TAPESTRY, INC. 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 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 The fiscal years endedJune 27, 2020 ,June 29, 2019 andJune 30, 2018 were each 52-week periods. 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 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. 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 through Stuart Weitzman operated stores, including the Internet,
sales to wholesale customers and through numerous independent third party
distributors.
Each of our brands is unique and independent, while sharing a commitment to
innovation and authenticity defined by distinctive products and differentiated
customer experiences across channels and geographies. Our success does not
depend solely on the performance of a single channel, geographic area or brand.
Acceleration Program
The guiding principle of the Company's multi-year growth agenda under the
Acceleration Program is to better meet the needs of each of its brands' unique
customers by:
• Sharpening our Focus on the Consumer: Operating with a clearly defined
purpose and strategy for each brand and an unwavering focus on the
consumer at the core of everything we do
• Leveraging Data and Leading with a Digital-First Mindset: Building
significant data and analytics capabilities to drive decision-making and
increase efficiency; Offering immersive customer experiences across our
e-commerce and social channels to meet the needs of consumers who areincreasingly utilizing digital platforms to engage with brands; Rethinking
the role of stores with an intent to optimize our fleet
• Transforming into a
greater agility, simplifying internal processes and empowering teams to
act quickly to meet the rapidly changing needs of the consumer
The Company believes the successful execution of these priorities will fuel
desire for the Coach, Kate Spade and Stuart Weitzman brands, driving accelerated
revenue growth, higher gross margins and substantial operating leverage across
Tapestry's portfolio. Key strategies by brand include:
Coach
• Deepening Engagement with Consumers through enhanced brand and cultural
relevance, united by our values and purpose to be authentic, inclusive and
embody the courageous spirit of
• Creating Innovative and Compelling Product to exceed the expectations of
our target consumers by geography and customer segments
• Driving Digital Sales and New Customer Recruitment by offering a true
omnichannel experience
• Accelerating Growth in
enhanced marketing and expanded reach across direct channels and third
party online distribution
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• Enhancing Profitability through more focused assortments and a disciplined
approach to promotions, resulting in continued Average Unit Retail ("AUR")
improvements and higher gross margin. In addition, achieving operational
excellence by right-sizing SG&A cost structure and store fleet
Kate Spade • Crystallizing the Brand's Purpose and Returning to a Position of Strength
by fulfilling our promise as a lifestyle brand representing joy, optimism
and color, amplified through unique, best-in-class storytelling on a
multi-category lifestyle platform
• Instilling a Laser Focus on the Customer across all touchpoints, and
fostering a community of women emotionally connected to and inspired by
the Kate Spade brand story and values
• Reenergizing and Growing Handbags and Leathergoods by reintroducing
non-negotiable brand elements, rebuilding the core offering, and
capitalizing on a new Signature platform
• Leaning into Digital Strength by modernizing and creating engaging brand
experiences across all of our digital platforms, fully unleashing the
power of Kate Spade community and brand
• Capturing Market Share and Improving Profitability by acquiring,re-engaging, and retaining customers, driving top and bottom line growth
Stuart Weitzman • Renewing the Brand's Reputation for Fit, Comfort and Quality, listening
and responding to our customer's needs in order to design beautiful and
on-trend shoes
• Growing Key Categories by building a leading presence in boots, booties
and sandals and expanding the casual assortment, while dramatically
simplifying the product offering
• Restoring Profitability by focusing distribution on those markets and
channels of greatest opportunity, notably
momentum and high margins
• Strengthening Relationship with
products and faster, more consistent execution
• Establishing a Robust Digital Presence which supports best-in-class
multi-media content and depth of assortment
Recent Developments Covid-19 Pandemic Tapestry began fiscal 2020 with a focus on profitable growth through innovation, global expansion, investing in digital capabilities, and harnessing the power of a multi-brand model. However, the Covid-19 pandemic has had significant impacts on our business globally. As a result, while the Company remains confident in its long-term strategy, its short-term focus has pivoted towards adapting to these challenges. 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, including full and partial store closures. As a result of the widespread impact of Covid-19, Tapestry had temporarily closed the majority of its directly operated stores in globally for some period of time to help reduce the spread of Covid-19. As of the end of the fiscal year, the vast majority of the Company's stores have reopened for either in-store or curb-side service. 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. In response to this challenging environment, the Company's focus is on the following actions: A Focus on Revenue • Re-opening stores as quickly as possible, while following governmental and
public health guidelines; and
• Aggressively leaning into the global digital opportunity for all brands.
Ensuring that our e-commerce platforms and distribution centers remain
operational across all major regions.
Eliminating Non-Essential Operating Costs Across All Key Areas of Spend • Driving SG&A savings through the right-sizing of marketing expenses to
adjust to the lower revenue base, while maintaining a focus on digital;
reducing fixed costs such as rent; driving procurement savings, including
reducing external third party services.
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Strengthening the Company's Balance Sheet and Enhancing Financial Flexibility
• Tightly managing inventories by reflowing product introductions and
cancelling inventory receipts for late summer/early fall 2020; and
• Reducing capital expenditures by delaying or cancelling new storeopenings, while prioritizing investment in high-return projects aligned
with the multi-year growth agenda, notably in digital.
Preserving Liquidity • Drawing down$700 million from its$900 million Revolving Credit Facility to add to cash balances;
• Suspending its quarterly cash dividend beginning in the fourth quarter of
fiscal 2020; and
• Suspending its share repurchase program.
Addressing Organizational Costs • Reducing our corporate and retail workforce;
• Applying for available government payroll subsidy programs in various
countries to mitigate payroll expense;
• A 50% reduction in cash compensation for the Board of Directors and salary
reductions of 5% to 20%, depending on salary level, for all corporate
employees above a certain salary threshold, expected to remain in effect
until up to the end of fiscal year 2021;
• Cancellation of our Annual Incentive Plan for fiscal year 2020, which
resulted in no bonuses being paid for fiscal 2020; and
• Elimination of merit salary increases for all employees for fiscal year 2021.
