TAPESTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | |
| Nine Months Ended |
| April 1, 2023 | | April 2, 2022 |
| (millions) |
| (unaudited) |
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES | | | |
Net income (loss) | $ | 711.9 | | | $ | 667.5 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 130.5 | | | 148.1 | |
Provision for bad debt | 5.8 | | | 18.6 | |
Loss on extinguishment of debt | — | | | 53.7 | |
Share-based compensation | 55.7 | | | 53.1 | |
| | | |
Acceleration Program charges | — | | | 9.4 | |
| | | |
| | | |
Changes to lease related balances, net | (26.1) | | | (42.0) | |
Deferred income taxes | 31.6 | | | 5.2 | |
| | | |
| | | |
Other non-cash charges, net | (21.3) | | | 27.2 | |
Changes in operating assets and liabilities: | | | |
Trade accounts receivable | (7.6) | | | (59.5) | |
Inventories | 53.8 | | | (192.2) | |
Accounts payable | (166.7) | | | 23.1 | |
Accrued liabilities | (161.2) | | | (110.6) | |
Other liabilities | (45.0) | | | (47.5) | |
Other assets | 13.4 | | | 62.3 | |
Net cash provided by (used in) operating activities | 574.8 | | | 616.4 | |
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES | | | |
| | | |
| | | |
| | | |
| | | |
Purchases of investments | (6.3) | | | (523.4) | |
Proceeds from maturities and sales of investments | 154.6 | | | 261.0 | |
Purchases of property and equipment | (149.6) | | | (75.1) | |
Settlement of net investment hedge | 41.9 | | | — | |
| | | |
| | | |
Net cash provided by (used in) investing activities | 40.6 | | | (337.5) | |
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES | | | |
Payment of dividends | (214.2) | | | (202.8) | |
Repurchase of common stock | (502.0) | | | (1,249.8) | |
Proceeds from issuance of debt, net of discount | — | | | 498.5 | |
Payment of debt issuance costs | — | | | (4.5) | |
Payment of debt extinguishment costs | — | | | (50.7) | |
Proceeds from share-based awards | 28.6 | | | 72.2 | |
| | | |
Repayment of debt | (25.0) | | | (500.0) | |
| | | |
| | | |
Taxes paid to net settle share-based awards | (55.3) | | | (30.5) | |
| | | |
| | | |
Payments of finance lease liabilities | (0.8) | | | (0.7) | |
| | | |
Net cash provided by (used in) financing activities | (768.7) | | | (1,468.3) | |
Effect of exchange rate changes on cash and cash equivalents | 0.7 | | | (12.3) | |
Net (decrease) increase in cash and cash equivalents | (152.6) | | | (1,201.7) | |
Cash and cash equivalents at beginning of period | 789.8 | | | 2,007.7 | |
Cash and cash equivalents at end of period | 637.2 | | | 806.0 | |
Supplemental information: | | | |
Cash paid for income taxes, net | $ | 191.1 | | | $ | 130.8 | |
Cash paid for interest | $ | 64.7 | | | $ | 62.1 | |
Noncash investing activity - property and equipment obligations | $ | 7.8 | | | $ | 7.7 | |
`
See accompanying Notes.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. NATURE OF OPERATIONS
Tapestry, Inc. (the "Company") is a leading New York-based house of iconic accessories and lifestyle brands. Our global house of brands unites the magic of Coach, kate spade new york and Stuart Weitzman. Each of our brands are unique and independent, while sharing a commitment to innovation and authenticity defined by distinctive products and differentiated customer experiences across channels and geographies. We use our collective strengths to move our customers and empower our communities, to make the fashion industry more sustainable, and to build a company that’s equitable, inclusive, and diverse. Individually, our brands are iconic. Together, we can stretch what’s possible.
The Coach segment includes global sales of Coach products to customers through Coach operated stores, including e-commerce sites and concession shop-in-shops, sales to wholesale customers and through independent third party distributors.
The Kate Spade segment includes global sales primarily of kate spade new york brand products to customers through Kate Spade operated stores, including e-commerce sites and concession shop-in-shops, sales to wholesale customers and through independent third party distributors.
The Stuart Weitzman segment includes global sales of Stuart Weitzman brand products primarily through Stuart Weitzman operated stores, sales to wholesale customers, through e-commerce sites and through independent third party distributors.
2. BASIS OF PRESENTATION AND ORGANIZATION
Interim Financial Statements
These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and are unaudited. In the opinion of management, such condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the condensed consolidated financial position, results of operations, comprehensive income (loss) and cash flows of the Company for the interim periods presented. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") have been condensed or omitted from this report as is permitted by the SEC's rules and regulations. However, the Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading. This report should be read in conjunction with the audited consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended July 2, 2022 ("fiscal 2022") and other filings filed with the SEC.
The results of operations, cash flows and comprehensive income for the nine months ended April 1, 2023 are not necessarily indicative of results to be expected for the entire fiscal year, which will end on July 1, 2023 ("fiscal 2023").
Fiscal Periods
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to June 30. Fiscal 2023 will be a 52-week period. Fiscal 2022, ended on July 2, 2022, was also a 52-week period. The third quarter of fiscal 2023 ended on April 1, 2023 and the third quarter of fiscal 2022 ended on April 2, 2022, both of which were 13-week periods.
Covid-19 Pandemic
The ongoing Covid-19 pandemic has impacted a significant majority of the regions in which we operate, resulting in significant global business disruptions. The widespread impact of Covid-19 resulted in temporary closures of directly operated stores globally, as well as at our wholesale and licensing partners starting in fiscal 2020. Since then, certain directly operated stores and the stores of our wholesale and licensing partners have experienced temporary re-closures or are operating under tighter restrictions in compliance with local government regulation. Covid-19 has also resulted in ongoing supply chain challenges, such as logistic constraints, the temporary closure of certain third-party manufacturers and certain increased freight costs.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The global Covid-19 pandemic is continuously evolving and the extent to which this impacts the Company - including unforeseen increased costs to the Company's business - will depend on future developments, which cannot be predicted, including the ultimate duration, severity and continued geographic resurgence of the virus and the success of actions to contain the virus, including variants of the novel strain, or treat its impact, among others. As the full magnitude of the effects on the Company's business is difficult to predict, the Covid-19 pandemic has and may continue to have a material adverse impact on the Company's business, financial condition, results of operations and cash flows for the foreseeable future. The Company 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 provide adequate funds to support our operating, capital, and debt service requirements. There can be no assurance, however, that any such capital will be available to the Company on acceptable terms or at all. The Company could experience other potential adverse impacts as a result of the Covid-19 pandemic, including, but not limited to, further charges from adjustments to the carrying amount of goodwill and other intangible assets, long-lived asset impairment charges, reserves for uncollectible accounts receivable and reserves for the realizability of inventory.
In response to the Covid-19 pandemic, the Company took actions to reinforce its liquidity and financial flexibility. If stores are required to close again for an extended period of time due to a resurgence of increased infections, the Company's liquidity may be negatively impacted.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and footnotes thereto. Actual results could differ from estimates in amounts that may be material to the financial statements.
Significant estimates inherent in the preparation of the condensed consolidated financial statements include reserves for the realizability of inventory; asset retirement obligations; customer returns, end-of-season markdowns and operational chargebacks; useful lives and impairments of long-lived tangible and intangible assets; accounting for income taxes and related uncertain tax positions; accounting for business combinations; the valuation of stock-based compensation awards and related expected forfeiture rates; reserves for restructuring; and reserves for litigation and other contingencies, amongst others.
Principles of Consolidation
These unaudited interim condensed consolidated financial statements include the accounts of the Company and all 100% owned and controlled subsidiaries. All intercompany transactions and balances are eliminated in consolidation.
Share Repurchases
The Company accounts for stock repurchases by allocating the repurchase price to common stock and retained earnings. Under Maryland law, the Company's state of incorporation, there are no treasury shares. All repurchased shares are authorized but unissued shares and these shares may be issued in the future for general corporate and other purposes. The Company may terminate or limit the stock repurchase program at any time. The Company accrues for the shares purchased under the share repurchase plan based on the trade date. Purchases of the Company's common stock are executed through open market purchases, including through purchase agreements under Rule 10b5-1. Effective January 1, 2023, the Company is subject to a 1% excise tax on net share repurchases as part of the Inflation Reduction Act of 2022, which is recorded in Retained earnings as part of Stockholders' Equity.
3. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Issued Accounting Pronouncements
In September 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2022-04, "Liabilities—Supplier Finance Programs (Subtopic 405-50)", which is intended to enhance the transparency of supplier finance programs. The ASU requires the buyer in a supplier finance program to disclose sufficient information about the program in order to allow a user of financial statements to understand the program's nature, activity during the period, changes from period to period, and potential magnitude. The requirements of the new standard will be effective for annual reporting periods beginning after December 15, 2022, and interim periods within those annual periods, which for the Company is the first quarter of fiscal 2024. Early adoption is permitted. The Company is currently in the process of evaluating the impact that adopting ASU 2022-04 will have on its condensed consolidated financial statements and notes thereto.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
4. REVENUE
The Company recognizes revenue primarily from sales of the products of its brands through retail and wholesale channels, including e-commerce sites. The Company also generates revenue from royalties related to licensing its trademarks, as well as sales in ancillary channels. In all cases, revenue is recognized upon the transfer of control of the promised products or services to the customer, which may be at a point in time or over time. Control is transferred when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized is the amount of consideration to which the Company expects to be entitled, including estimation of sale terms that may create variability in the consideration. Revenue subject to variability is constrained to an amount which will not result in a significant reversal in future periods when the contingency that creates variability is resolved.
The Company recognizes revenue in its retail stores, including concession shop-in-shops, at the point-of-sale when the customer obtains physical possession of the products. Digital revenue from sales of products ordered through the Company's e-commerce sites is recognized upon delivery and receipt of the shipment by its customers and includes shipping and handling charges paid by customers. Retail and digital revenues are recorded net of estimated returns, which are estimated by developing an expected value based on historical experience. Payment is due at the point of sale.
Gift cards issued by the Company are recorded as a liability until redeemed by the customer, at which point revenue is recognized. The Company also uses historical information to estimate the amount of gift card balances that will never be redeemed and recognizes that amount as revenue over time in proportion to actual customer redemptions if the Company does not have a legal obligation to remit unredeemed gift cards to any jurisdiction as unclaimed property.
Certain of the Company's retail operations use sales incentive programs, such as customer loyalty programs and the issuance of coupons. Loyalty programs provide the customer a material right to acquire additional products and give rise to the Company having a separate performance obligation. Additionally, certain products sold by the Company include an assurance warranty that is not considered a separate performance obligation. These programs are immaterial individually and in the aggregate.
The Company recognizes revenue within the wholesale channel at the time title passes and risk of loss is transferred to customers, which is generally at the point of shipment of products but may occur upon receipt of the shipment by the customer in certain cases. Payment is generally due 30 to 90 days after shipment. Wholesale revenue is recorded net of estimates for returns, discounts, end-of-season markdowns, cooperative advertising allowances and other consideration provided to the customer. Discounts are based on contract terms with the customer, while cooperative advertising allowances and other consideration may be based on contract terms or negotiated on a case-by-case basis. Returns and markdowns generally require approval from the Company and are estimated based on historical trends, current season results and inventory positions at the wholesale locations, current market and economic conditions as well as, in select cases, contractual terms. The Company's historical estimates of these variable amounts have not differed materially from actual results.
The Company recognizes licensing revenue over time during the contract period in which licensees are granted access to the Company's trademarks. These arrangements require licensees to pay a sales-based royalty and may include a contractually guaranteed minimum royalty amount. Revenue for contractually guaranteed minimum royalty amounts is recognized ratably over the license year and any excess sales-based royalties are recognized as earned once the minimum royalty threshold is achieved. Payments from the customer are generally due quarterly in an amount based on the licensee's sales of goods bearing the licensed trademarks during the period, which may differ from the amount of revenue recorded during the period thereby generating a contract asset or liability. Contract assets and liabilities and contract costs related to the licensing arrangements are immaterial as the licensing business represents approximately 1% of total net sales in the nine months ended April 1, 2023.
The Company has elected a practical expedient not to disclose the remaining performance obligations that are unsatisfied as of the end of the period related to contracts with an original duration of one year or less or variable consideration related to sales-based royalty arrangements. There are no other contracts with transaction price allocated to remaining performance obligations other than future minimum royalties as discussed above, which are not material.
Other practical expedients elected by the Company include (i) assuming no significant financing component exists for any contract with a duration of one year or less, (ii) accounting for shipping and handling as a fulfillment activity within SG&A expense regardless of the timing of the shipment in relation to the transfer of control and (iii) excluding sales and value added tax from the transaction price.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
Disaggregated Net Sales
The following table disaggregates the Company's net sales into geographies that depict how economic factors may impact the revenues and cash flows for the periods presented. Each geography presented includes net sales related to the Company's directly operated channels, global travel retail business and to wholesale customers, including distributors, in locations within the specified geographic area.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America | | Greater China(1) | | Other Asia(2) | | Other(3) | | Total |
| (millions) |
Three Months Ended April 1, 2023 | | | | | | | | | |
Coach | $ | 635.0 | | | $ | 253.8 | | | $ | 198.7 | | | $ | 56.5 | | | $ | 1,144.0 | |
Kate Spade | 227.3 | | | 13.6 | | | 37.9 | | | 18.4 | | | 297.2 | |
Stuart Weitzman | 42.5 | | | 18.4 | | | 0.7 | | | 6.7 | | | 68.3 | |
Total | $ | 904.8 | | | $ | 285.8 | | | $ | 237.3 | | | $ | 81.6 | | | $ | 1,509.5 | |
| | | | | | | | | |
Three Months Ended April 2, 2022 | | | | | | | | | |
Coach | $ | 616.3 | | | $ | 226.4 | | | $ | 176.9 | | | $ | 52.8 | | | $ | 1,072.4 | |
Kate Spade | 231.2 | | | 9.5 | | | 36.9 | | | 23.9 | | | 301.5 | |
Stuart Weitzman | 38.3 | | | 18.4 | | | — | | | 6.9 | | | 63.6 | |
Total | $ | 885.8 | | | $ | 254.3 | | | $ | 213.8 | | | $ | 83.6 | | | $ | 1,437.5 | |
| | | | | | | | | |
Nine Months Ended April 1, 2023 | | | | | | | | | |
Coach | $ | 2,289.5 | | | $ | 659.6 | | | $ | 567.2 | | | $ | 196.7 | | | $ | 3,713.0 | |
Kate Spade | 900.4 | | | 34.4 | | | 106.9 | | | 67.7 | | | 1,109.4 | |
Stuart Weitzman | 141.5 | | | 53.6 | | | 1.2 | | | 22.7 | | | 219.0 | |
Total | $ | 3,331.4 | | | $ | 747.6 | | | $ | 675.3 | | | $ | 287.1 | | | $ | 5,041.4 | |
| | | | | | | | | |
Nine Months Ended April 2, 2022 | | | | | | | | | |
Coach | $ | 2,309.2 | | | $ | 727.1 | | | $ | 515.4 | | | $ | 160.6 | | | $ | 3,712.3 | |
Kate Spade | 879.1 | | | 32.8 | | | 106.1 | | | 83.4 | | | 1,101.4 | |
Stuart Weitzman | 141.2 | | | 79.3 | | | 0.3 | | | 25.1 | | | 245.9 | |
Total | $ | 3,329.5 | | | $ | 839.2 | | | $ | 621.8 | | | $ | 269.1 | | | $ | 5,059.6 | |
(1) Greater China includes mainland China, Taiwan, Hong Kong SAR and Macao SAR.
(2) Other Asia includes Japan, Malaysia, Australia, New Zealand, Singapore, South Korea, and other countries within Asia.
(3) Other sales primarily represents sales in Europe, the Middle East and royalties earned from the Company's licensing partners.
