TAPESTRY, INC. 
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 consumers who are increasingly utilizing digital platforms to engage with brands; Rethinking the role of stores with an intent to optimize our fleet •Transforming into 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 second 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 over 1.5 million new customers inNorth America across brands through our e-commerce channels, a meaningful increase versus prior year, as we continue to meet consumers where they choose to shop and utilize marketing capabilities to drive engagement and enhance the customer's digital journey; •Leveraged Tapestry's scale and agility to deliver triple-digit digital growth by expanding our network through added fulfillment capacity and the diversification of parcel carrier partnerships, swiftly adapting to the current environment and navigating market constraints to support increased customer demand; •Drove significant growth inChina through compelling product assortments, enhanced marketing and expanded reach across direct channels and third party online distribution; •Deployed new data and analytics tools to drive strategic, data-driven decision making to optimize marketing messaging, assortment planning and promotional levels, supporting higher AUR and conversion rates; 27 -------------------------------------------------------------------------------- •Continued to enhance flexibility of operating model, with a streamlined organizational structure and empowered teams, while optimizing our global fleet with 18 net closures in the fiscal first half representing a net decrease of 84 stores from the prior year; Remain on track to achieve gross run-rate savings of$300 million , including gross savings of$200 million in fiscal 2021. Recent Developments Covid-19 Pandemic The Covid-19 virus has impacted regions all around the world, resulting in restrictions and shutdowns implemented by national, state, and local authorities. Consequently, the spread of Covid-19 has caused significant global business disruptions. As a result of the widespread impact of Covid-19, Tapestry had temporarily closed the majority of its directly operated stores globally for some period of time to help reduce the spread of Covid-19. The vast majority of the Company's stores re-opened for either in-store or pick-up service and they have continued to operate since then, however, some store locations have experienced temporary re-closures or are operating under tighter restrictions in compliance with local government regulation. Many of the Company's wholesale and licensing partners also closed their bricks and mortar stores as required by government orders during the third and fourth quarters of fiscal 2020, and while the majority of stores have reopened, they have also been subject to temporary re-closures and tighter capacity restrictions operating in compliance with the rules of certain local governments. However, there is still uncertainty around the duration of these disruptions and the possibility of other effects on the business. We will continue to monitor the rapidly evolving situation pertaining to the Covid-19 outbreak, including guidance from international and domestic authorities. In these circumstances, the Company will need to make adjustments to our operating plan. Refer to Part II, Item 1A. "Risk Factors" herein for further information. 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 fiscal 2021 through optimization of our fleet and prioritizing investment in digital. •Continue to drive SG&A savings, including actions taken under the Acceleration Program, through the reduction of corporate and retail workforce, right-sizing of marketing expenses, reduction of fixed costs such as rent as well as procurement savings, including reducing external third party services. •Did not pay out bonuses under the Annual Incentive Plan for fiscal year 2020, eliminated merit salary increases for all employees and temporarily reduced compensation for the Board of Directors and corporate employees above a certain salary threshold. During the second quarter of fiscal 2021, compensation resumed normal levels. •Tightly managed inventories by reflowing product introductions and cancelling inventory receipts as well as planned reduction of stock keeping units ("SKUs"). •Drew down$700 million from its$900 million Revolving Credit Facility to add to cash balances, of which$500 million was repaid during the second quarter of fiscal 2021 and the remaining$200 million was repaid onJanuary 25, 2021 . •Suspended its quarterly cash dividend and share repurchase program beginning in the fourth quarter of fiscal 2020. The Company will continue to consider near-term exigencies and the long-term financial health of the business as clear steps are taken to mitigate the consequences of the Covid-19 pandemic. 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. Additionally, onDecember 27, 2020 , the Covid-19 stimulus package was signed into law, which contained enhancements to certain tax credits enacted under the CARES Act. These laws 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. 28 -------------------------------------------------------------------------------- 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 theU.S. legislation, 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 has implemented a strategic growth plan after undergoing a review of its business under the Acceleration Program and expects to incur certain costs reflecting: (i) actions to streamline the Company's organization; (ii) select store closures as the Company optimizes its fleet (including store closure costs incurred as the Company exits certain regions in which it currently operates); and (iii) professional fees and compensation costs incurred as a result of the development and execution of the Company's comprehensive strategic initiatives aimed at increasing profitability. Including charges taken in 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 disruptions related to Covid-19 have materially adversely impacted our operations, cash flow, and liquidity. The virus has impacted regions all around the world, resulting in restrictions and shutdowns implemented by national, state, and local authorities. These requirements have resulted in full and partial store closures globally, causing a significant reduction in sales starting in the third quarter of fiscal 2020. While the vast majority of the Company's stores reopened for either in-store or curb-side service and have continued to operate since then, some store locations have experienced temporary re-closures or are operating under tighter restrictions in compliance with local government regulation, and other stores may be required to close again for an extended period of time due to the possibility of a resurgence of increased infections. Covid-19 may also cause disruptions in the Company's supply chain, resulting in facility closures, labor instability, potential inability to source raw materials and disrupted operating procedures in attempts to curb the spread of Covid-19 within our third-party manufacturers, distribution centers, and other vendors. The Company's e-commerce sites continue to operate, subject to the local guidance related to Covid-19 surrounding our distribution centers. In addition, the Company has started to experience delays as a result of port congestion for imported products, which may result in longer lead times or increased inbound freight costs. Furthermore, the Kate Spade brand has inventory on the Maersk Essen and One Apus cargo ships, which have experienced weather related incidents resulting in delays of expected inventory receipts, as well as possible loss or damage to the product. The Company is working to mitigate the impact of these incidents through various actions. If these mitigation efforts are not successful, there is a risk that these incidents could adversely impact the brand's sales in the second half of fiscal 2021. The newU.S. presidential administration may enact additional stimulus legislation or support public health policies, including the widespread distribution of vaccines, which may mitigate the impact of the pandemic. Furthermore, the newU.S. presidential administration has announced certain tax plans that, if passed as currently communicated, could have an adverse impact on our tax rate and financial results. Several organizations that monitor the world's economy, including theInternational Monetary Fund , observed that the outbreak of the Covid-19 pandemic has negatively shocked the global economy and may have a sustained negative impact on the global economic growth as compared to pre-pandemic estimates. Initial signs of recovery have been prevalent, however, these organizations expect recovery to continue on a slow or gradual pace with the possibility of slight setbacks after a period of temporary economic rebound. Economic activity continues to be marked by uncertainty as the factors surrounding the ability to control the spread of or treat Covid-19 remain considerable. Consumer behavior is largely impacted by governments' ability to enforce policies to prevent the resurgence of the virus and make strategic investments that aid economic recovery. While uncertainty continues to surround 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 or duty rates may contribute to a worsening of the macroeconomic environment or adversely impact our business. Continued increases in trade tensions could impact the Company's ability to grow its business, particularly with the Chinese consumer globally. Since fiscal 2019, the 29 --------------------------------------------------------------------------------U.S. andChina have both imposed tariffs on the importation of certain product categories into the respective country. There continues to be a possibility of increases in tariffs on goods imported into theU.S. fromChina andVietnam , or other countries. 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 concluded the transition phase onDecember 31, 2020 . OnDecember 24, 2020 , theU.K. and E.U. announced an agreement on their future relationship. This includes, but is not limited to, the free movement ofU.K. and E.U. originating products. However, products originating outside theU.K. and E.U. going to and coming from the E.U. will be subject to tariffs 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. 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. 30 -------------------------------------------------------------------------------- SECOND QUARTER FISCAL 2021 COMPARED TO SECOND QUARTER FISCAL 2020 The following table summarizes results of operations for the second quarter of fiscal 2021 compared to the second 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 December 26, 2020 December 28, 2019 Variance
(millions, except per share data)
% of % of
Amount net sales Amount net sales Amount %
Net sales $ 1,685.4 100.0 % $ 1,816.0 100.0 % $ (130.6) (7.2) %
Gross profit 1,173.7 69.6 1,209.7 66.6 (36.0) (3.0)
SG&A expenses 784.3 46.5 846.6 46.6 (62.3) (7.4)
Operating income (loss) 389.4 23.1 363.1 20.0 26.3 7.3
Interest expense, net 18.7 1.1 14.0 0.8 4.7 33.1
Other expense (income) (3.6) (0.2) (5.9) (0.3) 2.3 38.6
Provision for income taxes 63.3 3.8 56.2 3.1 7.1 12.6
Net income (loss) 311.0 18.5 298.8 16.5 12.2 4.1
Net income (loss) per share:
Basic $ 1.12 $ 1.08 $ 0.04 3.5
Diluted $ 1.11 $ 1.08 $ 0.03 2.5
GAAP to Non-GAAP Reconciliation
The Company's reported results are presented in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
reported results during the second quarter of fiscal 2021 and fiscal 2020
reflect the costs attributable to the CARES Act Tax Impact, the Acceleration
Program, ERP system implementation efforts and Organization-related and
Integration costs, as noted in the following tables. Refer to "Non-GAAP
Measures" herein for further discussion on the Non-GAAP measures.