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 income 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. Acceleration Program The Company is undergoing a review of its business under the Acceleration Program reflecting: (i) actions to streamline the Company's organization; (ii) select store closures as the Company optimizes its fleet (including store closure costs incurred as the Company exits certain regions in which it currently operates); and (iii) professional fees and compensation costs incurred as a result of the development and execution of the Company's comprehensive strategic initiatives aimed at increasing profitability. Including charges taken in 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 7, "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. Fiscal 2020 Impairments During fiscal 2020, Stuart Weitzman results continued to be negatively impacted by trailing impacts of operational challenges first experienced in 2018. While the Company addressed these challenges through investment in talent, operational process improvements, and a focus on the fashion sensibility of the core design aesthetic, the Brand experienced a reduction in demand. This reduction in cash flows generated by the brand as well as the decline in future expected cash flows was exacerbated by the Covid-19 pandemic, which resulted in lower sales driven by full and partial closures of a significant portion of our stores globally. During fiscal 2020, the Company recorded$210.7 million of impairment charges to goodwill and$267.0 million of impairment charges to indefinite-lived brand intangible assets for the Stuart Weitzman reporting unit. Refer to "Critical Accounting Policies and Estimates," herein, for further information. 35 -------------------------------------------------------------------------------- During fiscal 2020, the Company recorded$267.7 million of impairment charges related to store assets, inclusive of lease assets as well as purchase commitments. Impairment charges recorded in the first quarter related to an accounting policy change made in conjunction with the adoption of the new lease accounting standard, whereas the impairment charges recorded in the third and fourth quarter were primarily driven by lower cash flows due to Covid-19. Refer to Note 12, "Fair Value Measurements," and Note 18, "Segment Information," for further information. During fiscal 2020, the Company recorded$104.0 million of increases in inventory reserves, similarly driven by current and expected changes to operations as a result of Covid-19. ERP Implementation In fiscal 2020, the Company completed its multi-year Enterprise Resource Planning ("ERP") implementation. Key milestones were achieved as follows: • Fiscal 2018: Implementation of a global consolidation system which provided a common platform for financial reporting. • Fiscal 2019: Deployment of global finance and accounting systems for
Corporate, Coach and Stuart Weitzman and global finance, accounting, supply
chain and human resource information systems for Kate Spade.
• Fiscal 2020: Supply chain functions for Coach and Stuart Weitzman were
implemented at the beginning of fiscal 2020.
The Company is also implementing a point-of-sale system which supports all
in-store transactions, distributes management reporting for each store, and
collects sales and payroll information on a daily basis. This daily collection
of store sales and inventory information results in early identification of
business trends and provides a detailed baseline for store inventory
replenishment. The implementation is complete for Coach stores in North America
and Europe and expected to be implemented for Stuart Weitzman stores in North
America in fiscal 2021 and Kate Spade North America in fiscal 2022.
Organization-related and Integration Costs
During fiscal 2019, the Company acquired certain distributors for the Kate Spade
and Stuart Weitzman brands. During fiscal 2018, the Company acquired Kate Spade
& Company , 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 of
these acquisitions, the Company incurred charges related to the integration and
acquisition 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 does not expect
there to be any charges in fiscal 2021. Refer to Note 6, "Integration," Note 4,
"Acquisitions," and the "GAAP to Non-GAAP Reconciliation," herein, for further
information.
Chief Executive Officer and Chief Financial Officer Changes
On September 4, 2019 , the Company announced that Victor Luis departed as the
Company's Chief Executive Officer and resigned from the Board of Directors,
effective as of September 3, 2019 . On September 4, 2019 , the Company named Jide
Zeitlin , Chairman of the Board of Directors, as the Company's Chief Executive
Officer. In connection with Mr. Luis's departure, the Company and Mr. Luis
entered into a separation and mutual release agreement.
On July 21, 2020 , the Company announced that Jide Zeitlin resigned as the
Company's Chairman, Chief Executive Officer and from the Company's Board of
Directors, effective July 20, 2020 . Effective July 21, 2020 , the Company
appointed Joanne Crevoiserat , the Company's Chief Financial Officer, as Interim
Chief Executive Officer. The Company also appointed Andrea Shaw Resnick , the
Company's Global Head of Investor Relations and Corporate Communications, as
Interim Chief Financial Officer. Refer to Note 22, "Subsequent Events," for
further information.
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Current Trends and Outlook
The environment in which we operate is subject to a number of different factors
driving global consumer spending. Consumer preferences, macroeconomic
conditions, foreign currency fluctuations and geopolitical events continue to
impact overall levels of consumer travel and spending on discretionary items,
with inconsistent patterns across channels and geographies.
As previously noted, Covid-19 was officially declared a global pandemic by the
World Health Organization in March 2020 . The 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 the fiscal year, stores may be required to close again for an
extended period of time due to the possibility of a "second wave" 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" for further
information.
Several organizations that monitor the world's economy, including the
International 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 and potential changes to
trade agreements may contribute to a worsening of the macroeconomic environment.
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.
In addition, during fiscal 2019 and continuing into fiscal 2020, the Trump
Administration and China 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 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 a 2 year negotiation period with the E.U., which was
subsequently extended to January 31, 2020 . The U.K. officially terminated its
membership of the E.U. on January 31, 2020 under the terms of a withdrawal
agreement concluded between the U.K. and E.U. and has now entered into a
transition phase until December 31, 2020 . During the transition phase, the U.K.
will generally continue operating as if it were still a member of the E.U. Trade
talks between the E.U. and U.K. , to determine their future relationship, are
still underway. The U.K. passed on the opportunity to extend the transition
phase beyond December 31, 2020 , and as such, if a trade deal is not reached by
December 31, 2020 , the U.K. can expect checks and tariffs on products going to
and coming from the E.U. beginning on January 1, 2021 .
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 2020 COMPARED TO FISCAL 2019
The following table summarizes results of operations for fiscal 2020 compared to
fiscal 2019. All percentages shown in the tables below and the related
discussion that follows have been calculated using unrounded numbers.
