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

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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 year ended July 3, 2021 was a 53-week period, June 27, 2020 and June 29, 2019 were each 52-week periods.

Tapestry, Inc. is a leading New York-based house of modern luxury accessories and lifestyle brands. Our global house of brands unites the magic of Coach, kate spade new york and Stuart Weitzman. Each of our brands are unique and independent, while sharing a commitment to innovation and authenticity defined by distinctive products and differentiated customer experiences across channels and geographies. We use our collective strengths to move our customers and empower our communities, to make the fashion industry more sustainable, and to build a company that’s equitable, inclusive, and diverse. Individually, our brands are iconic. Together, we can stretch what’s possible.

The Company has three reportable segments:

Coach - Includes global sales of Coach products to customers through Coach operated stores, including e-commerce sites and concession shop-in-shops, 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 e-commerce sites, 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 e-commerce sites, 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.

Acceleration Program

The guiding principle of the Company’s multi-year growth agenda under the Acceleration Program is to better meet the needs of each of its brands' unique customers by:

Sharpening our Focus on the Consumer:** Operating with a clearly defined purpose and strategy for each brand and an unwavering focus on the consumer at the core of everything we do
Leveraging Data and Leading with a Digital-First Mindset:** Building significant data and analytics capabilities to drive decision-making and increase efficiency; Offering immersive customer experiences across our e-commerce and social channels to meet the needs of consumers who are increasingly utilizing digital platforms to engage with brands; Rethinking the role of stores with an intent to optimize our fleet
Transforming into a Leaner and More Responsive Organization:** Moving with greater agility, simplifying internal processes and empowering teams to act quickly to meet the rapidly changing needs of the consumer. The Company achieved approximately $200 million of gross run rate expense savings in fiscal 2021 and remains on track to realize gross run-rate savings of $300 million.

In fiscal 2021, the Company continued to make meaningful progress against its Acceleration Program to sharpen its focus on the consumer, leverage data to lead with a digital-first mindset and transform into a leaner and more responsive organization:

Recruited approximately 4 million new customers, including through our e-commerce channels in North America,** representing gains versus prior year;
Continued to deliver an increase in number of repeat transactions** versus prior year and reactivated lapsed customers across brands;
Drove high-single digit revenue gains with Chinese consumers globally** compared to pre-pandemic levels;
Effectively reduced SKU counts by** 40% to 45% and improved assortment productivity, supported by data and analytics, resulting in stronger overall AUR and gross margin through higher IMUs and lower promotional activity and increased inventory turn for the fiscal year;
Optimized global fleet** with 59 net closures in FY21 compared to FY20, representing a net decrease of 90 doors over the past two years.

Covid-19 Pandemic

The Covid-19 virus has impacted regions all around the world, resulting in restrictions and shutdowns implemented by national, state, and local authorities. Consequently, the spread of Covid-19 has caused significant global business disruptions. As a result of the widespread impact of Covid-19, Tapestry had temporarily closed the majority of its directly operated stores globally for some period of time to help reduce the spread of Covid-19. The vast majority of the Company's stores re-opened for either in-store or pick-up service and they have continued to operate since then, however, some store locations have experienced temporary re-closures or are operating under tighter restrictions in compliance with local government regulation. Many of the Company's wholesale and licensing partners also closed their bricks and mortar stores as required by government orders during the third and fourth quarters of fiscal 2020, and while the majority of stores have reopened, they have also been subject to temporary re-closures and tighter capacity restrictions operating in compliance with the rules of certain local governments. In addition, certain of the Company’s supply chain partners, particularly those in Southeast Asia, have experienced closures due to an increase in Covid-19 cases in the region, which has and may continue to negatively impact the Company’s supply chain operations. However, there is still uncertainty around the duration of these disruptions and the possibility of other effects on the business. We will continue to monitor the rapidly evolving situation pertaining to the Covid-19 outbreak, including guidance from international and domestic authorities. In these circumstances, the Company will need to make adjustments to our operating plan. Refer to Part I, Item 1A. "Risk Factors" herein for further information.

In response to the challenges that Covid-19 has imposed on our business, the Company implemented the following actions to mitigate these headwinds:

Re-opened stores as quickly as possible, while following governmental and public health guidelines.
Driving with a digital-first mindset for all brands. Implemented practices designed to support the continued operations of our e-commerce platforms and fulfillment centers remain operational across all major regions.
Reduced capital expenditures through fleet optimization through fiscal 2021.
Drove SG&A savings, including actions taken under the Acceleration Program, through the reduction of corporate and retail workforce, right-sizing of marketing expenses, reduction of fixed costs such as rent as well as procurement savings, including reducing external third party services.
Did not pay out bonuses under the Annual Incentive Plan for fiscal year 2020, eliminated merit salary increases for all employees and temporarily reduced compensation for the Board of Directors and corporate employees above a certain salary threshold. During the second quarter of fiscal 2021, compensation resumed normal levels.
Tightly managed inventories by reflowing product introductions and cancelling inventory receipts as well as planned reduction of SKUs.
Drew down $700 million from its $900 million Revolving Credit Facility to add to cash balances, all of which was repaid during fiscal 2021.
Suspended its quarterly cash dividend and share repurchase program beginning in the fourth quarter of fiscal 2020. Subsequent to the fiscal 2021 year end, the Company’s Board of Directors approved the reinstatement of the Company's shareholder return program and declared a quarterly dividend of $0.25 per common share payable on September 27, 2021. The Company also intends to repurchase approximately $500.0 million worth of stock in fiscal 2022, of which $600.0 million is remaining under its current authorization.

The Company will continue to consider near-term exigencies and the long-term financial health of the business as clear steps are taken to mitigate the consequences of the Covid-19 pandemic.

CARES Act Tax Impact

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in response to the Covid-19 pandemic. The CARES Act contains numerous tax provisions, such as refundable payroll tax credits, deferral of the employer portion of certain payroll taxes, net operating loss carrybacks, modifications to net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. Additionally, on December 27, 2020, the Covid-19 stimulus package was signed into law, which contained enhancements to certain tax credits enacted under the CARES Act. Certain provisions impacted the results of the Company. Refer to Note 16, "Income Taxes" for additional information on these provisions.