31--------------------------------------------------------------------------------
Second Quarter Fiscal 2021 Items
Three Months Ended December 26, 2020
Item Affecting Comparability
GAAP Basis CARES Act Tax Acceleration Non-GAAP Basis
(As Reported) Impact Program (Excluding Items)
(millions, except per share data)
Coach 888.1 - - 888.1
Kate Spade 233.1 - - 233.1
Stuart Weitzman 52.5 - - 52.5
Gross profit(1) $ 1,173.7 $ - $ - $ 1,173.7
Coach 476.1 - 5.8 470.3
Kate Spade 174.3 - 2.4 171.9
Stuart Weitzman 40.6 - (2.3) 42.9
Corporate 93.3 - 15.8 77.5
SG&A expenses $ 784.3 $ - $ 21.7 $ 762.6
Coach 412.0 - (5.8) 417.8
Kate Spade 58.8 - (2.4) 61.2
Stuart Weitzman 11.9 - 2.3 9.6
Corporate (93.3) - (15.8) (77.5)
Operating income (loss) $ 389.4 $ - $ (21.7) $ 411.1
Provision for income taxes 63.3 (3.3) (6.4) 73.0
Net income (loss) $ 311.0 $ 3.3 $ (15.3) $ 323.0
Net income (loss) per diluted common
share $ 1.11 $ 0.01 $ (0.05) $ 1.15
(1)Adjustments within Gross profit are recorded within Cost of sales.
In the second 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. This
reflects the adjustment to the Company's provisional estimate. Refer to Note 15,
"Income Taxes" for further information.
•Acceleration Program - Total charges incurred under the Acceleration Program
are primarily professional fees incurred as a result of the development and
execution of the Company's comprehensive strategic initiatives, as well as
actions to streamline the Company's organization, which include severance. Refer
to the "Executive Overview" and Note 6, "Restructuring Activities," herein for
further information.
These actions taken together increased the Company's SG&A expenses by $21.7
million and reduced Provision for income taxes by $9.7 million , negatively
impacting Net income by $12.0 million or $0.04 per diluted share.
32
--------------------------------------------------------------------------------Second Quarter Fiscal 2020 Items
Three
Months Ended
Items Affecting Comparability
Non-GAAP Basis
GAAP Basis Organization-related & (Excluding
(As Reported) ERP Implementation Integration costs Items)
(millions, except per share data)
Coach 877.3 - - 877.3
Kate Spade 262.4 - - 262.4
Stuart Weitzman 70.0 - (1.5) 71.5
Gross profit(1) $ 1,209.7 $ - $ (1.5) $ 1,211.2
Coach 494.5 - (0.4) 494.9
Kate Spade 194.5 - 0.7 193.8
Stuart Weitzman 60.4 - 0.3 60.1
Corporate 97.2 6.3 1.8 89.1
SG&A expenses $ 846.6 $ 6.3 $ 2.4 $ 837.9
Coach 382.8 - 0.4 382.4
Kate Spade 67.9 - (0.7) 68.6
Stuart Weitzman 9.6 - (1.8) 11.4
Corporate (97.2) (6.3) (1.8) (89.1)
Operating income (loss) $ 363.1 $ (6.3) $ (3.9) $ 373.3
Provision for income taxes 56.2 (1.5) (4.0) 61.7
Net income (loss) $ 298.8 $ (4.8) $ 0.1 $ 303.5
Net income (loss) per diluted common
share $ 1.08 $ (0.02) $ - $ 1.10
(1)Adjustments within Gross profit are recorded within Cost of sales.
In the second quarter of fiscal 2020, the Company incurred the following:
•ERP Implementation - Total charges represent technology implementation costs.
•Organization-related and Integration costs - Total charges represent
integration costs related to inventory and professional fees. Refer to Note 5,
"Integration," for more information regarding integration costs.
These actions taken together increased the Company's SG&A expenses by
$8.7 million , Cost of sales by $1.5 million and reduced Provision for income
taxes by $5.5 million , negatively impacting Net income by $4.7 million or $0.02
per diluted share.
Tapestry, Inc. Summary - Second Quarter of Fiscal 2021
Currency Fluctuation Effects
The change in net sales and gross margin for the second quarter of fiscal 2021
compared to the second quarter of fiscal 2020 has been presented both including
and excluding currency fluctuation effects. All percentages shown in the tables
below and the discussion that follows have been calculated using unrounded
numbers.