Fiscal Year Ended
June 27, 2020 June 29, 2019 Variance
(millions, except per share data)
% of % of
Amount net sales Amount net sales Amount %
Net sales $ 4,961.4 100.0 % $ 6,027.1 100.0 % $ (1,065.7 ) (17.7 )%
Gross profit 3,239.3 65.3 4,053.7 67.3 (814.4 ) (20.1 )
SG&A expenses 3,790.1 76.4 3,234.0 53.7 556.1 (17.2 )
Operating income (loss) (550.8 ) (11.1 ) 819.7 13.6 (1,370.5 ) NM
Interest expense, net 60.1 1.2 47.9 0.8 12.2 (25.2 )
Other expense (income) 13.3 0.3 5.6 0.1 7.7 NM
Income (Loss) before
provision for income taxes (624.2 ) (12.6 ) 766.2 12.7 (1,390.4 ) NM
Provision for income taxes 27.9 0.7 122.8 2.0 (94.9 ) (77.3 )
Net income (loss) (652.1 ) (13.1 ) 643.4 10.7 (1,295.5 ) NM
Net income (loss) per share:
Basic $ (2.34 ) $ 2.22 $ (4.56 ) NM
Diluted $ (2.34 ) $ 2.21 $ (4.55 ) NM
NM - Not meaningful
GAAP to Non-GAAP Reconciliation
The Company's reported results are presented in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
reported results during fiscal 2020 and fiscal 2019 reflect certain items which
affect the comparability of our results, as noted in the following tables. Refer
to "Non-GAAP Measures" herein for further discussion on the Non-GAAP measures.
38
--------------------------------------------------------------------------------Fiscal 2020 Items
Fiscal Year Ended
Items affecting comparability
Non-GAAP
Basis
GAAP Basis Organization-related & Acceleration (Excluding
(As Reported) ERP Implementation Integration costs Impairment Program Items)
(millions, except per share data)
Coach 2,411.6 - (0.1 ) (61.9 ) - 2,473.6
Kate Spade 682.9 - (1.2 ) (32.3 ) - 716.4
Stuart Weitzman 144.8 - (4.3 ) (9.8 ) (8.4 ) 167.3
Gross profit(1) $ 3,239.3 $ - $ (5.6 ) $ (104.0 ) $ (8.4 ) $ 3,357.3
Coach 1,822.2 - 0.5 116.7 18.5 1,686.5
Kate Spade 782.2 - 0.1 92.9 13.6 675.6
Stuart Weitzman 766.2 - (2.0 ) 526.7 17.6 223.9
Corporate 419.5 28.5 29.2 - 28.9 332.9
SG&A expenses $ 3,790.1 $ 28.5 $ 27.8 $ 736.3 $ 78.6 $ 2,918.9
Coach 589.4 - (0.6 ) (178.6 ) (18.5 ) 787.1
Kate Spade (99.3 ) - (1.3 ) (125.2 ) (13.6 ) 40.8
Stuart Weitzman (621.4 ) - (2.3 ) (536.5 ) (26.0 ) (56.6 )
Corporate (419.5 ) (28.5 ) (29.2 ) - (28.9 ) (332.9 )
Operating income (loss) $ (550.8 ) $ (28.5 ) $ (33.4 ) $ (840.3 ) $ (87.0 ) $ 438.4
Provision for income taxes 27.9 (6.0 ) 3.8 (55.3 ) (8.4 ) 93.8
Net income (loss) $ (652.1 ) $ (22.5 ) $ (37.2 ) $ (785.0 ) $ (78.6 ) $ 271.2
Net income (loss) per
diluted common share $ (2.34 ) $ (0.08 ) $ (0.13 ) $ (2.82 ) $ (0.28 ) $ 0.97 (1)Adjustments within Gross profit are recorded within Cost of sales. In 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 & Integration Costs - Total charges represent
integration costs primarily related to professional fees. Refer to the
"Executive Overview" herein and Note 6, "Integration," for more
information.
• Impairment - Total charges are primarily due to impairment charges on the
indefinite-lived brand intangible asset and goodwill for Stuart Weitzman,
impairment charges on property and equipment assets and lease ROU assets,
as well as increases in inventory reserves. Refer to Note 12, "Fair Value
Measurements," Note 15, "
18, "Segment Information," for further information.
• Acceleration Program - Total charges, incurred under the Acceleration
Program, are primarily due to organization-related costs as a result of
severance and store closures charges. Store closure charges represent lease
termination penalties, removal or modification of lease assets and
liabilities established in connection with the adoption of the new lease
accounting standard, establishing inventory reserves, accelerated
depreciation and severance. Refer to the "Executive Overview" and Note 7,
"Restructuring Activities," herein for further information.
These actions taken together increased the Company's SG&A expenses by$871.2 million , Cost of sales by$118.0 million and Provision for income taxes by$65.9 million , negatively impacting net income by$923.3 million , or$(3.31) per diluted share. 39 -------------------------------------------------------------------------------- Fiscal 2019 Items Fiscal Year Ended June 29, 2019 Items affecting comparability Non-GAAP Basis GAAP Basis Integration & Impact of Tax (Excluding (As Reported) ERP Implementation Acquisition Legislation Items) (millions, except per share data) Coach 2,996.4 - (1.9 ) - 2,998.3 Kate Spade 863.6 - (6.3 ) - 869.9 Stuart Weitzman 193.7 - (19.6 ) - 213.3 Gross profit(1)$ 4,053.7 $ - $ (27.8 ) $ -$ 4,081.5 Coach 1,848.0 - 7.1 - 1,840.9 Kate Spade 698.2 - 14.5 - 683.7 Stuart Weitzman 245.2 - 15.0 - 230.2 Corporate 442.6 36.9 30.0 - 375.7 SG&A expenses$ 3,234.0 $ 36.9 $ 66.6 $ -$ 3,130.5 Coach 1,148.4 - (9.0 ) - 1,157.4 Kate Spade 165.4 - (20.8 ) - 186.2 Stuart Weitzman (51.5 ) - (34.6 ) - (16.9 ) Corporate (442.6 ) (36.9 ) (30.0 ) - (375.7 ) Operating income (loss)$ 819.7 $ (36.9 ) $ (94.4 ) $ -$ 951.0 Provision for income taxes 122.8 (9.4 )
(25.8 ) 9.2 148.8
Net income (loss) $ 643.4 $ (27.5 ) $ (68.6 ) $ (9.2 ) $ 748.7
Net income (loss) per
diluted common share $ 2.21 $ (0.09 ) $ (0.24 ) $ (0.03 ) $ 2.57 (1)Adjustments within Gross profit are recorded within Cost of sales. In fiscal 2019 the Company incurred adjustments as follows: • ERP Implementation - Total charges represent technology implementation
costs. Refer to the "Executive Overview" herein for further information.