Since March 2020, the governments of numerous countries in which we operate have issued relief packages in response to Covid-19. These packages include, amongst other things, extended filing deadlines, wage subsidies, social security relief, rent relief and deferred tax payments. The Company is seeking select relief under these provisions where eligible. The Company has to make certain judgements in interpretation of the law and/or await guidance from the local authorities.

The Company recorded $95.0 million of tax benefits in fiscal 2021, most notably as a result of the Net Operating Loss ("NOL") carryback claim.

Impairments

During fiscal 2021, the Company recorded $45.8 million of impairment charges related to lease right-of-use assets, which were primarily driven by the continued impacts of Covid-19. Refer to Note 12, "Fair Value Measurements" for further information. In addition, the Company recognized a reversal of raw material reserves of $8.1 million, which was established in fiscal 2020 as a result of the projected impact of Covid-19.

During fiscal 2020, the Company recorded $210.7 million of impairment charges to goodwill and $267.0 million of impairment charges to indefinite-lived brand intangible assets for the Stuart Weitzman reporting unit. Refer to "Critical Accounting Policies and Estimates," herein, for further information.

During fiscal 2020, the Company recorded $267.7 million of impairment charges related to store assets, inclusive of lease assets as well as purchase commitments. Refer to Note 12, "Fair Value Measurements," and Note 18, "Segment Information," for further information.

During fiscal 2020, the Company recorded $104.0 million of increases in inventory reserves, driven by the impact of Covid-19.

Acceleration Program

The Company has implemented a strategic growth plan after undergoing a review of its business under the Acceleration Program and expects to incur certain costs reflecting: (i) actions to streamline the Company's organization; (ii) select store closures as the Company optimizes its fleet (including store closure costs incurred as the Company exits certain regions in which it currently operates); and (iii) professional fees and share-based compensation costs incurred as a result of the development and execution of the Company's comprehensive strategic initiatives aimed at increasing profitability. Including charges taken in fiscal 2020 and 2021, Company expects to incur total pre-tax charges of approximately $205 - $220 million related to the Acceleration Program. The Acceleration Program is expected to be substantially complete by the end of fiscal 2022. The Company achieved approximately $200 million of gross run rate expense savings in fiscal 2021 and remains on track to realize gross run-rate savings of $300 million. Refer to Note 7, "Restructuring Activities," and the "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.

The disruptions related to Covid-19 have materially adversely impacted our operations, cash flow, and liquidity. The virus has impacted regions all around the world, resulting in restrictions and shutdowns implemented by national, state, and local authorities. These requirements have resulted in closures of our directly operated stores and locations of our wholesale partners globally, causing a significant reduction in sales starting in the third quarter of fiscal 2020. While the vast majority of the Company's stores reopened for either in-store or curb-side service and have continued to operate since then, some store locations have experienced temporary re-closures or are operating under tighter restrictions in compliance with local government regulation, and other stores may be required to close again for an extended period of time due to the possibility of a resurgence of increased infections. The Company has noted that certain geographies have experienced increased infection rates due to new variants of Covid-19, resulting in a decline in store traffic in these regions. The Company currently expects that this trend will not have a material adverse impact on its financial results for Fiscal 2022. However, if such infections rates continue to rise resulting in further declines in store traffic, the Company's financial results may be negatively impacted from that which is currently expected. Furthermore, Covid-19 has and may continue to cause disruptions in the Company’s supply chain within our fulfillment centers and logistics providers, and has resulted in temporary closures in our third-party manufacturers. The Company exports a significant amount of its products from Southeast Asia, which has and continues to experience increased rates of Covid-19.

The Company has been experiencing other global logistics challenges, such as delays as a result of port congestion, vessel availability and container shortages for imported products that are expected to persist in fiscal 2022, which will result in the Company using air freight with greater frequency than in the past. In addition, the Company has recently incurred higher freight costs, as rates for ocean and air shipments have significantly increased from those experienced in the beginning of fiscal 2021.

Several organizations that monitor the world’s economy, including the International Monetary Fund, observed that the outbreak of the Covid-19 pandemic has negatively shocked the global economy. Recent economic data forecasts a return to global growth for the remainder of calendar 2021 and 2022. Projected growth is contingent on anticipated legislation of additional fiscal support and improved health metrics. Moreover, there are factors that may hinder a global economic rebound, including expected inflationary pressures in calendar 2022. Additionally, there are still lingering uncertainties due to Covid-19 that may limit growth rates and progress, such as expected vaccine rollouts and mutations of the virus. Thus, the revisions to estimated growth are heavily dependent on continued strong multilateral cooperation to bring the pandemic under control, including funding and support from local policymakers to make strategic investments that aid economic activity.

Certain markets around the world have been faced with labor shortages, which have not impacted the Company's operations to date. If these trends continue or worsen, it could potentially affect the Company's ability to attract and retain employees for its retail and fulfillment locations in the future.

Furthermore, currency volatility, political instability and potential changes to trade agreements or duty rates may contribute to a worsening of the macroeconomic environment or adversely impact our business. Since fiscal 2019, the U.S. and China have both imposed tariffs on the importation of certain product categories into the respective country, with limited progress in negotiations to reduce or remove the tariffs. However, while the U.S. has participated in multi-national negotiations on trade agreements and duty rates, there continues to be a possibility of increases in tariffs on goods imported into the U.S. from other countries.

Furthermore, certain tax legislation contemplated by the Biden Administration, including increasing the U.S. corporate tax rate, and by the Organization for Economic Co-operation and Development, would have an adverse impact on our tax rate and financial results if passed as currently communicated.

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." The U.K. officially terminated its membership of the E.U. on January 31, 2020 under the terms of a withdrawal agreement concluded between the U.K. and E.U. and concluded the transition phase on December 31, 2020. The Company does not expect Brexit to materially impact our business.