Deferred Revenue
Deferred revenue results from cash payments received or receivable from customers prior to the transfer of the promised goods or services, and is generally comprised of unredeemed gift cards, net of breakage which has been recognized. Additional deferred revenue may result from sales-based royalty payments received or receivable which exceed the revenue recognized during the contractual period. The balance of such amounts as of April 1, 2023 and July 2, 2022 was $43.1 million and $41.5 million, respectively, which were primarily recorded within Accrued liabilities on the Company's Condensed Consolidated Balance Sheets and are generally expected to be recognized as revenue within a year. For the nine months ended April 1, 2023, net sales of $20.4 million were recognized from amounts recorded as deferred revenue as of July 2, 2022. For the nine months ended April 2, 2022, net sales of $12.7 million were recognized from amounts recorded as deferred revenue as of July 3, 2021.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The change in the carrying amount of the Company’s goodwill by segment is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Coach | | Kate Spade | | Stuart Weitzman(1) | | Total |
| (millions) |
Balance at July 2, 2022 | $ | 609.1 | | | $ | 632.4 | | | $ | — | | | $ | 1,241.5 | |
| | | | | | | |
Foreign exchange impact | 3.9 | | | (0.1) | | | — | | | $ | 3.8 | |
| | | | | | | |
| | | | | | | |
Balance at April 1, 2023 | $ | 613.0 | | | $ | 632.3 | | | $ | — | | | $ | 1,245.3 | |
(1) Amount is net of accumulated goodwill impairment charges of $210.7 million as of April 1, 2023 and July 2, 2022.
Intangible Assets
Intangible assets consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| April 1, 2023 | | July 2, 2022 |
| Gross Carrying Amount | | Accum. Amort. | | Net | | Gross Carrying Amount | | Accum. Amort. | | Net |
| (millions) |
Intangible assets subject to amortization: | | | | | | | | | | | |
Customer relationships | $ | 100.4 | | | $ | (48.4) | | | $ | 52.0 | | | $ | 100.3 | | | $ | (43.5) | | | $ | 56.8 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Intangible assets not subject to amortization: | | | | | | | | | | | |
Trademarks and trade names | 1,309.8 | | | — | | | 1,309.8 | | | 1,309.8 | | | — | | | 1,309.8 | |
Total intangible assets | $ | 1,410.2 | | | $ | (48.4) | | | $ | 1,361.8 | | | $ | 1,410.1 | | | $ | (43.5) | | | $ | 1,366.6 | |
Amortization expense for the Company’s definite-lived intangible assets for the three and nine months ended April 1, 2023 was $1.6 million and $4.9 million, respectively. Amortization expense for the Company’s definite-lived intangible assets for the three and nine months ended April 2, 2022 was $1.6 million and $4.9 million, respectively.
As of April 1, 2023, the expected amortization expense for intangible assets is as follows:
| | | | | |
| Amortization Expense |
| (millions) |
Remainder of fiscal 2023 | $ | 1.7 | |
Fiscal 2024 | 6.5 | |
Fiscal 2025 | 6.5 | |
Fiscal 2026 | 6.5 | |
Fiscal 2027 | 6.5 | |
| |
Thereafter | 24.3 | |
Total | $ | 52.0 | |
The expected amortization expense above reflects remaining useful lives ranging from approximately 7.1 to 9.3 years for customer relationships.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
6. STOCKHOLDERS' EQUITY
A reconciliation of stockholders' equity is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock | | Additional Paid-in- Capital | | Retained Earnings / (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| (millions, except per share data) |
Balance at July 3, 2021 | 279.5 | | | $ | 2.8 | | | $ | 3,487.0 | | | $ | (158.5) | | | $ | (72.0) | | | $ | 3,259.3 | |
Net income (loss) | — | | | — | | | — | | | 226.9 | | | — | | | 226.9 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | (10.1) | | | (10.1) | |
Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes | 1.6 | | | — | | | (26.4) | | | — | | | — | | | (26.4) | |
Share-based compensation | — | | | — | | | 19.9 | | | — | | | — | | | 19.9 | |
Repurchase of common stock | (6.1) | | | — | | | — | | | (250.0) | | | — | | | (250.0) | |
| | | | | | | | | | | |
Dividends declared ($0.25 per share) | — | | | — | | | — | | | (69.6) | | | — | | | (69.6) | |
| | | | | | | | | | | |
Balance at October 2, 2021 | 275.0 | | | $ | 2.8 | | | $ | 3,480.5 | | | $ | (251.2) | | | $ | (82.1) | | | $ | 3,150.0 | |
Net income (loss) | — | | | — | | | — | | | 317.9 | | | — | | | 317.9 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | (13.6) | | | (13.6) | |
Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes | 0.7 | | | — | | | 19.0 | | | — | | | — | | | 19.0 | |
Share-based compensation | — | | | — | | | 22.0 | | | — | | | — | | | 22.0 | |
| | | | | | | | | | | |
Repurchase and retirement of common stock | (11.7) | | | $ | (0.2) | | | $ | — | | | $ | (499.8) | | | $ | — | | | (500.0) | |
Dividends declared ($0.25 per share) | — | | | — | | | — | | | (67.9) | | | — | | | (67.9) | |
Balance at January 1, 2022 | 264.0 | | | $ | 2.6 | | | $ | 3,521.5 | | | $ | (501.0) | | | $ | (95.7) | | | $ | 2,927.4 | |
Net income (loss) | — | | | — | | | — | | | 122.7 | | | — | | | 122.7 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | (22.0) | | | (22.0) | |
Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes | 1.3 | | | — | | | 49.0 | | | — | | | — | | | 49.0 | |
Share-based compensation | — | | | — | | | 23.0 | | | — | | | — | | | 23.0 | |
| | | | | | | | | | | |
Repurchase and retirement of common stock | (13.5) | | | $ | (0.1) | | | $ | — | | | $ | (499.7) | | | $ | — | | | (499.8) | |
Dividends declared ($0.25 per share) | — | | | — | | | — | | | (65.3) | | | — | | | (65.3) | |
Balance at April 2, 2022 | 251.8 | | | $ | 2.5 | | | $ | 3,593.5 | | | $ | (943.3) | | | $ | (117.7) | | | $ | 2,535.0 | |
| | | | | | | | | | | |
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock | | Common Stock | | Additional Paid-in- Capital | | Retained Earnings / (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| (millions, except per share data) |
Balance at July 2, 2022 | 241.2 | | | $ | 2.4 | | | $ | 3,620.2 | | | $ | (1,166.2) | | | $ | (170.9) | | | $ | 2,285.5 | |
Net income (loss) | — | | | — | | | — | | | 195.3 | | | — | | | 195.3 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | (22.0) | | | (22.0) | |
Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes | 2.7 | | | — | | | (45.8) | | | — | | | — | | | (45.8) | |
Share-based compensation | — | | | — | | | 15.1 | | | — | | | — | | | 15.1 | |
| | | | | | | | | | | |
Repurchase of common stock | (3.0) | | | — | | | — | | | (100.0) | | | — | | | (100.0) | |
Dividends declared ($0.30 per share) | — | | | — | | | — | | | (72.7) | | | — | | | (72.7) | |
| | | | | | | | | | | |
Balance at October 1, 2022 | 240.9 | | | $ | 2.4 | | | $ | 3,589.5 | | | $ | (1,143.6) | | | $ | (192.9) | | | $ | 2,255.4 | |
Net income (loss) | — | | | — | | | — | | | 329.9 | | | — | | | 329.9 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | (24.9) | | | (24.9) | |
Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes | 0.5 | | | — | | | 4.6 | | | — | | | — | | | 4.6 | |
Share-based compensation | — | | | — | | | 19.7 | | | — | | | — | | | 19.7 | |
| | | | | | | | | | | |
Repurchase of common stock | (5.4) | | | — | | | — | | | (200.0) | | | — | | | (200.0) | |
Dividends declared ($0.30 per share) | — | | | — | | | — | | | (71.5) | | | — | | | (71.5) | |
| | | | | | | | | | | |
Balance at December 31, 2022 | 236.0 | | | $ | 2.4 | | | $ | 3,613.8 | | | $ | (1,085.2) | | | $ | (217.8) | | | $ | 2,313.2 | |
Net income (loss) | — | | | — | | | — | | | 186.7 | | | — | | | 186.7 | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | 0.2 | | | 0.2 | |
Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes | 0.5 | | | — | | | 14.5 | | | — | | | — | | | 14.5 | |
Share-based compensation | — | | | — | | | 20.9 | | | — | | | — | | | 20.9 | |
| | | | | | | | | | | |
Repurchase of common stock, including excise tax | (4.7) | | | (0.1) | | | — | | | (202.0) | | | — | | | (202.1) | |
Dividends declared ($0.30 per share) | — | | | — | | | — | | | (70.0) | | | — | | | (70.0) | |