• Integration & Acquisition - Total charges primarily represent integration
and acquisition costs related to organization-related costs, professional
fees, one-time write-off of inventory and limited life purchase accounting
adjustments. Refer to the "Executive Overview" herein and Note 6,
"Integration," for more information.
• Impact of Tax Legislation - Total charges primarily related to the netimpact of the transition tax and re-measurement of deferred tax balances.
Refer to the "Executive Overview" herein and Note 16, "Income Taxes," for
further information.
These actions taken together increased the Company's SG&A expenses by $103.5
million and cost of sales by $27.8 million , decreased the provision for income
taxes by $26.0 million , negatively impacting net income by $105.3 million , or
$0.36 per diluted share.
Tapestry, Inc. Summary - Fiscal 2020
Currency Fluctuation Effects
The change in net sales and gross margin in fiscal 2020 compared to fiscal 2019
has been presented both including and excluding currency fluctuation effects.
40
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Net Sales
Net sales in fiscal 2020 decreased 17.7% or $1.07 billion to $4.96 billion .
Excluding the effects of foreign currency, net sales decreased by 17.5% or $1.05
billion . This decrease was driven by the impact of the Covid-19 outbreak on our
business.
Gross Profit
Gross profit decreased 20.1% or $814.4 million to $3.24 billion in fiscal 2020
from $4.05 billion in fiscal 2019. Gross margin for fiscal 2020 was 65.3% as
compared to 67.3% in fiscal 2019. Excluding items affecting comparability of
$118.0 million in fiscal 2020 and $27.8 million in fiscal 2019, as discussed in
the "GAAP to Non-GAAP Reconciliation" herein, gross profit decreased 17.7% or
$724.2 million to $3.36 billion in fiscal 2020, and gross margin remained at
67.7% in fiscal 2020 and fiscal 2019. This decrease in gross profit is primarily
driven by decreases in Coach of $524.7 million , in Kate Spade of $153.5 million
and in Stuart Weitzman of $46.0 million .
Selling, General and Administrative Expenses
The Company includes inbound product-related transportation costs from our
service providers within Cost of sales. The Company 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.
SG&A expenses increased 17.2% or $556.1 million to $3.79 billion in fiscal 2020
as compared to $3.23 billion in fiscal 2019. As a percentage of net sales, SG&A
expenses increased to 76.4% during fiscal 2020 as compared to 53.7% during
fiscal 2019. Excluding items affecting comparability of $871.2 million in fiscal
2020 and $103.5 million in fiscal 2019, SG&A expenses decreased 6.8% or $211.6
million to $2.92 billion from $3.13 billion in fiscal 2019; and SG&A expenses as
a percentage of net sales increased to 58.8% in fiscal 2020 from 51.9% in fiscal
2019. This decrease in SG&A expenses is primarily due to decreases in Coach of
$154.4 million , Corporate expenses of $42.8 million , Kate Spade of $8.1 million
and Stuart Weitzman of $6.3 million .
Corporate expenses, which are included within SG&A expenses discussed above but
are not directly attributable to a reportable segment, decreased 5.2% or $23.1
million to $419.5 million in fiscal 2020 as compared to $442.6 million in fiscal
2019. Excluding items affecting comparability of $86.6 million and $66.9 million
in fiscal 2020 and fiscal 2019, respectively, SG&A expenses decreased 11.4% or
$42.8 million to $332.9 million in fiscal 2020 as compared to $375.7 million in
fiscal 2019. This decrease in SG&A expenses was primarily due to lower
compensation cost mostly related to the cancellation of our Annual Incentive
Plan for fiscal year 2020.
Operating Income (Loss)
Operating income decreased $1.37 billion to an operating loss of $550.8 million
during fiscal 2020 as compared to operating income of $819.7 million in fiscal
2019. Operating margin was (11.1)% in fiscal 2020 as compared to 13.6% in fiscal
2019. Excluding items affecting comparability of $989.2 million in fiscal 2020
and $131.3 million in fiscal 2019, operating income decreased 53.9% or $512.6
million to $438.4 million from $951.0 million in fiscal 2019; and operating
margin was 8.8% in fiscal 2020 as compared to 15.8% in fiscal 2019. This
decrease in operating income is primarily driven by declines in operating income
in Coach of $370.3 million , in Kate Spade of $145.4 million and in Stuart
Weitzman of $39.7 million , partially offset by a decrease in Corporate expenses
of $42.8 million .
Interest Expense, net
Net interest expense increased 25.2% or $12.2 million to $60.1 million in fiscal
2020 as compared to $47.9 million in fiscal 2019. 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 the fiscal year.
Other Expense (Income)
Other expense increased $7.7 million to $13.3 million in fiscal 2020 as compared
to $5.6 million in fiscal 2019. This increase in other expense is related to an
increase in foreign exchange losses.
Provision for Income Taxes
The effective tax rate was (4.5)% in fiscal 2020 as compared to 16.0% in fiscal
2019. Excluding items affecting comparability, the effective tax rate was 25.7%
in fiscal 2020 as compared to 16.6% in fiscal 2019. The increase in our
effective tax rate was primarily attributable to impact of permanent tax
adjustments on lower net sales and the geographic mix of earnings.