33
--------------------------------------------------------------------------------Net Sales Three Months Ended Variance December 26, December 28, Constant Currency 2020 2019 Amount % Change (millions) Coach$ 1,225.3 $ 1,269.9 $ (44.6) (3.5) % (5.0) % Kate Spade 375.6 430.4 (54.8) (12.7) (13.2) Stuart Weitzman 84.5 115.7 (31.2) (26.9) (28.4) Total Tapestry$ 1,685.4 $ 1,816.0 $ (130.6) (7.2) (8.4) Net sales in the second quarter of fiscal 2021 decreased 7.2% or$130.6 million to$1.69 billion . Excluding the effects of foreign currency, net sales decreased by 8.4% or$153.0 million . •CoachNet Sales decreased 3.5% or$44.6 million to$1.23 billion in the second quarter of fiscal 2021. Excluding the impact of foreign currency, net sales decreased 5.0% or$63.4 million . This decrease in net sales is primarily attributed to a decline of$62.1 million in net global retail sales driven by lower sales in stores inNorth America , Other Asia, includingJapan , andEurope due to the impact of Covid-19, which was partially offset by an increase in global e-commerce sales and store sales in mainlandChina . •Kate SpadeNet Sales decreased 12.7% or$54.8 million to$375.6 million in the second quarter of fiscal 2021. Excluding the impact of foreign currency, net sales decreased 13.2% or$56.8 million . This decrease is primarily due to a decline of$33.2 million in net global retail sales driven by lower sales in stores, primarily inNorth America , due to the impact of the Covid-19, partially offset by an increase in global e-commerce sales. Wholesale sales also declined$21.7 million due to a strategic pullback in disposition and lower demand as a result of Covid-19. •Stuart WeitzmanNet Sales decreased 26.9% or$31.2 million to$84.5 million in the second quarter of fiscal 2021. Excluding the impact of foreign currency, net sales decreased 28.4% or$32.8 million . This decrease was primarily due to a net decline of$24.8 million in the retail business, which is attributed to store closures related to fleet optimization under the Acceleration Program, as well as a decline in demand as a result of Covid-19. Additionally, wholesale sales decreased$8.0 million , which is primarily due to a decline in demand as a result of the Covid-19. Gross Profit Three Months Ended December 26, 2020 December 28, 2019 Variance (millions) Amount % of Net Sales Amount % of Net Sales Amount % Coach$ 888.1 72.5 %$ 877.3 69.1 %$ 10.8 1.2 % Kate Spade 233.1 62.1 262.4 61.0 (29.3) (11.2) Stuart Weitzman 52.5 62.2 70.0 60.5 (17.5) (24.9) Tapestry$ 1,173.7 69.6$ 1,209.7 66.6$ (36.0) (3.0) Gross profit decreased 3.0% or$36.0 million to$1.17 billion in the second quarter of fiscal 2021 from$1.21 billion in the second quarter of fiscal 2020. Gross margin for the second quarter of fiscal 2021 was 69.6% as compared to 66.6% in the second quarter of fiscal 2020. Excluding items affecting comparability of$1.5 million in the second quarter of fiscal 2020 as discussed in the "GAAP to non-GAAP Reconciliation" herein, gross profit decreased 3.1% or$37.5 million to$1.17 billion from$1.21 billion in the second quarter of fiscal 2020. Excluding items affecting comparability, gross margin increased 290 basis points to 69.6% compared to 66.7% in the second quarter of fiscal 2020, and on a constant currency basis, gross margin increased 280 basis points from the second 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. 34 -------------------------------------------------------------------------------- •Coach Gross Profit increased 1.2% or$10.8 million to$888.1 million in the second quarter of fiscal 2021 from$877.3 million in the second quarter of fiscal 2020. Gross margin increased 340 basis points to 72.5% in the second quarter of fiscal 2021 from 69.1% in the second quarter of fiscal 2020. Coach gross margin was not materially impacted by foreign currency. This increase in gross margin was primarily due to reduced promotional activity. •Kate Spade Gross Profit decreased 11.2% or$29.3 million to$233.1 million in the second quarter of fiscal 2021 from$262.4 million in the second quarter of fiscal 2020. Gross margin increased 110 basis points to 62.1% in the second quarter of fiscal 2021 from 61.0% in the second quarter of fiscal 2020. Kate Spade gross margin was not materially impacted by foreign currency. This increase in gross margin was primarily due to favorable channel mix including a strategic pullback in disposition and reduced promotional activity, which was partially offset by the impact of directly operating the footwear business. •Stuart Weitzman Gross Profit decreased 24.9% or$17.5 million to$52.5 million during the second quarter of fiscal 2021 from$70.0 million in the second quarter of fiscal 2020. Gross margin increased to 62.2% in the second quarter of fiscal 2021 from 60.5% in the second quarter of fiscal 2020. Excluding items affecting comparability of$1.5 million in the second quarter of fiscal 2020, Stuart Weitzman gross profit decreased 26.5% or$19.0 million to$52.5 million from$71.5 million in the second quarter of fiscal 2020. Excluding items affecting comparability, gross margin increased 40 basis points to 62.2% from 61.8% in the second quarter of fiscal 2020, and on a constant currency basis gross margin decreased 140 basis points from the second quarter of fiscal 2020. This decrease in gross margin was primarily due to channel mix. Selling, General and Administrative Expenses ("SG&A") Three Months Ended December 26, 2020 December 28, 2019 Variance (millions) Amount % of Net Sales Amount % of Net Sales Amount % Coach$ 476.1 38.9 %$ 494.5 38.9 %$ (18.4) (3.7) % Kate Spade 174.3 46.4 194.5 45.2 (20.2) (10.4) Stuart Weitzman 40.6 48.0 60.4 52.3 (19.8) (32.9) Corporate 93.3 NA 97.2 NA (3.9) (4.0) Tapestry$ 784.3 46.5$ 846.6 46.6$ (62.3) (7.4) SG&A expenses decreased 7.4% or$62.3 million to$784.3 million in the second quarter of fiscal 2021 as compared to$846.6 million in the second quarter of fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 46.5% during the second quarter of fiscal 2021 as compared to 46.6% during the second quarter of fiscal 2020. Excluding items affecting comparability of$21.7 million and$8.7 million in the second quarter of fiscal 2021 and fiscal 2020, respectively, SG&A expenses decreased 9.0% or$75.3 million to$762.6 million from$837.9 million in the second quarter of fiscal 2020. SG&A as a percentage of sales decreased to 45.2% as compared to 46.1% during the second quarter of fiscal 2020. This decrease in SG&A expenses includes actions taken as part of the Acceleration Program as well as benefits from wage subsidies, rent concessions and a gain realized on the deferred purchase price of the Kate Spade joint venture, partially offset by an increase in accrued Annual Incentive Plan expenses. •Coach SG&A Expenses decreased 3.7% or$18.4 million to$476.1 million in the second quarter of fiscal 2021 as compared to$494.5 million in the second quarter of fiscal 2020. SG&A expenses as a percentage of net sales remained flat at 38.9% during the second quarter of fiscal 2021. Excluding items affecting comparability of$5.8 million and$(0.4) million in the second quarter of fiscal 2021 and fiscal 2020, respectively, SG&A expenses decreased 5.0% or$24.6 million to$470.3 million during the second quarter of fiscal 2021; and SG&A expenses as a percentage of net sales decreased to 38.4% in the second quarter of fiscal 2021 from 39.0% in the second quarter of fiscal 2020. This decrease in SG&A expenses is primarily due to a decline in compensation costs and occupancy costs, partially offset by an increase in e-commerce related selling costs and digital marketing spend in support of higher e-commerce sales. •Kate Spade SG&A Expenses decreased 10.4% or$20.2 million to$174.3 million in the second quarter of fiscal 2021 as compared to$194.5 million in the second quarter of fiscal 2020. As a percentage of net sales, SG&A expenses increased to 46.4% during the second quarter of fiscal 2021 as compared to 45.2% during the second quarter of fiscal 2020. Excluding items affecting comparability of$2.4 million and$0.7 million in the second quarter of fiscal 2021 and fiscal 2020, respectively, SG&A expenses decreased 11.3% or$21.9 million to$171.9 million during the second quarter of fiscal 2021; and SG&A expenses as a percentage of net sales increased to 45.8% in the second quarter of fiscal 2021 from 45.0% in the second quarter of fiscal 2020. This decrease in SG&A expenses is