Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the Company's financial condition and results of operations should be read together with the Company’s consolidated financial statements and notes to those financial statements included elsewhere in this document. When used herein, the terms “the Company,” "Tapestry," “we,” “us” and “our” refer to Tapestry, Inc., including consolidated subsidiaries. References to "Coach," "Stuart Weitzman," "Kate Spade" or "kate spade new york" refer only to the referenced brand.

EXECUTIVE OVERVIEW

The fiscal years ended June 29, 2019, June 30, 2018 and July 1, 2017 were each 52-week periods.

Tapestry is a leading New York-based house of modern luxury accessories and lifestyle brands. Tapestry is powered by optimism, innovation and inclusivity. Our brands are approachable and inviting and create joy every day for people around the world. Defined by quality, craftsmanship and creativity, our house of brands give global audiences the opportunity for exploration and self-expression. Tapestry is comprised of the Coach, Kate Spade and Stuart Weitzman brands, all of which have been part of the American landscape for over 25 years.

The Company has three reportable segments:

•	Coach - Includes global sales of Coach products to customers through Coach operated stores, including the Internet and concession shop-in-shops, and sales to wholesale customers and through independent third party distributors.

•	Kate Spade - Includes global sales primarily of kate spade new york brand products to customers through Kate Spade operated stores, including the Internet, sales to wholesale customers, through concession shop-in-shops and through independent third party distributors.

•	Stuart Weitzman - Includes global sales of Stuart Weitzman brand products primarily through Stuart Weitzman operated stores, including the Internet, sales to wholesale customers and through numerous independent third party distributors.

Each of our brands is unique and independent, while sharing a commitment to innovation and authenticity defined by distinctive products and differentiated customer experiences across channels and geographies. Our success does not depend solely on the performance of a single channel, geographic area or brand.

Fiscal 2020 Strategic Initiatives

The company continues to focus on execution in fiscal 2020. Specifically, in fiscal 2020, the Company intends to:

•	Ignite brand growth driven by innovation

•	Drive global growth, with a focus on maximizing opportunities with the Chinese consumer

•	Invest in our digital and data analytic capabilities

•	Harness the benefit of the multi-brand structure

Recent Developments

ERP Implementation

During fiscal 2018, the Company implemented a global consolidation system which provides a common platform for financial reporting, a point-of-sale system for Coach in North America as well as a human resource information system for Corporate, Coach and Stuart Weitzman employees. During the second quarter of fiscal 2019, the Company deployed global finance and accounting systems for Corporate, Coach and Stuart Weitzman. During the third quarter of fiscal 2019, the Company deployed global finance, accounting, supply chain and human resource information systems for Kate Spade. The ERP implementation was substantially completed in fiscal 2019, with the supply chain functions for Coach and Stuart Weitzman implemented in the beginning of fiscal 2020. The Company expects to incur charges of approximately $30 to $40 million in fiscal 2020 related to this project.

Stuart Weitzman Production Challenges

During fiscal 2019, Stuart Weitzman results continued to be negatively impacted by the trailing impacts of the supply chain operational challenges which began in the third quarter of fiscal 2018, including production delays, which caused lower than expected sales, as the brand was not prepared for the level of complexity and new development as it transitioned to a new creative vision. The Company has addressed these challenges through investment in talent, as well as added infrastructure and manufacturing capacity. As a result of these investments, Stuart Weitzman returned to sales growth in fiscal 2019.

Impact of Tax Legislation

On December 22, 2017, H.R.1, formerly known as the Tax Cuts and Jobs Act (the "Tax Legislation") was enacted. The Tax Legislation significantly revises the U.S. tax code by (i) lowering the U.S. federal statutory income tax rate from 35% to 21%, (ii) implementing a territorial tax system, (iii) imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries ("Transition Tax"), (iv) requiring current inclusion of global intangible low taxed income ("GILTI") of certain earnings of controlled foreign corporations in U.S. federal taxable income, (v) creating the base erosion anti-abuse tax ("BEAT"), (vi) implementing bonus depreciation that will allow for full expensing of qualified property, (vii) enacting a beneficial rate to be applied against Foreign Derived Intangible Income (“FDII”) and (viii) limiting deductibility of interest and executive compensation expense, among other changes. Notable changes include the following:

•

Foreign earnings that generated after December 31, 2017 will generally be eligible for a 100% dividends received deduction, however companies may be subject to the alternative BEAT and GILTI tax regimes which could increase the global effective tax rate. Conversely, companies may be eligible for a reduced rate to the extent their earnings qualify as FDII, which would reduce their global effective tax rate. Of these tax provisions, the GILTI and FDII provisions have impacted the Company in fiscal year 2019. The Company does not anticipate any impact under the BEAT provision. Under GILTI, a portion of the Company’s foreign earnings will be subject to U.S. taxation. For companies subject to GILTI, the Financial Accounting Standards Board (“FASB”) has indicated that companies are allowed to record tax associated with GILTI as a period cost in the period the earnings are included on the U.S. tax return. The Company has chosen this policy.

•

The Tax Legislation includes, what many believe, is an unintended consequence that results in certain leasehold improvements, being ineligible for bonus depreciation. The Company has estimated fiscal year 2019 depreciation expense based on how the law was drafted, with no consideration of the perceived legislative intent. The Company has estimated its capital expenditures by class to estimate depreciation expense for purposes of calculating the rate change adjustment of our deferred tax balance. To the extent that legislative actions on Qualified Improvement Property ("QIP") are retroactive, the overall effect associated with the remeasurement of deferred taxes will impact the Company's effective tax rate.

•	At this time, it is unknown whether certain states in which the Company operates will conform to the Tax Legislation or adopt an alternative regime. The Company continues to monitor developments; at this time all material aspects of its provision for income tax for the fiscal year ended June 29, 2019 are recorded based on recent guidance or its historical approach to state tax expense.

•

The Company applied the guidance in SEC Staff Accounting Bulletin (“SAB”) 118 when accounting for the enactment- date of the Tax Legislation for the twelve-month period following the date of the enactment. As of the fiscal year ended June 29, 2019, the Company completed the accounting for the enactment date income tax effects of the Tax Legislation pursuant to Accounting Standards Codification (“ASC”) 740, Income Taxes, for the measurement of deferred tax assets and liabilities and one-time transition tax. The amounts recorded were further adjusted due to additional guidance released during the third quarter of fiscal 2019. The amounts recorded are subject to adjustment as further regulations or additional guidance becomes available.

Integration and Acquisition Costs

During fiscal 2019, the Company acquired certain distributors for the Kate Spade and Stuart Weitzman brands. During fiscal 2018, the Company acquired Kate Spade & Company, certain distributors for the Coach and Stuart Weitzman brands and obtained operational control of the Kate Spade Joint Ventures. The operating results of the respective entities have been consolidated in the Company's operating results commencing on the date of each acquisition. As a result of these acquisitions, the Company incurred charges related to the integration and acquisition of the businesses. These charges are primarily associated with organization-related costs, professional fees, one-time write-off of inventory and limited life purchase accounting adjustments. The Company currently estimates that it will incur approximately $20 to $30 million in pre-tax charges, of which the majority are expected to be cash charges, in fiscal 2020. Refer to Note 5, "Integration and Acquisition Costs," Note 3, "Acquisitions," and the "GAAP to Non-GAAP Reconciliation," herein, for further information.

