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. •Kate Spade - Includes global sales primarily of kate spade new york brand products to customers through Kate Spade operated stores, including the Internet, sales to wholesale customers, through concession shop-in-shops and through independent third party distributors. •Stuart Weitzman - Includes global sales of Stuart Weitzman brand products primarily to customers through Stuart Weitzman operated stores, including the Internet, sales to wholesale customers and through numerous independent third party distributors. Each of our brands is unique and independent, while sharing a commitment to innovation and authenticity defined by distinctive products and differentiated customer experiences across channels and geographies. Our success does not depend solely on the performance of a single channel, geographic area or brand. Acceleration Program The guiding principle of the Company's multi-year growth agenda under the Acceleration Program is to better meet the needs of each of its brands' unique customers by: •Sharpening our Focus on the Consumer: Operating with a clearly defined purpose and strategy for each brand and an unwavering focus on the consumer at the core of everything we do •Leveraging Data and Leading with a Digital-First Mindset: Building significant data and analytics capabilities to drive decision-making and increase efficiency; Offering immersive customer experiences across our e-commerce and social channels to meet the needs of consumerswho are increasingly utilizing digital platforms to engage with brands; Rethinking the role of stores with an intent to optimize our fleet •Transforming into aLeaner and More Responsive Organization : Moving with greater agility, simplifying internal processes and empowering teams to act quickly to meet the rapidly changing needs of the consumer In the first fiscal quarter, the Company made meaningful progress against its previously announced Acceleration Program to sharpen its focus on the consumer, leverage data to lead with a digital-first mindset and transform into a leaner and more responsive organization: •Recruited nearly 800,000 new customers across brands inNorth America through our e-commerce channels, meeting consumers where they choose to shop and leveraging marketing capabilities to drive engagement and enhance the customer's digital journey; •Drove significant growth inChina through compelling product assortments, enhanced marketing and expanded reach across direct channels and third party online distribution; Coach is the number one ranked handbag brand on Tmall; •Leveraged data and analytics to optimize marketing messaging, assortment planning and promotional levels to support higher average unit retail ("AUR"); •Made further progress in creating an agile and scalable operating model, with a streamlined organizational structure and empowered teams, while optimizing our global fleet with 15 net store closures in the first fiscal quarter 23 -------------------------------------------------------------------------------- representing a net decrease of 50 stores from the prior year; Remain on track to achieve gross run-rate savings of$300 million , including gross savings of$200 million in fiscal 2021. Recent Developments Covid-19 Pandemic The Covid-19 virus has impacted regions all around the world, resulting in restrictions and shutdowns implemented by national, state, and local authorities. Consequently, the spread of Covid-19 has caused significant global business disruptions. As a result of the widespread impact of Covid-19, Tapestry had temporarily closed the majority of its directly operated stores globally for some period of time to help reduce the spread of Covid-19. As of the end of fiscal 2020, the vast majority of the Company's stores have reopened for either in-store or curb-side service and they have continued to operate through the first quarter of fiscal 2021. Many of our wholesale and licensing partners have also closed their bricks and mortar stores as required by government orders during the third and fourth quarter of fiscal 2020, but the majority of stores have reopened as of the end of the first quarter of fiscal 2021. In response to the challenges that Covid-19 has imposed on our business, the Company implemented the following actions to mitigate these headwinds: •Re-opened stores as quickly as possible, while following governmental and public health guidelines. •Driving with a digital-first mindset for all brands. Implemented practices designed to support the continued operations of our e-commerce platforms and distribution centers remain operational across all major regions. •Reduced capital expenditures for the second half of fiscal 2020 and continuing into the first quarter of fiscal 2021, with reduced planned spend for the remainder of fiscal 2021 as compared to fiscal 2020, through optimization of our fleet and prioritizing investment in digital. •Continue to drive SG&A savings, including actions taken under the Acceleration Program, through the reduction of corporate and retail workforce, right-sizing of marketing expenses, reduction of fixed costs such as rent as well as procurement savings, including reducing external third party services. •Did not pay out bonuses under the Annual Incentive Plan for fiscal year 2020, eliminated merit salary increases for all employees and temporarily reduced compensation for the Board of Directors and corporate employees above a certain salary threshold. •Tightly managed inventories by reflowing product introductions and cancelling inventory receipts as well as planned reduction of stock keeping units ("SKUs"). •Drew down$700 million from its$900 million Revolving Credit Facility to add to cash balances, subsequently repaying$150 million onOctober 30, 2020 . •Suspended its quarterly cash dividend and share repurchase program beginning in the fourth quarter of fiscal 2020. The Company will continue to consider near-term exigencies and the long-term financial health of the business as clear steps are taken to mitigate the consequences of the Covid-19 pandemic. OnMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law in response to the Covid-19 pandemic. The CARES Act contains numerous tax provisions, such as refundable payroll tax credits, deferral of the employer portion of certain payroll taxes, net operating loss carrybacks, modifications to net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act require the Company to make significant judgments and estimates in the interpretation of the law and in the calculation of the provision for income taxes. However, additional guidance may be issued by the Internal Revenue