primarily due to a 35 -------------------------------------------------------------------------------- decline in compensation costs, occupancy costs and depreciation expense, partially offset by an increase in digital marketing spend in support of higher e-commerce sales. •Stuart Weitzman SG&A Expenses decreased 32.9% or$19.8 million to$40.6 million in the second quarter of fiscal 2021 as compared to$60.4 million in the second quarter of fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 48.0% during the second quarter of fiscal 2021 as compared to 52.3% during the second quarter of fiscal 2020. Excluding items affecting comparability of$(2.3) million and$0.3 million in the second quarter of fiscal 2021 and fiscal 2020, respectively, SG&A expenses decreased 28.5% or$17.2 million to$42.9 million during the second quarter of fiscal 2021 from$60.1 million during the second quarter of fiscal 2020; and SG&A expenses as a percentage of net sales decreased to 50.9% in the second quarter of fiscal 2021 from 52.0% in the second quarter of fiscal 2020. This decrease is primarily due to a decline in occupancy and compensation costs, mainly as a result of fleet optimization under the Acceleration Program, as well as reduced marketing spend. •Corporate expenses, which are included within SG&A expenses discussed above but are not directly attributable to a reportable segment, decreased 4.0% or$3.9 million to$93.3 million in the second quarter of fiscal 2021 as compared to$97.2 million in the second quarter of fiscal 2020. Excluding items affecting comparability of$15.8 million and$8.1 million in the second quarter of fiscal 2021 and fiscal 2020, respectively, SG&A expenses decreased 13.1% or$11.6 million to$77.5 million in the second quarter of fiscal 2021 as compared to$89.1 million in the second quarter of fiscal 2020. This decrease in SG&A expenses was primarily driven by a gain realized on the deferred purchase price of the Kate Spade joint venture. Operating Income (Loss) Three Months Ended December 26, 2020 December 28, 2019 Variance (millions) Amount % of Net Sales Amount % of Net Sales Amount % Coach$ 412.0 33.6 %$ 382.8 30.1 %$ 29.2 7.6 % Kate Spade 58.8 15.7 67.9 15.8 (9.1) (13.4) Stuart Weitzman 11.9 14.1 9.6 8.2 2.3 25.5 Corporate (93.3) NA (97.2) NA 3.9 4.0 Tapestry$ 389.4 23.1$ 363.1 20.0$ 26.3 7.3 Operating income increased 7.3% or$26.3 million to$389.4 million in the second quarter of fiscal 2021 as compared to$363.1 million in the second quarter of fiscal 2020. Operating margin was 23.1% in the second quarter of fiscal 2021 as compared to 20.0% in the second quarter of fiscal 2020. Excluding items affecting comparability of$21.7 million and$10.2 million in the second quarter of fiscal 2021 and fiscal 2020, respectively, operating income increased 10.1% or$37.8 million to$411.1 million in the second quarter of fiscal 2021 from$373.3 million in the second quarter of fiscal 2020; and operating margin increased to 24.4% in the second quarter of fiscal 2021 as compared to 20.6% in the second quarter of fiscal 2020. •Coach Operating Income increased 7.6% or$29.2 million to$412.0 million in the second quarter of fiscal 2021, resulting in an operating margin of 33.6%, as compared to$382.8 million and 30.1%, respectively, in the second quarter of fiscal 2020. Excluding items affecting comparability, Coach operating income increased 9.3% or$35.4 million to$417.8 million from$382.4 million in the second quarter of fiscal 2020; and operating margin was 34.1% in the second quarter of fiscal 2021 as compared to 30.1% in the second quarter of fiscal 2020. This increase in operating income was due to lower SG&A expenses and higher gross profit. •Kate Spade Operating Income decreased 13.4% or$9.1 million to$58.8 million in the second quarter of fiscal 2021, resulting in an operating margin of 15.7%, as compared to$67.9 million and operating margin of 15.8% in the second quarter of fiscal 2020. Excluding items affecting comparability, Kate Spade operating income decreased 10.9% or$7.4 million to$61.2 million from$68.6 million in the second quarter of fiscal 2020; and operating margin was 16.3% in the second quarter of fiscal 2021 as compared to 15.9% in the second quarter of fiscal 2020. This decrease in operating income was due lower gross profit, partially offset by lower SG&A expenses. •Stuart Weitzman Operating Income increased 25.5% or$2.3 million to$11.9 million in the second quarter of fiscal 2021, resulting in an operating margin of 14.1%, as compared to$9.6 million and operating margin of 8.2% in the second quarter of fiscal 2020. Excluding items affecting comparability, Stuart Weitzman operating income decreased 16.3% or$1.8 million to$9.6 million from$11.4 million in the second quarter of fiscal 2020; and operating margin was 11.3% in the second quarter of fiscal 2021 as compared to 9.8% in the second quarter of fiscal 2020. This decrease in operating income was due to lower gross profit, partially offset by lower SG&A expenses. 36 -------------------------------------------------------------------------------- Interest Expense, net Interest expense, net increased 33.1% or$4.7 million to$18.7 million in the second quarter of fiscal 2021 as compared to$14.0 million in the second quarter of fiscal 2020. The increase in interest expense, net is due to the additional interest expense related to the draw down on the Revolving Credit Facility in the fourth quarter of fiscal 2020 and lower interest income. Other Expense (Income) Other income decreased$2.3 million to$3.6 million in the second quarter of fiscal 2021 as compared to income of$5.9 million in the second quarter of fiscal 2020. The decrease in other income is related to a decrease in foreign exchange gains. Provision for Income Taxes The effective tax rate was 16.9% in the second quarter of fiscal 2021 as compared to 15.8% in the second quarter of fiscal 2020. Excluding items affecting comparability, the effective tax rate was 18.5% in the second quarter of 2021 as compared to 16.9% in the second quarter of fiscal 2020. The increase in our effective tax rate was primarily attributable to the geographic mix of earnings. Net Income (Loss) Net income increased 4.1% or$12.2 million to$311.0 million in the second quarter of fiscal 2021 as compared to$298.8 million in the second quarter of fiscal 2020. Excluding items affecting comparability, net income increased 6.4% or$19.5 million to a net income of$323.0 million in the second quarter of fiscal 2021 as compared to a net income of$303.5 million in the second quarter of fiscal 2020. This increase was primarily due to higher operating income. Net Income (Loss) per Share Net income per diluted share increased 2.5% to$1.11 in the second quarter of fiscal 2021 as compared to$1.08 in the second quarter of fiscal 2020. Excluding items affecting comparability, net income per diluted share increased 4.8% to$1.15 in the second quarter of fiscal 2021 as compared to$1.10 in the second quarter of fiscal 2020. This change was primarily due to higher net income. 37 -------------------------------------------------------------------------------- FIRST SIX MONTHS FISCAL 2021 COMPARED TO FIRST SIX MONTHS FISCAL 2020 The following table summarizes results of operations for the first six months of fiscal 2021 compared to the first six months of fiscal 2020. All percentages shown in the table below and the discussion that follows have been calculated using unrounded numbers. Six Months Ended December 26, 2020 December 28, 2019 Variance
(millions, except per share data)
% of % of
Amount net sales Amount net sales Amount %
Net sales $ 2,857.6 100.0 % $ 3,173.9 100.0 % $ (316.3) (10.0) %
Gross profit 2,003.9 70.1 2,124.2 66.9 (120.3) (5.7)
SG&A expenses 1,412.3 49.4 1,709.5 53.9 (297.2) (17.4)
Operating income (loss) 591.6 20.7 414.7 13.1 176.9 42.7
Interest expense, net 38.1 1.3 26.3 0.8 11.8 44.7
Other expense (income) (6.2) (0.2) 6.8 0.2 (13.0) NM
Provision for income taxes 17.0 0.6 62.8 2.0 (45.8) (73.0)
Net income (loss) 542.7 19.0 318.8 10.0 223.9 70.3
Net income (loss) per share:
Basic $ 1.96 $ 1.14 $ 0.82 72.5
Diluted $ 1.94 $ 1.13 $ 0.81 71.7
NM - Not meaningful
GAAP to Non-GAAP Reconciliation
The Company's reported results are presented in accordance with GAAP. The
reported results during the first six months of fiscal 2021 and fiscal 2020
reflect the impact of the costs attributable to the 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.