41
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Net Income (Loss)
Net income decreased $1.3 billion to a net loss of $652.1 million in fiscal 2020
as compared to a net income of $643.4 million in fiscal 2019. Excluding items
affecting comparability, net income decreased 63.8% or $477.5 million to $271.2
million in fiscal 2020 from $748.7 million in fiscal 2019. This decrease was
primarily due to lower operating income, partially offset by a decrease in the
provision for income taxes.
Net Income (Loss) per Share
Net loss per diluted share was $2.34 in fiscal 2020 as compared to net income
per diluted share of $2.21 in fiscal 2019. Excluding items affecting
comparability, net income per diluted share decreased 62.3% or $1.60 to $0.97 in
fiscal 2020 from $2.57 in fiscal 2019, primarily due to lower net income.
Segment Performance - Fiscal 2020
Coach
Fiscal Year Ended
June 27, 2020 June 29, 2019 Variance
(millions)
% of % of
Amount net sales Amount net sales Amount %
Net sales $ 3,525.7 100.0 % $ 4,270.9 100.0 % $ (745.2 ) (17.4 )%
Gross profit 2,411.6 68.4 2,996.4 70.2 (584.8 ) (19.5 )
SG&A expenses 1,822.2 51.7 1,848.0 43.3 (25.8 ) (1.4 )
Operating income 589.4 16.7 1,148.4 26.9 (559.0 ) (48.7 )
Coach Net Sales decreased 17.4% or $745.2 million to $3.53 billion in fiscal
2020. Excluding the impact of foreign currency, net sales decreased 17.2% or
$736.4 million . This decrease was primarily attributed to a net decline of
$661.3 million in bricks and mortar retail sales globally due to the impact of
the Covid-19 outbreak, which was partially offset by an increase in e-commerce
sales globally. Wholesale sales also declined $75.4 million due to lower demand
as a result of the Covid-19 outbreak.
Coach Gross Profit decreased 19.5% or $584.8 million to $2.41 billion in fiscal
2020 from $3.00 billion in fiscal 2019. Gross margin decreased to 68.4% in
fiscal 2020 as compared to 70.2% in fiscal 2019. Excluding items affecting
comparability of $62.0 million and $1.9 million in fiscal 2020 and in fiscal
2019, respectively, Coach gross profit decreased 17.5% or $524.7 million to
$2.47 billion from $3.00 billion in fiscal 2019, and gross margin remained at
70.2% in fiscal 2020 and in fiscal 2019 on a non-GAAP basis. Excluding the
impact of foreign currency in both periods, gross margin increased 30 basis
points.
Coach SG&A expenses decreased 1.4% or $25.8 million to $1.82 billion in fiscal
2020 as compared to $1.85 billion in fiscal 2019. As a percentage of net sales,
SG&A expenses increased to 51.7% in fiscal 2020 as compared to 43.3% in fiscal
2019. Excluding items affecting comparability of $135.7 million and $7.1 million
in fiscal 2020 and fiscal 2019, respectively, SG&A expenses decreased 8.4% or
$154.4 million to $1.69 billion in fiscal 2020 from $1.84 billion in fiscal
2019. SG&A expenses as a percentage of sales increased from 47.8% in fiscal 2020
from 43.1% in fiscal 2019. This decrease in SG&A expenses is primarily due to a
decline in compensation costs, mainly related to the cancellation of the Annual
Incentive Plan for fiscal year 2020, and lower variable selling costs due to
store closures in relation to Covid-19.
Coach Operating Income decreased 48.7% or $559.0 million to $589.4 million in
fiscal 2020, resulting in an operating margin of 16.7%, as compared to $1.15
billion and 26.9%, respectively in fiscal 2019. Excluding items affecting
comparability, Coach operating income decreased 32.0% or $370.3 million to
$787.1 million from $1.16 billion in fiscal 2019; and operating margin was 22.3%
in fiscal 2020 as compared to 27.1% in fiscal 2019. This decrease in operating
income was due to a decrease in gross profit, partially offset by lower SG&A
expenses.
42
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Kate Spade
Fiscal Year Ended
June 27, 2020 June 29, 2019 Variance
(millions)
% of % of
Amount net sales Amount net sales Amount %
Net sales $ 1,149.5 100.0 % $ 1,366.8 100.0 % $ (217.3 ) (15.9 )% Gross profit 682.9 59.4 863.6 63.2 (180.7 ) (21.0 ) SG&A expenses 782.2 68.0 698.2 51.1 84.0 12.0 Operating income (loss) (99.3 ) (8.6 ) 165.4 12.1 (264.7 ) NMKate Spade Net Sales decreased 15.9% or$217.3 million to$1.15 billion in fiscal 2020. Excluding the impact of foreign currency, net sales decreased 16.0% or$218.4 million . This decrease is primarily due to a decline of$190.5 million in retail sales mainly inNorth America due to full and partial store closures related to the Covid-19 outbreak. Furthermore, wholesale sales declined$23.4 million due to lower demand as a result of the Covid-19 outbreak.Kate Spade Gross Profit decreased 21.0% or$180.7 million to$682.9 million in fiscal 2020 from$863.6 million in fiscal 2019. Gross margin decreased to 59.4% in fiscal 2020 from 63.2% in fiscal 2019. Excluding items affecting comparability of$33.5 million and$6.3 million in fiscal 2020 and fiscal 2019 respectively, Kate Spade gross profit decreased 17.6% or$153.5 million to$716.4 million from$869.9 million in fiscal 2019, and gross margin decreased 130 basis points to 62.3% from 63.6% in fiscal 2019. The gross margin decrease of 130 basis points is primarily due to promotional activity, unfavorable channel mix and the impact of directly operating the footwear business. Kate Spade SG&A Expenses increased 12.0% or$84.0 million to$782.2 million in fiscal 2020 from$698.2 million in fiscal 2019. As a percentage of net sales, SG&A expenses increased to 68.0% during fiscal 2020 as compared to 51.1% in fiscal 2019. Excluding items affecting comparability of$106.6 million and$14.5 million in fiscal 2020 and fiscal 2019, respectively, SG&A expenses decreased 1.2% or$8.1 million to$675.6 million in fiscal 2020 compared to$683.7 million in fiscal 2019; and SG&A expenses as a percentage of sales increased to 58.8% in fiscal 2020 from 50.0% in fiscal 2019. This decrease was due to a decline in compensation costs, mostly related to the cancellation of the Annual Incentive Plan for fiscal 2020, and lower variable selling costs due to store closures in relation to Covid-19, partially offset by new store openings and increased marketing expenses. Kate Spade Operating Income decreased$264.7 