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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the Quarterly Period Ended March 28, 2020
or 
          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
Commission file number: 1-16153
 
Tapestry, Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
52-2242751
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

10 Hudson Yards, New York, NY 10001
(Address of principal executive offices); (Zip Code) 
(212) 946-8400
(Registrant’s telephone number, including area code) 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol
 
Name of Each Exchange on which Registered
Common Stock, par value $.01 per share
 
TPR
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
Emerging growth company
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
On April 24, 2020, the Registrant had 276,098,489 outstanding shares of common stock, which is the Registrant’s only class of common stock.
 





TAPESTRY, INC.
INDEX
 

 




In this Form 10-Q, references to “we,” “our,” “us,” "Tapestry" and the “Company” refer to Tapestry, Inc., including consolidated subsidiaries. References to "Coach," "Kate Spade," "kate spade new york" or "Stuart Weitzman" refer only to the referenced brand.
SPECIAL NOTE ON FORWARD-LOOKING INFORMATION
This document, and the documents incorporated by reference in this document, in our press releases and in oral statements made from time to time by us or on our behalf, contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and are based on management’s current expectations, that involve risks and uncertainties that could cause our actual results to differ materially from our current expectations. These forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "may," "will," "should," "expect," "confidence," "trends," "intend," "estimate," "on track," "are positioned to," "on course," "opportunity," "continue," "project," "guidance," "target," "forecast," "anticipated," "plan," "potential," the negative of these terms or comparable terms. The Company's actual results could differ materially from the results contemplated by these forward-looking statements and are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from current expectations due to a number of important factors, including but not limited to: (i) the impact of the novel coronavirus ("Covid-19") global pandemic on our business and financial results; (ii) our ability to control costs; (iii) our exposure to international risks, including currency fluctuations and changes in economic or political conditions in the markets where we sell or source our products; (iv) the impact of the CARES Act and other legislation; (v) the risk of cyber security threats and privacy or data security breaches; (vi) the effect of existing and new competition in the marketplace; (vii) our ability to retain the value of our brands and to respond to changing fashion and retail trends in a timely manner; (viii) the effect of seasonal and quarterly fluctuations on our sales or operating results; (ix) our ability to protect against infringement of our trademarks and other proprietary rights; (x) the impact of legislation; (xi) our ability to achieve intended benefits, cost savings and synergies from acquisitions; (xii) the risks associated with potential changes to international trade agreements and the imposition of additional duties on importing our products; (xiii) such other risk factors as set forth in Part II, Item 1A. "Risk Factors" and elsewhere in this report and in the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2019 and Quarterly Report on Form 10-Q for the period ended December 28, 2019. The Company assumes no obligation to revise or update any such forward-looking statements for any reason, except as required by law.
 WHERE YOU CAN FIND MORE INFORMATION
Tapestry's quarterly financial results and other important information are available by calling the Investor Relations Department at (212) 629-2618.
Tapestry maintains its website at www.tapestry.com where investors and other interested parties may obtain, free of charge, press releases and other information as well as gain access to our periodic filings with the SEC.



 






TAPESTRY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

 
March 28,
2020
 
June 29,
2019
 
(millions)
 
(unaudited)
ASSETS
 

 
 

Current Assets:
 

 
 

Cash and cash equivalents
$
742.6

 
$
969.2

Short-term investments
155.6

 
264.6

Trade accounts receivable, less allowances of $16.0 and $4.4, respectively
190.4

 
298.1

Inventories
852.9

 
778.3

Prepaid expenses
60.2

 
99.8

Income tax receivable
35.1

 
55.8

Other current assets
95.1

 
91.0

Total current assets
2,131.9

 
2,556.8

Property and equipment, net
818.7

 
938.8

Operating lease right-of-use assets
1,970.9

 

Goodwill
1,298.5

 
1,516.2

Intangible assets
1,381.1

 
1,711.9

Deferred income taxes
35.9

 
19.4

Other assets
106.0

 
134.2

Total assets
$
7,743.0

 
$
6,877.3

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current Liabilities:
 

 
 

Accounts payable
$
200.1

 
$
243.6

Accrued liabilities
573.9

 
673.6

Current portion of operating lease liabilities
353.4

 

Current debt
11.5

 
0.8

Total current liabilities
1,138.9

 
918.0

Long-term debt
1,587.2

 
1,601.9

Long-term operating lease liabilities
1,897.3

 

