01—Abstract
Summary
Summary of the 8-K filed February 8, 2024. Cited figures are marked; the original filing is the authoritative source.
Tapestry, Inc. (NYSE: TPR) reported results for its fiscal second quarter ended December 30, 2023.
Net sales were $2.08 billiona, up 3% on both a reported and constant currency basis from $2.03 billion a year earlier. Gross margin rose to 71.6% from 68.6%, reflecting a 170 basis point benefit from lower freight expense and operational improvements. Reported operating income was $448 million (21.5% margin), and reported diluted EPS was $1.39, compared with $1.36 in the prior year.
On a non-GAAP basis, which excludes Capri acquisition costs, diluted EPS was $1.63b. The company generated operating cash flow of $827 million and free cash flow of $804 million in the quarter, and ended the period with inventory of $825 million, below the prior year's $976 million. The quarter was heavily shaped by the pending acquisition of Capri Holdings Limited.
Reported net interest expense rose to $49 millionc from $8 million, reflecting debt raised to finance the deal, and the company recorded about $0.24 per diluted share of acquisition-related costs. Tapestry issued $6.1 billion of USD and EUR bonds in November 2023 at an all-in debt interest rate of 6.5%, and total borrowings were $7.74 billion at quarter-end. The State Administration for Market Regulation in China approved the transaction, and the company expects closing in calendar 2024.
Long-term debt was $7,714.4 milliond at quarter-end, compared with $1,635.8 million at July 1, 2023. Management raised its fiscal 2024 non-GAAP EPS outlook to $4.20 to $4.25, representing 8% to 9% growth, and guided to revenue of approximately $6.7 billion and free cash flow of approximately $1.1 billion, excluding deal-related costs.
This outlook explicitly excludes any contribution from or costs related to the Capri acquisition. The board declared a quarterly dividend of $0.35 per share, payable March 25, 2024.
02—Key points
Key Highlights
- Net sales of $2.08 billion rose 3% versus the prior year; Coach grew 6% to $1.54 billion while Kate Spade declined 6% and Stuart Weitzman declined 4%.
- Gross margin expanded 300 basis points to 71.6%, aided by lower freight expense and operational improvements, and each brand contributed to the increase.
- Reported diluted EPS of $1.39 was up from $1.36, while non-GAAP diluted EPS of $1.63 was up 20% from the prior year, with acquisition costs of about $0.24 per share excluded.
- Operating cash flow was $827 million and free cash flow was $804 million for the quarter, compared with $633 million and approximately $551 million in the prior-year quarter.
- Inventory ended the quarter at $825 million, below the prior year's $976 million, and the company described its inventory levels as 15% below the prior year.
- Pending Capri Holdings acquisition: China's SAMR approved the deal, the company expects closing in calendar 2024, and it targets run-rate cost synergies of over $200 million within three years of closing.
- Fiscal 2024 non-GAAP EPS outlook raised to $4.20 to $4.25 (8% to 9% growth), excluding any Capri contribution; the quarterly dividend is $0.35 per share.
03—Questions
Frequently Asked Questions
How did Tapestry perform in the fiscal second quarter ended December 30, 2023?
Net sales were $2.08 billion, up 3% from $2.03 billion, and gross margin improved to 71.6% from 68.6%. Reported operating income was $448 million versus $418 million, and reported diluted EPS was $1.39 versus $1.36. The company described the quarter as delivering record revenue and EPS.
What is driving the change in Tapestry's net interest expense?
Reported net interest expense was $49 million, compared with $8 million a year earlier, reflecting incremental debt incurred to finance the proposed acquisition of Capri Holdings Limited. Excluding acquisition-related items, non-GAAP net interest expense was $5 million.
What is the status of the Capri Holdings acquisition and how is it being financed?
The State Administration for Market Regulation in China has approved the transaction, and Tapestry expects closing in calendar 2024. In November 2023 the company issued $6.1 billion in USD and EUR bonds at an all-in debt interest rate of 6.5%, and total borrowings were $7.74 billion at quarter-end. The company remains committed to a gross leverage target below 2.5x debt to adjusted EBITDA within 24 months of closing.
What is Tapestry's fiscal 2024 guidance?
On a non-GAAP basis, the company expects diluted EPS of $4.20 to $4.25, representing 8% to 9% growth, revenue of approximately $6.7 billion, and free cash flow of approximately $1.1 billion excluding deal-related costs. The outlook assumes no contribution from or costs related to the Capri acquisition, and the company says it replaces all previous guidance.
Is Tapestry's dividend changing?
The Board declared a quarterly cash dividend of $0.35 per common share, payable March 25, 2024 to shareholders of record as of March 8, 2024. The company expects to return approximately $325 million to shareholders through dividends this fiscal year, at an anticipated annual dividend rate of $1.40 per share.
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