Operational Efficiency Plan

During the fourth quarter of fiscal 2016, the Company announced a series of operational efficiency initiatives focused on creating an agile and scalable business model (the "Operational Efficiency Plan"). The significant majority of the charges under this plan were recorded within SG&A expense. These charges were associated with organizational efficiencies, primarily related to the reduction of corporate staffing levels globally, as well as accelerated depreciation, mainly associated with information systems retirement, technology infrastructure charges related to the initial costs of replacing and updating our core technology platforms, and international supply chain and office location optimization. Under this plan, the Company incurred charges of $87.4 million. The plan was completed in fiscal 2018.

Refer to Note 6, "Restructuring Activities," and "GAAP to Non-GAAP Reconciliation," herein, for further information.

Current Trends and Outlook

The environment in which we operate is subject to a number of different factors driving global consumer spending. Consumer preferences, macroeconomic conditions, foreign currency fluctuations and geopolitical events continue to impact overall levels of consumer travel and spending on discretionary items, with inconsistent patterns across channels and geographies.

Global consumer retail traffic trends remain under pressure. This, along with other factors, has led to a more promotional environment in the fragmented retail industry due to increased competition and a desire to offset traffic declines with increased levels of conversion. Further declines in traffic could result in store impairment charges if expected future cash flows of the related asset group do not exceed the carrying value.

Several organizations that monitor the world's economy, including the International Monetary Fund, observed that global expansion is slowing at a rate that is somewhat faster than expected. These organizations expect continued softening of the growth rates in the United States throughout the next two years, and also observed challenging economic growth across markets around the globe recently. Furthermore, there are factors noted that may pressure the economic growth levels currently anticipated. As a result, the current global outlook remains uncertain. It is still too early to understand what kind of sustained impact these trends or changes in trade agreements and tax legislations will have on consumer discretionary spending.

Risk of volatility or a worsening of the macroeconomic environment remains, including currency devaluation, due to political uncertainty and potential changes to international trade agreements. During the first quarter of fiscal 2019, the Trump Administration began to impose duties of 10% related to certain Chinese-made imported products. In May 2019, the United States increased the tariff rate from 10% to 25% on $200 billion of imports of select product categories into the U.S. from China. On August 1, 2019, the Trump Administration announced that the U.S. plans to implement an additional tariff of 10% on the remaining $300 billion of products imported into the U.S. from China on September 1, 2019. The Company continues to monitor this development closely and supports strategies that help diffuse these trade tensions with China. We expect these changes to have a modest impact on gross margin in fiscal 2020. Continued increases in trade tensions could impact the Company's ability to grow its business with the Chinese consumer globally.

Beginning in the second quarter of fiscal 2019, the Company noted volatility in the spending patterns of certain North American customers, believed to be resellers, in advance of changes in Chinese e-commerce laws effective January 1, 2019. The volatility experienced during this period may continue in the near-term. The Company also observed an acceleration in local customer demand in mainland China which has helped to partially offset this trend.

Additional macroeconomic impacts include but are not limited to the United Kingdom ("U.K.") voting to leave the European Union ("E.U."), commonly known as "Brexit." On March 29, 2017, the U.K. triggered Article 50 of the Lisbon Treaty formally starting negotiations with the E.U. The U.K. and E.U. announced in March 2018 an agreement in principle to transitional provisions under which E.U. law would remain in force in the U.K. for an agreed period, but this remains subject to the successful conclusion of a final withdrawal agreement between the parties and the ratification by U.K. parliament. As of the date of this report, the withdrawal agreement has been voted against three times by U.K. parliament. As a consequence, the E.U. and U.K. agreed to postpone Brexit until October 31, 2019. This date will be accelerated to anytime between now and October 31, 2019 if a withdrawal agreement is successfully concluded between the parties and ratified by U.K. parliament. Increased uncertainty surrounds future Brexit talks due to the new leadership of the British government following Theresa May's resignation as Prime Minister on June 7, 2019 and the election of Boris Johnson on July 23, 2019. In the absence of a withdrawal agreement there would be no transitional provisions and a "hard" Brexit would occur on October 31, 2019, resulting in potential increased legal and regulatory complexities and divergent laws between the U.K. and the E.U.

We will continue to monitor these trends and evaluate and adjust our operating strategies and cost management opportunities to mitigate the related impact on our results of operations, while remaining focused on the long-term growth of our business and protecting the value of our brands.

Furthermore, refer to Part I, Item 1 - "Business" for additional discussion on our expected store openings and closures within each of our segments. For a detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, refer to Part I, Item 1A - "Risk Factors".

FISCAL 2019 COMPARED TO FISCAL 2018

The following table summarizes results of operations for fiscal 2019 compared to fiscal 2018. All percentages shown in the tables below and the related discussion that follows have been calculated using unrounded numbers.

	Fiscal Year Ended
	June 29, 2019							June 30, 2018							Variance
	(millions, except per share data)
	Amount				% of net sales			Amount				% of net sales			Amount				%
Net sales	$	6,027.1			100.0	%		$	5,880.0			100.0	%		$	147.1			2.5	%
Gross profit	4,053.7				67.3			3,848.5				65.5			205.2				5.3
SG&A expenses	3,239.6				53.8			3,177.7				54.0			61.9				1.9
Operating income	814.1				13.5			670.8				11.4			143.3				21.4
Interest expense, net	47.9				0.8			74.0				1.3			(26.1		)		(35.2	)
Income before provision for income taxes	766.2				12.7			596.8				10.2			169.4				28.4
Provision for income taxes	122.8				2.0			199.3				3.4			(76.5		)		38.4
Net income	643.4				10.7			397.5				6.8			245.9				61.8
Net income per share:
Basic	$	2.22						$	1.39						$	0.83			59.7	%
Diluted	$	2.21						$	1.38						$	0.83			60.6	%

GAAP to Non-GAAP Reconciliation

The Company’s reported results are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The reported results during fiscal 2019 and fiscal 2018 reflect certain items which affect the comparability of our results, as noted in the following tables. Refer to "Non-GAAP Measures" herein for further discussion on the Non-GAAP measures.

Fiscal 2019 Items

	June 29, 2019
	GAAP Basis (As Reported)				ERP Implementation				Integration & Acquisition				Impact of Tax Legislation				Non-GAAP Basis (Excluding Items)
	(millions, except per share data)
Gross profit	$	4,053.7			$	—			$	(27.8	)		$	—			$	4,081.5
SG&A expenses	3,239.6				36.9				66.6				—				3,136.1
Operating income	814.1				(36.9		)		(94.4		)		—				945.4
Income before provision for income taxes	766.2				(36.9		)		(94.4		)		—				897.5
Provision for income taxes	122.8				(9.4		)		(25.8		)		9.2				148.8
Net income	643.4				(27.5		)		(68.6		)		(9.2		)		748.7
Diluted net income per share	2.21				(0.09		)		(0.24		)		(0.03		)		2.57

In fiscal 2019 the Company incurred charges as follows:

•	ERP Implementation - Total charges of $36.9 million primarily represent technology implementation costs. Refer to the "Executive Overview" herein for further information.

•	Integration & Acquisition - Total charges of $94.4 million primarily represent integration and acquisition costs related to organization-related costs, professional fees, one-time write-off of inventory and limited life purchase accounting adjustments.

Refer to the "Executive Overview" herein and Note 5, "Integration & Acquisition Costs," for more information.

•	Impact of Tax Legislation - Total charges of $9.2 million primarily related to the net impact of the transition tax and re-measurement of deferred tax balances. Refer to the "Executive Overview" herein and Note 15, "Income Taxes," for further information.