As part of our efforts to improve our working capital efficiency, we have worked with certain suppliers to revisit terms and conditions, including the extension of payment terms. As an alternative to our payment terms, available to certain suppliers is a voluntary supply chain finance (“SCF”) program that enables our suppliers to sell their receivables from the Company to a global financial institution on a non-recourse basis at a rate that leverages our credit rating. We do not have the ability to refinance or modify payment terms to the global financial institution through the SCF program. No guarantees are provided by the Company or any of our subsidiaries under the SCF program.

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 2021 COMPARED TO FISCAL 2020

The following table summarizes results of operations for fiscal 2021 compared to fiscal 2020. All percentages shown in the tables below and the related discussion that follows have been calculated using unrounded numbers.


	Fiscal Year Ended
	July 3, 2021				June 27, 2020				Variance
	(millions, except per share data)
	Amount		% of net sales		Amount		% of net sales		Amount		%
Net sales	$	5,746.3	100.0	%	$	4,961.4	100.0	%	$	784.9	15.8	%
Gross profit	4,081.9		71.0		3,239.3		65.3		842.6		26.0
SG&A expenses	3,113.9		54.2		3,790.1		76.4		(676.2)		(17.8)
Operating income (loss)	968.0		16.8		(550.8)		(11.1)		1,518.8		NM
Interest expense, net	71.4		1.2		60.1		1.2		11.3		18.8
Other expense (income)	(0.7)		—		13.3		0.3		(14.0)		NM
Income (Loss) before provision for income taxes	897.3		15.6		(624.2)		(12.6)		1,521.5		NM
Provision for income taxes	63.1		1.1		27.9		0.7		35.2		NM
Net income (loss)	834.2		14.5		(652.1)		(13.1)		1,486.3		NM
Net income (loss) per share:
Basic	$	3.00			$	(2.34)			$	5.34	NM
Diluted	$	2.95			$	(2.34)			$	5.29	NM

NM - Not meaningful

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 2021 and fiscal 2020 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 2021 Items


	Fiscal Year Ended July 3, 2021
			Items affecting comparability
	GAAP Basis (As Reported)			CARES Act Tax Impact		Impairment		Acceleration Program		Non-GAAP Basis (Excluding Items)
	(millions, except per share data)
Coach	3,149.0			—		8.1		—		3,140.9
Kate Spade	768.4			—		—		—		768.4
Stuart Weitzman	164.5			—		—		—		164.5
Gross profit(1)	$	4,081.9		$	—	$	8.1	$	—	$	4,073.8

Coach	1,836.9			—		20.4		21.9		1,794.6
Kate Spade	659.9			—		19.3		4.4		636.2
Stuart Weitzman	173.1			—		6.1		(2.5)		169.5
Corporate	444.0			—		—		65.8		378.2
SG&A expenses	$	3,113.9		$	—	$	45.8	$	89.6	$	2,978.5

Coach	1,312.1			—		(12.3)		(21.9)		1,346.3
Kate Spade	108.5			—		(19.3)		(4.4)		132.2
Stuart Weitzman	(8.6)			—		(6.1)		2.5		(5.0)
Corporate	(444.0)			—		—		(65.8)		(378.2)
Operating income (loss)	$	968.0		$	—	$	(37.7)	$	(89.6)	$	1,095.3

Provision for income taxes	63.1			(95.0)		(7.8)		(17.6)		183.5
Net income (loss)	$	834.2		$	95.0	$	(29.9)	$	(72.0)	$	841.1
Net income (loss) per diluted common share	$	2.95		$	0.31	$	(0.10)	$	(0.23)	$	2.97

(1)Adjustments within Gross profit are recorded within Cost of sales.

In fiscal 2021 the Company incurred charges as follows:

CARES Act Tax Impact - Total amount primarily relates to tax benefits, most notably as a result of the NOL carryback claim. Refer to Note 16, "Income Taxes" for further information.
Acceleration Program - Total charges incurred under the Acceleration Program are primarily professional fees incurred as a result of the development and execution of the Company's comprehensive strategic initiatives, share-based compensation, as well as actions to streamline the Company's organization, which include severance. Refer to the "Executive Overview" herein and Note 7, "Restructuring Activities," for further information.
Impairment - Total adjustments are primarily due to impairment charges on lease ROU assets, as well as a reversal of raw material reserves which was established in fiscal 2020 as a result of the projected impact of Covid-19. Refer to the "Executive Overview" herein and Note 12, "Fair Value Measurements," for further information.

These actions taken together increased the Company's SG&A expenses by $135.4 million, decreased Cost of sales by $8.1 million and Provision for income taxes by $120.4 million, negatively impacting net income by $6.9 million, or $0.02 per diluted share.

Fiscal 2020 Items


	Fiscal Year Ended June 27, 2020
			Items affecting comparability
	GAAP Basis (As Reported)		ERP Implementation		Organization-related & Integration costs		Impairment		Acceleration Program		Non-GAAP Basis (Excluding Items)
	(millions, except per share data)
Coach	2,411.6		—		(0.1)		(61.9)		—		2,473.6
Kate Spade	682.9		—		(1.2)		(32.3)		—		716.4
Stuart Weitzman	144.8		—		(4.3)		(9.8)		(8.4)		167.3
Gross profit(1)	$	3,239.3	$	—	$	(5.6)	$	(104.0)	$	(8.4)	$	3,357.3

Coach	1,822.2		—		0.5		116.7		18.5		1,686.5
Kate Spade	782.2		—		0.1		92.9		13.6		675.6
Stuart Weitzman	766.2		—		(2.0)		526.7		17.6		223.9
Corporate	419.5		28.5		29.2		—		28.9		332.9
SG&A expenses	$	3,790.1	$	28.5	$	27.8	$	736.3	$	78.6	$	2,918.9

Coach	589.4		—		(0.6)		(178.6)		(18.5)		787.1
Kate Spade	(99.3)		—		(1.3)		(125.2)		(13.6)		40.8
Stuart Weitzman	(621.4)		—		(2.3)		(536.5)		(26.0)		(56.6)
Corporate	(419.5)		(28.5)		(29.2)		—		(28.9)		(332.9)
Operating income (loss)	$	(550.8)	$	(28.5)	$	(33.4)	$	(840.3)	$	(87.0)	$	438.4



Provision for income taxes	27.9		(6.0)		3.8		(55.3)		(8.4)		93.8
Net income (loss)	$	(652.1)	$	(22.5)	$	(37.2)	$	(785.0)	$	(78.6)	$	271.2
Net income (loss) per diluted common share	$	(2.34)	$	(0.08)	$	(0.13)	$	(2.82)	$	(0.28)	$	0.97

(1)Adjustments within Gross profit are recorded within Cost of sales.