million to an operating loss of$99.3 million in fiscal 2020, resulting in an operating margin of (8.6)% as compared to an operating income of$165.4 million and operating margin of 12.1% in fiscal 2019. Excluding items affecting comparability, Kate Spade operating income decreased 78.1% or$145.4 million to$40.8 million from$186.2 million in fiscal 2019, resulting in an operating margin of 3.6% as compared to 13.6% in fiscal 2019. The decrease in operating income was due to lower gross profit, partially offset by lower SG&A expenses. Stuart Weitzman Fiscal Year Ended June 27, 2020 June 29, 2019 Variance (millions) % of % of Amount net sales Amount net sales Amount % Net sales$ 286.2 100.0 %$ 389.4 100.0 %$ (103.2 ) (26.5 )% Gross profit 144.8 50.6 193.7 49.8 (48.9 ) (25.3 ) SG&A expenses 766.2 NM 245.2 63.0 521.0 NM Operating loss (621.4 ) NM (51.5 ) (13.2 ) (569.9 ) NMStuart Weitzman Net Sales decreased by 26.5% or$103.2 million to$286.2 million in fiscal 2020. Excluding the impact of foreign currency, net sales decreased 25.6% or$99.5 million . This decrease was primarily due to lower shipments in the wholesale business of$74.2 million and a decline in the retail business of$25.3 million as a result of the Covid-19 outbreak partially offset by an expanded store network.Stuart Weitzman Gross Profit decreased 25.3% or$48.9 million to$144.8 million in fiscal 2020 from$193.7 million in fiscal 2019. Gross margin increased 80 basis points to 50.6% in fiscal 2020 from 49.8% in fiscal 2019. Excluding items affecting comparability of$22.5 million in fiscal 2020 and$19.6 million in fiscal 2019, Stuart Weitzman gross profit decreased 21.6% or$46.0 million to$167.3 million from$213.3 million in fiscal 2019, and gross margin increased 370 basis points to 58.5% in fiscal 2020 from 54.8% in fiscal 2019. The year over year change in gross margin was positively impacted by foreign currency rates by 43 -------------------------------------------------------------------------------- 120 basis points. Excluding the impact of foreign currency, the increase in gross margin of 250 basis points is primarily due to favorable channel mix. Stuart Weitzman SG&A Expenses increased$521.0 million to$766.2 million in fiscal 2020 as compared to$245.2 million in fiscal 2019. Excluding items affecting comparability of$542.3 million in fiscal 2020 and$15.0 million in fiscal 2019, SG&A expenses decreased 2.8% or$6.3 million to$223.9 million in fiscal 2020 from$230.2 million in fiscal 2019; and SG&A expenses as a percentage of net sales increased to 78.2% in fiscal 2020 from 59.1% in fiscal 2019. This decrease is primarily due to a decrease in marketing expenses and compensation costs partially offset by additional store-related costs as a result of new store openings. Stuart Weitzman Operating Loss increased$569.9 million to an operating loss of$621.4 million in fiscal 2020, as compared to an operating loss of$51.5 million in fiscal 2019. Excluding items affecting comparability, Stuart Weitzman operating loss increased$39.7 million to an operating loss of$56.6 million from an operating loss of$16.9 million in fiscal 2019; and operating margin was (19.8)% in fiscal 2020 as compared to (4.3)% in fiscal 2019. The increase in operating loss was due to a decrease in gross profit partially offset by lower SG&A expenses. FISCAL 2019 COMPARED TO FISCAL 2018 The comparison of fiscal 2019 to 2018 has been omitted from this Form 10-K, but can be referenced in our Form 10-K for the fiscal year endedJune 29, 2019 , filed onAugust 15, 2019 . 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 reflect certain items, including the impact of the Impairment charges and Acceleration Program costs in fiscal 2020,ERP Implementation and Organization -related and Integration charges in fiscal 2020 and 2019, and the impact of Tax Legislation in fiscal 2019. 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 extensive full and partial store closures resulting from the Covid-19 pandemic, comparable store sales are not reported for fiscal year endedJune 27, 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, the human resources committee of the Company's Board uses these non-GAAP measures when setting and assessing achievement of incentive compensation goals. The Company operates on a global basis and reports financial results 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 revenue results by translating current period revenue in local currency using the prior year period's 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 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. 44 --------------------------------------------------------------------------------
For a detailed discussion on these non-GAAP measures, see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations".
45
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FINANCIAL CONDITION
Cash Flows - Fiscal 2020 Compared to Fiscal 2019
Fiscal Year Ended
June 27, June 29,
2020 2019 Change
(millions)
Net cash provided by operating activities $ 407.0 $ 792.4 $ (385.4 )
Net cash provided by (used in) investing
activities 44.3 (574.2 ) 618.5
Net cash provided by (used in) financing
activities 5.9 (485.6 ) 491.5
Effect of exchange rate changes on cash and cash
equivalents (0.1 ) (6.8 ) 6.7
Net increase (decrease) in cash and cash
equivalents $ 457.1 $
(274.2 )
The Company's cash and cash equivalents increased by$457.1 million in fiscal 2020 compared to a decrease of$274.2 million in fiscal 2019, as discussed below. Net cash provided by operating activities Net cash provided by operating activities decreased$385.4 million primarily due to changes in operating assets and liabilities of$192.3 million , the impact of non-cash charges of$717.8 million and changes in net income of$1.30 billion . The$192.3 million change in our operating asset and liability balances was primarily driven by: • Other liabilities changed by$18.0 million . They were a use of cash of
fiscal 2019, primarily driven by the application of net operating losses
to reduce the Transition Tax liability partially in fiscal 2019, partially
offset by a reclass of liability from long-term to short-term.