Service ("IRS"), theDepartment of the Treasury , or other governing body that may significantly differ from our interpretation of the law, which may result in a material adverse effect on our business, cash flow, results of operations, or financial conditions. SinceMarch 2020 , the governments of numerous countries in which we operate have issued relief packages in response to Covid-19. These packages include, amongst other things, extended filing deadlines, wage subsidies, social security relief, rent relief and deferred tax payments. The Company is seeking relief under these provisions where eligible. As noted above in relation to the CARES Act, the Company does have to make certain judgements in interpretation of the law and/or await guidance from the local authorities. Acceleration Program The Company is undergoing a review of its business under the Acceleration Program and expects to incur certain costs reflecting: (i) actions to streamline the Company's organization; (ii) select store closures as the Company optimizes its fleet (including store closure costs incurred as the Company exits certain regions in which it currently operates); and (iii) 24 -------------------------------------------------------------------------------- professional fees and compensation costs incurred as a result of the development and execution of the Company's comprehensive strategic initiatives aimed at increasing profitability. Including charges taken in fiscal2020, Company expects to incur total pre-tax charges of approximately$185 -$200 million related to the Acceleration Program with most of the remaining charges expected in fiscal 2021. Refer to Note 6, "Restructuring Activities," and the "GAAP to Non-GAAP Reconciliation," herein, for further information. The Company estimates that it will realize approximately$300 million in gross run rate expense savings from these initiatives, including$200 million projected for fiscal 2021. Current Trends and Outlook The environment in which we operate is subject to a number of different factors driving global consumer spending. Consumer preferences, macroeconomic conditions, foreign currency fluctuations and geopolitical events continue to impact overall levels of consumer travel and spending on discretionary items, with inconsistent patterns across channels and geographies. As previously noted, Covid-19 was officially declared a global pandemic by theWorld Health Organization inMarch 2020 . The virus has impacted regions all around the world, resulting in restrictions and shutdowns implemented by national, state, and local authorities. These requirements have resulted in full and partial store closures globally, causing a significant reduction in sales starting in the third quarter of fiscal 2020. While the vast majority of the Company's stores have reopened for either in-store or curb-side service as of the end of fiscal 2020 and they have continued to operate through the first quarter of fiscal 2021, stores may be required to close again for an extended period of time due to the possibility of a resurgence of increased infections. Covid-19 may also cause disruptions in the Company's supply chain, resulting in facility closures, labor instability, potential inability to source raw materials and disrupted operating procedures in attempts to curb the spread of Covid-19 within our third-party manufacturers, distribution centers, and other vendors. The Company's e-commerce sites continue to operate, subject to the local guidance related to Covid-19 surrounding our distribution centers. The disruptions related to Covid-19 have materially adversely impacted our operations, cash flow, and liquidity. There is uncertainty around the duration of these disruptions and the possibility of other effects on the business. We will continue to monitor the rapidly evolving situation pertaining to the Covid-19 outbreak, including guidance from international and domestic authorities. In these circumstances, the Company will need to make adjustments to our operating plan. Refer to Part I, Item 1A. "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year endedJune 27, 2020 for further information. Several organizations that monitor the world's economy, including theInternational Monetary Fund , observed that global expansion has declined significantly in the last year and the outbreak of the Covid-19 pandemic has negatively shocked the global economy, contributing to further anticipated declines for the remainder of calendar 2020. These organizations expect recovery to be more gradual than initially anticipated based on the economic activity displayed by economies with declining infection rates. Economic activity has been marked by persistent social distancing and declines in productivity as businesses struggle to ramp up operations in response to risks and regulations related to Covid-19. For economies that struggle with infection control, the negative impacts will be amplified due to lengthier lockdown provisions. While intensifying uncertainty surrounds future economic growth, multilateral cooperation and support from local policymakers is pivotal in shaping the economic outlook. Furthermore, currency volatility, political instability, such as the uncertainty associated with the potential impact of the new policies that may be implemented depending on the results of theU.S. Presidential election and potential changes to trade agreements may contribute to a worsening of the macroeconomic environment. Since fiscal 2019, theTrump Administration andChina have both imposed new tariffs on the importation of certain product categories into the respective country. Continued increases in trade tensions could impact the Company's ability to grow its business with the Chinese consumer globally. Additional macroeconomic impacts include but are not limited to theUnited Kingdom ("U.K.") voting to leave theEuropean Union ("E.U."), commonly known as "Brexit." 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 still underway. TheU.K. passed on the opportunity to extend the transition phase beyondDecember 31, 2020 , and as such, if a trade deal is not reached byDecember 31, 2020 , theU.K. can expect checks and tariffs on products going to and coming from the E.U. beginning onJanuary 1, 2021 . The Company does not expect Brexit to materially impact our business. As part of our efforts to improve our working capital efficiency, we have worked with certain suppliers to revisit terms and conditions, including the extension of payment terms. As an alternative to our payment terms, available to certain suppliers is a voluntary supply chain finance ("SCF") program that enables our suppliers to sell their receivables from the Company to a global financial institution on a non-recourse basis at a rate that leverages our credit rating. We do not have the ability to refinance or modify payment terms to the global financial institution through the SCF program. No guarantees are provided by the Company or any of our subsidiaries under the SCF program. 25 -------------------------------------------------------------------------------- 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 27, 2020 . 26 -------------------------------------------------------------------------------- FIRST QUARTER FISCAL 2021 COMPARED TO FIRST QUARTER FISCAL 2020 The following table summarizes results of operations for the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020. All percentages shown in the table below and the discussion that follows have been calculated using unrounded numbers. Three Months Ended September 26, 2020 September 28, 2019 Variance