These actions taken together increased the Company's SG&A expenses by $103.5 million, Cost of sales by $27.8 million and Provision for income taxes by $(26.0) million, negatively impacting net income by $105.3 million, or $0.36 per diluted share.

The following table summarizes the GAAP to Non-GAAP Reconciliation by reportable segment through operating income for fiscal 2019:

	June 29, 2019
	GAAP Basis (As Reported)				Coach				Kate Spade				Stuart Weitzman				Corporate				Non-GAAP Basis (Excluding Items)
	(millions)
Cost of sales
Integration & Acquisition					(1.9		)		(6.3		)		(19.6		)		—
Gross profit	$	4,053.7			$	(1.9	)		$	(6.3	)		$	(19.6	)		$	—			$	4,081.5
SG&A expenses
Integration & Acquisition					7.1				14.5				15.0				30.0
ERP Implementation					—				—				—				36.9
SG&A expenses	$	3,239.6			$	7.1			$	14.5			$	15.0			$	66.9			$	3,136.1
Operating income	$	814.1			$	(9.0	)		$	(20.8	)		$	(34.6	)		$	(66.9	)		$	945.4

Fiscal 2018 Items

	June 30, 2018
	GAAP Basis (As Reported)				Operational Efficiency Plan				Integration & Acquisition				Impact of Tax Legislation				Non-GAAP Basis (Excluding Items)
	(millions, except per share data)
Gross profit	$	3,848.5			$	—			$	(116.4	)		$	—			$	3,964.9
SG&A expenses	3,177.7				19.5				185.2				—				2,973.0
Operating income	670.8				(19.5		)		(301.6		)		—				991.9
Income before provision for income taxes	596.8				(19.5		)		(301.6		)		—				917.9
Provision for income taxes	199.3				(6.2		)		(130.7		)		178.2				158.0
Net income	397.5				(13.3		)		(170.9		)		(178.2		)		759.9
Diluted net income per share	1.38				(0.05		)		(0.58		)		(0.62		)		2.63

In fiscal 2018 the Company incurred adjustments as follows:

•	Operational Efficiency Plan - Total charges of $19.5 million primarily related to technology infrastructure costs. Refer to the "Executive Overview" herein and Note 6, "Restructuring Activities," for further information regarding this plan.

•

Integration & Acquisition - Total charges of $301.6 million, primarily attributable to the integration and acquisition of Kate Spade, and to a lesser extent the acquisition of certain distributors for the Coach and Stuart Weitzman brands and assumed operational control of the Kate Spade Joint Ventures. Provision for income taxes includes a one-time benefit of $40.7 million as a result of the reversal of certain valuation allowances that relate, in part, to the enactment of Tax Legislation. These charges include:

◦Limited life purchase accounting adjustments

◦Professional fees

◦Severance and other costs related to contractual agreements with certain Kate Spade executives

◦Organizational costs as a result of integration

◦Inventory reserves established primarily for the destruction of inventory

Refer to the "Executive Overview" herein and Note 5, "Integration & Acquisition Costs," for more information.

•	Impact of Tax Legislation - Total charges of $178.2 million primarily related to the net impact of the transition tax and re-measurement of deferred tax balances. Refer to the "Executive Overview" herein and Note 15, "Income Taxes," for further information.

These actions taken together increased the Company's SG&A expenses by $204.7 million, cost of sales by $116.4 million and provision for income taxes by $41.3 million, negatively impacting net income by $362.4 million, or $1.25 per diluted share.

The following table summarizes the GAAP to Non-GAAP Reconciliation by reportable segment through operating income for fiscal 2018:

	June 30, 2018
	GAAP Basis (As Reported)				Coach				Kate Spade				Stuart Weitzman				Corporate				Non-GAAP Basis (Excluding Items)
	(millions)
Cost of sales
Integration & Acquisition(1)					(4.1		)		(106.5		)		(5.8		)		—
Gross profit	$	3,848.5			$	(4.1	)		$	(106.5	)		$	(5.8	)		$	—			$	3,964.9
SG&A expenses
Integration & Acquisition(1)					0.5				113.7				7.8				63.2
Operational Efficiency Plan					—				—				—				19.5
SG&A expenses	$	3,177.7			$	0.5			$	113.7			$	7.8			$	82.7			$	2,973.0
Operating income	$	670.8			$	(4.6	)		$	(220.2	)		$	(13.6	)		$	(82.7	)		$	991.9

(1)

During the first quarter of fiscal 2018, the Company completed its acquisition of Kate Spade & Company. During the third quarter of fiscal 2018, the Company completed its acquisition of certain distributors for the Coach and Stuart Weitzman brands and obtained operational control of the Kate Spade Joint Ventures. The operating results of the respective entity have been consolidated in the Company's operating results commencing on the date of each acquisition.

Tapestry, Inc. Summary - Fiscal 2019

Currency Fluctuation Effects

The change in net sales and gross margin in fiscal 2019 compared to fiscal 2018 has been presented both including and excluding currency fluctuation effects.

Net Sales

Net sales in fiscal 2019 increased 2.5% or $147.1 million to $6.03 billion. Excluding the effects of foreign currency, net sales increased by 3.6% or $213.8 million. Excluding the effects of foreign currency, net sales increased across all brands.

Gross Profit

Gross profit increased 5.3% or $205.2 million to $4.05 billion in fiscal 2019 from $3.85 billion in fiscal 2018. Gross margin for fiscal 2019 was 67.3% as compared to 65.5% in fiscal 2018. Excluding Non-GAAP charges of $27.8 million in fiscal 2019 and $116.4 million in fiscal 2018, as discussed in the "GAAP to Non-GAAP Reconciliation" herein, gross profit increased 2.9% or $116.6 million to $4.08 billion in fiscal 2019, and gross margin increased to 67.7% in fiscal 2019 from 67.4% in fiscal 2018. This increase in gross profit is primarily driven by increases in Coach of $62.7 million and increases in Kate Spade of $57.7 million partially offset by decreases in Stuart Weitzman of $3.8 million.

Selling, General and Administrative Expenses

The Company includes inbound product-related transportation costs from our service providers within Cost of sales. The Company includes certain transportation-related costs due to our distribution network in SG&A expenses rather than in Cost of sales; for this reason, our gross margins may not be comparable to that of entities that include all costs related to their distribution network in Cost of sales.

SG&A expenses increased 1.9% or $61.9 million to $3.24 billion in fiscal 2019 as compared to $3.18 billion in fiscal 2018. As a percentage of net sales, SG&A expenses decreased to 53.8% during fiscal 2019 as compared to 54.0% during fiscal 2018. Excluding non-GAAP charges of $103.5 million in fiscal 2019 and $204.7 million in fiscal 2018, SG&A expenses increased 5.5% or $163.1 million from fiscal 2018; and SG&A expenses as a percentage of net sales increased to 52.0% in fiscal 2019 from 50.6% in fiscal 2018. This increase is primarily due to increases in Kate Spade of $68.7 million, Corporate expenses of $41.2 million, Coach of $27.1 million and Stuart Weitzman of $26.1 million.

Corporate expenses, which are included within SG&A expenses discussed above but are not directly attributable to a reportable segment, increased 6.0% or $25.4 million to $448.8 million in fiscal 2019 as compared to $423.4 million in fiscal 2018. Excluding non-GAAP charges of $66.9 million and $82.7 million in fiscal 2019 and fiscal 2018, respectively, SG&A expenses increased 12.2% or $41.2 million to $381.9 million in fiscal 2019 as compared to $340.7 million in fiscal 2018. This increase in SG&A expenses was primarily driven by ongoing expenses as a result of the new system implementations, as well as higher employee related costs including compensation.