38--------------------------------------------------------------------------------
First Six Months of Fiscal 2021 Items
Six Months Ended December 26, 2020
Items affecting
comparability
Non-GAAP Basis
GAAP Basis CARES Act Tax Acceleration (Excluding
(As Reported) Impact Program Items)
(millions, except per share data)
Cost of sales
Coach 1,533.0 - - 1,533.0
Kate Spade 387.2 - - 387.2
Stuart Weitzman 83.7 - - 83.7
Gross profit(1) $ 2,003.9 $ - $ - $ 2,003.9
SG&A expenses
Coach 851.0 - 16.5 834.5
Kate Spade 305.2 - 3.4 301.8
Stuart Weitzman 71.8 - (4.7) 76.5
Corporate 184.3 - 33.1 151.2
SG&A expenses $ 1,412.3 $ - $ 48.3 $ 1,364.0
Operating income (loss)
Coach 682.0 - (16.5) 698.5
Kate Spade 82.0 - (3.4) 85.4
Stuart Weitzman 11.9 - 4.7 7.2
Corporate (184.3) - (33.1) (151.2)
Operating income (loss) $ 591.6 $ - $ (48.3) $ 639.9
Provision for income taxes 17.0 (95.0) (12.2) 124.2
Net income (loss) $ 542.7 $ 95.0 $ (36.1) $ 483.8 Net income (loss) per diluted common share $ 1.94 $
0.34 $ (0.13) $ 1.73
(1)Adjustments within Gross profit are recorded within Cost of sales.
In the first six months of fiscal 2021 the Company incurred charges as follows:
•CARES Act Tax Impact - Total amount relates to the income tax benefits under
the CARES Act, most notably the Net Operating Loss ("NOL") carryback claim.
Refer to Note 15, "Income Taxes" for further information.
•Acceleration Program - Total charges incurred under the Acceleration Program
are primarily professional fees incurred as a result of the development and
execution of the Company's comprehensive strategic initiatives, as well as
actions to streamline the Company's organization, which include severance. Refer
to the "Executive Overview" and Note 6, "Restructuring Activities," herein for
further information.
These actions taken together decreased Provision for income taxes by $107.2
million and increased the Company's SG&A expenses by $48.3 million , positively
impacting Net income by $58.9 million or $0.21 per diluted share.
39
--------------------------------------------------------------------------------First Six Months of Fiscal 2020 Items
Six
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)
Cost of sales
Coach 1,554.9 - (0.1) - 1,555.0
Kate Spade 453.9 - (1.2) - 455.1
Stuart Weitzman 115.4 - (4.3) - 119.7
Gross profit(1) $ 2,124.2 $ - $ (5.6) $ - $ 2,129.8
SG&A expenses
Coach 972.6 - (0.1) 41.5 931.2
Kate Spade 393.2 - 0.8 25.2 367.2
Stuart Weitzman 125.1 - (2.1) 8.9 118.3
Corporate 218.6 20.8 24.5 - 173.3
SG&A expenses $ 1,709.5 $ 20.8 $ 23.1 $ 75.6 $ 1,590.0
Operating income (loss)
Coach 582.3 - - (41.5) 623.8
Kate Spade 60.7 - (2.0) (25.2) 87.9
Stuart Weitzman (9.7) - (2.2) (8.9) 1.4
Corporate (218.6) (20.8) (24.5) - (173.3)
Operating income (loss) $ 414.7 $ (20.8) $ (28.7) $ (75.6) $ 539.8
Provision for income taxes 62.8 (5.0) (9.4) (12.1) 89.3
Net income (loss) $ 318.8 $ (15.8) $ (19.3) $ (63.5) $ 417.4
Net income (loss) per diluted
common share $ 1.13 $ (0.06) $ (0.07) $ (0.22) $ 1.48
(1)Adjustments within Gross profit are recorded within Cost of sales.
In the first six months of fiscal 2020, the Company incurred charges as follows:
•ERP Implementation - Total charges primarily relate to technology
implementation costs.
•Organization-related and Integration costs - Total charges represent
organization-related costs as a result of the departure of the Company's former
CEO in September 2019 and integration costs related to inventory, professional
fees and share-based compensation. Refer to Note 5, "Integration," for more
information regarding integration costs.
•Impairment - Total charges are primarily due to impairment charges on 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 $5.6
million , increased SG&A expenses by $119.5 million and decreased Provision for
income taxes by $26.5 million , negatively impacting Net income by $98.6 million
or $0.35 per diluted share.
Tapestry, Inc. Summary - First Six Months of Fiscal 2021
Currency Fluctuation Effects
The change in net sales and gross margin for the first six months of fiscal 2021
compared to fiscal 2020 has been presented both including and excluding currency
fluctuation effects.