| | | | | | | | | | | |
Balance at April 1, 2023 | 231.8 | | | $ | 2.3 | | | $ | 3,649.2 | | | $ | (1,170.5) | | | $ | (217.6) | | | $ | 2,263.4 | |
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The components of accumulated other comprehensive income (loss) ("AOCI"), as of the dates indicated, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Gains (Losses) on Cash Flow Hedging Derivatives(1) | | Unrealized Gains (Losses) on Available- for-Sale Investments | | Cumulative Translation Adjustment(2) | | | | Total |
| (millions) |
Balances at July 3, 2021 | $ | (0.7) | | | $ | — | | | $ | (71.3) | | | | | $ | (72.0) | |
Other comprehensive income (loss) before reclassifications | (2.4) | | | (0.9) | | | (44.2) | | | | | (47.5) | |
Less: amounts reclassified from accumulated other comprehensive income to earnings | (1.8) | | | — | | | — | | | | | (1.8) | |
Net current-period other comprehensive income (loss) | (0.6) | | | (0.9) | | | (44.2) | | | | | (45.7) | |
Balances at April 2, 2022 | $ | (1.3) | | | $ | (0.9) | | | $ | (115.5) | | | | | $ | (117.7) | |
| | | | | | | | | |
Balances at July 2, 2022 | $ | (2.3) | | | $ | (0.5) | | | $ | (168.1) | | | | | $ | (170.9) | |
Other comprehensive income (loss) before reclassifications | (14.2) | | | 0.5 | | | (37.1) | | | | | (50.8) | |
Less: amounts reclassified from accumulated other comprehensive income to earnings | (4.1) | | | — | | | — | | | | | (4.1) | |
Net current-period other comprehensive income (loss) | (10.1) | | | 0.5 | | | (37.1) | | | | | (46.7) | |
Balances at April 1, 2023 | $ | (12.4) | | | $ | — | | | $ | (205.2) | | | | | $ | (217.6) | |
(1) The ending balances of AOCI related to cash flow hedges are net of tax of ($0.3) million and $0.6 million as of April 1, 2023 and April 2, 2022, respectively. The amounts reclassified from AOCI are net of tax of $1.2 million and $0.6 million as of April 1, 2023 and April 2, 2022, respectively.
(2) The ending balances of AOCI related to foreign currency translation adjustments includes a loss of $68.8 million, net of tax of $2.4 million, as of April 1, 2023, related to changes in the fair values of instruments designated as hedges of the Company's net investment in certain foreign operations. As the Company began entering into net investment hedges in the fourth quarter of Fiscal 2022, there was no balance as of April 2, 2022.
7. LEASES
The Company leases retail space, office space, warehouse facilities, fulfillment centers, storage space, machinery, equipment and certain other items under operating leases. The Company's leases have initial terms ranging from 1 to 20 years and may have renewal or early termination options ranging from 1 to 10 years. These leases may also include rent escalation clauses or lease incentives. In determining the lease term used in the lease right-of-use ("ROU") asset and lease liability calculations, the Company considers various factors such as market conditions and the terms of any renewal or termination options that may exist. When deemed reasonably certain, the renewal and termination options are included in the determination of the lease term and calculation of the lease ROU asset and lease liability. The Company is typically required to make fixed minimum rent payments, variable rent payments primarily based on performance (i.e., percentage-of-sales-based payments), or a combination thereof, directly related to its ROU asset. The Company is also often required, by the lease, to pay for certain other costs including real estate taxes, insurance, common area maintenance fees, and/or certain other costs, which may be fixed or variable, depending upon the terms of the respective lease agreement. To the extent these payments are fixed, the Company has included them in calculating the lease ROU assets and lease liabilities.
The Company calculates lease ROU assets and lease liabilities as the present value of fixed lease payments over the reasonably certain lease term beginning at the commencement date. The Company is required to use the implicit rate to determine the present value of lease payments. As the rate implicit in the Company's leases is not readily determinable, the Company uses its incremental borrowing rate based on the information available at the lease commencement date, including the
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
Company's credit rating, credit spread and adjustments for the impact of collateral, lease tenors, economic environment and currency.
For operating leases, fixed lease payments are recognized as operating lease cost on a straight-line basis over the lease term. For finance leases and impaired operating leases, the ROU asset is depreciated on a straight-line basis over the remaining lease term, along with recognition of interest expense associated with accretion of the lease liability. For leases with a lease term of 12 months or less ("short-term lease"), any fixed lease payments are recognized on a straight-line basis over such term and are not recognized on the Condensed Consolidated Balance Sheets. Variable lease cost for both operating and finance leases, if any, is recognized as incurred.
The Company acts as sublessor in certain leasing arrangements, primarily related to a sublease of a portion of the Company's leased headquarters space as well as certain retail locations. Fixed sublease payments received are recognized on a straight-line basis over the sublease term.
ROU assets, along with any other related long-lived assets, are periodically evaluated for impairment.
The following table summarizes the ROU assets and lease liabilities recorded on the Company's Condensed Consolidated Balance Sheets as of April 1, 2023 and July 2, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | April 1, 2023 | | July 2, 2022 | | Location Recorded on Balance Sheet |
| | (millions) | | |
Assets: | | | | | | |
Operating leases | | $ | 1,363.8 | | | $ | 1,281.6 | | | Operating lease right-of-use assets |
Finance leases | | 1.4 | | | 1.9 | | | Property and equipment, net |
Total lease assets | | $ | 1,365.2 | | | $ | 1,283.5 | | | |
Liabilities: | | | | | | |
Operating leases: | | | | | | |
Current lease liabilities | | $ | 294.7 | | | $ | 288.7 | | | Current portion of operating lease liabilities |
Long-term lease liabilities | | 1,332.0 | | | 1,282.3 | | | Long-term operating lease liabilities |
Total operating lease liabilities | | $ | 1,626.7 | | | $ | 1,571.0 | | | |
Finance leases: | | | | | | |
Current lease liabilities | | $ | 1.2 | | | $ | 1.1 | | | Accrued liabilities |
Long-term lease liabilities | | 1.5 | | | 2.4 | | | Other liabilities |
Total finance lease liabilities | | $ | 2.7 | | | $ | 3.5 | | | |
| | | | | | |
Total lease liabilities | | $ | 1,629.4 | | | $ | 1,574.5 | | | |
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The following table summarizes the composition of net lease costs, primarily recorded within SG&A expenses on the Company's Condensed Consolidated Statements of Operations for the three and nine months ended April 1, 2023 and April 2, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | April 1, 2023 | | April 2, 2022 | | April 1, 2023 | | April 2, 2022 |
| | (millions) |
Finance lease cost: | | | | | | | | |
Amortization of right-of-use assets | | $ | 0.3 | | | $ | 0.2 | | | $ | 0.8 | | | $ | 0.7 | |
Interest on lease liabilities(1) | | 0.1 | | | 0.1 | | | 0.3 | | | 0.3 | |
Total finance lease cost | | 0.4 | | | 0.3 | | | 1.1 | | | 1.0 | |
Operating lease cost | | 81.3 | | | 83.7 | | | 239.1 | | | 254.4 | |
Short-term lease cost | | 5.8 | | | 5.0 | | | 22.2 | | | 14.6 | |
Variable lease cost(2) | | 60.0 | | | 45.8 | | | 158.4 | | | 144.6 | |
| | | | | | | | |
Less: sublease income | | (4.4) | | | (5.1) | | | (13.7) | | | (15.2) | |
Total net lease cost | | $ | 143.1 | | | $ | 129.7 | | | $ | 407.1 | | | $ | 399.4 | |
(1) Interest on lease liabilities is recorded within Interest expense, net on the Company's Condensed Consolidated Statement of Operations.
(2) Rent concessions negotiated related to Covid-19 are recorded in variable lease expense.