• Other assets changed by $107.5 million . They were a source of cash of
in fiscal 2019, primarily driven by timing of tax related payments.
• Inventories changed by $46.1 million . They were a use of cash of $58.6
million in fiscal 2020 as compared to a use of cash of
fiscal 2019, primarily driven by increased inventory in transit at the end
of fiscal 2019, and lower than expected sales in fiscal 2020.
• Accrued liabilities changed by
of $7.6 million in fiscal 2020 as compared to a use of cash of $28.8
million in fiscal 2019, primarily driven by the timing of income tax
payments, higher reserves due to Covid-19, partially offset by the
cancellation of AIP.
• Accounts payable changed by $51.9 million . They were a use of cash ofin fiscal 2019, primarily driven by the timing of lower inventory receipts
across all brands.
• Trade accounts receivable changed by
cash of
shipments across all brands and a decrease in retail sales due to store
closures related to Covid-19.
Net cash provided by (used in) investing activities
Net cash provided by investing activities was $44.3 million in fiscal 2020
compared to a use of cash of $574.2 million in fiscal 2019, resulting in a
$618.5 million increase in net cash provided by investing activities.
The $44.3 million source of cash in fiscal 2020 is primarily due to net cash
proceeds from maturities and sales of investments of $462.1 million . This source
of cash was partially offset by purchases of investments of $212.4 million and
capital expenditures of $205.4 million .
The $574.2 million use of cash in fiscal 2019 is primarily due to purchase of
investments of $415.5 million and capital expenditures of $274.2 million . This
use of cash was partially offset by net cash proceeds from maturities and sales
of investments of $159.0 million .
Net cash provided by (used in) financing activities
Net cash provided by financing activities was $5.9 million in fiscal 2020 as
compared to a use of cash of $485.6 million in fiscal 2019, resulting in a
$491.5 million increase in net cash provided by financing activities.
46
--------------------------------------------------------------------------------
The $5.9 million source of cash in fiscal 2020 was primarily due to proceeds
from the draw down on the Revolving Credit Facility of $700.0 million , partially
offset by dividend payments of $380.3 million and repurchases of common stock of
$300.0 million .
The $485.6 million of cash used in fiscal 2019 was primarily due to dividend
payments of $390.7 million and repurchases of common stock of $100.0 million .
Cash Flows - Fiscal 2019 Compared to Fiscal 2018
The comparison of fiscal 2019 to 2018 has been omitted from this Form 10-K, but
can be referenced in our Form 10-K for the fiscal year ended June 29, 2019 ,
filed on August 15, 2019 .
47
--------------------------------------------------------------------------------
Working Capital and Capital Expenditures
As of June 27, 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) $ 1,426.3 $ - $ 1,426.3
Short-term investments(1) 8.1 - 8.1
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 $ 3,934.4 $ 2,300.0 $ 1,634.4 (1) As of
investments were held outside
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. The Company has recorded deferred taxes on certainearnings of non-US subsidiaries that are deemed likely to be repatriated.
See Note 16, "Income Taxes" for more information.
(2) In
whereby
party thereto, and a syndicate of banks and financial institutions have made
available to the Company a
including sub-facilities for letters of credit, with a maturity date of
Revolving Credit Facility bear interest at a rate per annum equal to, at the
Borrowers' option, either (a) an alternate base rate (which is a rate equal
to the greatest of (i) the Prime Rate in effect on such day, (ii) the
Federal Funds Effective Rate in effect on such day plus ½ of 1% or (iii) the
Adjusted LIBO Rate for a one month Interest Period on such day plus 1%) or
(b) a rate based on the rates applicable for deposits in the interbank
market for
made plus, in each case, an applicable margin. The applicable margin will be
determined by reference to a grid, defined in the Credit Agreement, based on
the ratio of (a) consolidated debt plus operating lease liability to (b)
consolidated EBITDAR. Additionally, the Company pays a commitment fee at a
rate determined by the reference to the aforementioned pricing grid. On May
19, 2020, the Company entered into Amendment No. 1 (the "Amendment") to the
Revolving Credit Facility. Under the terms of the Amendment, during the
period from the Effective Date until October 2, 2021 , the Company must
maintain available liquidity of $700 million (with available liquiditydefined as the sum of unrestricted cash and cash equivalents and available
commitments under credit facilities, including the Revolving Credit
Facility). Following the period from the Effective Date until the compliance
certificate is delivered for the fiscal quarter ending
"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
commitment amount under the revolving credit facility remains unchanged. As
of
Revolving Credit Facility. Refer to Note 13, "Debt," for further information
on our existing debt instruments.
(3) In
of 4.250% senior unsecured notes due
"2025 Senior Notes"). Furthermore, on
due
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
events of default have occurred. Refer to Note 13, "Debt," for further
information on our existing debt instruments.
48-------------------------------------------------------------------------------- We believe that our Revolving Credit Facility is adequately diversified with no undue concentrations in any one financial institution. As ofJune 27, 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 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, 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. The Company expects total capital expenditures to be approximately$150 million in fiscal 2021. 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, including pandemics such as Covid-19. Share Repurchase Plan OnMay 9, 2019 , the Company announced that its Board of Directors had authorized the repurchase up to$1.00 billion of shares of its outstanding common stock. Pursuant to this program, purchases of the Company's common stock will be made subject to market conditions and at prevailing market prices, through open market purchases. Repurchased shares of common stock will become authorized but unissued shares. These shares may be issued in the future for general corporate and other purposes. In addition, the Company may terminate or limit the stock repurchase program at any time. During fiscal 2020, the Company repurchased$300.0 million of common stock. As ofJune 27, 2020 , the Company has the authorization to repurchase up to$600.0 million of additional shares under the plan. Amendment No. 1 to the Revolving Credit Facility contains negative covenants that limit the ability of the Company to, among other things, engage in share buybacks during the Covenant Relief Period. Refer to Part II, Item 5. "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities ," for further information. 49 -------------------------------------------------------------------------------- Contractual and Other Obligations Firm Commitments As ofJune 27, 2020 , the Company's contractual obligations are as follows: Fiscal Fiscal Fiscal Fiscal 2026 Total 2021 2022 - 2023 2024 - 2025 and Beyond (millions) Capital expenditure commitments$ 17.0 $ 17.0 $ - $ - $ - Inventory purchase obligations 280.4 280.4 - - - Operating lease obligations 2,614.9 454.6 692.9 493.0 974.4 Finance lease obligations 6.9 1.4 2.8 2.7 - Debt repayment 2,311.5 711.5 400.0 600.0 600.0 Interest on outstanding debt 325.0 67.4 113.0 94.1 50.5 Mandatory transition tax payments(1) 155.9 11.9 48.7 95.3 - Other 72.8 39.5 33.3 - - Total$ 5,784.4 $ 1,583.7 $ 1,290.7 $ 1,285.1 $ 1,624.9
(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. Refer to Note 16, "Income Taxes,"
for further information.
