated to that reporting
unit.
Determination of the fair value of a reporting unit and intangible asset is
based on management's assessment, considering independent third-party appraisals
when necessary. Furthermore, this determination is judgmental in nature and
often involves the use of significant estimates and assumptions, which may
include projected future cash flows, discount rates, growth rates, and
determination of appropriate market comparables and recent transactions. These
estimates and assumptions could have a significant impact on whether or not an
impairment charge is recognized and the amount of any such charge.
The Company performs its annual impairment assessment of goodwill as well as
brand intangibles during the fourth quarter of each fiscal year. The Company
determined that there was no impairment in fiscal 2018, fiscal 2017 or fiscal
2016 as the fair values of our Coach brand reporting units significantly
exceeded their respective carrying values. The Company determined that there was
no impairment in fiscal 2018 as the fair values of the Kate Spade brand
reporting unit and indefinite-lived brand significantly exceeded their
respective carrying values. Furthermore, the fair values of the Stuart Weitzman
brand reporting unit and indefinite-lived brand exceeded their respective
carrying values by approximately 15% and 90%, respectively. Several factors
could impact the Stuart Weitzman brand's ability to achieve future cash flows,
including the management of the supply chain operational challenges at Stuart
Weitzman, the success of international expansion strategies including the
consolidation or take-back and integration of certain distributor relationships,
the optimization of the store fleet productivity, the impact of promotional
activity in department stores, the simplification of certain corporate overhead
structures and other initiatives aimed at expanding higher performing categories
of the business. Given the relatively small excess of fair value over carrying
value as noted above, if profitability trends decline during fiscal 2019 from
those that are expected, it is possible that an interim test, or our annual
impairment test, could result in an impairment of these assets.
Valuation of Long-Lived Assets
Long-lived assets, such as property and equipment, are evaluated for impairment
whenever events or circumstances indicate that the carrying value of the assets
may not be recoverable. In evaluating long-lived assets for recoverability, the
Company uses its best estimate of future cash flows expected to result from the
use of the asset and its eventual disposition. To the extent that estimated
future undiscounted net cash flows attributable to the asset are less than its
carrying value, an impairment loss is recognized equal to the difference between
the carrying value of such asset and its fair value, considering external market
participant assumptions.
In determining future cash flows, the Company takes various factors into
account, including the effects of macroeconomic trends such as consumer
spending, in-store capital investments, promotional cadence, the level of
advertising and changes in merchandising strategy. Since the determination of
future cash flows is an estimate of future performance, there may be future
impairments in the event that future cash flows do not meet expectations.
Share-Based Compensation
The Company recognizes the cost of equity awards to employees and the
non-employee Directors based on the grant-date fair value of those awards. The
grant-date fair values of share unit awards are based on the fair value of the
Company's common stock on the date of grant. The grant-date fair value of stock
option awards is determined using the Black-Scholes option pricing model and
involves several assumptions, including the expected term of the option,
expected volatility and dividend yield. The expected term of options represents
the period of time that the options granted are expected to be outstanding and
is based on historical experience. Expected volatility is based on historical
volatility of the Company's stock as well as the implied volatility from
publicly traded options on the Company's stock. Dividend yield is based on the
current expected annual dividend per share and the Company's stock price.
Changes in the assumptions used to determine the Black-Scholes value could
result in significant changes in the Black-Scholes value.

                                       50
--------------------------------------------------------------------------------

For stock options and share unit awards, the Company recognizes share-based
compensation net of estimated forfeitures and revises the estimates in
subsequent periods if actual forfeitures differ from the estimates. We estimate
the forfeiture rate based on historical experience as well as expected future
behavior.
The Company grants performance-based share awards to certain key executives, the
vesting of which is subject to the executive's continuing employment and the
Company's achievement of certain performance goals. On a quarterly basis, the
Company assesses actual performance versus the predetermined performance goals,
and adjusts the share-based compensation expense to reflect the relative
performance achievement. Actual distributed shares are calculated upon
conclusion of the service and performance periods, and include dividend
equivalent shares. If the performance-based award incorporates a market
condition, the grant-date fair value of such award is determined using a pricing
model, such as a Monte Carlo Simulation.
A hypothetical 10% change in our stock-based compensation expense would not have
a material impact to our fiscal 2018 net income.
Income Taxes
The Company's effective tax rate is based on pre-tax income, statutory tax
rates, tax laws and regulations, and tax planning strategies available in the
various jurisdictions in which the Company operates. The Company classifies
interest and penalties on uncertain tax positions in the provision for income
taxes. We record net deferred tax assets to the extent we believe that it is
more likely than not that these assets will be realized. In making such
determination, we consider all available evidence, including scheduled reversals
of deferred tax liabilities, projected future taxable income, tax planning
strategies and recent and expected future results of operation. We reduce our
deferred tax assets by a valuation allowance if, based upon the weight of
available evidence, it is more likely than not that some amount of deferred tax
assets is not expected to be realized. Before the Tax Legislation, the Company
considered the earnings of its non-U.S. subsidiaries to be indefinitely
reinvested, and accordingly, recorded no deferred income taxes on these
earnings. We are partially changing our assertion in fiscal 2018, and have
recorded an estimate of the deferred tax impact associated with this change.
The Company recognizes the impact of tax positions in the financial statements
if those positions will more likely than not be sustained on audit, based on the
technical merits of the position. Although we believe that the estimates and
assumptions we use are reasonable and legally supportable, the final
determination of tax audits could be different than that which is reflected in
historical tax provisions and recorded assets and liabilities. Tax authorities
periodically audit the Company's income tax returns, and in specific cases, the
tax authorities may take a contrary position that could result in a significant
impact on our results of operations. Significant management judgment is required
in determining the effective tax rate, in evaluating our tax positions and in
determining the net realizable value of deferred tax assets.
Refer to Note 14, "Income Taxes," for further information.
Recent Accounting Pronouncements
Refer to Note 2, "Significant Accounting Policies," to the accompanying audited
consolidated financial statements for a description of certain recently adopted,
issued or proposed accounting standards which may impact our consolidated
financial statements in future reporting periods.

                                       51

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