Deferred income taxes
204.6

 
234.1

Long-term income taxes payable
147.0

 
155.9

Other liabilities
214.9

 
454.0

Total liabilities
5,189.9

 
3,363.9

 
 
 
 
See Note 16 on commitments and contingencies


 


 
 
 
 
Stockholders' Equity:
 

 
 

Preferred stock: (authorized 25.0 million shares; $0.01 par value per share) none issued

 

Common stock: (authorized 1.0 billion shares; $0.01 par value per share) issued and outstanding - 276.1 million and 286.8 million shares, respectively
2.8

 
2.9

Additional paid-in-capital
3,346.0

 
3,302.1

Retained earnings (accumulated deficit)
(699.0
)
 
291.6

Accumulated other comprehensive income (loss)
(96.7
)
 
(83.2
)
Total stockholders' equity
2,553.1

 
3,513.4

Total liabilities and stockholders' equity
$
7,743.0

 
$
6,877.3

 
See accompanying Notes.

1



TAPESTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three Months Ended
 
 
Nine Months Ended
 
March 28,
2020
 
March 30,
2019
 
 
March 28,
2020
 
March 30,
2019
 
(millions, except per share data)
 
 
(millions, except per share data)
 
(unaudited)
 
 
(unaudited)
Net sales
$
1,072.7

 
$
1,331.4

 
 
$
4,246.6

 
$
4,513.4

Cost of sales
456.5

 
415.5

 
 
1,506.2

 
1,458.9

Gross profit
616.2

 
915.9

 
 
2,740.4

 
3,054.5

Other selling, general and administrative expenses
824.0

 
806.1

 
 
2,533.5

 
2,405.9

Impairment of goodwill and intangible assets
477.7

 

 
 
477.7

 

Total selling, general and administrative expenses
1,301.7

 
806.1

 
 
3,011.2

 
2,405.9

Operating income (loss)
(685.5
)
 
109.8

 
 
(270.8
)
 
648.6

Interest expense, net
13.5

 
10.6

 
 
39.8

 
36.9

Other expense (income)
6.0

 
4.0

 
 
12.8

 
4.4

Income before provision for income taxes
(705.0
)
 
95.2

 
 
(323.4
)
 
607.3

Provision for income taxes
(27.9
)
 
(22.2
)
 
 
34.9

 
112.8

Net income (loss)
$
(677.1
)
 
$
117.4

 
 
$
(358.3
)
 
$
494.5

Net income (loss) per share:
 

 
 

 
 
 

 
 

Basic
$
(2.45
)
 
$
0.40

 
 
$
(1.28
)
 
$
1.71

Diluted
$
(2.45
)
 
$
0.40

 
 
$
(1.28
)
 
$
1.70

Shares used in computing net income (loss) per share:
 

 
 

 
 
 

 
 

Basic
276.1

 
290.0

 
 
279.4

 
289.5

Diluted
276.6

 
290.9

 
 
280.2

 
291.2

Cash dividends declared per common share
$
0.3375

 
$
0.3375

 
 
$
1.0125

 
$
1.0125

 
See accompanying Notes.
 

2



TAPESTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
 
 
Three Months Ended
 
 
Nine Months Ended
 
March 28,
2020
 
March 30,
2019
 
 
March 28,
2020
 
March 30,
2019
 
(millions)
 
 
(millions)
 
(unaudited)
 
 
(unaudited)
Net income (loss)
$
(677.1
)
 
$
117.4

 
 
$
(358.3
)
 
$
494.5

Other comprehensive income (loss), net of tax:
 

 
 

 
 
 

 
 

Unrealized gains (losses) on cash flow hedging derivatives, net
1.2

 
(4.0
)
 
 
6.5

 
(2.7
)
Unrealized gains (losses) on available-for-sale investments, net

 
0.1

 
 

 
0.2

Other

 

 
 
(1.7
)
 

Foreign currency translation adjustments
(12.9
)
 
4.9

 
 
(18.3
)
 
(5.2
)
Other comprehensive income (loss), net of tax
(11.7
)
 
1.0

 
 
(13.5
)
 
(7.7
)
Comprehensive income
$
(688.8
)
 
$
118.4

 
 
$
(371.8
)
 
$
486.8

 
See accompanying Notes.