In fiscal 2020 the Company incurred adjustments as follows:

ERP Implementation - Total charges represent technology implementation costs.
Organization-related & Integration Costs - Total charges represent integration costs primarily related to professional fees. Refer to Note 6, "Integration," for more information.
Impairment - Total charges are primarily due to impairment charges on the indefinite-lived brand intangible asset and goodwill for Stuart Weitzman, impairment charges on property and equipment assets and lease ROU assets, as well as increases in inventory reserves. Refer to Note 12, "Fair Value Measurements," Note 15, "Goodwill and Other Intangible Assets," and Note 18, "Segment Information," for further information.
Acceleration Program - Total charges, incurred under the Acceleration Program, are primarily due to organization-related costs as a result of severance and store closures charges. Store closure charges represent lease termination penalties, removal or modification of lease assets and liabilities established in connection with the adoption of the new lease accounting standard, establishing inventory reserves, accelerated depreciation and severance. Refer to the "Executive Overview" herein and Note 7, "Restructuring Activities," for further information.

These actions taken together increased the Company's SG&A expenses by $871.2 million and Cost of sales by $118.0 million and decreased the Provision for income taxes by $65.9 million, negatively impacting net income by $923.3 million, or $3.31 per diluted share.

Tapestry, Inc. Summary - Fiscal 2021

Currency Fluctuation Effects

The change in net sales and gross margin in fiscal 2021 compared to fiscal 2020 has been presented both including and excluding currency fluctuation effects.

Net Sales

The Company has provided comparisons to certain fiscal year 2019 results, which the Company believes is useful to investors and others in evaluating the Company’s results, due to the significant impact of the Covid-19 pandemic on the Company’s operations and financial results, notably in the second half of fiscal year 2020.


	Fiscal Year Ended				Variance
	July 3, 2021		June 27, 2020		Amount		%		Constant Currency Change		% Change versus FY19
	(millions)
Coach	$	4,253.1	$	3,525.7	$	727.4	20.6	%	18.6	%	(0.4)	%
Kate Spade	1,210.0		1,149.5		60.5		5.3		4.6		(11.5)
Stuart Weitzman	283.2		286.2		(3.0)		(1.0)		(3.4)		(27.3)
Total Tapestry	$	5,746.3	$	4,961.4	$	784.9	15.8		14.1		(4.7)

Net sales in fiscal 2021 increased 15.8% or $784.9 million to $5.75 billion. Excluding the impact of foreign currency, net sales increased by 14.1% or $699.0 million. Included in net sales of $5.75 billion in fiscal 2021 is the favorable impact of the 53rd week, which resulted in incremental net revenues of $92.7 million.

*•*Coach Net Sales increased 20.6% or $727.4 million to $4.25 billion in fiscal 2021. Excluding the impact of foreign currency, net sales increased 18.6% or $656.4 million. The following discussion is presented excluding the favorable impact of the 53rd week to net sales of $67.7 million and the impact of foreign currency. This increase is primarily attributed to a net increase of $517.5 million in net global retail sales driven by higher global e-commerce sales and store sales in mainland China, partially offset by lower store sales in North America, Europe and Other Asia, including Japan. Wholesale sales also increased $64.8 million primarily due to growth of the wholesale business in mainland China.

*•*Kate Spade Net Sales increased 5.3% or $60.5 million to $1.21 billion in fiscal 2021. Excluding the impact of foreign currency, net sales increased 4.6% or $52.5 million. The following discussion is presented excluding the favorable impact of the 53rd week to net sales of $21.7 million and the impact of foreign currency. This increase is primarily due to a net increase of $79.5 million in net global retail sales driven by higher global e-commerce sales, partially offset by lower stores sales in Other Asia, notably Japan, North America and Europe, due to the Covid-19 outbreak. This was partially offset by a decrease in wholesale sales of $50.8 million due to the strategic pullback in disposition and lower demand as a result of the Covid-19 outbreak.

*•*Stuart Weitzman Net Sales decreased by 1.0% or $3.0 million to $283.2 million in fiscal 2021. Excluding the impact of foreign currency, net sales decreased 3.4% or $9.9 million. The following discussion is presented excluding the favorable impact of the 53rd week to net sales of $3.3 million and the impact of foreign currency. This decrease is primarily due to a decline in the retail business of $16.1 million primarily driven by store closures related to fleet optimization under the Acceleration Program and market exits, partially offset by increase in store sales in mainland China and an increase in global e-commerce sales.

Gross Profit


	Fiscal Year Ended
	July 3, 2021				June 27, 2020				Variance
	(millions)
	Amount		% of Net Sales		Amount		% of Net Sales		Amount		%
Coach	$	3,149.0	74.0	%	$	2,411.6	68.4	%	$	737.4	30.6	%
Kate Spade	768.4		63.5		682.9		59.4		85.5		12.5
Stuart Weitzman	164.5		58.1		144.8		50.6		19.7		13.6
Tapestry	$	4,081.9	71.0		$	3,239.3	65.3		$	842.6	26.0

Gross profit increased 26.0% or $842.6 million to $4.08 billion in fiscal 2021 from $3.24 billion in fiscal 2020. Gross margin for fiscal 2021 was 71.0% as compared to 65.3% in fiscal 2020. Excluding items affecting comparability of a reduction of expense of $8.1 million in fiscal 2021 and $118.0 million in fiscal 2020, as discussed in the "GAAP to Non-GAAP Reconciliation" herein, gross profit increased 21.3% or $716.5 million to $4.07 billion in fiscal 2021, and gross margin increased 320 basis points to 70.9% in fiscal 2021 and 67.7% in fiscal 2020 and was not materially impacted by foreign currency.

