The following discussion of the Company's financial condition and results of operations should be read together with the Company's condensed consolidated financial statements and notes to those financial statements included elsewhere in this document. When used herein, the terms "the Company," "Tapestry," "we," "us" and "our" refer toTapestry, Inc. , including consolidated subsidiaries. References to "Coach," "Stuart Weitzman," "Kate Spade" or "kate spade new york" refer only to the referenced brand. EXECUTIVE OVERVIEW Tapestry is a leadingNew York -based house of modern luxury accessories and lifestyle brands. Tapestry is powered by optimism, innovation and inclusivity. Our brands are approachable and inviting and create joy every day for people around the world. Defined by quality, craftsmanship and creativity, our house of brands gives global audiences the opportunity for exploration and self-expression. Tapestry is comprised of the Coach,Kate Spade and Stuart Weitzman brands, all of which have been part of the American landscape for over 25 years. The Company has three reportable segments: • Coach - Includes global sales of Coach products to customers through Coach operated stores, including the Internet and concession shop-in-shops, and sales to wholesale customers and through independent third party distributors.
•
products to customers through
Internet, sales to wholesale customers, through concession shop-in-shops
and through independent third party distributors.
• Stuart Weitzman - Includes global sales of Stuart Weitzman brand products
primarily to customers through Stuart Weitzman operated stores, including
the Internet, sales to wholesale customers and through numerous independent
third party distributors.
Each of our brands is unique and independent, while sharing a commitment to innovation and authenticity defined by distinctive products and differentiated customer experiences across channels and geographies. Our success does not depend solely on the performance of a single channel, geographic area or brand. Fiscal 2020 Strategic Initiatives The company continues to focus on execution in fiscal 2020. Specifically, in fiscal 2020, the Company intends to: •Ignite brand growth driven by innovation •Drive global growth, with a focus on maximizing opportunities with the Chinese consumer •Invest in our digital and data analytic capabilities •Harness the benefit of the multi-brand structure Recent Developments ERP Implementation During fiscal 2018, the Company implemented a global consolidation system which provides a common platform for financial reporting, a point-of-sale system for Coach inNorth America as well as a human resource information system for Corporate, Coach and Stuart Weitzman employees. During the second quarter of fiscal 2019, the Company deployed global finance and accounting systems for Corporate, Coach and Stuart Weitzman. During the third quarter of fiscal 2019, the Company deployed global finance, accounting, supply chain and human resource information systems forKate Spade . During the first quarter of fiscal 2020, the Company deployed the final major phase of its ERP Implementation, specifically, the supply chain functions for Coach and Stuart Weitzman. Stuart Weitzman Production Challenges During fiscal 2018, Stuart Weitzman results were negatively impacted by supply chain operational challenges including production delays, as the brand was not prepared for the level of complexity and new development as it transitioned to a new creative vision. The trailing impacts of these operational challenges continued to negatively impact Stuart Weitzman results in fiscal 2019 and in fiscal 2020, including, but not limited to, a reduction in wholesale demand at Stuart Weitzman. The Company continues to address these challenges through investment in talent, operational process improvements, and a focus on the fashion sensibility of the core design aesthetic. Integration During fiscal 2019, the Company acquired certain distributors for the Kate Spade and Stuart Weitzman brands. 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 of these acquisitions, the Company incurred charges related to the integration of the businesses. These charges are primarily associated with organization-related costs, professional fees, one-time write-off of inventory and limited life purchase accounting adjustments. The Company currently estimates that it will incur approximately$5-10 million in pre-tax charges, of which the majority are expected to be cash charges, for the remainder of fiscal 2020. Refer to Note 5, "Integration," Note 6, "Acquisitions," and the "GAAP to Non-GAAP Reconciliation," herein, for further information. 