The following table summarizes certain cash flow information related to the Company's leases for the nine months ended April 1, 2023 and April 2, 2022:
| | | | | | | | | | | | | | |
| | Nine Months Ended |
| | April 1, 2023 | | April 2, 2022 |
| | (millions) |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows from operating leases | | $ | 290.3 | | | $ | 321.1 | |
Operating cash flows from finance leases | | 0.3 | | | 0.3 | |
Financing cash flows from finance leases | | 0.8 | | | 0.7 | |
Non-cash transactions: | | | | |
Right-of-use assets obtained in exchange for operating lease liabilities | | 299.2 | | | 102.1 | |
| | | | |
Additionally, the Company had approximately $20.3 million of future payment obligations related to executed lease agreements for which the related lease had not yet commenced as of April 1, 2023.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The majority of the Company’s purchases of finished goods are denominated in U.S. dollars, which limits the Company’s exposure to the transactional effects of foreign currency exchange rate fluctuations. However, the Company is exposed to foreign currency exchange risk related to its sale of U.S. dollar inventory to foreign operating subsidiaries in local currency, as well as risk related to various cross-currency intercompany loans and payables, and translation risk. The Company is also exposed to foreign currency risk related to changes in the U.S. dollar value of its net investment in foreign subsidiaries. The Company uses derivative financial instruments to manage these risks. These derivative transactions are in accordance with the Company’s risk management policies. The Company does not enter into derivative transactions for speculative or trading purposes.
The Company records all derivative contracts at fair value on the Condensed Consolidated Balance Sheets. The fair values of foreign currency derivatives are based on the forward curves of the specific indices upon which settlement is based and include an adjustment for the Company’s credit risk. Judgment is required of management in developing estimates of fair value. The use of different market assumptions or methodologies could affect the estimated fair value.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
For derivative instruments that qualify for hedge accounting, the changes in the fair value of these instruments are either (i) offset against the changes in fair value of the hedged assets or liabilities through earnings or (ii) recognized as a component of Accumulated other comprehensive income (loss) ("AOCI") until the hedged item is recognized in earnings, depending on whether the derivative is being used to hedge changes in fair value or cash flows. For derivative instruments that are designated as a net investment hedge, the changes in the fair value of the instruments are recognized as a component of AOCI, and upon discontinuation of the hedge remain in AOCI until the net investment is sold or liquidated.
Each derivative instrument entered into by the Company that qualifies for hedge accounting is expected to be highly effective at reducing the risk associated with the exposure being hedged. For each derivative that is designated as a hedge, the Company documents the related risk management objective and strategy, including identification of the hedging instrument, the hedged item and the risk exposure, as well as how hedge effectiveness will be assessed over the term of the instrument. The extent to which a hedging instrument has been and is expected to remain highly effective in achieving offsetting changes in fair value or cash flows is assessed and documented by the Company on at least a quarterly basis.
If it is determined that a derivative instrument has not been highly effective and will continue not to be highly effective in hedging the designated exposure, hedge accounting is discontinued, and further gains (losses) are recognized in earnings within foreign currency gains (losses). Upon discontinuance of hedge accounting, the cumulative change in fair value of cash flow derivatives previously recorded in AOCI is recognized in earnings when the related hedged item affects earnings, consistent with the original hedging strategy, unless the forecasted transaction is no longer probable of occurring, in which case the accumulated amount is immediately recognized in earnings within foreign currency gains (losses).
As a result of the use of derivative instruments, the Company may be exposed to the risk that the counterparties to such contacts will fail to meet their contractual obligations. To mitigate this counterparty credit risk, the Company has a policy of only entering into contracts with carefully selected financial institutions based upon an evaluation of their credit ratings, among other factors.
The fair values of the Company’s derivative instruments are recorded on its Condensed Consolidated Balance Sheets on a gross basis. For cash flow reporting purposes, the Company classifies proceeds received or amounts paid upon the settlement of a derivative instrument in the same manner as the related item being hedged, primarily within cash from operating activities.
Hedging Portfolio
The Company enters into forward currency contracts primarily to reduce its risks related to exchange rate fluctuations on foreign currency denominated inventory transactions, as well as various cross-currency intercompany loans and payables. To the extent its derivative contracts designated as cash flow hedges are highly effective in offsetting changes in the value of the hedged items, the related gains (losses) are initially deferred in AOCI and subsequently recognized in the Consolidated Statements of Operations as part of the cost of the inventory purchases being hedged within Cost of sales, when the related inventory is sold to a third party. Current maturity dates range from April 2023 to December 2024. Forward foreign currency exchange contracts designated as fair value hedges and associated with intercompany and other contractual obligations are recognized within foreign currency gains (losses) generally in the period in which the related balances being hedged are revalued. The maturity date of most instruments held as of April 1, 2023 are in May 2023, and such contracts are typically renewed upon maturity if the related balance has not been settled. The Company also enters into cross-currency swaps to reduce its risks related to exchange rate fluctuations on net investments in foreign subsidiaries. The related gains (losses) are deferred in AOCI until the net investment is sold or liquidated, and current maturity dates range from April 2025 to March 2032.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The following tables provide information related to the Company's derivative instruments recorded on the Company's Condensed Consolidated Balance Sheets as of April 1, 2023 and July 2, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Notional Value | | Derivative Assets | | Derivative Liabilities |
Designated Derivative Hedging Instruments | | | | | | | | Fair Value | | | | Fair Value |
| April 1, 2023 | | July 2, 2022 | | Balance Sheet Classification | | April 1, 2023 | | July 2, 2022 | | Balance Sheet Classification | | April 1, 2023 | | July 2, 2022 |
| | (millions) |
FC - Inventory purchases(1) | | $ | 774.8 | | | $ | 41.5 | | | Other Current Assets | | 4.9 | | | $ | — | | | Accrued Liabilities | | $ | 17.5 | | | $ | 2.7 | |
FC - Intercompany liabilities and loans(2) | | 243.7 | | | 274.1 | | | Other Current Assets | | 0.2 | | | 0.4 | | | Accrued Liabilities | | — | | | 0.5 | |
CCS - Net investment hedges(3) | | 1,200.0 | | | 1,200.0 | | | Other Assets | | 5.4 | | | 47.8 | | | Other Liabilities | | 102.4 | | | 44.0 | |
Total Hedges | | $ | 2,218.5 | | | $ | 1,515.6 | | | | | $ | 10.5 | | | $ | 48.2 | | | | | $ | 119.9 | | | $ | 47.2 | |
(1)Represents forward foreign currency exchange contracts ("FC") designated as derivative instruments in cash flow hedging relationships.
(2)Represents forward foreign currency exchange contracts ("FC") designated as derivative instruments in fair value hedging relationships.
(3)Represents cross currency swap contracts ("CCS") designated as derivative instruments in net investment hedging relationships.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The following tables provides the pretax impact of gains and losses from the Company's designated derivative instruments on its Condensed Consolidated Financial Statements as of April 1, 2023 and April 2, 2022:
| | | | | | | | | | | | | | | | |
| | Amount of Gain (Loss) Recognized in OCI on Derivatives |
| | Nine Months Ended |
| | April 1, 2023 | | April 2, 2022 | | |
| | (millions) |
Cash flow hedges: | | | | | | |
Inventory purchases(1) | | $ | (14.2) | | | $ | (3.3) | | | |
Cash flow hedges, total | | $ | (14.2) | | | $ | (3.3) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Other: | | | | | | |
Net investment hedges | | (74.9) | | | — | | | |
Other, total | | $ | (74.9) | | | $ | — | | | |
Total hedges | | $ | (89.1) | | | $ | (3.3) | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income |
| | Statement of Operations Classification | | Nine Months Ended |
| | April 1, 2023 | | April 2, 2022 | | |
| | | | (millions) |
Cash flow hedges: | | | | | | | | |
Inventory purchases(1) | | Cost of Sales | | $ | (5.2) | | | $ | (2.4) | | | |
Total hedges | | | | $ | (5.2) | | | $ | (2.4) | | | |
(1)Represents forward foreign currency exchange contracts ("FC") designated as derivative instruments in cash flow hedging relationships.