3



TAPESTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
March 28,
2020
 
March 30,
2019
 
(millions)
 
(unaudited)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
 

 
 

Net income (loss)
$
(358.3
)
 
$
494.5

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
194.9

 
189.8

Provision for bad debt
16.8

 
6.4

Share-based compensation
47.0

 
65.4

Organization-related and integration activities
15.2

 
13.0

Impairment charges
697.6

 

Changes to lease related balances, net
26.1

 

Deferred income taxes
(33.3
)
 
41.5

Other non-cash charges, net
4.7

 
(5.5
)
Changes in operating assets and liabilities:
 

 
 

Trade accounts receivable
75.2

 
50.9

Inventories
(171.6
)
 
(123.1
)
Accounts payable
(18.5
)
 
(43.5
)
Accrued liabilities
(31.2
)
 
29.1

Other liabilities
(37.6
)
 
(61.2
)
Other assets
19.1

 
(54.5
)
Net cash provided by (used in) operating activities
446.1

 
602.8

CASH FLOWS USED IN INVESTING ACTIVITIES
 

 
 

Acquisitions, net of cash acquired

 
(39.4
)
Purchases of investments
(212.4
)
 
(336.4
)
Proceeds from maturities and sales of investments
316.1

 
82.3

Purchases of property and equipment
(172.9
)
 
(184.2
)
Net cash used in investing activities
(69.2
)
 
(477.7
)
CASH FLOWS USED IN FINANCING ACTIVITIES
 

 
 

Dividend payments
(287.1
)
 
(292.8
)
Repurchase of common stock
(300.0
)
 

Proceeds from share-based awards
1.7

 
31.6

Taxes paid to net settle share-based awards
(14.7
)
 
(26.1
)
Payments of finance lease liabilities
(0.6
)
 
(0.6
)
Payment of deferred purchase price
(2.4
)
 

Net cash used in financing activities
(603.1
)
 
(287.9
)
Effect of exchange rate changes on cash and cash equivalents
(0.4
)
 
(5.3
)
Net decrease in cash and cash equivalents
(226.6
)
 
(168.1
)
Cash and cash equivalents at beginning of period
969.2

 
1,243.4

Cash and cash equivalents at end of period
$
742.6

 
$
1,075.3

Supplemental information:
 
 
 
Cash paid for income taxes, net
$
80.5

 
$
135.3

Cash paid for interest
$
50.4

 
$
45.4

Noncash investing activity - property and equipment obligations
$
22.4

 
$
53.2

 

See accompanying Notes.

4

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 modern luxury accessories and lifestyle brands. Tapestry owns the Coach, Kate Spade and Stuart Weitzman brands. The Company’s primary product offerings, manufactured by third-party suppliers, include women’s and men’s bags, small leather goods, footwear, ready-to-wear including outerwear, watches, weekend and travel accessories, scarves, eyewear, fragrance, jewelry and other lifestyle products.
The Coach segment 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.
The Kate Spade segment 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.
The Stuart Weitzman segment includes global sales of Stuart Weitzman brand products primarily through Stuart Weitzman operated stores, including the Internet, sales to wholesale customers and through numerous independent third party distributors.
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 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 June 29, 2019 ("fiscal 2019") and other filings filed with the SEC.
The results of operations, cash flows and comprehensive income for the nine months March 28, 2020 are not necessarily indicative of results to be expected for the entire fiscal year, which will end on June 27, 2020 ("fiscal 2020"). 
During the fiscal year ended June 29, 2019, the Company acquired designated assets of its Stuart Weitzman distributor in Southern China and Australia and of its Kate Spade distributor in Australia, Malaysia and Singapore. The results of operations of each acquired entity have been included in the condensed consolidated financial statements since the respective date of each acquisition.
Fiscal Periods
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to June 30. Fiscal 2020 will be a 52-week period. Fiscal 2019 ended on June 29, 2019 and was also a 52-week period. The third quarter of fiscal 2020 ended on March 28, 2020 and the third quarter of fiscal 2019 ended on March 30, 2019, both of which were 13-week periods.
Covid-19 Pandemic
The outbreak of a novel strain of coronavirus continues to grow worldwide, impacting a significant majority of the regions in which we operate. In March 2020, the outbreak was labeled a global pandemic by the World Health Organization. National, state and local governments have responded to the Covid-19 pandemic in a variety of ways, including, but not limited to, by declaring states of emergency, restricting people from gathering in groups or interacting within a certain physical distance (i.e., social distancing), requiring individuals to stay at home, and in most cases, ordering non-essential businesses to close or limit operations. The majority of the Company’s stores in mainland China were closed in the third quarter of fiscal 2020, but have essentially all re-opened by the end of the quarter. Also in March 2020, the Company closed all of its stores in North America and Europe, and many in the Asia Pacific region. Many of the Company’s wholesale partners have also closed their bricks and mortar stores and have substantially reduced their operations.
The global Covid-19 pandemic is rapidly 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 are highly uncertain and cannot be predicted, including the ultimate duration, severity and geographic spread of the virus and the success of actions to contain the virus or treat its impact, among others. As the full magnitude of the effects on the Company's business is difficult to predict at this time, the