27 -------------------------------------------------------------------------------- Change in Chief Executive Officer OnSeptember 4, 2019 , the Company announced thatVictor Luis departed as the Company's Chief Executive Officer and resigned from the Board of Directors, effective as ofSeptember 3, 2019 . OnSeptember 4, 2019 , the Company namedJide Zeitlin , Chairman of the Board of Directors, as the Company's Chief Executive Officer. In connection withMr. Luis's departure, the Company andMr. Luis entered into a separation and mutual release agreement. Impairment During the first quarter of fiscal 2020, the Company recorded$75.6 million of impairment charges related to store assets, including the lease assets recorded in connection with the adoption of the new lease accounting standard. Refer to Note 13, "Fair Value Measurements," and Note 16, "Segment Information," 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, specifically for our brick & mortar channel, 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 impairment charges if expected future cash flows of the related asset group do not exceed the carrying value. InDecember 2019 , a novel strain of coronavirus was reported to have surfaced inWuhan, China . This virus has caused business disruption beginning inJanuary 2020 , including traffic declines and the closure of the majority of stores on mainlandChina . While the business disruption is currently expected to be temporary, there is uncertainty around the duration of these disruptions or the possibility of other effects on the business. The Company estimates that this disruption will negatively impact its results for the second half of fiscal 2020 by approximately$200-250 million in net sales and$0.35-$0.45 in net income per diluted share, given current trends inChina . If the situation further deteriorates, or the outbreak affects demand outside of the country, this impact could be worse. Several organizations that monitor the world's economy, including theInternational Monetary Fund , observed that global expansion has declined significantly in the last year and remains weak. These organizations expect only modest growth globally due to continued softening of the growth rates inthe United States andChina , as well as challenging economic growth across certain other markets. Furthermore, though there are early signs of stabilization, there are certain risk factors noted that may further pressure the economic growth levels currently anticipated. As a result, the current global outlook remains uncertain. It is still too early to understand what kind of sustained impact these trends or changes in trade agreements and tax legislations will have on consumer discretionary spending. Risk of volatility or a worsening of the macroeconomic environment remains, including currency devaluation, due to political uncertainty and potential changes to international trade agreements. During fiscal 2020, Hong Kong SAR,China has been the subject of worsening political unrest, as demonstrated through ongoing public demonstrations and protests, which has impacted and is expected to continue to impact our business. Furthermore, during fiscal 2019 and continuing into fiscal 2020, theTrump Administration andChina have both imposed new tariffs on the importation of certain product categories into the respective country. We expect these changes to have a modest impact on gross margin in fiscal 2020. Continued increases in trade tensions could impact the Company's ability to grow its business with the Chinese consumer globally. Beginning in the second quarter of fiscal 2019, the Company noted volatility in the spending patterns of certain North American customers, believed to be resellers, in advance of changes in Chinese e-commerce laws effectiveJanuary 1, 2019 . The volatility experienced since that time may continue in the near-term. The Company also observed an acceleration in local customer demand in mainlandChina which has helped to partially offset this trend. Additional macroeconomic impacts include but are not limited to theUnited Kingdom ("U.K.") voting to leave theEuropean Union ("E.U."), commonly known as "Brexit." OnMarch 29, 2017 , theU.K. triggered Article 50 of the Lisbon Treaty formally starting a 2 year negotiation period with