(millions, except per share data)
% of % of Amount net sales Amount net sales Amount % Net sales$ 1,172.2 100.0 %$ 1,357.9 100.0 %$ (185.7) (13.7) % Gross profit 830.2 70.8 914.5 67.3 (84.3) (9.2) SG&A expenses 628.0 53.6 862.9 63.5 (234.9) (27.2) Operating income (loss) 202.2 17.3 51.6 3.8 150.6 NM Interest expense, net 19.4 1.7 12.3 0.9 7.1 58.0 Other expense (income) (2.6) (0.2) 12.7 0.9 (15.3) NM Provision for income taxes (46.3) (4.0) 6.6 0.5 (52.9) NM Net income (loss) 231.7 19.8 20.0 1.5 211.7 NM Net income (loss) per share: Basic$ 0.84 $ 0.07 $ 0.77 NM Diluted$ 0.83 $ 0.07 $ 0.76 NM NM - Not meaningful 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 first quarter of fiscal 2021 and fiscal 2020 reflect the costs attributable to the CARES Act Tax Impact, the Acceleration Program, ERP system implementation efforts, Organization-related and Integration costs and Impairment charges, as noted in the following tables. Refer to "Non-GAAP Measures" herein for further discussion on the Non-GAAP measures. 27
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First Quarter Fiscal 2021 Items
Three
Months Ended
Items Affecting Comparability Non-GAAP Basis GAAP Basis CARES Act Tax Acceleration (Excluding (As Reported) Impact Program Items) (millions, except per share data) Coach 644.9 - - 644.9 Kate Spade 154.1 - - 154.1 Stuart Weitzman 31.2 - - 31.2 Gross profit(1)$ 830.2 $ - $ -$ 830.2 Coach 374.9 - 10.7 364.2 Kate Spade 130.9 - 1.0 129.9 Stuart Weitzman 31.2 - (2.4) 33.6 Corporate 91.0 - 17.3 73.7 SG&A expenses$ 628.0 $ - $ 26.6$ 601.4 Coach 270.0 - (10.7) 280.7 Kate Spade 23.2 - (1.0) 24.2 Stuart Weitzman - - 2.4 (2.4) Corporate (91.0) - (17.3) (73.7) Operating income (loss)$ 202.2 $ -$ (26.6) $ 228.8 Provision for income taxes (46.3) (91.7) (5.8) 51.2 Net income (loss)$ 231.7 $ 91.7$ (20.8) $ 160.8
Net income (loss) per diluted common share $ 0.83 $
0.33$ (0.08) $ 0.58 (1)Adjustments within Gross profit are recorded within Cost of sales. In the first quarter of fiscal 2021 the Company incurred charges as follows: •CARES Act Tax Impact - Total amount relates to the income tax benefits under the CARES Act, most notably the Net Operating Loss ("NOL") carryback claim. Refer to Note 15, "Income Taxes" for further information. •Acceleration Program - Total charges incurred under the Acceleration Program are primarily professional fees incurred as a result of the development and execution of the Company's strategic initiatives, as well as actions to streamline the Company's organization, which include severance. Refer to the "Executive Overview" and Note 6, "Restructuring Activities," herein for further information. These actions taken together increased the Company's SG&A expenses by$26.6 million and reduced Provision for income taxes by$97.5 million , positively impacting Net income by$70.9 million or$0.25 per diluted share. 28 --------------------------------------------------------------------------------
First Quarter Fiscal 2020 Items
Three
Months Ended
Items Affecting Comparability Non-GAAP Basis GAAP Basis Organization-related & (Excluding (As Reported) ERP Implementation Integration costs Impairment Items) (millions, except per share data) Coach 677.6 - (0.1) - 677.7 Kate Spade 191.5 - (1.2) - 192.7 Stuart Weitzman 45.4 - (2.8) - 48.2 Gross profit(1)$ 914.5 $ - $ (4.1) $ -$ 918.6 Coach 478.1 - 0.3 41.5 436.3 Kate Spade 198.7 - 0.1 25.2 173.4 Stuart Weitzman 64.7 - (2.4) 8.9 58.2 Corporate 121.4 14.5 22.7 - 84.2 SG&A expenses$ 862.9 $ 14.5 $ 20.7$ 75.6 $ 752.1 Coach 199.5 - (0.4) (41.5) 241.4 Kate Spade (7.2) - (1.3) (25.2) 19.3 Stuart Weitzman (19.3) - (0.4) (8.9) (10.0) Corporate (121.4) (14.5) (22.7) - (84.2) Operating income (loss)$ 51.6 $ (14.5) $ (24.8)$ (75.6) $ 166.5 Provision for income taxes 6.6 (3.5) (5.4) (12.1) 27.6 Net income (loss)$ 20.0 $ (11.0) $ (19.4)$ (63.5) $ 113.9 Net income (loss) per diluted common share$ 0.07 $ (0.04) $ (0.07)$ (0.22) $ 0.40 (1)Adjustments within Gross profit are recorded within Cost of sales. In the first quarter of fiscal 2020, the Company incurred the following: •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 organization-related costs as a result of the departure of the Company's CEO inSeptember 2019 and integration costs related to inventory and share-based compensation. Refer to Note 5, "Integration," for more information regarding integration costs. •Impairment - Total charges are primarily due to impairment charges on property and equipment assets and lease ROU assets. Refer to the Note 13, "Fair Value Measurements," for further information. These actions taken together increased the Company's Cost of sales by$4.1 million , SG&A expenses by$110.8 million and reduced Provision for income taxes by$21.0 million , negatively impacting Net income by$93.9 million or$0.33 per diluted share.Tapestry, Inc. Summary - First Quarter of Fiscal 2021 Currency Fluctuation Effects The change in net sales and gross margin for the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020 has been presented both including and excluding currency fluctuation effects. All percentages shown in the tables below and the discussion that follows have been calculated using unrounded numbers. 29 --------------------------------------------------------------------------------