For forward foreign currency exchange contracts that are designated as fair value hedges, both the gain (loss) on the derivative as well as the offsetting gain (loss) on the hedged item attributable to the hedged risk are recorded within Other expense (income) on the Company's Condensed Consolidated Statement of Operations.
The Company expects that $7.1 million of net derivative loss included in Accumulated other comprehensive income at April 1, 2023 will be reclassified into earnings within the next 12 months. This amount will vary due to fluctuations in foreign currency exchange rates.
The Company assesses the cross-currency swaps used as net investment hedges under the spot method. This results in the cross-currency basis spread being excluded from the assessment of hedge effectiveness and recorded as incurred as a reduction in interest expense in the Company’s consolidated statements of operations. Accordingly, the Company recorded net interest income of $21.2 million and $0.0 million during the nine months ended April 1, 2023 and April 2, 2022, respectively.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
9. EARNINGS PER SHARE
Basic net income per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted net income per share is calculated similarly but includes potential dilution from the exercise of stock options and restricted stock units and any other potentially dilutive instruments, only in the periods in which such effects are dilutive under the treasury stock method.
The following is a reconciliation of the weighted-average shares outstanding and calculation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| April 1, 2023 | | April 2, 2022 | | April 1, 2023 | | April 2, 2022 |
| (millions, except per share data) |
Net income (loss) | $ | 186.7 | | | $ | 122.7 | | | $ | 711.9 | | | $ | 667.5 | |
| | | | | | | |
Weighted-average basic shares | 234.6 | | | 259.9 | | | 238.4 | | | 269.7 | |
Dilutive securities: | | | | | | | |
| | | | | | | |
| | | | | | | |
Effect of dilutive securities | 5.1 | | | 5.6 | | | 4.8 | | | 6.2 | |
Weighted-average diluted shares | 239.7 | | | 265.5 | | | 243.2 | | | 275.9 | |
| | | | | | | |
Net income (loss) per share: | | | | | | | |
Basic | $ | 0.80 | | | $ | 0.47 | | | $ | 2.99 | | | $ | 2.47 | |
Diluted | $ | 0.78 | | | $ | 0.46 | | | $ | 2.93 | | | $ | 2.42 | |
Earnings per share amounts have been calculated based on unrounded numbers. Options to purchase shares of the Company's common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive and therefore not included in the computation of diluted net income (loss) per common share. In addition, the Company has outstanding restricted stock unit awards that are issuable only upon the achievement of certain performance goals. Performance-based restricted stock unit awards are included in the computation of diluted shares only to the extent that the underlying performance conditions and any applicable market condition modifiers (i) are satisfied as of the end of the reporting period or (ii) would be considered satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive under the treasury stock method. As of April 1, 2023 and April 2, 2022, there were 2.0 million and 6.4 million, respectively, of additional shares issuable upon exercise of anti-dilutive options and contingent vesting of performance-based restricted stock unit awards, which were excluded from the diluted share calculations.
10. SHARE-BASED COMPENSATION
The following table shows the share-based compensation expense and the related tax benefits recognized in the Company's Condensed Consolidated Statements of Operations for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| April 1, 2023 | | April 2, 2022 | | April 1, 2023 | | April 2, 2022 |
| (millions) |
Share-based compensation expense(1) | $ | 20.9 | | | $ | 23.0 | | | $ | 55.7 | | | $ | 64.9 | |
Income tax benefit related to share-based compensation expense | 3.9 | | | 4.4 | | | 10.6 | | | 12.4 | |
(1) There was no share-based compensation expense under the Acceleration program during the nine months ended April 1, 2023. During the three and nine months ended April 2, 2022, the company incurred $3.4 million and $11.8 million of share-based compensation expense related to its Acceleration Program.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
Stock Options
A summary of stock option activity during the nine months ended April 1, 2023 is as follows:
| | | | | | | |
| Number of Options Outstanding | | |
| (millions) | | |
Outstanding at July 2, 2022 | 10.0 | | | |
Granted | 1.1 | | | |
Exercised | (1.1) | | | |
Forfeited or expired | (1.0) | | | |
Outstanding at April 1, 2023 | 9.0 | | | |
| | | |
| | | |
The weighted-average grant-date fair value of options granted during the nine months ended April 1, 2023 and April 2, 2022 was $12.03 and $13.94, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model and the following weighted-average assumptions:
| | | | | | | | | | | |
| April 1, 2023 | | April 2, 2022 |
Expected term (years) | 4.9 | | 5.0 |
Expected volatility | 48.6 | % | | 46.9 | % |
Risk-free interest rate | 3.3 | % | | 0.8 | % |
Dividend yield | 3.4 | % | | 2.4 | % |
Service-based Restricted Stock Unit Awards ("RSUs")
A summary of service-based RSU activity during the nine months ended April 1, 2023 is as follows:
| | | | | | | |
| Number of Non-vested RSUs | | |
| (millions) | | |
Non-vested at July 2, 2022 | 6.4 | | | |
Granted | 2.4 | | | |
Vested | (2.3) | | | |
Forfeited | (0.4) | | | |
Non-vested at April 1, 2023 | 6.1 | | | |
The weighted-average grant-date fair value of share awards granted during the nine months ended April 1, 2023 and April 2, 2022 was $35.32 and $42.00, respectively.
Performance-based Restricted Stock Unit Awards ("PRSUs")
A summary of PRSU activity during the nine months ended April 1, 2023 is as follows:
| | | | | | | |
| Number of Non-vested PRSUs | | |
| (millions) | | |
Non-vested at July 2, 2022 | 1.2 | | | |
Granted | 0.4 | | | |
Change due to performance condition achievement | 0.8 | | | |
Vested | (1.7) | | | |
Forfeited | — | | | |
Non-vested at April 1, 2023 | 0.7 | | | |
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The PRSU awards included in the non-vested amount are based on certain Company-specific financial metrics. The effect of the change due to performance condition on the non-vested amount is recognized at the conclusion of the performance period, which may differ from the date on which the award vests.
The weighted-average grant-date fair value per share of PRSU awards granted during the nine months ended April 1, 2023 and April 2, 2022 was $35.37 and $42.12, respectively.
11. DEBT
The following table summarizes the components of the Company’s outstanding debt:
| | | | | | | | | | | |
| April 1, 2023 | | July 2, 2022 |
| (millions) |
Current debt: | | | |
Term Loan | $ | 25.0 | | | $ | 31.2 | |
| | | |
| | | |
| | | |
| | | |
Total current debt | $ | 25.0 | | | $ | 31.2 | |
| | | |
Long-term debt: | | | |
Term Loan | $ | 450.0 | | | $ | 468.8 | |
3.050% Senior Notes due 2032 | 500.0 | | | 500.0 | |
4.125% Senior Notes due 2027 | 396.6 | | | 396.6 | |
| | | |
4.250% Senior Notes due 2025 | 303.4 | | | 303.4 | |
| | | |
| | | |
Total long-term debt | 1,650.0 | | | 1,668.8 | |
Less: Unamortized discount and debt issuance costs on Senior Notes | (8.4) | | | (9.6) | |
Total long-term debt, net | $ | 1,641.6 | | | $ | 1,659.2 | |
During the three and nine months ended April 1, 2023, the Company recognized interest expense related to its debt of $19.0 million and $53.4 million, respectively. During the three and nine months ended April 2, 2022, the Company recognized interest expense related to its debt of $15.3 million and $48.4 million, respectively.
$1.25 Billion Revolving Credit Facility and $500.0 Million Term Loan
On May 11, 2022, 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 $1.25 billion revolving credit facility (the “$1.25 Billion Revolving Credit Facility”) and an unsecured $500.0 million Term Loan (the “Term Loan”). Both the $1.25 Billion Revolving Credit Facility and Term Loan (collectively, the “Credit Facilities”) will mature on May 11, 2027. The Company and its subsidiaries must comply on a quarterly basis with a maximum 4.0 to 1.0 ratio of (a) consolidated debt minus unrestricted cash and cash equivalents in excess of $300 million to (b) consolidated EBITDAR.