5

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




Covid-19 pandemic has and is expected to 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 for fiscal 2020 and beyond. 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 addition, the negative impacts of the Covid-19 pandemic could result in the establishment of additional valuation allowances in certain jurisdictions.
In response to the Covid-19 pandemic, the Company has taken actions to reinforce its liquidity and financial flexibility. In the third quarter of fiscal 2020 the Company announced that it has suspended its quarterly dividend and all share repurchases for the foreseeable future.
In addition, and subsequent to March 28, 2020, the Company has taken other additional actions. These actions include, but are not limited to, actively reducing non-essential SG&A expense, reducing corporate compensation, terminating 2,100 part-time store associates, tightly managing inventory and reducing capital expenditures.
Furthermore, on March 30, 2020, the Company borrowed $700 million under its $900 million definitive credit agreement, as entered on October 24, 2019 ("Revolving Credit Facility") as a precautionary measure. If the Company's stores remain closed for an extended period of time, its liquidity may continue to be negatively impacted and it may need to draw additional funds from our Revolving Credit Facility or seek additional sources of financing, which may or may not be available. If the Company does not repay some or all of the outstanding borrowings under the Revolving Credit Facility prior to the end of the fourth quarter of fiscal 2020, the Company may be unable to maintain compliance with the leverage ratio financial covenant required by the Revolving Credit Facility. The Company is actively seeking an amendment to the terms of the agreement from its lenders, however no assurances can be given that the amendment will be granted or on terms that are acceptable to the Company. Non-compliance with its covenants would constitute an event of default under the terms of the Revolving Credit Facility, which may result in an acceleration of payment to the lenders. In the event of an acceleration of payment to the lenders, this would result in a cross default of the Company’s notes payable (refer to Note 12, "Debt" for further information regarding the Company's outstanding notes payable), causing the Company’s outstanding borrowings to also become due and payable on demand. If the Company is not able to obtain such amendment, it expects, and has the ability to repay some or all of the $700 million borrowed against the Revolving Credit Facility, in order to prevent an event of default under the Revolving Credit Facility.
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 useful lives and impairments of long-lived tangible and intangible assets; reserves for the realizability of inventory; customer returns, end-of-season markdowns and operational chargebacks; accounting for income taxes (including the impacts of tax legislation) 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.
Share Repurchases
The Company accounts for share repurchases by allocating the repurchase price to common stock and retained earnings. As a result, all repurchased shares are authorized but unissued shares. Under Maryland law, the Company's state of incorporation, there are no treasury shares. 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 a purchase agreement under Rule 10b5-1. The Company may terminate or limit the share repurchase program at any time.
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.

6

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




Reclassifications
Certain reclassifications have been made to the prior periods' financial information in order to conform to the current period's presentation. Beginning in fiscal 2020, the Company presented the impact of foreign currency gains and losses within Other expense (income) within its Condensed Consolidated Statements of Operations. Accordingly, foreign currency gains and losses that were reported within Selling, general and administrative expenses ("SG&A") in fiscal 2019 are now reflected within Other expense (income).
3. RECENT ACCOUNTING PROUNOUNCEMENTS
Recently Adopted Accounting Pronouncements
During the first quarter of fiscal 2020, the Company adopted Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02") and related ASUs. This ASU requires recognition of lease assets and lease liabilities on the balance sheet for all leases other than short-term leases. The Company elected the package of practical expedients intended to ease transition whereby the Company need not reassess as of the adoption date (1) whether contracts are or contain leases, (2) the lease classification for any existing leases and (3) initial direct costs for any existing leases. The Company also elected the practical expedient to
combine non-lease components and lease components for real estate leases. The Company applied the provisions of ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements" ("ASU 2018-11"), allowing it to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without restating the comparative prior year periods.
The effects of the adoption on selected line items within the Company's Condensed Consolidated Balance Sheet as of June 30, 2019 were as follows:
 