Net Sales Three Months Ended Variance September 26, September 28, Constant Currency 2020 2019 Amount % Change (millions) Coach$ 875.4 $ 965.9 $ (90.5) (9.4) % (9.6) % Kate Spade 240.4 305.5 (65.1) (21.3) (21.4) Stuart Weitzman 56.4 86.5 (30.1) (34.8) (35.2) Total Tapestry$ 1,172.2 $ 1,357.9 (185.7) (13.7) (13.9) Net sales in the first quarter of fiscal 2021 decreased 13.7% or$185.7 million to$1.17 billion . Excluding the effects of foreign currency, net sales decreased by 13.9% or$188.6 million . •CoachNet Sales decreased 9.4% or$90.5 million to$875.4 million in the first quarter of fiscal 2021. Excluding the impact of foreign currency, net sales decreased$92.6 million or 9.6%. This decrease in net sales is primarily attributed to a net decline of$89.5 million in net global retail sales driven by lower sales inNorth America stores due to the impact of Covid-19, which was partially offset by an increase in e-commerce sales inNorth America and retail sales in mainlandChina . •Kate SpadeNet Sales decreased 21.3% or$65.1 million to$240.4 million in the first quarter of fiscal 2021. Excluding the impact of foreign currency, net sales decreased 21.4% or$65.5 million . This decrease is primarily due to a decline of$34.4 million in net global retail sales driven by lower sales inNorth America due to the impact of the Covid-19 outbreak, partially offset by an increase in e-commerce sales. Wholesale sales also declined$31.9 million due to a strategic pullback in disposition and lower demand as a result of the Covid-19 outbreak. •Stuart WeitzmanNet Sales decreased 34.8% or$30.1 million to$56.4 million in the first quarter of fiscal 2021. Excluding the impact of foreign currency, net sales decreased 35.2% or$30.5 million . This decrease was primarily due to lower shipments in the wholesale business of$16.2 million due to a decline in demand as a result of the Covid-19 outbreak. Additionally, retail sales decreased$14.3 million , which is attributed to both a decline in demand as a result of the Covid-19 outbreak and store closures as a result of market exits. Gross Profit Three Months Ended September 26, 2020 September 28, 2019 Variance (millions) Amount % of Net Sales Amount % of Net Sales Amount % Coach$ 644.9 73.7 %$ 677.6 70.1 %$ (32.7) (4.8) % Kate Spade 154.1 64.1 191.5 62.7 (37.4) (19.5) Stuart Weitzman 31.2 55.3 45.4 52.5 (14.2) (31.4) Tapestry 830.2 70.8$ 914.5 67.3 (84.3) (9.2) Gross profit decreased 9.2% or$84.3 million to$830.2 million in the first quarter of fiscal 2021 from$914.5 million in the first quarter of fiscal 2020. Gross margin for the first quarter of fiscal 2021 was 70.8% as compared to 67.3% in the first quarter of fiscal 2020. Excluding items affecting comparability of$4.1 million in the first quarter of fiscal 2020 as discussed in the "GAAP to non-GAAP Reconciliation" herein, gross profit decreased 9.6% or$88.4 million to$830.2 million in the first quarter of fiscal 2021. Excluding items affecting comparability, gross margin increased 320 basis points to 70.8% compared to 67.6% in the first quarter of fiscal 2020, and on a constant currency basis, gross margin increased 310 basis points from the first quarter of fiscal 2020. The Company includes inbound product-related transportation costs from our service providers within Cost of sales. The Company, similar to some companies, includes certain transportation-related costs due to our distribution network in SG&A expenses rather than in Cost of sales; for this reason, our gross margins may not be comparable to that of entities that include all costs related to their distribution network in Cost of sales. 30 -------------------------------------------------------------------------------- •Coach Gross Profit decreased 4.8% or$32.7 million to$644.9 million in the first quarter of fiscal 2021 from$677.6 million in the first quarter of fiscal 2020. Gross margin increased to 73.7% in the first quarter of fiscal 2021 from 70.1% in the first quarter of fiscal 2020. Excluding items affecting comparability of$0.1 million in the first quarter of fiscal 2020, gross profit decreased 4.8% or$32.8 million from$677.7 million in the first quarter of fiscal 2020. Excluding items affecting comparability, gross margin increased to 73.7% from 70.2% in the first quarter of fiscal 2020, and on a constant currency basis gross margin increased 350 basis points from the first quarter of fiscal 2020. This increase in gross margin was primarily due to reduced promotional activity. •Kate Spade Gross Profit decreased 19.5% or$37.4 million to$154.1 million in the first quarter of fiscal 2021 from$191.5 million in the first quarter of fiscal 2019. Gross margin increased to 64.1% in the first quarter of fiscal 2021 from 62.7% in the first quarter of fiscal 2020. Excluding items affecting comparability of$1.2 million in the first quarter of fiscal 2020, gross profit decreased 20.0% or$38.6 million to$154.1 million from$192.7 million in the first quarter of fiscal 2020. Excluding items affecting comparability, gross margin increased to 64.1% from 63.1% in the first quarter of fiscal 2020, and on a constant currency basis gross margin increased 100 basis points from first quarter of fiscal 2020. This increase in gross margin was primarily due to favorable channel mix including a strategic pullback in disposition, which was partially offset by the impact of directly operating the footwear business. •Stuart Weitzman Gross Profit decreased 31.4% or$14.2 million to$31.2 million during the first quarter of fiscal 2021 from$45.4 million in the first quarter of fiscal 2020. Gross margin increased to 55.3% in the first quarter of fiscal 2021 from 52.5% in the first quarter of fiscal 2020. Excluding items affecting comparability of$2.8 million in the first quarter of fiscal 2020, Stuart Weitzman gross profit decreased 35.4% or$17.0 million to$31.2 million from$48.2 million in the first quarter of fiscal 2020. Excluding items affecting comparability, gross margin decreased to 55.3% from 55.7% in the first quarter of fiscal 2020, and on a constant currency basis gross margin decreased 160 basis points from the first quarter of fiscal 2020. This decrease in gross margin was primarily due to actions taken to exit certain markets. Selling, General and Administrative Expenses ("SG&A") Three Months Ended September 26, 2020 September 28, 2019 Variance (millions) Amount % of Net Sales Amount % of Net Sales Amount % Coach$ 374.9 42.8 %$ 478.1 49.5 %$ (103.2) (21.6) % Kate Spade 130.9 54.5 198.7 65.0 (67.8) (34.1) Stuart Weitzman 31.2 55.2 64.7 74.8 (33.5) (51.8) Corporate 91.0 NA 121.4 NA (30.4) (25.0) Tapestry 628.0 53.6 862.9 63.5 234.9 (27.2) SG&A expenses decreased 27.2% or$234.9 million to$628.0 million in the first quarter of fiscal 2021 as compared to$862.9 million in the first quarter of fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 53.6% during the first quarter of fiscal 2021 as compared to 63.5% during the first quarter of fiscal 2020. Excluding items affecting comparability of$26.6 million and$110.8 million in the first quarter of fiscal 2021 and fiscal 2020, respectively, SG&A expenses decreased 20.0% or$150.7 million to$601.4 