Operating Income

Operating income increased 21.4% or $143.3 million to $814.1 million during fiscal 2019 as compared to $670.8 million in fiscal 2018. Operating margin was 13.5% in fiscal 2019 as compared to 11.4% in fiscal 2018. Excluding non-GAAP charges of $131.3 million in fiscal 2019 and $321.1 million in fiscal 2018, operating income decreased 4.7% or $46.5 million to $945.4 million from $991.9 million in fiscal 2018; and operating margin was 15.7% in fiscal 2019 as compared to 16.9% in fiscal 2018. This decrease in operating income is primarily driven by an increase in Corporate expenses of $41.2 million as well as declines in operating income in Stuart Weitzman of $29.9 million and Kate Spade of $11.0 million, partially offset by increases in Coach of $35.6 million.

Interest Expense, net

Net interest expense decreased 35.2% or $26.1 million to $47.9 million in fiscal 2019 as compared to $74.0 million in fiscal 2018. The decrease in interest expense, net is due to repayments made in the third quarter of fiscal 2018 related to the Company's debt borrowings.

Provision for Income Taxes

The effective tax rate was 16.0% in fiscal 2019 as compared to 33.4% in fiscal 2018. Excluding non-GAAP charges, the effective tax rate was 16.6% in fiscal 2019 as compared to 17.2% in fiscal 2018. The decrease in our effective tax rate was primarily attributable to geographic mix of earnings.

Net Income

Net income increased 61.8% or $245.9 million to $643.4 million in fiscal 2019 as compared to $397.5 million in fiscal 2018. Excluding non-GAAP charges, net income decreased 1.5% or $11.2 million to $748.7 million in fiscal 2019 from $759.9 million in fiscal 2018. This decrease was primarily due to lower operating income, partially offset by a decrease in net interest expense as well as a decrease in the provision for income taxes.

Net Income per Share

Net income per diluted share increased 60.6% to $2.21 in fiscal 2019 as compared to $1.38 in fiscal 2018. Excluding non-GAAP charges, net income per diluted share decreased 2.2% or $0.06 to $2.57 in fiscal 2019 from $2.63 in fiscal 2018, due to lower net income and an increase in shares outstanding.

Segment Performance - Fiscal 2019

Coach

	Fiscal Year Ended
	June 29, 2019							June 30, 2018							Variance
	(millions)
	Amount				% of net sales			Amount				% of net sales			Amount				%
Net sales	$	4,270.9			100.0	%		$	4,221.5			100.0	%		$	49.4			1.2	%
Gross profit	2,996.4				70.2			2,931.5				69.4			64.9				2.2
SG&A expenses	1,848.0				43.3			1,814.3				43.0			33.7				1.9
Operating income	1,148.4				26.9			1,117.2				26.5			31.2				2.8

Coach Net Sales increased 1.2% or $49.4 million to $4.27 billion in fiscal 2019. Excluding the unfavorable impact of foreign currency, net sales increased 2.4% or $101.4 million. This increase was due to an increase in comparable store sales of $67.1 million or 2% compared to fiscal 2018, including a benefit of approximately 1% driven by an increase in global e-commerce. The increase in comparable store sales is primarily due to increases in Japan, Greater China, Other Asia and Europe primarily due to traffic and conversion. Non-comparable store sales increased by $36.9 million, primarily driven by direct ownership of the business in Australia and New Zealand, as well as non-comparable store sales in Greater China and Europe, partially offset by a decrease in Japan and North America related to store closures.

Coach Gross Profit increased 2.2% or $64.9 million to $3.00 billion in fiscal 2019 from $2.93 billion in fiscal 2018. Gross margin increased to 70.2% in fiscal 2019 as compared to 69.4% in fiscal 2018. Excluding non-GAAP charges of $1.9 million and $4.1 million in fiscal 2019 and in fiscal 2018, respectively, Coach gross profit increased 2.1% or $62.7 million to $3.00 billion from $2.94 billion in fiscal 2018, and gross margin increased 70 basis points to 70.2% in fiscal 2019 from 69.5% in fiscal 2018 on a non-GAAP basis. Excluding the impact of foreign currency in both periods, gross margin increased 30 basis points. The increase in gross margin was primarily due to improved product costing, partially offset by promotional activity.

Coach SG&A expenses increased 1.9% or $33.7 million to $1.85 billion in fiscal 2019 as compared to $1.81 billion in fiscal 2018. As a percentage of net sales, SG&A expenses increased to 43.3% in fiscal 2019 as compared to 43.0% in fiscal 2018. Excluding non-GAAP charges of $7.1 million and $0.5 million in fiscal 2019 and fiscal 2018, respectively, SG&A expenses increased 1.5% or $27.1 million. The $27.1 million increase is primarily due to higher compensation expenses and higher store-related costs.

Coach Operating Income increased 2.8% or $31.2 million to $1.15 billion in fiscal 2019, resulting in an operating margin of 26.9%, as compared to $1.12 billion and 26.5%, respectively in fiscal 2018. Excluding non-GAAP charges, Coach operating income increased 3.2% or $35.6 million to $1.16 billion from $1.12 billion in fiscal 2018; and operating margin was 27.1% in fiscal 2019 as compared to 26.6% in fiscal 2018. The increase in operating income was due to an increase in gross profit, partially offset by higher SG&A expenses.

Kate Spade

	Fiscal Year Ended
	June 29, 2019							June 30, 2018(1)							Variance
	(millions)
	Amount				% of net sales			Amount				% of net sales			Amount				%
Net sales	$	1,366.8			100.0	%		$	1,284.7			100.0	%		$	82.1			6.4	%
Gross profit	863.6				63.2			705.7				54.9			157.9				22.4
SG&A expenses	697.9				51.1			728.4				56.7			(30.5		)		(4.2	)
Operating income (loss)	165.7				12.1			(22.7		)		(1.8	)		188.4				NM

NM - Not meaningful

(1)	On July 11, 2017, the Company completed its acquisition of Kate Spade. The operating results of the Kate Spade brand have been consolidated in the Company's operating results commencing on July 11, 2017.

Kate Spade Net Sales increased 6.4% or $82.1 million to $1.37 billion in fiscal 2019. Excluding the unfavorable impact of foreign currency, net sales increased 7.1% or $90.8 million. The increase was due to an increase in non-comparable store sales of $192.2 million, which benefited from new store openings in North America, Japan, and Europe, taking operational control of Kate Spade Joint Ventures in Greater China and the direct ownership of the businesses in Australia, Singapore, and Malaysia. In addition, there were increases related to the additional days under Tapestry ownership in the first quarter of fiscal 2019 when compared to the same period in the prior year. These increases were partially offset by a decline in comparable store sales of $75.8 million or 7%, including a benefit of approximately 4% driven by an increase in global e-commerce. The decrease in comparable store sales was primarily due to decreased traffic and conversion. In addition, there was a decline in wholesale sales of $33.3 million primarily due to lower wholesale sales in North America including the strategic pullback, as well as the impact of the direct ownership of the business in Australia, Singapore and Malaysia being transitioned from wholesale sales to direct sales.