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.

*•*Coach Gross Profit increased 30.6% or $737.4 million to $3.15 billion in fiscal 2021 from $2.41 billion in fiscal 2020. Gross margin increased to 74.0% in fiscal 2021 as compared to 68.4% in fiscal 2020. Excluding items affecting comparability of a reduction of expense of $8.1 million and $62.0 million in fiscal 2021 and fiscal 2020, respectively, Coach gross profit increased 27.0% or $667.3 million to $3.14 billion from $2.47 billion in fiscal 2020, and gross margin increased 370 basis points to 73.9% from 70.2% in fiscal 2020 and was not materially impacted by foreign currency. This increase in gross margin is primarily attributed to reduced promotional activity.

*•*Kate Spade Gross Profit increased 12.5% or $85.5 million to $768.4 million in fiscal 2021 from $682.9 million in fiscal 2020. Gross margin increased to 63.5% in fiscal 2021 from 59.4% in fiscal 2020. Excluding items affecting comparability of $33.5 million in fiscal 2020, Kate Spade gross profit increased 7.3% or $52.0 million to $768.4 million from $716.4 million in fiscal 2020, and gross margin increased 120 basis points to 63.5% from 62.3% in fiscal 2020 and was not materially impacted by foreign currency. This gross margin increase of 120 basis points is primarily due to reduced promotional activity and a strategic pullback in disposition, partially offset by higher inbound freight and duty expenses.

*•*Stuart Weitzman Gross Profit increased 13.6% or $19.7 million to $164.5 million in fiscal 2021 from $144.8 million in fiscal 2020. Gross margin increased 750 basis points to 58.1% in fiscal 2021 from 50.6% in fiscal 2020. Excluding items affecting comparability of $22.5 million in fiscal 2020, Stuart Weitzman gross profit decreased 1.7% or $2.8 million to $164.5 million from $167.3 million in fiscal 2020, and gross margin decreased 40 basis points to 58.1% in fiscal 2021 from 58.5% in fiscal 2020. On a constant currency basis, gross margin decreased 260 basis points. This decrease in gross margin is primarily due to channel mix and increased promotional activity.

Selling, General and Administrative Expenses


	Fiscal Year Ended
	July 3, 2021				June 27, 2020				Variance
	(millions)
	Amount		% of Net Sales		Amount		% of Net Sales		Amount		%
Coach	$	1,836.9	43.2	%	$	1,822.2	51.7	%	$	14.7	0.8	%
Kate Spade	659.9		54.5		782.2		68.0		(122.3)		(15.6)
Stuart Weitzman	173.1		61.1		766.2		NM		(593.1)		(77.4)
Corporate	444.0		NA		419.5		NA		24.5		5.8
Tapestry	$	3,113.9	54.2		$	3,790.1	76.4		$	(676.2)	(17.8)

SG&A expenses decreased 17.8% or $676.2 million to $3.11 billion in fiscal 2021 as compared to $3.79 billion in fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 54.2% during fiscal 2021 as compared to 76.4% during fiscal 2020. Excluding items affecting comparability of $135.4 million in fiscal 2021 and $871.2 million in fiscal 2020, SG&A expenses increased 2.0% or $59.6 million to $2.98 billion from $2.92 billion in fiscal 2020; and SG&A expenses as a percentage of net sales decreased to 51.8% in fiscal 2021 from 58.8% in fiscal 2020. This increase in SG&A expenses includes an increase in accrued Annual Incentive Plan expenses due to the cancellation of the Plan in fiscal 2020, higher marketing spend due to focus on digital and funding the endowment of the newly established Tapestry Foundation, partially offset by decreases as a result of actions taken as part of the Acceleration Program as well as benefits from wage subsidies and rent concessions.

*•*Coach SG&A Expenses increased 0.8% or $14.7 million to $1.84 billion in fiscal 2021 as compared to $1.82 billion in fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 43.2% in fiscal 2021 as compared to 51.7% in fiscal 2020. Excluding items affecting comparability of $42.3 million and $135.7 million in fiscal 2021 and fiscal 2020, respectively, SG&A expenses increased 6.4% or $108.1 million to $1.79 billion in fiscal 2021 from $1.69 billion in fiscal 2020. SG&A expenses as a percentage of sales decreased to 42.2% in fiscal 2021 from 47.8% in fiscal 2020. This increase in SG&A expenses is primarily due to an increase in digital marketing spend and e-commerce related operational and selling costs in support of higher e-commerce sales, partially offset by a decline in occupancy costs and compensation costs primarily as a result of actions taken as part of the Acceleration Program.

*•*Kate Spade SG&A Expenses decreased 15.6% or $122.3 million to $659.9 million in fiscal 2021 from $782.2 million in fiscal 2020. As a percentage of net sales, SG&A expenses decreased to 54.5% during fiscal 2021 as compared to 68.0% in fiscal 2020. Excluding items affecting comparability of $23.7 million and $106.6 million in fiscal 2021 and fiscal 2020, respectively, SG&A expenses decreased 5.8% or $39.4 million to $636.2 million in fiscal 2021 compared to $675.6 million in fiscal 2020; and SG&A expenses as a percentage of sales decreased to 52.6% in fiscal 2021 from 58.8% in fiscal 2020. This decrease is due to a decline in occupancy costs, compensation costs and depreciation expense, primarily as a result of actions taken as part of the Acceleration Program, partially offset by an increase in digital marketing spend and e-commerce related operational and selling costs in support of higher e-commerce sales.