 
June 29, 2019
 
 
 
June 30, 2019
 
 
As Reported under ASC 840
 
ASC 842 Adjustments
 
As Reported under ASC 842
 
 
(millions)
Current Assets:
 
 
 
 
 
 
Prepaid expenses(1)
 
$
99.8

 
$
(37.8
)
 
$
62.0

Other current assets(1)
 
91.0

 
(2.3
)
 
88.7

Long-term Assets:
 
 
 
 
 

Operating lease right-of-use assets(1)
 

 
2,133.7

 
2,133.7

Intangible assets(1)
 
1,711.9

 
(58.5
)
 
1,653.4

Deferred income tax assets(3)
 
19.4

 
1.7

 
21.1

Other assets(1)
 
134.2

 
(27.4
)
 
106.8

Current Liabilities:
 
 
 
 
 

Accrued liabilities(1)(3)
 
673.6

 
(39.2
)
 
634.4

Operating lease liabilities(2)
 

 
362.3

 
362.3

Current debt
 
0.8

 
(0.8
)
 

Long-term Liabilities:
 
 
 
 
 

Long-term debt
 
1,601.9

 
(5.3
)
 
1,596.6

Operating lease liabilities(2)
 

 
1,961.6

 
1,961.6

Deferred income tax liabilities(3)
 
234.1

 
(13.1
)
 
221.0

Other liabilities(1)(3)
 
454.0

 
(207.2
)
 
246.8

Stockholder's Equity:
 
 
 
 
 

Retained earnings (accumulated deficit)(3)
 
291.6

 
(48.9
)
 
242.7

 
(1)  
Upon adoption, the Company recognized operating lease right-of-use ("ROU") assets on the Condensed Consolidated Balance Sheet. In conjunction with this recognition, the Company reclassified amounts to lease right-of-use assets including: prepaid rent from prepaid expenses; key money and lease right intangibles from current and long-term other assets; deferred rent, lease incentives, unfavorable lease right liability and other accrued rent from current and long-term other liabilities. In addition, upon adoption in the first quarter of fiscal 2020, the Company recognized initial ROU asset balances of $2.13 billion on its Condensed Consolidated Balance Sheet.
(2)  
Upon adoption, the Company recognized lease liabilities of $2.32 billion on the Condensed Consolidated Balance Sheet, which were recorded with Current and Long-term lease liabilities.
(3)  
Upon adoption, the Company recognized a cumulative adjustment of $63.7 million, net of tax, decreasing the opening balance of Retained earnings, related to right-of-use asset impairment charges for certain of the Company’s stores where it was previously determined that the carrying value of assets was not recoverable. This adjustment was partially offset by ($14.8) million, net of tax, of increases to retained earnings to recognize deferred gains resulting from real estate transactions.
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820)" ("ASU 2018-13"), which is intended to improve the effectiveness of fair value disclosures. The ASU removes or modifies certain disclosure requirements related to fair value information, as well as adds new disclosure requirements for Level 3 fair value measurements. The requirements of the new standard will be effective for annual reporting periods beginning after December 15, 2019, and interim periods within those annual periods, which for the Company is the first quarter of fiscal 2021. Early adoption is permitted. The Company is currently in the process of evaluating the impact that adopting ASU 2018-13 will have on its condensed consolidated financial

7

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




statements and notes thereto, however, does not expect a material impact resulting from this guidance.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)" ("ASU 2018-15"), which is intended to clarify the accounting for implementation costs of cloud computing arrangements which are deemed to be a service contract rather than a software license. The requirements of the new standard will be effective for annual reporting periods beginning after December 15, 2019, and interim periods within those annual periods, which for the Company is the first quarter of fiscal 2021. Early adoption is permitted. The Company is currently in the process of evaluating the impact that adopting ASU 2018-15 will have on its condensed consolidated financial statements and notes thereto.
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires companies to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. The FASB has subsequently issued updates to the standard to provide additional clarification on specific topics. The requirement of the new standard will be effective for annual reporting periods beginning after December 15, 2019, and interim periods within those annual periods, which for the Company is the first quarter of fiscal 2021. Early adoption is permitted. The Company is currently in the process of evaluating the impact that adopting ASU 2016-13 will have on its condensed consolidated financial statements and notes thereto.
4. REVENUE
The Company recognizes revenue primarily from sales of the products of its brands through retail and wholesale channels, including the Internet. 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. Internet revenue from sales of products ordered through the Company's e-commerce sites is recognized upon delivery and receipt of the shipment by its customers and includes shipping and handling charges paid by customers. Retail and Internet revenues are recorded net of estimated returns, which are estimated by developing an expected value based on historical experience. Payment is due at the point of sale.
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.
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 March 28, 2020.
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.