Kate Spade Gross Profit increased 22.4% or $157.9 million to $863.6 million in fiscal 2019 from $705.7 million in fiscal 2018. Gross margin increased to 63.2% in fiscal 2019 from 54.9% in fiscal 2018. Excluding non-GAAP charges of $6.3 million and $106.5 million in fiscal 2019 and fiscal 2018 respectively, Kate Spade gross profit increased 7.1% or $57.7 million to $869.9 million from $812.2 million in fiscal 2018, and gross margin increased 40 basis points to 63.6% from 63.2% in fiscal 2018. The gross margin increase of 40 basis points is primarily due to improved product costing as a result of synergies, partially offset by promotional activity within North America outlet.

Kate Spade SG&A Expenses decreased 4.2% or $30.5 million to $697.9 million in fiscal 2019 from $728.4 million in fiscal 2018. As a percentage of net sales, SG&A expenses decreased to 51.1% during fiscal 2019 as compared to 56.7% in fiscal 2018. Excluding non-GAAP charges of $14.5 million and $113.7 million in fiscal 2019 and fiscal 2018, respectively, SG&A expenses increased 11.1% or $68.7 million to $683.4 million in fiscal 2019 compared to $614.7 million in fiscal 2018; and SG&A expenses as a percentage of sales increased to 50.0% in fiscal 2019 from 47.9% in fiscal 2018. This increase was due to taking operational control of the Kate Spade Joint Ventures in Greater China and the direct ownership of the businesses in Australia, Singapore and Malaysia, additional store-related costs as a result of new store openings, as well as the additional days under Tapestry ownership in the first quarter of fiscal 2019 when compared to the prior fiscal year.

Kate Spade Operating Income increased $188.4 million to $165.7 million in fiscal 2019, resulting in an operating margin of 12.1% as compared to an operating loss of $22.7 million and operating margin of (1.8)% in fiscal 2018. Excluding non-GAAP charges, Kate Spade operating income decreased 5.5% or $11.0 million to $186.5 million from $197.5 million in fiscal 2018, resulting in an operating margin of 13.6% as compared to 15.4% in fiscal 2018. The decrease in operating income was due to higher SG&A expenses, partially offset by an increase in gross profit.

Stuart Weitzman

	Fiscal Year Ended
	June 29, 2019							June 30, 2018							Variance
	(millions)
	Amount				% of net sales			Amount				% of net sales			Amount				%
Net sales	$	389.4			100.0	%		$	373.8			100.0	%		$	15.6			4.2	%
Gross profit	193.7				49.8			211.3				56.5			(17.6		)		(8.3	)
SG&A expenses	244.9				62.9			211.6				56.7			33.3				15.6
Operating loss	(51.2		)		(13.1	)		(0.3		)		(0.1	)		(50.9		)		NM

NM - Not meaningful

Stuart Weitzman Net Sales increased by 4.2% or $15.6 million to $389.4 million in fiscal 2019. Excluding the unfavorable impact of foreign currency, net sales increased 5.8% or $21.6 million. This increase was primarily due to higher sales in the retail business of $39.8 million, primarily due to the direct ownership of the business in mainland China and new store openings, partially offset by a decline in comparable store sales. This was partially offset by a decline in wholesale sales of $17.8 million primarily due to trailing impacts as a result of supply chain operational challenges.

Stuart Weitzman Gross Profit decreased 8.3% or $17.6 million to $193.7 million in fiscal 2019 from $211.3 million in fiscal 2018. Gross margin decreased 670 basis points to 49.8% in fiscal 2019 from 56.5% in fiscal 2018. Excluding non-GAAP charges of $19.6 million in fiscal 2019 and $5.8 million in fiscal 2018, Stuart Weitzman gross profit decreased 1.8% or $3.8 million to $213.3 million from $217.1 million in fiscal 2018, and gross margin decreased 330 basis points to 54.8% in fiscal 2019 from 58.1% in fiscal 2018. The year over year change in gross margin was negatively impacted by foreign currency rates by 220 basis points. Excluding the impact of foreign currency, there was a decrease in gross margin of 110 basis points primarily due to lower

wholesale margins from the trailing impacts as a result of supply chain operational challenges, partially offset by the direct ownership of the business in mainland China.

Stuart Weitzman SG&A Expenses increased 15.6% or $33.3 million to $244.9 million in fiscal 2019 as compared to $211.6 million in fiscal 2018. As a percentage of net sales, SG&A expenses increased to 62.9% in fiscal 2019 as compared to 56.7% in fiscal 2018. Excluding non-GAAP charges of $15.0 million in fiscal 2019 and $7.8 million in fiscal 2018, SG&A expenses increased 12.7% or $26.1 million to $229.9 million in fiscal 2019; and SG&A expenses as a percentage of net sales increased to 59.0% in fiscal 2019 from 54.6% in fiscal 2018. This increase is primarily due to the direct ownership of the businesses in mainland China and new store openings.

Stuart Weitzman Operating Loss increased $50.9 million to an operating loss of $51.2 million in fiscal 2019, resulting in an operating margin of (13.1)%, as compared to an operating loss of $0.3 million and operating margin of (0.1)% in fiscal 2018. Excluding non-GAAP charges, Stuart Weitzman operating income decreased $29.9 million to an operating loss of $16.6 million from an operating income of $13.3 million in fiscal 2018; and operating margin was (4.3)% in fiscal 2019 as compared to 3.5% in fiscal 2018. The decrease in operating income was due to higher SG&A expenses and a decrease in gross profit.

FISCAL 2018 COMPARED TO FISCAL 2017

The comparison of fiscal 2018 to 2017 has been omitted from this Form 10-K, but can be referenced in our Form 10-K for the fiscal year ended June 30, 2018, filed on August 16, 2018, as well as the Form 8-K, furnished with the SEC on October 30, 2018.

NON-GAAP MEASURES

The Company’s reported results are presented in accordance with GAAP. The reported gross profit, SG&A expenses, operating income, provision for income taxes, net income and earnings per diluted share in fiscal 2019 and fiscal 2018 reflect certain items, including the impact of the ERP Implementation in fiscal 2019, Integration and Acquisition costs for acquired companies by Tapestry, the impact of Tax Legislation and in fiscal 2018, the Operational Efficiency Plan. As a supplement to the Company's reported results, these metrics are also reported on a non-GAAP basis to exclude the impact of these items, along with a reconciliation to the most directly comparable GAAP measures.

Comparable store sales, which is a non-GAAP measure, reflects sales performance at stores that have been open for at least 12 months, and includes sales from the Internet. In certain instances, orders placed via the Internet are fulfilled by a physical store; such sales are recorded by the physical store. The Company excludes new, including newly acquired locations, from the comparable store base for the first twelve months of operation. The Company excludes closed stores from the calculation. Comparable store sales have not been adjusted for store expansions. Comparable store sales for Kate Spade have been calculated beginning on the acquisition date.

These non-GAAP performance measures were used by management to conduct and evaluate its business during its regular review of operating results for the periods affected. Management and the Company’s Board utilized these non-GAAP measures to make decisions about the uses of Company resources, analyze performance between periods, develop internal projections and measure management performance. The Company’s internal management reporting excluded these items. In addition, the human resources committee of the Company’s Board uses these non-GAAP measures when setting and assessing achievement of incentive compensation goals.

The Company operates on a global basis and reports financial results in U.S. dollars in accordance with GAAP. Fluctuations in foreign currency exchange rates can affect the amounts reported by the Company in U.S. dollars with respect to its foreign revenues and profit. Accordingly, certain material increases and decreases in operating results for the Company and its segments have been presented both including and excluding currency fluctuation effects. These effects occur from translating foreign-denominated amounts into U.S. dollars and comparing to the same period in the prior fiscal year. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. The Company calculates constant currency revenue results by translating current period revenue in local currency using the prior year period's currency conversion rate.