40
--------------------------------------------------------------------------------Net Sales Six Months Ended Variance December 26, December 28, Constant Currency 2020 2019 Amount % Change (millions) Coach$ 2,100.7 $ 2,235.8 $ (135.1) (6.0) % (7.0) % Kate Spade 616.0 735.9 (119.9) (16.3) (16.6) Stuart Weitzman 140.9 202.2 (61.3) (30.3) (31.3) Total Tapestry$ 2,857.6 $ 3,173.9 $ (316.3) (10.0) (10.8) Net sales in the first six months of fiscal 2021 decreased 10.0% or$316.3 million to$2.86 billion . Excluding the effects of foreign currency, net sales decreased by 10.8% or$341.6 million . •CoachNet Sales decreased 6.0% or$135.1 million to$2.10 billion in the first six months of fiscal 2021. Excluding the impact of foreign currency, net sales decreased 7.0% or$156.0 million . This decrease in net sales is primarily attributed to a net decline of$151.6 million in net global retail sales driven by lower sales in stores inNorth America , Other Asia, includingJapan , andEurope , due to the impact of Covid-19, which was partially offset by an increase in global e-commerce sales and store sales in mainlandChina . •Kate SpadeNet Sales decreased 16.3% or$119.9 million to$616.0 million in the first six months of fiscal 2021. Excluding the impact of foreign currency, net sales decreased 16.6% or$122.3 million . The decrease in net sales is driven by a decline of$67.6 million in net global retail sales driven by lower sales in stores, primarily inNorth America , due to the impact of the Covid-19, partially offset by an increase in global e-commerce sales. Wholesale sales also declined$53.7 million due to a strategic pullback in disposition and lower demand as a result of the Covid-19 outbreak. •Stuart WeitzmanNet Sales decreased 30.3% or$61.3 million to$140.9 million in the first six months of fiscal 2021. Excluding the impact of foreign currency, net sales decreased 31.3% or$63.3 million . This decrease was primarily due to a net decline of$39.1 million in the retail business, which is attributed to store closures related to fleet optimization under the Acceleration Program, as well as a decline in demand as a result of Covid-19. Additionally, wholesale sales decreased$24.2 million , which is primarily due to a decline in demand as a result of Covid-19. Gross Profit Six Months Ended December 26, 2020 December 28, 2019 Variance (millions) Amount % of Net Sales Amount % of Net Sales Amount % Coach$ 1,533.0 73.0 %$ 1,554.9 69.5 %$ (21.9) (1.4) % Kate Spade 387.2 62.9 453.9 61.7 (66.7) (14.7) Stuart Weitzman 83.7 59.4 115.4 57.1 (31.7) (27.5) Tapestry$ 2,003.9 70.1$ 2,124.2 66.9$ (120.3) (5.7) Gross profit decreased 5.7% or$120.3 million to$2.00 billion during the first six months of fiscal 2021 from$2.12 billion in the first six months of fiscal 2020. Gross margin for the first six months of fiscal 2021 was 70.1% as compared to 66.9% in the first six months of fiscal 2020. Excluding items affecting comparability of$5.6 million in the first six months of fiscal 2020, as discussed in the "GAAP to Non-GAAP Reconciliation" herein, gross profit decreased 5.9% or$125.9 million to$2.00 billion in the first six months of fiscal 2021, and gross margin increased 70.1% from 67.1% in the first six months of fiscal 2020, and on a constant currency basis, gross margin increased 290 basis points from the first six months of fiscal 2020. The Company includes inbound product-related transportation costs from our service providers within Cost of sales. The Company, similar to some companies, includes certain transportation-related costs due to our distribution network in SG&A expenses rather than in Cost of sales; for this reason, our gross margins may not be comparable to that of entities that include all costs related to their distribution network in Cost of sales. 41 -------------------------------------------------------------------------------- •Coach Gross Profit decreased 1.4% or$21.9 million to$1.53 billion in the first six months of fiscal 2021 from$1.55 billion in the first six months of fiscal 2020. Gross margin increased 350 basis points to 73.0% in the first six months of fiscal 2021 from 69.5% in the first six months of fiscal 2020. Excluding items affecting comparability of$0.1 million in the first six months of fiscal 2020, Coach gross profit decreased 1.4% or$22.0 million to$1.53 billion in the first six months of fiscal 2021 from$1.56 billion in the first six months of fiscal 2020. Excluding items affecting comparability, gross margin increased 340 basis points to 73.0% from 69.6% in the first six months of fiscal 2020, and was not materially impacted by foreign currency. This increase in gross margin is primarily attributed to reduced promotional activity. •Kate Spade Gross Profit decreased 14.7% or$66.7 million to$387.2 million in the first six months of fiscal 2021 from$453.9 million in the first six months of fiscal 2020. Gross margin increased 120 basis points to 62.9% in the first six months of fiscal 2021 from 61.7% in the first six months of fiscal 2020. Excluding items affecting comparability of$1.2 million in the first six months of fiscal 2020, Kate Spade gross profit decreased 14.9% or$67.9 million to$387.2 million in the first six months of fiscal 2021 from$455.1 million in the first six months of fiscal 2020. Excluding items affecting comparability, gross margin increased 110 basis points to 62.9% from 61.8% in the first six months of fiscal 2020, and was not materially impacted by foreign currency. This increase in gross margin was primarily due to favorable channel mix including a strategic pullback in disposition and reduced promotional activity, which was partially offset by the impact of directly operating the footwear business. •Stuart Weitzman Gross Profit decreased 27.5% or$31.7 million to$83.7 million during the first six months of fiscal 2021 from$115.4 million in the first six months of fiscal 2020. Gross margin increased 230 basis points to 59.4% in the first six months of fiscal 2021 from 57.1% in the first six months of fiscal 2020. Excluding items affecting comparability of$4.3 million in the first six months of fiscal 2020, Stuart Weitzman gross profit decreased 30.1% or$36.0 million to$83.7 million in the first six months of fiscal 2021 compared to$119.7 million in the first six months of fiscal 2020, and gross margin increased 20 basis points to 59.4% from 59.2% in the first six months of fiscal 2021. On a constant currency basis, gross margin decreased 130 basis points. This decrease in gross margin was primarily attributed to channel mix. Selling, General and Administrative Expenses Six Months Ended December 26, 2020 December 28, 2019 Variance (millions) Amount % of Net Sales Amount % of Net Sales Amount % Coach$ 851.0 40.5 %$ 972.6 43.5 %$ (121.6) (12.5) % Kate Spade 305.2 49.5 393.2 53.4 (88.0) (22.4) Stuart Weitzman 71.8 50.9 125.1 61.9 (53.3) (42.7) Corporate 184.3 NA 218.6 NA (34.3) (15.7) Tapestry$ 1,412.3 49.4$ 1,709.5 53.9$ (297.2) (17.4) SG&A expenses decreased 17.4% or$297.2 million to$1.41 billion in the first six months of fiscal 2021 as compared to$1.71 billion in the first six months of fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 49.4% during the first six months of fiscal 2021 as compared to 53.9% during the first six months of fiscal 2020. Excluding items affecting comparability of$48.3 million and$119.5 million in the first six months of fiscal 2021 and 2020, respectively, SG&A expenses decreased 14.2% or$226.0 million from the first six months of fiscal 2020. Excluding items affecting comparability, SG&A expenses as a percentage of net sales decreased to 47.7% in the first six months of fiscal 2021 from 50.1% in the first six months of fiscal 2020. This decrease in SG&A expenses includes actions taken as part of the Acceleration Program as well as benefits from wage subsidies and rent concessions, partially offset by an increase in accrued Annual Incentive Plan expenses. •Coach SG&A Expenses decreased 12.5% or$121.6 million to$851.0 million in the first six months of fiscal 2021 as compared to$972.6 million in the first six months of fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 40.5% during the first six months of fiscal 2021 as compared to 43.5% during the first six months of fiscal 2020. Excluding items affecting comparability of$16.5 million and$41.4 million in the first six months of fiscal 2021 and fiscal 2020, respectively, SG&A expenses decreased 10.4% or$96.7 million to$834.5 million in the first six months of fiscal 2021; and SG&A expenses as a percentage of net sales decreased to 39.7% in the first six months of fiscal 2021 from 41.7% in the first six months of fiscal 2020. This decrease in SG&A expenses was primarily due to a decline in compensation costs, occupancy costs and depreciation expense, partially offset by an increase in e-commerce related selling costs and digital marketing spend in support of higher e-commerce sales. 