Borrowings under the $1.25 Billion Revolving Credit Facility bear interest at a rate per annum equal to, at the Company’s option, (i) for borrowings in U.S. Dollars, either (a) an alternate base rate or (b) a term secured overnight financing rate, (ii) for borrowings in Euros, the Euro Interbank Offered Rate, (iii) for borrowings in Pounds Sterling, the Sterling Overnight Index Average Reference Rate and (iv) for borrowings in Japanese Yen, the Tokyo Interbank Offer Rate, plus, in each case, an applicable margin. The applicable margin will be adjusted by reference to a grid (the “Pricing Grid”) based on the ratio of (a) consolidated debt to (b) consolidated EBITDAR (the “Gross Leverage Ratio”). Additionally, the Company will pay facility fees, calculated at a rate per annum determined in accordance with the Pricing Grid, on the full amount of the $1.25 Billion Revolving Credit Facility, payable quarterly in arrears, and certain fees with respect to letters of credit that are issued. The $1.25 Billion Revolving Credit Facility may be used to finance the working capital needs, capital expenditures, permitted investments, share purchases, dividends and other general corporate purposes of the Company and its subsidiaries (which may include commercial paper backup). There were no outstanding borrowings on the $1.25 Billion Revolving Credit Facility as of April 1, 2023.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The Term Loan includes up to a two-month delayed draw period from the closing date. In the fourth quarter of fiscal 2022 the Company drew down on the Term Loan to satisfy the Company’s remaining obligations under the 3.000% senior unsecured notes due 2022 and for general corporate purposes. The Term Loan amortizes in an amount equal to 5.00% per annum, with payments made quarterly. Borrowings under the Term Loan bear interest at a rate per annum equal to, at the Company’s option, either (i) an alternate base rate or (ii) a term secured overnight financing rate plus, in each case, an applicable margin. The applicable margin will be adjusted by reference to a pricing grid based on the Gross Leverage Ratio. Additionally, the Company will pay a ticking fee on the undrawn amount of the Term Loan.
3.050% Senior Notes due 2032
On December 1, 2021, the Company issued $500.0 million aggregate principal amount of 3.050% senior unsecured notes due March 15, 2032 at 99.705% of par (the "2032 Senior Notes"). Interest is payable semi-annually on March 15 and September 15 beginning March 15, 2022. Prior to December 15, 2031 (the date that is three months prior to the scheduled maturity date), the Company may redeem the 2032 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the 2032 Senior Notes to be redeemed or (2) as determined by a Quotation Agent, the sum of the present values of the remaining scheduled payments of principal and interest thereon that would have been payable in respect of the 2032 Senior Notes calculated as if the maturity date of the 2032 Senior Notes was December 15, 2031 (not including any portion of payments of interest accrued to the date of redemption), discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as defined in the Prospectus Supplement) plus 25 basis points, plus, in the case of each of (1) and (2), accrued and unpaid interest to the redemption date.
Cash Tender Offer
On December 1, 2021, the proceeds from the 2032 Senior Notes were utilized to complete a cash tender offer of $203.4 million and $296.6 million of the outstanding aggregate principal amount of the Company's 2027 Senior Notes (defined below under "4.125% Senior Notes due 2027") and 2025 Senior Notes (defined below under "4.250% Senior Notes due 2025"), respectively. As a result of these cash tender offers completed prior to their scheduled maturities, the transactions were subject to a premium of $22.4 million and $26.8 million for the 2027 Senior Notes and 2025 Senior Notes, respectively. Additionally, the Company recognized $4.5 million of debt issuance costs, tender fees, and unamortized original discount in connection with the transaction. These premiums and costs, which totaled $53.7 million, were recorded as a pre-tax debt extinguishment charge during the second quarter of fiscal 2022.
4.125% Senior Notes due 2027
On June 20, 2017, the Company issued $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"). Interest is payable semi-annually on January 15 and July 15 beginning January 15, 2018. Prior to April 15, 2027 (the date that is three month prior to the scheduled maturity date), the Company may redeem the 2027 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the 2027 Senior Notes to be redeemed or (2) as determined by a Quotation Agent, the sum of the present values of the remaining scheduled payments of principal and interest thereon that would have been payable in respect of the 2027 Senior Notes calculated as if the maturity date of the 2027 Senior Notes was April 15, 2027 (not including any portion of payments of interest accrued to the date of redemption), discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as defined in the Prospectus Supplement) plus 30 basis points, plus, in the case of each of (1) and (2), accrued and unpaid interest to the redemption date. On December 1, 2021, the Company completed a cash tender offer for $203.4 million of the outstanding aggregate principal amount of its 2027 Senior Notes.
4.250% Senior Notes due 2025
On March 2, 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”). Interest is payable semi-annually on April 1 and October 1 beginning October 1, 2015. Prior to January 1, 2025 (90 days prior to the scheduled maturity date), the Company may redeem the 2025 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the 2025 Senior Notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon that would have been payable in respect of the 2025 Senior Notes calculated as if the maturity date of the 2025 Senior Notes was January 1, 2025 (not including any portion of payments of interest accrued to the date of redemption), discounted to the redemption date on a semi-annual basis at the Adjusted Treasury Rate (as defined in the indenture for the 2025 Senior Notes) plus 35 basis points, plus, in the case of each of (1) and (2), accrued and unpaid interest to the redemption date. On and after January 1, 2025 (90 days prior to the scheduled maturity date), the
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
Company may redeem the 2025 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to 100% of the principal amount of the 2025 Senior Notes to be redeemed, plus accrued and unpaid interest to the redemption date. On December 1, 2021, the Company completed a cash tender offer for $296.6 million of the outstanding aggregate principal amount of its 2025 Senior Notes.
At April 1, 2023 the fair value of the 2032, 2027, and 2025 Senior Notes was approximately $408.9 million, $374.1 million and $299.4 million, respectively, based on external pricing data, including available quoted market prices of these instruments, and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy. At July 2, 2022, the fair value of the 2032, 2027 and 2025 Senior Notes was approximately $409.0 million, $383.0 million and $304.1 million, respectively.
12. FAIR VALUE MEASUREMENTS
The Company categorizes its assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. The three levels of the hierarchy are defined as follows:
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for substantially the full term of the asset or liability.
Level 3 — Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. The Company does not have any Level 3 investments.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The following table shows the fair value measurements of the Company’s financial assets and liabilities at April 1, 2023 and July 2, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | |
| April 1, 2023 | | July 2, 2022 | | April 1, 2023 | | July 2, 2022 | | | | |
| (millions) |
Assets: | | | | | | | | | | | |
Cash equivalents(1) | $ | 130.7 | | | $ | 99.1 | | | $ | 0.4 | | | $ | 10.9 | | | | | |
Short-term investments: | | | | | | | | | | | |
Time deposits(2) | — | | | — | | | 0.6 | | | 0.6 | | | | | |
Commercial paper(2) | — | | | — | | | — | | | 59.6 | | | | | |
Government securities - U.S.(2) | — | | | 39.4 | | | — | | | — | | | | | |
Corporate debt securities - U.S.(2) | — | | | — | | | — | | | 55.2 | | | | | |
| | | | | | | | | | | |
Other | — | | | — | | | 14.0 | | | 8.6 | | | | | |
Long-term investments: | | | | | | | | | | | |
Other | — | | | — | | | 1.3 | | | 0.1 | | | | | |
Derivative assets: | | | | | | | | | | | |
Inventory-related instruments(3) | — | | | — | | | 4.9 | | | — | | | | | |
Net investment hedges(3) | — | | | — | | | 5.4 | | | 47.8 | | | | | |
Intercompany loans and payables(3) | — | | | — | | | 0.2 | | | 0.4 | | | | | |
Liabilities: | | | | | | | | | | | |
| | | | | | | | | | | |
Derivative liabilities: | | | | | | | | | | | |
Inventory-related instruments(3) | — | | | — | | | 17.5 | | | 2.7 | | | | | |
Net investment hedges(3) | — | | | — | | | 102.4 | | | 44.0 | | | | | |
Intercompany loans and payables(3) | — | | | — | | | — | | | 0.5 | | | | | |
| | | | | | | | | | | |
(1)Cash equivalents consist of money market funds and time deposits with maturities of three months or less at the date of purchase. Due to their short-term maturity, management believes that their carrying value approximates fair value.
(2)Short-term investments are recorded at fair value, which approximates their carrying value, and are primarily based upon quoted vendor or broker priced securities in active markets.