We believe these non-GAAP measures are useful to investors and others in evaluating the Company’s ongoing operating and financial results in a manner that is consistent with management’s evaluation of business performance and understanding how such results compare with the Company’s historical performance. Additionally, we believe presenting certain increases and decreases in constant currency provides a framework for assessing the performance of the Company’s business outside the United States and helps investors and analysts understand the effect of significant year-over-year currency fluctuations. We believe excluding these items assists investors and others in developing expectations of future performance.

By providing the non-GAAP measures, as a supplement to GAAP information, we believe we are enhancing investors’ understanding of our business and our results of operations. The non-GAAP financial measures are limited in their usefulness and

should be considered in addition to, and not in lieu of, GAAP financial measures. Further, these non-GAAP measures may be unique to the Company, as they may be different from non-GAAP measures used by other companies.

For a detailed discussion on these non-GAAP measures, see Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations".

FINANCIAL CONDITION

Cash Flows - Fiscal 2019 Compared to Fiscal 2018

		Fiscal Year Ended
		June 29, 2019				June 30, 2018				Change
		(millions)
Net cash provided by operating activities		$	791.7			$	996.7			$	(205.0	)
Net cash used in investing activities		(574.2		)		(2,164.8		)		1,590.6
Net cash used in financing activities		(484.9		)		(249.9		)		(235.0		)
Effect of exchange rate changes on cash and cash equivalents		(6.8		)		(11.5		)		4.7
Net (decrease) increase in cash and cash equivalents		$	(274.2	)		$	(1,429.5	)		$	1,155.3

The Company’s cash and cash equivalents decreased by $274.2 million in fiscal 2019 compared to a decrease of $1.43 billion in fiscal 2018, as discussed below.

Net cash provided by operating activities

Net cash provided by operating activities decreased $205.0 million primarily due to changes in operating assets and liabilities of $442.5 million and lower non-cash charges of $8.4 million, partially offset by higher net income of $245.9 million.

The $442.5 million decrease in changes in our operating asset and liability balances was primarily driven by:

•

Other liabilities changed by $213.5 million. They were a use of cash of $55.8 million in fiscal 2019 compared to a source of cash of $157.7 million in fiscal 2018, primarily driven by an increase in the Company's long-term income tax payable in fiscal 2018 as a result of the Transition Tax and a decrease to the Company's long-term income tax payable in fiscal 2019 as a result of payments made as well as the application of net operating losses to reduce the Transition Tax liability.

•	Other assets changed by $150.1 million. They were a use of cash of $69.2 million in fiscal 2019 as compared to a source of cash of $80.9 million in fiscal 2018, primarily driven by timing of income tax payments.

•	Inventories changed by $135.1 million. They were a use of cash of $104.7 million in fiscal 2019 as compared to a source of cash of $30.4 million in fiscal 2018, primarily driven by increased inventory in transit, lower inventory at Kate Spade at the end of fiscal 2018 as a result of strong sales in the fourth quarter of fiscal 2018 and lower than expected sales in fiscal 2019.

•	Accrued liabilities changed by $12.6 million. They were a use of cash of $29.5 million in fiscal 2019 as compared to a use of cash of $16.9 million in fiscal 2018, primarily driven by the timing of employee-related costs and accrued interest.

•	Accounts payable changed by $37.5 million. They were a use of cash of $39.8 million in fiscal 2019 as compared to a use of cash of $77.3 million in fiscal 2018, primarily driven by the timing of Kate Spade and Coach inventory payments.

•	Trade accounts receivable changed by $31.3 million. They were a source of cash of $25.7 million in fiscal 2019 as compared to a use of cash of $5.6 million in fiscal 2018, primarily driven by the timing of certain international sales.

Net cash used in investing activities

Net cash used in investing activities was $574.2 million in fiscal 2019 compared to a use of cash of $2.16 billion in fiscal 2018, resulting in a $1.59 billion decrease in net cash used in investing activities.

The $574.2 million use of cash in fiscal 2019 is primarily due to purchases of investments of $415.5 million and capital expenditures of $274.2 million. This use of cash was partially offset by net cash proceeds from maturities and sales of investments of $159.0 million.

The $2.16 billion use of cash in fiscal 2018 is primarily due to the $2.38 billion purchase of Kate Spade and other acquisitions, net of cash acquired, and capital expenditures of $267.4 million. This use of cash was partially offset by net cash proceeds from maturities and sales of investments of $478.4 million.

Net cash used in financing activities

Net cash used in financing activities was $484.9 million in fiscal 2019 as compared to a use of cash of $249.9 million in fiscal 2018, resulting in a $235.0 million increase in net cash used in financing activities.

The $484.9 million of cash used in fiscal 2019 was primarily due to dividend payments of $390.7 million and repurchases of common stock of $100.0 million.

The $249.9 million of cash used in fiscal 2018 was primarily due to dividend payments of $384.1 million which were partially offset by proceeds from share-based awards of $165.7 million. The Company also borrowed and repaid debt of $1.10 billion within the fiscal year.

Cash Flows - Fiscal 2018 Compared to Fiscal 2017

The comparison of fiscal 2018 to 2017 has been omitted from this Form 10-K, but can be referenced in our Form 10-K for the fiscal year ended June 30, 2018, filed on August 16, 2018.

Working Capital and Capital Expenditures

As of June 29, 2019, in addition to our cash flows from operations, our sources of liquidity and capital resources were comprised of the following:

	Sources of Liquidity				Outstanding Indebtedness				Total Available Liquidity**(1)**
	(millions)
Cash and cash equivalents**(1)**	$	969.2			$	—			$	969.2
Short-term investments**(1)**	264.6				—				264.6
Revolving Credit Facility**(2)**	900.0				—				900.0
3.000% Senior Notes due 2022**(3)**	400.0				400.0				—
4.250% Senior Notes due 2025**(3)**	600.0				600.0				—
4.125% Senior Notes due 2027**(3)**	600.0				600.0				—
Total	$	3,733.8			$	1,600.0			$	2,133.8

(1)

As of June 29, 2019, approximately 59.6% of our cash and short-term investments were held outside the United States. Before the Tax Legislation, the Company considered the earnings of its non-U.S. subsidiaries to be indefinitely reinvested, and accordingly, recorded no deferred income taxes on these earnings. In fiscal 2019, we have analyzed our global working capital and cash requirements, and the potential tax liabilities associated with repatriation, and have determined that we will likely repatriate some portion of available foreign cash in the foreseeable future. See Note 15, "Income Taxes" for more information.

(2)

In May 2017, the Company entered into a definitive credit agreement whereby Bank of America, N.A., as administrative agent, the other agents party thereto, and a syndicate of banks and financial institutions have made available to the Company a $900.0 million revolving credit facility, including sub-facilities for letters of credit, with a maturity date of May 30, 2022 (the "Revolving Credit Facility"). Borrowings under the Revolving Credit Facility bear interest at a rate per annum equal to, at the Borrowers’ option, either (a) an alternate base rate (which is a rate equal to the greatest of (i) the Prime Rate in effect on such day, (ii) the Federal Funds Effective Rate in effect on such day plus ½ of 1% or (iii) the Adjusted LIBO Rate for a one month Interest Period on such day plus 1%) or (b) a rate based on the rates applicable for deposits in the interbank 47 market for U.S. Dollars or the applicable currency in which the loans are made plus, in each case, an applicable margin. The applicable margin will be determined by reference to a grid, defined in the Credit Agreement, based on the ratio of (a) consolidated debt plus 600% of consolidated lease expense to (b) consolidated EBITDAR. Additionally, the Company pays a commitment fee at a rate determined by the reference to the aforementioned pricing grid. The Company had no outstanding borrowings under the Revolving Credit Facility at fiscal year-end. Refer to Note 12, "Debt," for further information on our existing debt instruments.