million from$752.1 million in the first quarter of fiscal 2020. SG&A as a percentage of sales decreased to 51.3% as compared to 55.4% during the first quarter of fiscal 2020. This decrease in SG&A expenses is primarily attributed to actions taken as part of the Acceleration Program, as well as reduced variable expenses. •Coach SG&A Expenses decreased 21.6% or$103.2 million to$374.9 million in the first quarter of fiscal 2021 as compared to$478.1 million in the first quarter of fiscal 2020. SG&A expenses as a percentage of net sales decreased to 42.8% during the first quarter of fiscal 2021 from 49.5% during the first quarter of fiscal 2020. Excluding items affecting comparability of$10.7 million and$41.8 million in the first quarter of fiscal 2021 and fiscal 2020, respectively, SG&A expenses decreased 16.5% or$72.1 million to$364.2 million during the first quarter of fiscal 2021; and SG&A expenses as a percentage of net sales decreased to 41.6% in the first quarter of fiscal 2021 from 45.2% in the first quarter of fiscal 2020. This decrease in SG&A expenses is primarily due to a decline in compensation costs, occupancy costs and depreciation expense. •Kate Spade SG&A Expenses decreased 34.1% or$67.8 million to$130.9 million in the first quarter of fiscal 2021 as compared to$198.7 million in the first quarter of fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 54.5% during the first quarter of fiscal 2021 as compared to 65.0% during the first quarter of fiscal 2020. Excluding items affecting comparability of$1.0 million and$25.3 million in the first quarter of fiscal 2021 and fiscal 2020, 31 -------------------------------------------------------------------------------- respectively, SG&A expenses decreased 25.1% or$43.5 million to$129.9 million during the first quarter of fiscal 2021; and SG&A expenses as a percentage of net sales decreased to 54.0% in the first quarter of fiscal 2021 from 56.7% in the first quarter of fiscal 2020. This decrease in SG&A expenses is primarily due to a decline in compensation costs, occupancy costs, marketing spend and depreciation expense. •Stuart Weitzman SG&A Expenses decreased 51.8% or$33.5 million to$31.2 million in the first quarter of fiscal 2021 as compared to$64.7 million in the first quarter of fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 55.2% during the first quarter of fiscal 2021 as compared to 74.8% during the first quarter of fiscal 2020. Excluding items affecting comparability of$(2.4) million and$6.5 million in the first quarter of fiscal 2021 and fiscal 2020, respectively, SG&A expenses decreased 42.3% or$24.6 million to$33.6 million during the first quarter of fiscal 2021 from$58.2 million during the first quarter of fiscal 2020; and SG&A expenses as a percentage of net sales decreased to 59.5% in the first quarter of fiscal 2021 from 67.2% in the first quarter of fiscal 2020. This decrease is primarily due to store closures mainly as a result of certain market exits, a decline in marketing spend, true up of reserves and reduced depreciation expense. •Corporate expenses, which are included within SG&A expenses discussed above but are not directly attributable to a reportable segment, decreased 25.0% or$30.4 million to$91.0 million in the first quarter of fiscal 2021 as compared to$121.4 million in the first quarter of fiscal 2020. Excluding items affecting comparability of$17.3 million and$37.2 million in the first quarter of fiscal 2021 and fiscal 2020, respectively, SG&A expenses decreased 12.4% or$10.5 million to$73.7 million in the first quarter of fiscal 2021 as compared to$84.2 million in the first quarter of fiscal 2020. This decrease in SG&A expenses was primarily driven by a gain realized on the sale of our corporate office inHong Kong . Operating Income (Loss) Three Months Ended September 26, 2020 September 28, 2019 Variance (millions) Amount % of Net Sales Amount % of Net Sales Amount % Coach$ 270.0 30.8 %$ 199.5 20.7 %$ 70.5 35.4 % Kate Spade 23.2 9.6 (7.2) (2.4) 30.4 NM Stuart Weitzman - - (19.3) (22.2) 19.3 NM Corporate (91.0) NA (121.4) NA 30.4 25.0 Tapestry 202.2 17.3 51.6 3.8 150.6 NM Operating income increased$150.6 million to an operating income of$202.2 million in the first quarter of fiscal 2021 as compared to operating income of$51.6 million in the first quarter of fiscal 2020. Operating margin was 17.3% in the first quarter of fiscal 2021 as compared to 3.8% in the first quarter of fiscal 2020. Excluding items affecting comparability of$26.6 million and$114.9 million in the first quarter of fiscal 2021 and fiscal 2020, respectively, operating income increased$62.3 million to an operating income of$228.8 million in the first quarter of fiscal 2021 from an operating income of$166.5 million in the first quarter of fiscal 2020; and operating margin increased to 19.5% in the first quarter of fiscal 2021 as compared to 12.3% in the first quarter of fiscal 2020. •Coach Operating Income increased 35.4% or$70.5 million to$270.0 million in the first quarter of fiscal 2021, resulting in an operating margin of 30.8%, as compared to$199.5 million and 20.7%, respectively, in the first quarter of fiscal 2020. Excluding items affecting comparability, Coach operating income increased 16.3% or$39.3 million to$280.7 million from$241.4 million in the first quarter of fiscal 2020; and operating margin was 32.1% in the first quarter of fiscal 2021 as compared to 25.0% in the first quarter of fiscal 2020. This increase in operating income was due to lower SG&A expenses, partially offset by lower gross profit. •Kate Spade Operating Income increased$30.4 million to operating income of$23.2 million in the first quarter of fiscal 2021, resulting in an operating margin of 9.6%, as compared to an operating loss of$7.2 million and operating margin of (2.4)% in the first quarter of fiscal 2020. Excluding items affecting comparability, Kate Spade operating income increased$4.9 million to an operating income of$24.2 million from an operating income of$19.3 million in the first quarter of fiscal 2020; and operating margin was 10.1% in the first quarter of fiscal 2021 as compared to 6.3% in the first quarter of fiscal 2020. This increase in operating income was due to lower SG&A expenses, partially offset by lower gross profit. •Stuart Weitzman Operating Loss decreased$19.3 million to$0.0 million in the first quarter of fiscal 2021, as compared to an operating loss of$19.3 million in the first quarter of fiscal 2020. Excluding items affecting 32 -------------------------------------------------------------------------------- comparability, Stuart Weitzman operating loss decreased$7.6 million to$2.4 million from an operating loss of$10.0 million