*•*Stuart Weitzman SG&A Expenses decreased 77.4% or $593.1 million to $173.1 million in fiscal 2021 as compared to $766.2 million in fiscal 2020. Excluding items affecting comparability of $3.6 million in fiscal 2021 and $542.3 million in fiscal 2020, SG&A expenses decreased 24.3% or $54.4 million to $169.5 million in fiscal 2021 from $223.9 million in fiscal 2020; and SG&A expenses as a percentage of net sales decreased to 59.9% in fiscal 2021 from 78.2% in fiscal 2020. This decrease is primarily due to a decline in occupancy and compensation costs mainly as a result of fleet optimization under the Acceleration Program and market exits, as well as higher bad debt reserves in the prior year due to Covid-19.

Corporate expenses, which are included within SG&A expenses discussed above but are not directly attributable to a reportable segment, increased 5.8% or $24.5 million to $444.0 million in fiscal 2021 as compared to $419.5 million in fiscal 2020. Excluding items affecting comparability of $65.8 million and $86.6 million in fiscal 2021 and fiscal 2020, respectively, SG&A expenses increased 13.6% or $45.3 million to $378.2 million in fiscal 2021 as compared to $332.9 million in fiscal 2020. This increase in SG&A expenses is primarily due to an increase in accrued Annual Incentive Plan expenses and the costs associated with the endowment of the newly established Tapestry Foundation, partially offset by the gain realized on the sale of our corporate office in Hong Kong SAR, China and on the deferred purchase price of the Kate Spade joint venture.

Operating Income (Loss)


	Fiscal Year Ended
	July 3, 2021				June 27, 2020				Variance
	(millions)
	Amount		% of Net Sales		Amount		% of Net Sales		Amount		%
Coach	$	1,312.1	30.9	%	$	589.4	16.7	%	$	722.7	NM
Kate Spade	108.5		9.0		(99.3)		(8.6)		207.8		NM
Stuart Weitzman	(8.6)		(3.1)		(621.4)		NM		612.8		98.6
Corporate	(444.0)		NA		(419.5)		NA		(24.5)		(5.8)
Tapestry	968.0		16.8		$	(550.8)	(11.1)		$	1,518.8	NM

Operating income increased $1.52 billion to $968.0 million during fiscal 2021 as compared to operating loss of $550.8 million in fiscal 2020. Operating margin was 16.8% in fiscal 2021 as compared to (11.1)% in fiscal 2020. Excluding items affecting comparability of $127.3 million in fiscal 2021 and $989.2 million in fiscal 2020, operating income increased $656.9 million to $1.10 billion from $438.4 million in fiscal 2020; and operating margin was 19.1% in fiscal 2021 as compared to 8.8% in fiscal 2020. Included in operating income excluding items affecting comparability of $1.10 billion is $30.0 million from the favorable impact of the 53rd week in fiscal 2021.

*•*Coach Operating Income increased $722.7 million to $1.31 billion in fiscal 2021, resulting in an operating margin of 30.9%, as compared to $589.4 million and 16.7%, respectively in fiscal 2020. Excluding items affecting comparability, Coach operating income increased $559.2 million to $1.35 billion from $787.1 million in fiscal 2020; and operating margin was 31.7% in fiscal 2021 as compared to 22.3% in fiscal 2020. This increase in operating income includes the favorable impact of the 53rd week in fiscal 2021 of $28.6 million and is due to an increase in gross profit, partially offset by higher SG&A expenses.

*•*Kate Spade Operating Income increased $207.8 million to an operating income of $108.5 million in fiscal 2021, resulting in an operating margin of 9.0% as compared to an operating loss of $99.3 million and operating margin of (8.6)% in fiscal 2020. Excluding items affecting comparability, Kate Spade operating income increased $91.4 million to $132.2 million from $40.8 million in fiscal 2020, resulting in an operating margin of 10.9% as compared to 3.6% in fiscal 2020. This increase in operating income includes the favorable impact of the 53rd week in fiscal 2021 of $4.7 million and is due to an increase in gross profit and lower SG&A expenses.

*•*Stuart Weitzman Operating Loss decreased $612.8 million to an operating loss of $8.6 million in fiscal 2021, as compared to an operating loss of $621.4 million in fiscal 2020. Excluding items affecting comparability, Stuart Weitzman operating loss decreased $51.6 million to an operating loss of $5.0 million from an operating loss of $56.6 million in fiscal 2020; and operating margin was (1.8)% in fiscal 2021 as compared to (19.8)% in fiscal 2020. This decrease in operating loss includes the favorable impact of the 53rd week in fiscal 2021 of $0.2 million and is due to a lower SG&A expenses, partially offset by a decrease in gross profit.

Interest Expense, net

Net interest expense increased 18.8% or $11.3 million to $71.4 million in fiscal 2021 as compared to $60.1 million in fiscal 2020. This increase in interest expense, net is due to lower interest income and the additional interest expense related to the draw down on the Revolving Credit Facility in the fourth quarter of fiscal 2020 that was fully repaid in the third quarter of fiscal 2021.

Other Expense (Income)

Other income increased $14.0 million to income of $0.7 million in fiscal 2021 as compared to expense of $13.3 million in fiscal 2020. This increase in other income is related to an increase in foreign exchange gains.

Provision for Income Taxes

The effective tax rate was 7.0% in fiscal 2021 as compared to (4.5)% in fiscal 2020. Excluding items affecting comparability, the effective tax rate was 17.9% in fiscal 2021 as compared to 25.7% in fiscal 2020. The decrease in our effective tax rate was primarily attributable to geographic mix of earnings and the impact of nondeductible expenses on lower pretax operating income in fiscal 2020.

Net Income (Loss)

Net income increased $1.49 billion to a net income of $834.2 million in fiscal 2021 as compared to a net loss of $652.1 million in fiscal 2020. Excluding items affecting comparability, net income increased $569.9 million to $841.1 million in fiscal 2021 from $271.2 million in fiscal 2020. This increase was primarily due to higher operating income, partially offset by an increase in the provision for income taxes.