8

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 March 28, 2020
 
 
 
 
 
 
 
 
 
Coach
$
427.6

 
$
103.7

 
$
193.8

 
$
47.4

 
$
772.5

Kate Spade
181.4

 
8.9

 
41.1

 
18.1

 
249.5

Stuart Weitzman
28.7

 
10.6

 
4.5

 
6.9

 
50.7

Total
$
637.7

 
$
123.2

 
$
239.4

 
$
72.4

 
$
1,072.7

 
 
 
 
 
 
 
 
 
 
Three Months Ended March 30, 2019
 
 
 
 
 
 
 
 
 
Coach
$
484.0

 
$
213.7

 
$
212.8

 
$
54.5

 
$
965.0

Kate Spade
205.1

 
13.6

 
43.8

 
18.6

 
281.1

Stuart Weitzman
45.8

 
18.0

 
6.3

 
15.2

 
85.3

Total
$
734.9

 
$
245.3

 
$
262.9

 
$
88.3

 
$
1,331.4

 
 
 
 
 
 
 
 
 
 
Nine Months Ended March 28, 2020
 
 
 
 
 
 
 
 
 
Coach
$
1,751.3

 
$
451.0

 
$
622.0

 
$
184.0

 
$
3,008.3

Kate Spade
761.8

 
34.8

 
125.2

 
63.6

 
985.4

Stuart Weitzman
137.7

 
62.7

 
16.4

 
36.1

 
252.9

Total
$
2,650.8

 
$
548.5

 
$
763.6

 
$
283.7

 
$
4,246.6

 
 
 
 
 
 
 
 
 
 
Nine Months Ended March 30, 2019
 
 
 
 
 
 
 
 
 
Coach
$
1,788.1

 
$
577.2

 
$
627.9

 
$
181.1

 
$
3,174.3

Kate Spade
812.3

 
37.4

 
118.9

 
66.3

 
1,034.9

Stuart Weitzman
170.4

 
57.1

 
18.5

 
58.2

 
304.2

Total
$
2,770.8

 
$
671.7

 
$
765.3

 
$
305.6

 
$
4,513.4

 
(1) 
Greater China includes mainland China, Hong Kong SAR, Macao SAR and Taiwan.
(2) 
Other Asia includes Japan, Australia, New Zealand, South Korea, Thailand and other countries within Asia.
(3) 
Other sales primarily represents sales in Europe, the Middle East and royalties related to licensing.
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 primarily related to 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 March 28, 2020 and June 29, 2019 was $31.6 million and $27.5 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 March 28, 2020, net sales of $11.3 million were recognized from amounts recorded as deferred revenue as of June 29, 2019. For the nine months ended March 30, 2019, net sales of $16.6 million were recognized from amounts recorded as deferred revenue as of June 30, 2018.
5. INTEGRATION
During the three and nine months ended March 28, 2020, the Company incurred integration costs of $3.4 million and $11.6 million. The charges recorded in Cost of sales for the nine months ended March 28, 2020 were $5.6 million. There were no charges recorded for the three months ended March 28, 2020. Of the amount recorded to Cost of sales for the nine months ended March 28, 2020, $4.3 million was recorded in the Stuart Weitzman segment, $1.2 million was recorded in the Kate Spade segment and $0.1 million was recorded in the Coach segment, respectively. The charges recorded to SG&A expenses for the three and nine months ended March 28, 2020 were $3.4 million and $6.0 million, respectively. Of the amount recorded to SG&A expenses, $2.9 million and $6.9 million was recorded within Corporate, $0.2 million and a reduction of expense of $1.9 million was recorded in the Stuart Weitzman segment, $0.3 million and $1.1 million was recorded in the Kate Spade segment and $0.0 million and a reduction of expense of $0.1 million was recorded in the Coach segment, respectively. Of the total costs of $3.4 million, a reduction of expense of $0.1 million were non-cash charges. Of the total costs of $11.6 million, $3.8 million were non-cash charges related to inventory charges, organization-related costs and purchase accounting adjustments.
The Company estimates that it will incur approximately $5 million in pre-tax charges, of which the majority are expected to be cash charges, for the remainder of fiscal 2020.
During the three and nine months ended March 30, 2019, the Company incurred integration costs of $20.6 million and $55.3 million, respectively. The charges recorded in Cost of sales for the three and nine months ended March 30, 2019 were $5.0 million and $9.1 million, respectively. Of the amount recorded to Cost of sales, $4.3 million and $5.4 million was recorded in the Kate Spade segment, $0.0 million and $2.0 million was recorded in the Coach segment and $0.7 million and $1.7 million was recorded in the Stuart Weitzman segment, respectively. The charges recorded in SG&A expenses for the three and nine months ended March 30, 2019 were $15.6 million and $46.2 million, respectively. Of the amount recorded to SG&A expenses, $7.0 million and $18.4 million was recorded within Corporate, $0.1 million and $12.2 million was recorded in the Stuart Weitzman segment and $3.0 million and $10.1 million was recorded in the Kate Spade segment, respectively. The charges recorded to SG&A expenses in the Coach segment were $5.5 million for the three and nine months ended March 30, 2019. Of the total costs of $20.6 million, $6.7 million were non-cash charges related to purchase accounting adjustments and asset write-offs. Of the total costs of $55.3 million, $13.0 million were non-cash charges related to purchase accounting adjustments and organization-related costs.
Refer to Note 6, "Acquisitions," for more information.
A summary of the integration charges is as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
 