42 -------------------------------------------------------------------------------- •Kate Spade SG&A Expenses decreased 22.4% or$88.0 million to$305.2 million in the first six months of fiscal 2021 from$393.2 million in the first six months of fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 49.5% during the first six months of fiscal 2021 as compared to 53.4% during the first six months of fiscal 2020. Excluding items affecting comparability of$3.4 million and$26.0 million in the first six months of fiscal 2021 and 2020, respectively, SG&A expenses decreased 17.8% or$65.4 million to$301.8 million in the first six months of fiscal 2021; and SG&A expenses as a percentage of net sales decreased to 49.0% in the first six months of fiscal 2021 from 49.9% in the first six months of fiscal 2020. This decrease in SG&A expenses was due to a decline in compensation costs, occupancy costs and depreciation expense. •Stuart Weitzman SG&A Expenses decreased 42.7% or$53.3 million to$71.8 million in the first six months of fiscal 2021 as compared to$125.1 million in the first six months of fiscal 2020. Excluding items affecting comparability of$(4.7) million and$6.8 million in the first six months of fiscal 2021 and 2020, respectively, SG&A expenses decreased 35.3% or$41.8 million to$76.5 million in the first six months of fiscal 2021; and SG&A expenses as a percentage of net sales decreased to 54.3% in the first six months of fiscal 2021 from 58.5% in the first six months of fiscal 2020. This decrease in SG&A expenses is primarily due to a decline in occupancy and compensation costs mainly as a result of fleet optimization under the Acceleration Program, as well as declines in marketing spend and a reduction in wholesale selling costs. •Corporate expenses, which are included within SG&A expenses discussed above but are not directly attributable to a reportable segment, decreased 15.7% or$34.3 million to$184.3 million in the first six months of fiscal 2021 as compared to$218.6 million in the first six months of fiscal 2020. Excluding items affecting comparability of$33.1 million and$45.3 million in the first six months of fiscal 2021 and 2020, respectively, SG&A expenses decreased by 12.8% or$22.1 million to$151.2 million in the first six months of fiscal 2021 as compared to$173.3 million in the first six months of fiscal 2020. This decrease in corporate expenses is due to a gain realized on the sale of our corporate office inHong Kong and a gain realized on the deferred purchase price of the Kate Spade joint venture. Operating Income (Loss) Six Months Ended December 26, 2020 December 28, 2019 Variance (millions) Amount % of Net Sales Amount % of Net Sales Amount % Coach$ 682.0 32.5 %$ 582.3 26.0 %$ 99.7 17.1 % Kate Spade 82.0 13.3 60.7 8.2 21.3 35.1 Stuart Weitzman 11.9 8.5 (9.7) (4.8) 21.6 NM Corporate (184.3) NA (218.6) NA 34.3 15.7 Tapestry$ 591.6 20.7$ 414.7 13.1$ 176.9 42.7 Operating income increased 42.7% or$176.9 million to$591.6 million in the first six months of fiscal 2021 as compared to income of$414.7 million in the first six months of fiscal 2020. Operating margin was 20.7% in the first six months of fiscal 2021 as compared to 13.1% in the first six months of fiscal 2020. Excluding items affecting comparability of$48.3 million and$125.1 million in the first six months of fiscal 2021 and fiscal 2020, respectively, operating income increased 18.5% or$100.1 million to$639.9 million from$539.8 million in the first six months of fiscal 2020; and operating margin was 22.4% in the first six months of fiscal 2021 as compared to 17.0% in the first six months of fiscal 2020. •Coach Operating Income increased 17.1% or$99.7 million to$682.0 million in the first six months of fiscal 2021, resulting in an operating margin of 32.5%, as compared to$582.3 million and 26.0%, respectively, in the first six months of fiscal 2020. Excluding items affecting comparability, Coach operating income increased 12.0% or$74.7 million to$698.5 million from$623.8 million in the first six months of fiscal 2020; and operating margin was 33.3% in the first six months of fiscal 2021 as compared to 27.9% in the first six months 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 35.1% or$21.3 million to$82.0 million in the first six months of fiscal 2021, resulting in an operating margin of 13.3%, as compared to$60.7 million and 8.2%, respectively, in the first six months of fiscal 2020. Excluding items affecting comparability, Kate Spade operating income decreased 2.9% or$2.5 million to$85.4 million from$87.9 million in the first six months of fiscal 2020; and operating margin was 13.9% in the first six months of fiscal 2021 as compared to 11.9% in the first six months of fiscal 2020. This decrease in operating income was due a decrease in gross profit, partially offset by lower SG&A expenses. 43 -------------------------------------------------------------------------------- •Stuart Weitzman Operating Income increased$21.6 million to$11.9 million in the first six months of fiscal 2021, resulting in an operating margin of 8.5%, as compared to an operating loss of$9.7 million and operating margin of (4.8)% in first six months of fiscal 2020. Excluding items affecting comparability, Stuart Weitzman operating income increased$5.8 million to$7.2 million from$1.4 million in the first six months of fiscal 2020; and operating margin was from 5.1% in the first six months of fiscal 2021 as compared to 0.7% in the first six months of fiscal 2020. This increase in operating income was due to lower SG&A expenses, partially offset by a decrease in gross profit. Interest Expense, net Interest expense, net increased 44.7% or$11.8 million to$38.1 million in the first six months of fiscal 2021 as compared to interest expense, net of$26.3 million in the first six months of fiscal 2020. This 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 income increased$13.0 million to income of$6.2 million in the first six months of fiscal 2021 as compared to expense of$6.8 million in the first six months of fiscal 2020. This increase in other income is related to an increase in foreign exchange gains. Provision for Income Taxes The effective tax rate was 3.0% in the first six months of fiscal 2021 as compared to 16.5% in the first six months of fiscal 2020. Excluding items affecting comparability, the effective tax rate was 20.4% in the first six months of fiscal 2021 as compared to 17.6% in the first six months of fiscal 2020. This increase in our effective tax rate was primarily attributable to geographic mix of earnings. Net Income (Loss) Net income increased 70.3% or$223.9 million to$542.7 million in the first six months of fiscal 2021 as compared to$318.8 million in the first six months of fiscal 2020. Excluding items affecting comparability, net income increased 15.9% or$66.4 million to$483.8 million in the first six months of fiscal 2021 as compared to$417.4 million in the first six months of fiscal 2020. This increase was primarily due to lower SG&A expenses, partially offset by a decrease in gross profit. Net Income (Loss) per Share Net income per diluted share increased 71.7% to$1.94 in the first six months of fiscal 2021 as compared to net income per diluted share of$1.13 in the first six months of fiscal 2020. Excluding items affecting comparability, net income per diluted share increased 16.9% to$1.73 in the first six months of fiscal 2021 from$1.48 in the first six months of fiscal 2020, primarily due to higher net income. 44
-------------------------------------------------------------------------------- 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 second quarter and the first six months 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 and six months endedDecember 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." 45 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Cash Flows Six Months Ended December 26, December 28, 2020 2019 Change (millions)
Net cash provided by (used in) operating activities
$ 561.7 $ 184.6 Net cash used in investing activities (25.8) (127.9) 102.1 Net cash used in financing activities (518.9) (506.5) (12.4) Effect of exchange rate changes on cash and cash equivalents 14.7 0.4 14.3 Net increase/ (decrease) in cash and cash equivalents$ 216.3