Net Income (Loss) per Share

Net income per diluted share was $2.95 in fiscal 2021 as compared to net loss per diluted share of $2.34 in fiscal 2020. Excluding items affecting comparability, net income per diluted share increased $2.00 to $2.97 in fiscal 2021 from $0.97 in fiscal 2020, primarily due to higher net income. The impact of the 53rd week contributed approximately $0.09 to net income per diluted share.

FISCAL 2020 COMPARED TO FISCAL 2019

The comparison of fiscal 2020 to 2019 has been omitted from this Form 10-K, but can be referenced in our Form 10-K for the fiscal year ended June 27, 2020, filed on August 13, 2020.

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 reflect certain items, including the impact of the CARES Act Tax Impact in fiscal 2021, Impairment costs and Acceleration Program costs in fiscal 2021 and 2020, and ERP Implementation and Organization-related and Integration charges in fiscal 2020. 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.

Furthermore, the Company has disclosed the impact of the 53rd week in fiscal 2021 on net sales, operating income and earnings per diluted share results.

The Company has historically reported comparable store sales, which reflects sales performance at stores that have been open for at least 12 months, and includes sales from e-commerce sites. The Company excludes new stores, 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 are not adjusted for store expansions. Due to extensive full and partial store closures resulting from the Covid-19 pandemic, comparable store sales are not reported for fiscal year ended July 3, 2021 as the Company does not believe this metric is currently meaningful to the readers of its financial statements for this period.

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 2021 Compared to Fiscal 2020


	Fiscal Year Ended
	July 3, 2021		June 27, 2020		Change
	(millions)
Net cash provided by operating activities	$	1,323.7	$	407.0	$	916.7
Net cash provided by (used in) investing activities	(91.0)		44.3		(135.3)
Net cash provided by (used in) financing activities	(666.0)		5.9		(671.9)
Effect of exchange rate changes on cash and cash equivalents	14.7		(0.1)		14.8
Net increase (decrease) in cash and cash equivalents	$	581.4	$	457.1	$	124.3

The Company’s cash and cash equivalents increased by $581.4 million in fiscal 2021 compared to an increase of $457.1 million in fiscal 2020, as discussed below.

Net cash provided by (used in) operating activities

Net cash provided by operating activities increased $916.7 million primarily due to changes in net income of $1.49 billion and changes in operating assets and liabilities of $310.6 million, partially offset by the impact of non-cash charges of $880.2 million.

The $310.6 million change in our operating asset and liability balances was primarily driven by:

Accounts payable were a source of cash of $307.3 million in fiscal 2021 as compared to a use of cash of $91.7 million in fiscal 2020, primarily due to the extension of payment terms to certain vendors in addition to higher inventory in transit compared to the prior period.
Accrued liabilities were a source of cash of $140.3 million in fiscal 2021 as compared to a source of cash of $7.6 million in fiscal 2020, primarily attributed to increased accruals for Annual Incentive Plan payments compared to the prior period, partially offset by the timing of tax related payments.
Inventories were a source of cash of $32.2 million in fiscal 2021 as compared to a use of cash of $58.6 million in fiscal 2020, primarily driven by more disciplined inventory management, higher than expected sales, and actions taken to exit certain markets, partially offset by higher inventory in transit compared to the prior period.
Other assets were a use of cash of $223.1 million in fiscal 2021 as compared to a source of cash of $38.3 million in fiscal 2020, primarily related to an increase in income tax receivable due to the NOL carryback claim under the CARES Act.
Trade accounts receivable were a use of cash of $9.6 million in fiscal 2021 as compared to a source of cash of $61.9 million in fiscal 2020, primarily driven by a lower balance in the fourth quarter of fiscal 2020 due to impacts from Covid-19.

Net cash provided by (used in) investing activities

Net cash used in investing activities was $91.0 million in fiscal 2021 compared to a source of cash of $44.3 million in fiscal 2020, resulting in a $135.3 million decrease in net cash provided by investing activities.

The $91.0 million use of cash in fiscal 2021 is primarily due to capital expenditures of $116.0 million. This use of cash was partially offset by net cash proceeds from the sale of building of $23.9 million.

The $44.3 million source of cash in fiscal 2020 is primarily due to net cash proceeds from maturities and sales of investments of $462.1 million. This source of cash was offset by purchases of investments of $212.4 million and capital expenditures of $205.4 million.

Net cash provided by (used in) financing activities

Net cash used in financing activities was $666.0 million in fiscal 2021 as compared to a source of cash of $5.9 million in fiscal 2020, resulting in a $671.9 million decrease in net cash provided by financing activities.

The $666.0 million use of cash in fiscal 2021 was primarily due to repayments on the Revolving Credit Facility of $700.0 million, partially offset by proceeds from share based awards of $61.2 million.

The $5.9 million source of cash in fiscal 2020 was primarily due to proceeds from the draw down on the Revolving Credit Facility of $700.0 million, which was offset by dividend payments of $380.3 million and repurchases of common stock of $300.0 million.

Cash Flows - Fiscal 2020 Compared to Fiscal 2019

The comparison of fiscal 2020 to 2019 has been omitted from this Form 10-K, but can be referenced in our Form 10-K for the fiscal year ended June 27, 2020, filed on August 13, 2020.

Working Capital and Capital Expenditures

As of July 3, 2021, 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)	$	2,007.7	$	—	$	2,007.7
Short-term investments(1)	8.1		—		8.1

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	$	4,515.8	$	1,600.0	$	2,915.8

(1) As of July 3, 2021, approximately 33.5% of our cash and cash equivalents and short-term investments were held outside the United States. 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. The Company has recorded deferred taxes on certain earnings of non-US subsidiaries that are deemed likely to be repatriated. See Note 16, "Income Taxes" for more information.

