01—Abstract
Summary
Summary of the 10-K filed August 16, 2018. Cited figures are marked; the original filing is the authoritative source.
Tapestry, Inc. (NYSE: TPR), formerly Coach, Inc., reported fiscal 2018 (ended June 30, 2018) net sales of $5.88 billiona, up 31.0% from $4.49 billion in fiscal 2017, driven mainly by the July 2017 acquisition of Kate Spade & Company for $2.40 billion.
Net income fell 32.7% to $397.5 millionb ($1.38 per diluted share) from $591.0 million, largely due to $301.6 million of integration and acquisition charges and $178.2 million of tax legislation impacts. Excluding non-GAAP items, net income rose 24.7% to $759.9 million ($2.63 per diluted share), and operating income rose 22.1% to $991.9 million. The company now has three reportable segments: Coach (72% of fiscal 2018 net sales, operating income of $1.08 billion), Kate Spade (22% of net sales, operating loss of $61.9 million, or $158.3 million excluding charges), and Stuart Weitzman (6% of net sales, operating loss of $2.6 million after production delays and supply chain challenges).
Gross margin declined to 65.5% from 68.6%, and SG&A rose to 54.1% of net sales from 51.1%. Balance sheet and cash flow changes were significant: cash and cash equivalents fell to $1.24 billionc from $2.67 billion after the acquisition, total debt was $1.60 billion, and operating cash flow rose to $996.7 million. The company expects a Transition Tax payment of about $266 million payable over eight years, and it plans fiscal 2019 capital expenditures of $300 to $325 million.
02—Key points
Key Highlights
- Net sales rose 31.0% to $5.88 billion, primarily due to the Kate Spade acquisition; Coach net sales increased 2.6% to $4.22 billion.
- GAAP net income fell 32.7% to $397.5 million ($1.38 diluted EPS); non-GAAP net income rose 24.7% to $759.9 million ($2.63 diluted EPS).
- Integration and acquisition charges totaled $301.6 million, and Tax Legislation added $178.2 million of net charges in fiscal 2018.
- Stuart Weitzman posted an operating loss of $2.6 million due to supply chain production delays; the company expects negative impacts through the Fall/Winter 2019 season.
- Kate Spade reported an operating loss of $61.9 million on net sales of $1.28 billion, with comparable store sales down 7.2%.
- Cash and cash equivalents declined to $1.24 billion from $2.67 billion; total debt stood at $1.60 billion with a $900 million undrawn revolving credit facility.
- Dividends declared were $1.35 per share in fiscal 2018, and the company expects fiscal 2019 operating income and revenue growth.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Tapestry kept $0.07.
- Revenue$5.88B100.0%
- Cost of revenue−$2.03B34.5%
- Gross profit$3.85B65.5%
- Operating costs−$3.18B54.0%
- Operating income$672.0M11.4%
- Interest, other & tax−$274.5M4.7%
- Net income$397.5M6.8%
Where FY2018 revenue went
$5.88B- SG&A: $3.18B, 54% of revenue
- Cost of revenue: $2.03B, 35% of revenue
- Net income: $397.5M, 6.8% of revenue
- Interest, other & tax: $274.5M, 4.7% of revenue
Kept 6.8% as net incomeNet income $397.5M · 6.8%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed August 16, 2018Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $5.88B$4.49B | +31.0% |
| Cost of Revenue | $2.03B$1.41B | +44.4% |
| Gross Profit | $3.85B$3.08B | +24.9% |
| SG&A Expenses | $3.18B$2.29B | +38.5% |
| Operating Income | $672.00M$787.40M | −14.7% |
| Interest Expense | $86.30M$26.80M | +222.0% |
| Net Income | $397.50M$591.00M | −32.7% |
| EPS (Basic) | $1.39$2.11 | −34.1% |
| EPS (Diluted) | $1.38$2.09 | −34.0% |
| Shares Outstanding (Basic) | 285.40M280.60M | +1.7% |
| Shares Outstanding (Diluted) | 288.60M282.80M | +2.1% |
05—Questions
Frequently Asked Questions
Why did net income decline in fiscal 2018 despite higher sales?
Net income fell 32.7% to $397.5 million because of $301.6 million of integration and acquisition charges, $178.2 million of net Tax Legislation impacts, and higher SG&A expenses, which rose to 54.1% of net sales from 51.1%. Excluding these non-GAAP items, net income increased 24.7% to $759.9 million.
How is the Kate Spade acquisition affecting results?
Kate Spade was acquired for $18.50 per share in cash, a total of $2.40 billion, and contributed $1.28 billion of net sales in fiscal 2018 with an operating loss of $61.9 million. Excluding non-GAAP charges, Kate Spade operating income was $158.3 million, a 12.3% operating margin.
What risks did management highlight for fiscal 2019?
Management cited Stuart Weitzman production delays and supply chain challenges, a more promotional retail environment, potential impacts from U.S. tariffs on Chinese imports, Brexit uncertainty, and the multi-year ERP implementation expected to be substantially complete in fiscal 2019. Integration and acquisition costs of $50 to $60 million pre-tax are also expected in fiscal 2019.
How much debt does the company carry and what are its liquidity sources?
Consolidated indebtedness was approximately $1.6 billion at June 30, 2018, including $1.6 billion of senior notes due 2022, 2025 and 2027. The company had no borrowings under its $900 million revolving credit facility, which matures May 30, 2022, and cash and short-term investments of $1.25 billion.
What is the impact of the Tax Legislation on the company?
The company recorded a Transition Tax of $266.0 million, payable over eight years, and a $87.8 million re-measurement benefit on deferred taxes. The U.S. federal statutory rate was approximately 28% in fiscal 2018 and is expected to decline to 21% in fiscal 2019. These amounts are provisional and subject to adjustment.
06—Continue