(3)The fair value of these hedges is primarily based on the forward curves of the specific indices upon which settlement is based and includes an adjustment for the counterparty’s or Company’s credit risk.
Refer to Note 11, "Debt," for the fair value of the Company's outstanding debt instruments.
Non-Financial Assets and Liabilities
The Company’s non-financial instruments, which primarily consist of goodwill, intangible assets, right-of-use assets and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written-down to and recorded at fair value, considering market participant assumptions. There were no impairment charges recorded during the three and nine months ended April 1, 2023 and April 2, 2022.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
13. INVESTMENTS
The following table summarizes the Company’s U.S. dollar-denominated investments, recorded within the Company's Condensed Consolidated Balance Sheets as of April 1, 2023 and July 2, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| April 1, 2023 | | July 2, 2022 |
| Short-term | | Long-term(3) | | Total | | Short-term | | Long-term(3) | | Total |
| (millions) |
Available-for-sale investments: | | | | | | | | | | | |
Commercial paper(1) | $ | — | | | $ | — | | | $ | — | | | $ | 59.6 | | | $ | — | | | $ | 59.6 | |
Government securities - U.S.(2) | — | | | — | | | — | | | 39.4 | | | — | | | 39.4 | |
| | | | | | | | | | | |
Corporate debt securities - U.S.(2) | — | | | — | | | — | | | 55.2 | | | — | | | 55.2 | |
| | | | | | | | | | | |
Available-for-sale investments, total | $ | — | | | $ | — | | | $ | — | | | $ | 154.2 | | | $ | — | | | $ | 154.2 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other: | | | | | | | | | | | |
Time deposits(1) | $ | 0.6 | | | $ | — | | | $ | 0.6 | | | $ | 0.6 | | | $ | — | | | $ | 0.6 | |
Other | 14.0 | | | 1.3 | | | 15.3 | | | 8.6 | | | 0.1 | | | 8.7 | |
Total Investments | $ | 14.6 | | | $ | 1.3 | | | $ | 15.9 | | | $ | 163.4 | | | $ | 0.1 | | | $ | 163.5 | |
(1)These securities have original maturities greater than three months and are recorded at fair value.
(2)These securities as of period end have maturity dates during their respective fiscal years and are recorded at fair value.
(3)Long-term investments are presented within Other assets on the Condensed Consolidated Balance Sheets.
There were no material gross realized and unrealized gains or losses on available-for-sale investments as of the periods ended April 1, 2023 and July 2, 2022.
14. COMMITMENTS AND CONTINGENCIES
Letters of Credit
The Company had standby letters of credit, surety bonds and bank guarantees totaling $36.3 million and $37.8 million outstanding at April 1, 2023 and July 2, 2022, respectively. The agreements, which expire at various dates through fiscal year 2028, primarily collateralize the Company's obligation to third parties for duty, leases, insurance claims and materials used in product manufacturing. The Company pays certain fees with respect to these instruments that are issued.
Other
The Company had other contractual cash obligations as of April 1, 2023 related to debt repayments. Refer to Note 11, "Debt," for further information. Additionally, the Company had future payment obligations related to executed lease agreements for which the related lease had not yet commenced. Refer to Note 7, "Leases," for further information.
The Company is involved in various routine legal proceedings as both plaintiff and defendant incident to the ordinary course of its business, including proceedings to protect Tapestry's intellectual property rights, litigation instituted by persons alleged to have been injured by advertising claims or upon premises within the Company’s control, contractual disputes, insurance claims and litigation with present or former employees.
As part of Tapestry’s policing program for its intellectual property rights, from time to time, the Company files lawsuits in the U.S. and abroad alleging acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, copyright infringement, unfair competition, trademark dilution and/or state or foreign law claims. At any given point in time, Tapestry may have a number of such actions pending. These actions often result in seizure of counterfeit merchandise and/or out of court settlements with defendants. From time to time, defendants will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of Tapestry’s intellectual properties.
Although the Company's litigation as described above is routine and incidental to the conduct of Tapestry’s business, such litigation can result in large monetary awards, such as when a civil jury is allowed to determine compensatory and/or punitive damages.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The Company believes that the outcome of all pending legal proceedings in the aggregate will not have a material effect on the Company's business or condensed consolidated financial statements.
15. SEGMENT INFORMATION
The Company has three reportable segments:
•Coach - Includes global sales of Coach products to customers through Coach operated stores, including e-commerce sites and concession shop-in-shops, 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 e-commerce sites and concession shop-in-shops, sales to wholesale customers, and through independent third party distributors.
•Stuart Weitzman - Includes global sales of Stuart Weitzman brand products primarily through Stuart Weitzman operated stores, sales to wholesale customers, through e-commerce sites and through independent third party distributors.
In deciding how to allocate resources and assess performance, the Company's chief operating decision maker regularly evaluates the sales and segment operating profit of these segments. Segment operating profit is the gross margin of the segment less direct expenses of the segment.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The following table summarizes net sales of each of the company's segments for the three and nine months ended April 1, 2023 and April 2, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | |
| April 1, 2023 | | April 2, 2022 | | April 1, 2023 | | April 2, 2022 | | |
Segment net sales: | | | | | | | | | |
Coach | $ | 1,144.0 | | | $ | 1,072.4 | | | $ | 3,713.0 | | | $ | 3,712.3 | | | |
Kate Spade | 297.2 | | | 301.5 | | 1,109.4 | | | 1,101.4 | | | |
Stuart Weitzman | 68.3 | | | 63.6 | | 219.0 | | 245.9 | | |
Total Net sales: | $ | 1,509.5 | | | $ | 1,437.5 | | | $ | 5,041.4 | | | $ | 5,059.6 | | | |
| | | | | | | | | |
The following table summarizes segment operating profit of each of the company's segments and reconciliation to Income (loss) before provision for income taxes for the three and nine months ended April 1, 2023 and April 2, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | |
| April 1, 2023 | | April 2, 2022 | | April 1, 2023 | | April 2, 2022 | | |
Segment operating profit: | | | | | | | | | |
Coach | $ | 342.2 | | | $ | 285.5 | | | $ | 1,134.6 | | | $ | 1,124.5 | | | |
Kate Spade | 8.0 | | 10.3 | | 100.2 | | 131.2 | | |
Stuart Weitzman | 0.8 | | (6.3) | | | (3.6) | | | 5.5 | | |
Total segment operating profit: | $ | 351.0 | | | $ | 289.5 | | | $ | 1,231.2 | | | $ | 1,261.2 | | | |
Unallocated corporate expenses(1) | 124.7 | | | 120.0 | | | 332.4 | | | 333.9 | | | |
Loss on extinguishment of debt | — | | | — | | | — | | | 53.7 | | | |
Unallocated other charges, net(2) | 3.1 | | | 17.8 | | | 22.5 | | | 55.1 | | | |
Income (loss) before provision for income taxes | $ | 223.2 | | | $ | 151.7 | | | $ | 876.3 | | | $ | 818.5 | | | |
| | | | | | | | | |
The following table summarizes depreciation and amortization expense of each of the company's segments for the three and nine months ended April 1, 2023 and April 2, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | |
| April 1, 2023 | | April 2, 2022 | | April 1, 2023 | | April 2, 2022 | | |
Depreciation and amortization expense(3): | | | | | | | | | |
Coach | $ | 21.0 | | | $ | 19.2 | | | $ | 68.0 | | | $ | 59.3 | | | |
Kate Spade | 10.0 | | | 9.7 | | 32.3 | | 30.7 | | |
Stuart Weitzman | 2.7 | | | 2.1 | | 7.8 | | 6.4 | | |
Unallocated corporate(1) | 8.2 | | | 17.5 | | | 22.4 | | | 51.7 | | | |
Total Depreciation and amortization expense: | $ | 41.9 | | | $ | 48.5 | | | $ | 130.5 | | | $ | 148.1 | | | |
| | | | | | | | | |
(1) Corporate, which is not a reportable segment, represents certain costs that are not directly attributable to a segment. These costs primarily include administration and certain costs for information systems.
(2) Includes Interest expense, net and Other expense (income).
(3) Depreciation and amortization expense for the segments includes an allocation of expense related to assets which support multiple segments.