(2) In October 2019, 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 October 24, 2024 (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 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 operating lease liability to (b) consolidated EBITDAR. Additionally, the Company pays a commitment fee at a rate determined by the reference to the aforementioned pricing grid. On May 19, 2020, the Company entered into Amendment No. 1 (the “Amendment”) to the Revolving Credit Facility. Under the terms of the Amendment, during the period from the Effective Date until October 2, 2021, the Company must maintain available liquidity of $700 million (with available liquidity defined as the sum of unrestricted cash and cash equivalents and available commitments under credit facilities, including the Revolving Credit Facility). Following the period from the Effective Date until the compliance certificate is delivered for the fiscal quarter ending July 3, 2021 (the “Covenant Relief Period”), the Company must comply on a quarterly basis with a maximum net leverage ratio of 4.0 to 1.0. In addition, the Amendment provides that during the Covenant Relief Period, if any two of the Company’s three credit ratings are non-investment grade, the Revolving Credit Facility will be guaranteed by the Company’s material domestic subsidiaries and will be subject to liens on accounts receivable, inventory and intellectual property, in each case subject to customary exceptions. The Amendment also contains negative covenants that limit the ability of the Company and its subsidiaries to, among other things, incur certain debt, incur certain liens, dispose of assets, make investments, loans or advances, and engage in share buybacks during the Covenant Relief Period. An increased interest rate will be applicable during the Covenant Relief Period when the Company’s gross leverage ratio exceeds 4.0 to 1.0. The $900 million aggregate commitment amount under the revolving credit facility remains unchanged. As of July 3, 2021, $0.0 million of borrowings were outstanding under the Revolving Credit Facility. Refer to Note 13, "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"). 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"). 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

July 3, 2021, no known events of default have occurred. Refer to Note 13, "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 July 3, 2021, there were 12 financial institutions participating in the Revolving Credit Facility, with no one participant maintaining a combined maximum commitment percentage in excess of 14%. 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 2021 and beyond. There can be no assurance that any such capital will be available to the Company on acceptable terms or at all. Our ability to fund working capital needs, planned capital expenditures, 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. This future operating performance and cash flow are subject to prevailing economic conditions, which is uncertain as a result of Covid-19, and to financial, business and other factors, some of which are beyond the Company's control. The Company expects total capital expenditures to be approximately $220 million in fiscal 2022 as the Company continues to prioritize investing in digital capabilities.

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, including pandemics such as Covid-19.

Stock 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. As of July 3, 2021, the Company has $600.0 million of additional shares available to be repurchased as authorized under the plan. Amendment No. 1 to the Revolving Credit Facility contains negative covenants that limit the ability of the Company to, among other things, engage in share buybacks during the Covenant Relief Period. Refer to Part II, Item 5. "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities," for further information. Subsequent to the fiscal 2021 year end, the Company’s Board of Directors approved the reinstatement of the Company's shareholder return program and declared a quarterly dividend of $0.25 per common share payable on September 27, 2021. The Company also intends to repurchase approximately $500.0 million worth of stock in fiscal 2022, of which $600.0 million is remaining under its current authorization.

Contractual and Other Obligations

Firm Commitments

As of July 3, 2021, the Company's contractual obligations are as follows:


	Total		Fiscal 2022		Fiscal 2023 – 2024		Fiscal 2025 – 2026		Fiscal 2027 and Beyond
	(millions)
Capital expenditure commitments	$	28.5	$	17.7	$	10.8	$	—	$	—
Inventory purchase obligations	484.8		484.8		—		—		—
Operating lease obligations	2,207.8		389.4		616.3		410.5		791.6
Finance lease obligations	5.5		1.4		2.8		1.3		—
Debt repayment	1,600.0		—		400.0		600.0		600.0
Interest on outstanding debt	257.6		62.3		101.0		68.6		25.7
Mandatory transition tax payments(1)	144.0		16.9		74.2		52.9		—
Other	187.2		124.7		57.6		4.9		—
Total	$	4,915.4	$	1,097.2	$	1,262.7	$	1,138.2	$	1,417.3

(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. Refer to Note 16, "Income Taxes," for further information.

Excluded from the above contractual obligations table is the non-current liability for unrecognized tax benefits of $113.1 million as of July 3, 2021, 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 July 3, 2021 as these items will be paid within one year and certain long-term liabilities not requiring cash payments.

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 $40.5 million as of July 3, 2021, 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 2028.

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 14, "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. Digital revenue from sales of products ordered through the Company’s e-commerce sites is recognized upon delivery and receipt of the shipment by its customers and includes shipping and handling charges paid by customers. Retail and digital revenues are recorded net of estimated returns, which are estimated by developing an expected value based on historical experience. Payment is due at the point of sale.

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 July 3, 2021, 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 on a weighted-average cost basis. 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 July 3, 2021, 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 4, "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, right-of-use assets 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 as appropriate. 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 2021 or fiscal 2019. During the third quarter of fiscal 2020, profitability trends continued to decline from those that were expected for the Stuart Weitzman brand. The reduction in both cash from operations and future expected cash flows were 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 of fiscal 2020, 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 the third quarter of fiscal 2020 did not exceed their respective carrying values. Accordingly, in the third quarter of fiscal 2020, the Company recorded a goodwill impairment charge of $210.7 million related to the Stuart Weitzman reporting unit, resulting in a full impairment. During the third quarter of fiscal 2020, the Company also recorded an impairment charge of $267.0 million related to the Stuart Weitzman indefinite-lived brand, resulting in a full impairment. In considering the excess of the fair value over its carrying value for all Coach and Kate Spade reporting unit and indefinite-lived brand intangibles, management did not perform an interim assessment for these reporting units. Further, the Company determined there was no impairment during the fiscal 2020 annual impairment assessment.

Based on the annual assessment in fiscal 2021, 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 2021 testing date exceeded their carrying values by approximately 41% and 77%, respectively. Several factors could impact the Kate Spade brand's ability to achieve expected future cash flows, including continued economic volatility and potential operational challenges related to the Covid-19 pandemic, the reception of new collections in all channels, the success of international expansion strategies, the optimization of the store fleet productivity, the impact of promotional activity in department stores, and other initiatives aimed at increasing profitability of the business. Given the relatively small excess of fair value over carrying value as noted above, if profitability trends decline during fiscal 2022 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 2021 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 16, “Income Taxes,” for further information.

Recent Accounting Pronouncements

Refer to Note 3, "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.

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