in the first quarter of fiscal 2020; and operating margin was (4.2)% in the first quarter of fiscal 2021 as compared to (11.5)% in the first quarter of fiscal 2020. This decrease in operating loss was due to lower SG&A expenses, partially offset by lower gross profit. Interest Expense, net Interest expense, net increased 58.0% or$7.1 million to$19.4 million in the first quarter of fiscal 2021 as compared to$12.3 million in the first quarter of fiscal 2020. The increase in interest expense, net is due to lower interest income and the additional interest expense related to the draw down on the Revolving Credit Facility in the fourth quarter of fiscal 2020. Other Expense (Income) Other expense decreased$15.3 million to income of$2.6 million in the first quarter of fiscal 2021 as compared to expense of$12.7 million in the first quarter of fiscal 2020. The decrease in other expense is related to a decrease in foreign exchange losses. Provision for Income Taxes The effective tax rate was (25.0)% in the first quarter of fiscal 2021 as compared to 24.8% in the first quarter of fiscal 2020. Excluding items affecting comparability, the effective tax rate was 24.1% in the first quarter of 2021 as compared to 19.6% in the first quarter of fiscal 2020. The increase in our effective tax rate was primarily attributable to the geographic mix of earnings and excess tax shortfall related to the vesting of equity compensation awards. Net Income (Loss) Net income increased$211.7 million to$231.7 million in the first quarter of fiscal 2021 as compared to$20.0 million in the first quarter of fiscal 2020. Excluding items affecting comparability, net income increased$46.9 million to a net income of$160.8 million in the first quarter of fiscal 2021 as compared to a net income of$113.9 million in the first quarter of fiscal 2020. This increase was primarily due to higher operating income. Net Income (Loss) per Share Net income per diluted share was$0.83 in the first quarter of fiscal 2021 as compared to$0.07 in the first quarter of fiscal 2020. Excluding items affecting comparability, net income per diluted share was$0.58 in the first quarter of fiscal 2021 as compared to$0.40 in the first quarter of fiscal 2020. This change was primarily due to higher net income. 33 -------------------------------------------------------------------------------- NON-GAAP MEASURES The Company's reported results are presented in accordance with GAAP. The reported gross profit, SG&A expenses, operating income, provision for income taxes, net income and earnings per diluted share in the first quarter of fiscal 2021 and fiscal 2020 reflect certain items, including the impact of ERP Implementation, Organization-related and Integration costs and Impairment charges in fiscal 2020, as well as Acceleration Program costs and CARES Act Tax Impact in fiscal 2021. As a supplement to the Company's reported results, these metrics are also reported on a non-GAAP basis to exclude the impact of these items, along with a reconciliation to the most directly comparable GAAP measures. The Company has historically reported comparable store sales, which reflects sales performance at stores that have been open for at least 12 months, and includes sales from the Internet. The Company excludes new stores, including newly acquired locations, from the comparable store base for the first twelve months of operation. The Company excludes closed stores from the calculation. Comparable store sales are not adjusted for store expansions. Due to the uncertain business environment resulting from the impact of the Covid-19 pandemic, comparable store sales are not reported for the three months endedSeptember 26, 2020 as the Company does not believe this metric is currently meaningful to the readers of its financial statements for this period. These non-GAAP performance measures were used by management to conduct and evaluate its business during its regular review of operating results for the periods affected. Management and the Company's Board utilized these non-GAAP measures to make decisions about the uses of Company resources, analyze performance between periods, develop internal projections and measure management performance. The Company's internal management reporting excluded these items. In addition, theHuman Resources Committee of the Company's Board uses these non-GAAP measures when setting and assessing achievement of incentive compensation goals. The Company operates on a global basis and reports financial results inU.S. dollars in accordance with GAAP. Fluctuations in foreign currency exchange rates can affect the amounts reported by the Company inU.S. dollars with respect to its foreign revenues and profit. Accordingly, certain material increases and decreases in operating results for the Company and its segments have been presented both including and excluding currency fluctuation effects. These effects occur from translating foreign-denominated amounts intoU.S. dollars and comparing to the same period in the prior fiscal year. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. The Company calculates constant currency results by translating current period Net sales and Cost of sales, in local currency using the prior year period's currency conversion rate. The constant currency gross margin results are reported excluding items affecting comparability. We believe these non-GAAP measures are useful to investors and others in evaluating the Company's ongoing operating and financial results in a manner that is consistent with management's evaluation of business performance and understanding how such results compare with the Company's historical performance. Additionally, we believe presenting certain increases and decreases in constant currency provides a framework for assessing the performance of the Company's business outsidethe United States and helps investors and analysts understand the effect of significant year-over-year currency fluctuations. We believe excluding these items assists investors and others in developing expectations of future performance. By providing the non-GAAP measures, as a supplement to GAAP information, we believe we are enhancing investors' understanding of our business and our results of operations. The non-GAAP financial measures are limited in their usefulness and should be considered in addition to, and not in lieu of, GAAP financial measures. Further, these non-GAAP measures may be unique to the Company, as they may be different from non-GAAP measures used by other companies. For a detailed discussion on these non-GAAP measures, see Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations." 34 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Cash Flows Three Months Ended September 26, September 28, 2020 2019 Change (millions)