March 28,
2020
 
March 30,
2019
 
March 28,
2020
 
March 30,
2019
 
 
(millions)
Purchase accounting adjustments(1)
 
$

 
$
3.9

 
$
0.8

 
$
9.3

Acquisition costs(2)
 

 
0.3

 

 
1.0

Inventory-related charges(3)
 

 
1.0

 
4.9

 
(0.4
)
Contractual payments(4)
 

 
(0.6
)
 

 
6.6

Other(5)
 
3.4

 
16.0

 
5.9

 
38.8

Total
 
$
3.4

 
$
20.6

 
$
11.6

 
$
55.3

 
(1) 
Purchase accounting adjustments primarily relate to the short-term impact of the amortization of fair value adjustments.
(2)  
Acquisition costs were primarily related to deal fees associated with acquisitions.
(3) 
Inventory-related charges primarily relate to inventory reserves.
(4) 
Contractual payments primarily relate to contract termination charges for the three and nine months ended March 30, 2019.
(5) 
Other primarily relates to share-based compensation, severance charges, professional fees and asset write-offs.

9

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




6. ACQUISITIONS
Fiscal 2019 Acquisitions
Distributor Acquisitions
During the fiscal year ended June 29, 2019, the Company acquired designated assets of its Stuart Weitzman distributor in Southern China and Australia and of its Kate Spade distributor in Australia, Malaysia and Singapore.
The aggregate purchase consideration for the acquisitions was $47.8 million, $44.0 million of which was cash consideration and the remaining is related to non-cash consideration. Of the $44.0 million of cash consideration, $43.5 million was paid during fiscal 2019 and the remaining will be paid in the future. Of the total purchase consideration of $47.8 million, $21.8 million of net assets were recorded at their fair values. The excess of the purchase consideration over the fair value of the net assets acquired was recorded as non-tax deductible goodwill in the amount of $26.0 million, of which $13.3 million was assigned to the Stuart Weitzman segment and $12.7 million was assigned to the Kate Spade segment. Refer to Note 7, "Goodwill and Other Intangible Assets" for further information.
The purchase price allocation for these assets acquired and liabilities assumed is completed, however may be subject to change as additional information is obtained during the acquisition measurement period for the respective acquisitions. The pro forma results are not presented for these acquisitions as they are immaterial.