(3)

In March 2015, the Company issued $600.0 million aggregate principal amount of 4.250% senior unsecured notes due April 1, 2025 at 99.445% of par (the "2025 Senior Notes"). Furthermore, on June 20, 2017, the Company issued $400.0 million aggregate principal amount of 3.000% senior unsecured notes due July 15, 2022 at 99.505% of par (the "2022 Senior Notes"), and $600.0 million aggregate principal amount of 4.125% senior unsecured notes due July 15, 2027 at 99.858% of par (the "2027 Senior Notes"). Furthermore, the indentures for the 2025 Senior Notes, 2022 Senior Notes and 2027 Senior Notes contain certain covenants limiting the Company's ability to: (i) create certain liens, (ii) enter into certain sale and leaseback transactions and (iii) merge, or consolidate or transfer, sell or lease all or substantially all of the Company's assets. As of June 29, 2019, no known events of default have occurred. Refer to Note 12, "Debt," for further information on our existing debt instruments.

We believe that our Revolving Credit Facility is adequately diversified with no undue concentrations in any one financial institution. As of June 29, 2019, there were 13 financial institutions participating in the Revolving Credit Facility, with no one participant maintaining a combined maximum commitment percentage in excess of 13%. We have no reason to believe at this time that the participating institutions will be unable to fulfill their obligations to provide financing in accordance with the terms of the facility in the event we elect to draw funds in the foreseeable future.

We have the ability to draw on our credit facilities or access other sources of financing options available to us in the credit and capital markets for, among other things, acquisition or integration-related costs, our restructuring initiatives, settlement of a material contingency, or a material adverse business or macroeconomic development, as well as for other general corporate business purposes.

Management believes that cash flows from operations, access to the credit and capital markets and our credit lines, on-hand cash and cash equivalents and our investments will provide adequate funds to support our operating, capital, and debt service requirements for fiscal 2020, including our plans for further investment in our brands, while returning capital to shareholders through our dividend and share repurchase programs. We expect total capital expenditures to be approximately $300 million. Our ability to fund working capital needs, planned capital expenditures, dividend payments, share repurchases and scheduled debt payments, as well as to comply with all of the financial covenants under our debt agreements, depends on future operating performance and cash flow, which in turn are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond the Company's control.

Seasonality

The Company's results are typically affected by seasonal trends. During the first fiscal quarter, we build inventory for the holiday selling season. In the second fiscal quarter, working capital requirements are reduced substantially as we generate higher net sales and operating income, especially during the holiday months of November and December.

Fluctuations in net sales, operating income and operating cash flows of the Company in any fiscal quarter may be affected by the timing of wholesale shipments and other events affecting retail sales, including adverse weather conditions or other macroeconomic events.

Share Repurchase Plan

On May 9, 2019, the Company announced that its Board of Directors had authorized the repurchase up to $1.00 billion of shares of its outstanding common stock. Pursuant to this program, purchases of the Company's common stock will be made subject to market conditions and at prevailing market prices, through open market purchases. Repurchased shares of common stock will become authorized but unissued shares. These shares may be issued in the future for general corporate and other purposes. In addition, the Company may terminate or limit the stock repurchase program at any time. During fiscal 2019, the Company repurchased $100.0 million of common stock. Refer to Part II, Item 5. "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," for further information.

Contractual and Other Obligations

Firm Commitments

As of June 29, 2019, the Company's contractual obligations are as follows:

		Total				Fiscal 2020				Fiscal 2021 – 2022				Fiscal 2023 – 2024				Fiscal 2025 and Beyond
		(millions)
Capital expenditure commitments		$	16.2			$	16.2			$	—			$	—			$	—
Inventory purchase obligations		404.2				404.2				—				—				—
Operating lease obligations		2,611.3				399.0				649.7				496.9				1,065.7
Capital lease obligations		6.1				0.8				1.8				2.3				1.2
Debt repayment		1,611.4				—				411.4				—				1,200.0
Interest on outstanding debt		407.8				62.9				125.6				107.1				112.2
Mandatory transition tax payments(1)		155.9				—				28.8				74.2				52.9
Other		93.6				33.1				46.0				14.5				—
Total		$	5,306.5			$	916.2			$	1,263.3			$	695.0			$	2,432.0

(1)

Mandatory transition tax payments represent our tax obligation incurred in connection with the deemed repatriation of previously deferred foreign earnings pursuant to the Tax Legislation. These amounts represent the Company's best estimate as of June 29, 2019, but are subject to adjustment as further regulations or additional guidance becomes available. Refer to Note 15, "Income Taxes," for further information.

Excluded from the above contractual obligations table is the non-current liability for unrecognized tax benefits of $76.1 million as of June 29, 2019, as we cannot make a reliable estimate of the period in which the liability will be settled, if ever. The above table also excludes amounts included in current liabilities in the Consolidated Balance Sheet at June 29, 2019 as these items will

be paid within one year, certain long-term liabilities not requiring cash payments and cash contributions for the Company’s pension plan.

Off-Balance Sheet Arrangements

In addition to the commitments included in the table above, we have outstanding letters of credit, surety bonds and bank guarantees of $34.5 million as of June 29, 2019, primarily serving to collateralize our obligation to third parties for duty, leases, insurance claims and materials used in product manufacturing. These letters of credit expire at various dates through 2039.

We do not maintain any other off-balance sheet arrangements, transactions, obligations, or other relationships with unconsolidated entities that would be expected to have a material current or future effect on our consolidated financial statements. Refer to Note 13, "Commitments and Contingencies," for further information.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect our results of operations, financial condition and cash flows as well as the disclosure of contingent assets and liabilities as of the date of the Company's financial statements. Actual results could differ from estimates in amounts that may be material to the financial statements. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results could differ from estimates in amounts that may be material to the financial statements. The development and selection of the Company’s critical accounting policies and estimates are periodically reviewed with the Audit Committee of the Board.

The accounting policies discussed below are considered critical because changes to certain judgments and assumptions inherent in these policies could affect the financial statements. For more information on the Company's accounting policies, please refer to the Notes to Consolidated Financial Statements.

Revenue Recognition

Revenue is recognized when the Company satisfies its performance obligations by transferring control of promised products or services to its customers, which may be at a point of 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.

Retail store and concession shop-in-shop revenues are recognized 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.

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. Wholesale revenue is recorded net of estimates for returns, discounts, end-of-season markdowns, cooperative advertising allowances and other consideration provided to the customer. 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.

At June 29, 2019, a 10% change in the allowances for estimated uncollectible accounts, markdowns and returns would not have resulted in a material change in the Company's reserves and net sales.