Net cash provided by (used in) operating activities $ 90.0
$ 5.7$ 84.3 Net cash used in investing activities (2.0) (73.6) 71.6 Net cash used in financing activities (8.4) (377.4) 369.0 Effect of exchange rate changes on cash and cash equivalents 8.0 (1.8) 9.8 Net decrease in cash and cash equivalents $ 87.6
The Company's cash and cash equivalents increased by$87.6 million in the first three months ended of fiscal 2021 as compared to a decrease of$447.1 million in the first three months ended of fiscal 2020, as discussed below. Net cash provided by (used in) operating activities Net cash provided by operating activities increased$84.3 million due to higher net income of$211.7 million and changes in operating assets and liabilities of$77.4 million , partially off by the impact of non-cash adjustments of$204.8 million . The$77.4 million increase in changes in operating asset and liability balances were primarily driven by the following: •Accounts payable were a source of cash of$135.1 million in the first three months ended of fiscal 2021 compared to a source of cash of$37.1 million in the first three months ended of fiscal 2020, primarily due to the extension of payment terms to certain vendors. •Inventories were a use of cash of$57.5 million in the first three months ended of fiscal 2021 compared to a use of cash of$116.7 million in the first three months ended of fiscal 2020, primarily driven by more disciplined inventory management. •Other assets were a use of cash of$66.4 million in the first three months ended of fiscal 2021 compared to a use of cash of$17.9 million in the first three months ended of fiscal 2020, primarily related to an increase in income tax receivable due to the NOL carryback claim under the CARES Act, partially offset by lower receivables related to other taxes. •Accrued liabilities were a use of cash of$61.2 million in the first three months ended of fiscal 2021 as compared to a use of cash of$14.1 million in the first three months ended of fiscal 2020, primarily driven by the timing of tax payments as well as accruals for expected severance, partially offset by the Annual Incentive Plan payment in the first quarter of fiscal 2020 when compared to fiscal 2021, as the Company did not pay out under its Annual Incentive Plan during fiscal 2021. Net cash used in investing activities Net cash used in investing activities in the first three months ended of fiscal 2021 was$2.0 million as compared to a use of cash of$73.6 million in the first three months ended of fiscal 2020, resulting in a$71.6 million decrease in net cash used in investing activities. The$2.0 million use of cash in the first three months ended of fiscal 2021 is primarily due to capital expenditures of$26.0 million partially offset by proceeds from the sale of building of$23.9 million . The$73.6 million use of cash in the first three months ended of fiscal 2020 is primarily due to capital expenditures of$71.9 million . Net cash used in financing activities Net cash used in financing activities was$8.4 million in the first three months ended of fiscal 2021 as compared to a use of cash of$377.4 million in the first three months ended of fiscal 2020, resulting in a net decrease in use of cash for financing activities of$369.0 million . The$8.4 million of cash used in the first three months ended of fiscal 2021 was primarily due to taxes paid to net settle share-based awards of$8.2 million . 35 -------------------------------------------------------------------------------- The$377.4 million use of cash in the first three months ended of fiscal 2020 was primarily due to repurchases of common stock of$267.0 million and dividend payments of$96.8 million . Working Capital and Capital Expenditures As ofSeptember 26, 2020 , in addition to our cash flows from operations, our sources of liquidity and capital resources were comprised of the following: Sources of Outstanding Total Available Liquidity Indebtedness Liquidity(1) (millions) Cash and cash equivalents(1)$ 1,513.9 $ -$ 1,513.9 Short-term investments(1) 8.5 - 8.5 Revolving Credit Facility(2) 900.0 700.0 200.0 3.000% Senior Notes due 2022(3) 400.0 400.0 - 4.250% Senior Notes due 2025(3) 600.0 600.0 - 4.125% Senior Notes due 2027(3) 600.0 600.0 - Total$ 4,022.4 $ 2,300.0 $ 1,722.4 (1) As ofSeptember 26, 2020 , approximately 39% of our cash and short-term investments were held outsidethe United States . The Company will likely repatriate some portion of available foreign cash in the foreseeable future, and has recorded deferred taxes on certain earnings of non-US subsidiaries that are deemed likely to be repatriated. (2) InOctober 2019 , the Company entered into a definitive credit agreement wherebyBank 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 ofOctober 24, 2024 (the "Revolving Credit Facility"). Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to, at the Borrowers' option, either (a) an alternate base rate (which is a rate equal to the greatest of (i) the Prime Rate in effect on such day, (ii) the Federal Funds Effective Rate in effect on such day plus ½ of 1% or (iii) the Adjusted LIBO Rate for a one month Interest Period on such day plus 1%) or (b) a rate based on the rates applicable for deposits in the interbank market forU.S. Dollars or the applicable currency in which the loans are made plus, in each case, an applicable margin. The applicable margin will be determined by reference to a grid, defined in the Credit Agreement, based on the ratio of (a) consolidated debt plus operating lease liability to (b) consolidated EBITDAR. Additionally, the Company pays a commitment fee at a rate determined by the reference to the aforementioned pricing grid. OnMay 19, 2020 , the Company entered into Amendment No. 1 (the "Amendment") to the Revolving Credit Facility. Under the terms of the Amendment, during the period from the Effective Date untilOctober 2, 2021 , the Company must maintain available liquidity of$700 million (with available liquidity defined as the sum of unrestricted cash and cash equivalents and available commitments under credit facilities, including the Revolving Credit Facility). Following the period from the Effective Date until the compliance certificate is delivered for the fiscal quarter endingJuly 3, 2021 (the "Covenant Relief Period"), the Company must comply on a quarterly basis with a maximum net leverage ratio of 4.0 to 1.0. In addition, the Amendment provides that during the Covenant Relief Period, if any two of the Company's three credit ratings are non-investment grade, the Revolving Credit Facility will be guaranteed by the