10

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




7. GOODWILL AND OTHER INTANGIBLE ASSETS
Interim Impairment Assessment
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 or if an event occurs that would more likely than not reduce the fair value below its carrying amount.
During the three months ended March 28, 2020, profitability trends continued to decline from those that were expected for the Stuart Weitzman brand. This reduction in both current and future expected cash flows was exacerbated by the Covid-19 pandemic, which resulted in a decline in sales driven by full and partial closures of a significant portion of our stores globally. As a result of these macroeconomic conditions, the Company concluded that a triggering event had occurred during the third quarter, resulting in the need to perform a quantitative interim impairment assessment over the Company’s Stuart Weitzman reporting unit and indefinite-lived brand intangible assets. The assessment concluded that the fair values of the Stuart Weitzman reporting unit and indefinite-lived brand intangible asset as of March 28, 2020 did not exceed their respective carrying values.
Accordingly, the Company recorded a goodwill impairment charge of $210.7 million related to the Stuart Weitzman reporting unit, resulting in a full impairment. The Company also recorded an impairment charge of $267.0 million related to the Stuart Weitzman indefinite-lived brand, resulting in a full impairment. The goodwill and brand intangible impairment charges were recorded within total SG&A expenses on the Company's Condensed Consolidated Statement of Operations for the three and nine months ended March 28, 2020.
The estimated fair value of the Stuart Weitzman reporting unit was based on a weighted average of the income and market approaches. The income approach is based on estimated discounted future cash flows, while the market approach is based on earnings multiples of selected guideline companies. The approach, which qualifies as level 3 in the fair value hierarchy, incorporated a number of significant assumptions and judgments, including, but not limited to, estimated future cash flows, discount rates, income tax rates, terminal growth rates and valuation multiples derived from comparable publicly traded companies. In considering the excess of the fair value over its carrying value for the Coach and Kate Spade reporting units and indefinite-lived brand intangibles, management did not perform an interim assessment for these reporting units.
Goodwill
The change in the carrying amount of the Company’s goodwill by segment is as follows:
 
Coach
 
Kate Spade
 
Stuart Weitzman
 
Total
 
(millions)
Balance at June 29, 2019
$
661.8

 
$
640.4

 
$
214.0

 
$
1,516.2

Impairment charges

 

 
(210.7
)
 
(210.7
)
Foreign exchange impact
(1.9
)
 
(1.8
)
 
(3.3
)
 
(7.0
)
Balance at March 28, 2020
$
659.9

 
$
638.6

 
$

 
$
1,298.5


Intangible Assets
Intangible assets consist of the following:
 
March 28, 2020
 
June 29, 2019
 
Gross
Carrying
Amount
 
Accum.
Amort.
 
Net
 
Gross
Carrying
Amount
 
Accum.
Amort.
 
Net
 
(millions)
Intangible assets subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
100.5

 
$
(29.2
)
 
$
71.3

 
$
100.6

 
$
(24.0
)
 
$
76.6

Favorable lease rights(1)

 

 

 
93.1

 
(34.6
)
 
58.5

Total intangible assets subject to amortization
100.5

 
(29.2
)
 
71.3

 
193.7

 
(58.6
)
 
135.1

Intangible assets not subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
Trademarks and trade names(2)
1,309.8

 

 
1,309.8

 
1,576.8

 

 
1,576.8

Total intangible assets
$
1,410.3

 
$
(29.2
)
 
$
1,381.1

 
$
1,770.5

 
$
(58.6
)
 
$
1,711.9


 
(1) 
Refer to Note 3, "Recent Accounting Pronouncements," for further information.

11

TAPESTRY, INC.
 
Notes to Condensed Consolidated Financial Statements (continued)




(2) 
During the three and nine months ended March 28, 2020, the Company recognized a $267.0 million non-cash charge related to the impairment of the Stuart Weitzman indefinite-lived brand.
As of March 28, 2020, the expected amortization expense for intangible assets is as follows:
 
 Amortization Expense
 
(millions)
Remainder of fiscal 2020
$
1.1

Fiscal 2021
6.5

Fiscal 2022
6.5

Fiscal 2023
6.5

Fiscal 2024
6.5

Fiscal 2025
6.5

Fiscal 2026 and thereafter
37.7

Total
$
71.3


The expected amortization expense above reflects remaining useful lives ranging from approximately 10.1 to 12.3 years for customer relationships.
8. 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 June 30, 2018
288.0

 
$
2.9

 
$
3,205.5

 
$
119.0

 
$
(82.8
)
 
$
3,244.6

Net income (loss)

 

 

 
122.3

 

 
122.3

Other comprehensive income (loss)

 

 

 

 
(5.3
)
 
(5.3
)
Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes
1.8

 

 
3.2

 

 

 
3.2

Share-based compensation

 

 
22.4

 

 

 
22.4

Dividends declared ($0.3375 per share)

 

 

 
(97.8)

 

 
(97.8)

Cumulative adjustment from adoption of new accounting standard
(see Note 3)

 

 

 
20.2

 

 
20.2

Balance at September 29, 2018
289.8

 
$
2.9

 
$
3,231.1

 
$
163.7

 
$
(88.1
)
 
$
3,309.6

Net income (loss)