Excluded from the above contractual obligations table is the non-current liability for unrecognized tax benefits of$77.3 million as ofJune 27, 2020 , 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 atJune 27, 2020 as these items will be paid within one year and certain long-term liabilities not requiring cash payments. 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$33.3 million as ofJune 27, 2020 , 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 14, "Commitments and Contingencies," for further information. 50 -------------------------------------------------------------------------------- CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted inthe 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 when the Company satisfies its performance obligations by transferring control of promised products or services to its customers, which may be at a point of time or over time. Control is transferred when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized is the amount of consideration to which the Company expects to be entitled, including estimation of sale terms that may create variability in the consideration. Revenue subject to variability is constrained to an amount which will not result in a significant reversal in future periods when the contingency that creates variability is resolved. Retail store and concession shop-in-shop revenues are recognized at the point-of-sale, when the customer obtains physical possession of the products. Internet revenue from sales of products ordered through the Company's e-commerce sites is recognized upon delivery and receipt of the shipment by its customers and includes shipping and handling charges paid by customers. Retail and internet revenues are recorded net of estimated returns, which are estimated by developing an expected value based on historical experience. Payment is due at the point of sale. The Company recognizes revenue within the wholesale channel at the time title passes and risk of loss is transferred to customers, which is generally at the point of shipment of products but may occur upon receipt of the shipment by the customer in certain cases. Wholesale revenue is recorded net of estimates for returns, discounts, end-of-season markdowns, cooperative advertising allowances and other consideration provided to the customer. The Company's historical estimates of these variable amounts have not differed materially from actual results. The Company recognizes licensing revenue over time during the contract period in which licensees are granted access to the Company's trademarks. These arrangements require licensees to pay a sales-based royalty and may include a contractually guaranteed minimum royalty amount. Revenue for contractually guaranteed minimum royalty amounts is recognized ratably over the license year and any excess sales-based royalties are recognized as earned once the minimum royalty threshold is achieved. AtJune 27, 2020 , 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 The Company holds inventory that is sold through retail and wholesale distribution channels, including e-commerce sites. Substantially all of the Company's inventories are comprised of finished goods, and are reported at the lower of cost or net realizable value. Inventory costs include material, conversion costs, freight and duties and are primarily determined on a weighted-average cost basis. 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. AtJune 27, 2020 , 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. Furthermore, the Company 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 4, "Acquisitions," for detailed disclosures related to our acquisitions. 51 --------------------------------------------------------------------------------Goodwill and Other Intangible Assets Upon acquisition, the Company estimates and records the fair value of purchased intangible assets, which primarily consists of brands, customer relationships, right-of-use assets and order backlog.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, 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 as appropriate. 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 at the beginning of the fourth quarter of each fiscal year. The Company determined that there was no impairment in fiscal 2019 or fiscal 2018. During the third quarter of fiscal 2020, profitability trends continued to decline from those that were expected for the Stuart Weitzman brand. The reduction in both cash from operations and future expected cash flows were exacerbated by the Covid-19 pandemic, which resulted in a decline in sales driven by full and partial closures of a significant portion of our stores globally. As a result of these macroeconomic conditions, the Company concluded that a triggering event had occurred during the third quarter, resulting in the need to perform a quantitative interim impairment assessment over the Company's Stuart Weitzman reporting unit and indefinite-lived brand intangible assets. The assessment concluded that the fair values of the Stuart Weitzman reporting unit and indefinite-lived brand intangible asset as of the third quarter did not exceed their respective carrying values. Accordingly, in the third quarter of fiscal 2020, the Company recorded a goodwill impairment charge of$210.7 million related to the Stuart Weitzman reporting unit, resulting in a full impairment. During the third quarter of fiscal 2020, the Company also recorded an impairment charge of$267.0 million related to the Stuart Weitzman indefinite-lived brand, resulting in a full impairment. The Company considered the excess of the fair value over its carrying value for all Coach and Kate Spade reporting unit and indefinite-lived brand intangibles, management did not perform an interim assessment for these reporting units. Based on the annual assessment, 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. 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 related asset group 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 52 -------------------------------------------------------------------------------- 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. 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. The Company estimates the forfeiture rate based on historical experience as well as expected future behavior. The Company grants performance-based share awards to key executives, the vesting of which is subject to the executive's continuing employment and the Company's or individual'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 2020 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. The Company records net deferred tax assets to the extent it believes that it is more likely than not that these assets will be realized. In making such determination, the Company considers 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. The Company reduces 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. The Company is not permanently reinvested with respect to earnings of a limited number of foreign entities and has recorded the tax consequences of remitting earnings from these entities. The Company is permanently reinvested with respect to all other earnings. 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 the Company believes that the estimates and assumptions used 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 the tax authorities may take a contrary position that could result in a significant impact on the Company's results of operations. Significant management judgment is required in determining the effective tax rate, in evaluating tax positions and in determining the net realizable value of deferred tax assets. Refer to Note 16, "Income Taxes," for further information. Recent Accounting Pronouncements Refer to Note 3, "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. 53
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