Company's material domestic subsidiaries and will be subject to liens on accounts receivable, inventory and intellectual property, in each case subject to customary exceptions. The Amendment also contains negative covenants that limit the ability of the Company and its subsidiaries to, among other things, incur certain debt, incur certain liens, dispose of assets, make investments, loans or advances, and engage in share buybacks during the Covenant Relief Period. An increased interest rate will be applicable during the Covenant Relief Period when the Company's gross leverage ratio exceeds 4.0 to 1.0. The$900 million aggregate commitment amount under the revolving credit facility remains unchanged. As ofSeptember 26, 2020 ,$700.0 million of borrowings were outstanding under the Revolving Credit Facility. Refer to Note 12, "Debt," for further information on our existing debt instruments and Note 18, "Subsequent Events" for further information on the repayment of outstanding borrowings under the Revolving Credit Facility. (3) InMarch 2015 , the Company issued$600.0 million aggregate principal amount of 4.250% senior unsecured notes dueApril 1, 2025 at 99.445% of par (the "2025 Senior Notes"). Furthermore, inJune 2017 , the Company issued$400.0 million aggregate principal amount of 3.000% senior unsecured notes dueJuly 15, 2022 at 99.505% of par (the "2022 Senior Notes"), and$600.0 million aggregate principal amount of 4.125% senior unsecured notes dueJuly 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 36 -------------------------------------------------------------------------------- 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 ofSeptember 26, 2020 , no known events of default have occurred. Refer to Note 12, "Debt," for further information on our existing debt instruments. We believe that our Revolving Credit Facility is adequately diversified with no undue concentrations in any one financial institution. As ofSeptember 26, 2020 , there were 12 financial institutions participating in the Revolving Credit Facility, with no one participant maintaining a combined maximum commitment percentage in excess of 14%. We have the ability to draw on our credit facilities or access other sources of financing options available to us in the credit and capital markets for, among other things, acquisition or integration-related costs, our restructuring initiatives, settlement of a material contingency, or a material adverse business or macroeconomic development, as well as for other general corporate business purposes. Management believes that cash flows from operations, access to the credit and capital markets and our credit lines, on-hand cash and cash equivalents and our investments will provide adequate funds to support our operating, capital, and debt service requirements for fiscal 2021 and beyond. There can be no assurance that any such capital will be available to the Company on acceptable terms or at all. Our ability to fund working capital needs, planned capital expenditures, and scheduled debt payments, as well as to comply with all of the financial covenants under our debt agreements, depends on future operating performance and cash flow. This future operating performance and cash flow are subject to prevailing economic conditions, which is uncertain as a result of Covid-19, and to financial, business and other factors, some of which are beyond the Company's control. Reference should be made to our most recent Annual Report on Form 10-K and other filings with theSEC for additional information regarding liquidity and capital resources. The Company expects total fiscal 2021 capital expenditures to be approximately$150 million . Seasonality The Company's results are typically affected by seasonal trends. During the first fiscal quarter, we build inventory for the holiday selling season. In the second fiscal quarter, working capital requirements are reduced substantially as we generate higher net sales and operating income, especially during the holiday months of November and December. Accordingly, the Company's net sales, operating income and operating cash flows for the three months endedSeptember 26, 2020 are not necessarily indicative of that expected for the full fiscal 2021. However, fluctuations in net sales, operating income and operating cash flows of the Company in any fiscal quarter may be affected by the timing of wholesale shipments and other events affecting retail sales, including adverse weather conditions or other macroeconomic events. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our significant accounting policies are described in Note 3 to the audited consolidated financial statements in our fiscal 2020 10-K. Our discussion of results of operations and financial condition relies on our condensed consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates which are subject to varying degrees of uncertainty. While we believe that these accounting policies are based on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts. For a complete discussion of our critical accounting policies and estimates, see the "Critical Accounting Policies and Estimates" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2020 10-K. As of September 26, 2020, there have been no material changes to any of the critical accounting policies. The Company performs its annual impairment assessment of goodwill as well as brand intangibles at the beginning of the fourth quarter of each fiscal year. In all fiscal years, the fair values of our Coach brand reporting units significantly exceeded their respective carrying values. The fair values of the Kate Spade brand reporting unit and indefinite-lived brand as of the fiscal 2020 testing date exceeded their respective carrying values by approximately 13% and 35%, respectively. Several factors could impact the Kate Spade brand's ability to achieve expected future cash flows, including continued economic volatility and potential operational challenges related to the Covid-19 pandemic, the reception of new collections in all channels, the success of international expansion strategies including the direct operation of certain previous distributor and joint venture businesses, the optimization of the store fleet productivity, the impact of promotional activity in department stores, and the simplification of certain corporate overhead structures and other initiatives aimed at increasing profitability of the business. Given the relatively small excess of fair value over carrying value as noted above, if profitability trends decline during fiscal 2021 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. 37
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