Inventories

The Company holds inventory that is sold through retail and wholesale distribution channels, including e-commerce sites. Substantially all of the Company's inventories are comprised of finished goods, and are reported at the lower of cost or net realizable value. Inventory costs include material, conversion costs, freight and duties and are primarily determined by the first-in, first-out method. The Company reserves for inventory, including slow-moving and aged inventory, based on current product demand, expected future demand and historical experience. A decrease in product demand due to changing customer tastes, buying patterns or increased competition could impact the Company's evaluation of its inventory and additional reserves might be required. Estimates may differ from actual results due to the quantity, quality and mix of products in inventory, consumer and retailer preferences and market conditions. At June 29, 2019, a 10% change in the inventory reserve, would not have resulted in material change in inventory and cost of sales.

Business Combinations

In connection with an acquisition, the Company records all assets acquired and liabilities assumed of the acquired business at their acquisition date fair value, including the recognition of contingent consideration at fair value on the acquisition date. These fair value determinations require judgment and may involve the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives, and market multiples, among other items. Furthermore, the Company may utilize independent third-party valuation firms to assist in making these fair value determinations. If goodwill is identified based upon the valuation of an acquired business, the goodwill is assigned to the reporting units which will benefit from the synergies that result from the business combination and reported within the segment that such reporting units comprise. Refer to Note 3, "Acquisitions," for detailed disclosures related to our acquisitions.

Goodwill and Other Intangible Assets

Upon acquisition, the Company estimates and records the fair value of purchased intangible assets, which primarily consists of brands, customer relationships, lease rights and order backlog. Goodwill and certain other intangible assets deemed to have indefinite useful lives, including brand intangible assets, are not amortized, but are assessed for impairment at least annually. Finite-lived intangible assets are amortized over their respective estimated useful lives and, along with other long-lived assets as noted above, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable. Estimates of fair value for finite-lived and indefinite-lived intangible assets are primarily determined using discounted cash flows and the multi-period excess earnings method, respectively, with consideration of market comparisons. This approach uses significant estimates and assumptions, including projected future cash flows, discount rates and growth rates.

The Company generally performs its annual goodwill and indefinite-lived intangible assets impairment analysis using a quantitative approach. The quantitative goodwill impairment test identifies the existence of potential impairment by comparing the fair value of each reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit's goodwill is considered not to be impaired. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized in an amount equal to that excess. The impairment charge recognized is limited to the amount of goodwill allocated to that reporting unit.

Determination of the fair value of a reporting unit and intangible asset is based on management's assessment, considering independent third-party appraisals when necessary. Furthermore, this determination is judgmental in nature and often involves the use of significant estimates and assumptions, which may include projected future cash flows, discount rates, growth rates, and determination of appropriate market comparables and recent transactions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the amount of any such charge.

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. The Company determined that there was no impairment in fiscal 2019, fiscal 2018 or fiscal 2017. In all fiscal years, the fair values of our Coach brand reporting units significantly exceeded their respective carrying values. The fair values of the Kate Spade brand reporting unit and indefinite-lived brand as of the fiscal 2019 testing date exceeded their respective carrying values by approximately 21% and 61%, respectively. Furthermore, the fair values of the Stuart Weitzman brand reporting unit and indefinite-lived brand exceeded their respective carrying values by approximately 11% and 62%, respectively. Since the annual assessment date, the Company has updated its projections to reflect more modest top line growth at Kate Spade and has concluded that all the intangible assets are not impaired as of June 29, 2019. Several factors could impact the Kate Spade and Stuart Weitzman brands' ability to achieve expected future cash flows, including the management of the supply chain operational challenges at Stuart Weitzman, reception of new collections, the success of international expansion strategies including the consolidation or integration of certain distributor relationships, the optimization of the store fleet productivity, the impact of promotional activity in department stores, the simplification of certain corporate overhead structures and other initiatives aimed at expanding higher performing categories of the business. Given the relatively small excess of fair value over carrying value as noted above, if profitability trends decline during fiscal 2020 from those that are expected, it is possible that an interim test, or our annual impairment test, could result in an impairment of these assets.

Valuation of Long-Lived Assets

Long-lived assets, such as property and equipment, are evaluated for impairment whenever events or circumstances indicate that the carrying value of the assets may not be recoverable. In evaluating long-lived assets for recoverability, the Company uses its best estimate of future cash flows expected to result from the use of the related asset group and its eventual disposition. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than its carrying value, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value, considering external market participant assumptions.

In determining future cash flows, the Company takes various factors into account, including the effects of macroeconomic trends such as consumer spending, in-store capital investments, promotional cadence, the level of advertising and changes in merchandising strategy. Since the determination of future cash flows is an estimate of future performance, there may be future impairments in the event that future cash flows do not meet expectations.

Share-Based Compensation

The Company recognizes the cost of equity awards to employees and the non-employee Directors based on the grant-date fair value of those awards. The grant-date fair values of share unit awards are based on the fair value of the Company's common stock on the date of grant. The grant-date fair value of stock option awards is determined using the Black-Scholes option pricing model and involves several assumptions, including the expected term of the option, expected volatility and dividend yield. The expected term of options represents the period of time that the options granted are expected to be outstanding and is based on historical experience. Expected volatility is based on historical volatility of the Company’s stock as well as the implied volatility from publicly traded options on the Company's stock. Dividend yield is based on the current expected annual dividend per share and the Company’s stock price. Changes in the assumptions used to determine the Black-Scholes value could result in significant changes in the Black-Scholes value.

For stock options and share unit awards, the Company recognizes share-based compensation net of estimated forfeitures and revises the estimates in subsequent periods if actual forfeitures differ from the estimates. The Company estimates the forfeiture rate based on historical experience as well as expected future behavior.

The Company grants performance-based share awards to key executives, the vesting of which is subject to the executive’s continuing employment and the Company's or individual's achievement of certain performance goals. On a quarterly basis, the Company assesses actual performance versus the predetermined performance goals, and adjusts the share-based compensation expense to reflect the relative performance achievement. Actual distributed shares are calculated upon conclusion of the service and performance periods, and include dividend equivalent shares. If the performance-based award incorporates a market condition, the grant-date fair value of such award is determined using a pricing model, such as a Monte Carlo Simulation.

A hypothetical 10% change in our stock-based compensation expense would not have a material impact to our fiscal 2019 net income.

Income Taxes

The Company’s effective tax rate is based on pre-tax income, statutory tax rates, tax laws and regulations, and tax planning strategies available in the various jurisdictions in which the Company operates. The Company classifies interest and penalties on uncertain tax positions in the provision for income taxes. The Company records net deferred tax assets to the extent it believes that it is more likely than not that these assets will be realized. In making such determination, the Company considers all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent and expected future results of operation. The Company reduces deferred tax assets by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that some amount of deferred tax assets is not expected to be realized. The Company is not permanently reinvested with respect to earnings of a limited number of foreign entities and has recorded the tax consequences of remitting earnings from these entities. The Company is permanently reinvested with respect to all other earnings.

The Company recognizes the impact of tax positions in the financial statements if those positions will more likely than not be sustained on audit, based on the technical merits of the position. Although the Company believes that the estimates and assumptions used are reasonable and legally supportable, the final determination of tax audits could be different than that which is reflected in historical tax provisions and recorded assets and liabilities. Tax authorities periodically audit the Company’s income tax returns and the tax authorities may take a contrary position that could result in a significant impact on the Company's results of operations. Significant management judgment is required in determining the effective tax rate, in evaluating tax positions and in determining the net realizable value of deferred tax assets.

Refer to Note 15, “Income Taxes,” for further information.

Recent Accounting Pronouncements

Refer to Note 2, "Significant Accounting Policies," to the accompanying audited consolidated financial statements for a description of certain recently adopted, issued or proposed accounting standards which may impact our consolidated financial statements in future reporting periods.