The Company's cash and cash equivalents increased by$216.3 million in the first six months of fiscal 2021 as compared to a decrease of$72.3 million in the first six months of fiscal 2020, as discussed below. Net cash provided by (used in) operating activities Net cash provided by operating activities increased$184.6 million due to higher net income of$223.9 million and changes in operating assets and liabilities of$236.5 million , partially off by the impact of non-cash adjustments of$275.8 million . The$236.5 million increase in changes in operating asset and liability balances were primarily driven by the following: •Accounts payable were a source of cash of$253.8 million in the first six months of fiscal 2021 compared to a source of cash of$19.3 million in the first six months of fiscal 2020, primarily due to the extension of payment terms to certain vendors in addition to higher inventory in transit compared to the prior period. •Inventories were a source of cash of$144.3 million in the first six months of fiscal 2021 compared to a source of cash of$19.5 million in the first six months of fiscal 2020, primarily driven by higher than expected sales, more disciplined inventory management and actions taken to exit certain markets. •Trade accounts receivable were a use of cash of$143.2 million in the first six months of fiscal 2021 compared to a use of cash of$78.7 million in the first six months of fiscal 2020, primarily driven by a lower balance in the fourth quarter of fiscal 2020 due to impacts from Covid-19. •Other assets were a use of cash of$76.8 million in the first six months of fiscal 2021 compared to a use of cash of$27.7 million in the first six months of fiscal 2020, primarily related to an increase in income tax receivable primarily due to the NOL carryback claim under the CARES Act, partially offset by lower receivables related to other taxes. Net cash used in investing activities Net cash used in investing activities in the first six months of fiscal 2021 was$25.8 million as compared to a use of cash of$127.9 million in the first six months of fiscal 2020, resulting in a$102.1 million decrease in net cash used in investing activities. The$25.8 million use of cash in the first six months of fiscal 2021 is primarily due to capital expenditures of$49.7 million partially offset by proceeds from the sale of building of$23.9 million . The$127.9 million use of cash in the first six months of fiscal 2020 is primarily due to capital expenditures of$122.2 million . Net cash used in financing activities Net cash used in financing activities was$518.9 million in the first six months of fiscal 2021 as compared to a use of cash of$506.5 million in the first six months of fiscal 2020, resulting in a net increase in use of cash for financing activities of$12.4 million . The$518.9 million of cash used in the first six months of fiscal 2021 was primarily due to repayments on the revolving credit facility of$500.0 million and note payable of$11.5 million . The$506.5 million use of cash in the first six months of fiscal 2020 was primarily due to repurchases of common stock of$300.0 million and dividend payments of$194.0 million . 46 --------------------------------------------------------------------------------
Working Capital and Capital Expenditures
As of
Sources of Outstanding Total Available
Liquidity Indebtedness Liquidity(1)
(millions)
Cash and cash equivalents(1) $ 1,642.6 $ - $ 1,642.6
Short-term investments(1) 9.2 - 9.2
Revolving Credit Facility(2) 900.0 200.0 700.0
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 $ 4,151.8 $ 1,800.0 $ 2,351.8
(1) As of December 26, 2020 , approximately 36% of our cash and short-term
investments were held outside the United States . The Company will likely
repatriate some portion of available foreign cash in the foreseeable future, and
has recorded deferred taxes on certain earnings of non-US subsidiaries that are
deemed likely to be repatriated.
(2) In October 2019 , the Company entered into a definitive credit agreement
whereby Bank of America, N.A ., as administrative agent, the other agents party
thereto, and a syndicate of banks and financial institutions have made available
to the Company a $900.0 million revolving credit facility, including
sub-facilities for letters of credit, with a maturity date of October 24, 2024
(the "Revolving Credit Facility"). Borrowings under the Revolving Credit
Facility bear interest at a rate per annum equal to, at the Borrowers' option,
either (a) an alternate base rate (which is a rate equal to the greatest of (i)
the Prime Rate in effect on such day, (ii) the Federal Funds Effective Rate in
effect on such day plus ½ of 1% or (iii) the Adjusted LIBO Rate for a one month
Interest Period on such day plus 1%) or (b) a rate based on the rates applicable
for deposits in the interbank market for U.S. Dollars or the applicable currency
in which the loans are made plus, in each case, an applicable margin. The
applicable margin will be determined by reference to a grid, defined in the
Credit Agreement, based on the ratio of (a) consolidated debt plus operating
lease liability to (b) consolidated EBITDAR. Additionally, the Company pays a
commitment fee at a rate determined by the reference to the aforementioned
pricing grid. On May 19, 2020 , the Company entered into Amendment No. 1 (the
"Amendment") to the Revolving Credit Facility. Under the terms of the Amendment,
during the period from the Effective Date until October 2, 2021 , the Company
must maintain available liquidity of $700 million (with available liquidity
defined as the sum of unrestricted cash and cash equivalents and available
commitments under credit facilities, including the Revolving Credit Facility).
Following the period from the Effective Date until the compliance certificate is
delivered for the fiscal quarter ending July 3, 2021 (the "Covenant Relief
Period"), the Company must comply on a quarterly basis with a maximum net
leverage ratio of 4.0 to 1.0. In addition, the Amendment provides that during
the Covenant Relief Period, if any two of the Company's three credit ratings are
non-investment grade, the Revolving Credit Facility will be guaranteed by the
Company's material domestic subsidiaries and will be subject to liens on
accounts receivable, inventory and intellectual property, in each case subject
to customary exceptions. The Amendment also contains negative covenants that
limit the ability of the Company and its subsidiaries to, among other things,
incur certain debt, incur certain liens, dispose of assets, make investments,
loans or advances, and engage in share buybacks during the Covenant Relief
Period. An increased interest rate will be applicable during the Covenant Relief
Period when the Company's gross leverage ratio exceeds 4.0 to 1.0. The $900
million aggregate commitment amount under the revolving credit facility remains
unchanged. As of December 26, 2020 , $200.0 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) In March 2015 , the Company issued $600.0 million aggregate principal amount
of 4.250% senior unsecured notes due April 1, 2025 at 99.445% of par (the "2025
Senior Notes"). Furthermore, in June 2017 , the Company issued $400.0 million
aggregate principal amount of 3.000% senior unsecured notes due July 15, 2022 at
99.505% of par (the "2022 Senior Notes"), and $600.0 million aggregate principal
amount of 4.125% senior unsecured notes due July 15, 2027 at 99.858% of par (the
"2027 Senior Notes"). Furthermore, the indentures for the 2025 Senior Notes,
2022 Senior Notes and 2027 Senior Notes contain certain covenants limiting the
Company's ability to: (i) create certain liens, (ii) enter into certain sale and
leaseback transactions and (iii) merge, or consolidate or transfer, sell or
lease all or substantially all of the Company's
47
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assets. As of December 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 of December 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 the SEC for additional information regarding liquidity and capital
resources. The Company expects total fiscal 2021 capital expenditures to be
approximately $135 million .
Seasonality
The Company's results are typically affected by seasonal trends. During the
first fiscal quarter, we build inventory for the holiday selling season. In the
second fiscal quarter, working capital requirements are reduced substantially as
we generate higher net sales and operating income, especially during the holiday
months of November and December. Accordingly, the Company's net sales, operating
income and operating cash flows for the three months ended December 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 December 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.
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