the E.U., which was subsequently extended toJanuary 31, 2020 . TheU.K. officially terminated its membership of the E.U. onJanuary 31, 2020 under the terms of a withdrawal agreement concluded between theU.K. and E.U. and has now entered into a transition phase untilDecember 31, 2020 . During the transition phase, theU.K. will generally continue operating as if it were still a member of the E.U. Trade talks between the E.U. andU.K. , to determine their future relationship, are expected to commence imminently. If a trade deal is not reached byDecember 31, 2020 , absent an extension to the transition period, theU.K. can expect checks and tariffs on products going to and coming from the E.U. beginning onJanuary 1, 2021 . 28 -------------------------------------------------------------------------------- We will continue to monitor these trends and evaluate and adjust our operating strategies and cost management opportunities to mitigate the related impact on our results of operations, while remaining focused on the long-term growth of our business and protecting the value of our brands. For a detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, see Part II, Item 1A. "Risk Factors" herein and Part I, Item 1A. "Risk Factors" disclosed in our Annual Report on Form 10-K for the fiscal year endedJune 29, 2019 . 29 -------------------------------------------------------------------------------- SECOND QUARTER FISCAL 2020 COMPARED TO SECOND QUARTER FISCAL 2019 The following table summarizes results of operations for the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019. All percentages shown in the table below and the discussion that follows have been calculated using unrounded numbers. Three Months Ended December 28, 2019 December 29, 2018 Variance (millions, except per share data) % of % of Amount net sales Amount net sales Amount % Net sales$ 1,816.0 100.0 %$ 1,800.8 100.0 %$ 15.2 0.8 % Gross profit 1,209.7 66.6 1,203.5 66.8 6.2 0.5 SG&A expenses 846.6 46.6 827.0 45.9 19.6 2.4 Operating income 363.1 20.0 376.5 20.9 (13.4 ) (3.6 ) Interest expense, net 14.0 0.8 13.2 0.7 0.8 5.8 Other expense (income) (5.9 ) (0.3 ) (4.2 ) (0.2 ) (1.7 ) (39.2 ) Provision for income taxes 56.2 3.1 112.7 6.3 (56.5 ) (50.1 ) Net income 298.8 16.5 254.8 14.1 44.0 17.2 Net income per share: Basic$ 1.08 $ 0.88 $ 0.20 23.2 % Diluted$ 1.08 $ 0.88 $ 0.20 23.3 % GAAP to Non-GAAP Reconciliation The Company's reported results are presented in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The reported results during the second quarter of fiscal 2020 and fiscal 2019 reflect the costs attributable to the ERP system implementation efforts, organization-related, integration and acquisition costs and impairment charges, as noted in the following tables. Refer to "Non-GAAP Measures" herein for further discussion on the Non-GAAP measures. 30
--------------------------------------------------------------------------------
Second Quarter Fiscal 2020 Items
Three Months Ended December 28, 2019 Non-GAAP Basis GAAP Basis Organization-related & (Excluding (As Reported) ERP Implementation Integration costs Items) (millions, except per share data) Coach 877.3 - - 877.3 Kate Spade 262.4 - - 262.4 Stuart Weitzman 70.0 - (1.5 ) 71.5 Gross profit(1)$ 1,209.7 $ - $ (1.5 )$ 1,211.2 Coach 494.5 - (0.4 ) 494.9 Kate Spade 194.5 - 0.7 193.8 Stuart Weitzman 60.4 - 0.3 60.1 Corporate 97.2 6.3 1.8 89.1 SG&A expenses$ 846.6 $ 6.3 $ 2.4$ 837.9 Coach 382.8 - 0.4 382.4 Kate Spade 67.9 - (0.7 ) 68.6 Stuart Weitzman 9.6 - (1.8 ) 11.4 Corporate (97.2 ) (6.3 ) (1.8 ) (89.1 ) Operating income (loss)$ 363.1 $ (6.3 ) $ (3.9 )$ 373.3 Provision for income taxes 56.2 (1.5 ) (4.0 ) 61.7 Net income$ 298.8 $ (4.8 ) $ 0.1$ 303.5 Net income per diluted common share $ 1.08 $ (0.02 ) $ -$ 1.10
(1)Adjustments within Gross profit are recorded within Cost of sales. In the second quarter of fiscal 2020 the Company incurred charges as follows: • ERP Implementation - Total charges represent technology implementation
costs. Refer to the "Executive Overview" herein for further information.
• Organization-related and Integration costs - Total charges represent
integration costs related to inventory and professional fees. Refer to the
"Executive Overview" herein and Note 5, "Integration," for more
information regarding integration costs.
These actions taken together increased the Company's SG&A expenses by
31
--------------------------------------------------------------------------------
© Edgar Online, source