Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 2. 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 condensed 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

Tapestry, Inc. (the "Company") 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

In the first quarter of fiscal 2022, the Company continues 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 over 1.6 million new customers across channels in North America**, representing an increase of over 20% versus prior year, with growth in stores and online;
Drove higher repeat transactions** and continued to reactivate lapsed customers across brands through a sharpened focus on the consumer;
Realized low double-digit revenue gains with Chinese consumers globally** compared to pre-pandemic levels, representing a sequential improvement from the prior quarter;
Increased global average unit retail ("AUR") across Coach, Kate Spade and Stuart Weitzman,** reflecting strong brand momentum and successful structural changes to lessen promotional activity and improve assortment productivity;
Advanced Digital capabilities** through significant investments in the channel, including in talent, to improve the customer experience and drive conversion, resulting in a sequential acceleration in revenue trends on a two-year basis; and
Remain on track to realize gross run-rate savings of $300 million in FY22.**

Recent Developments

Covid-19 Pandemic

The disruptions related to Covid-19 have materially adversely impacted our operations, cash flow, and liquidity. The virus has impacted all regions 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 third-party manufacturers and logistics providers. The Company manufactures a significant amount of its products from Southeast Asia, which has and continues to experience increased rates of Covid-19. During the first quarter of fiscal 2022, certain of the Company’s third-party manufacturers, primarily located in Vietnam, have experienced ongoing and longer-than-expected government mandated restrictions, which resulted in a significant decrease in production capacity for these third-party manufacturers. In response, the Company took deliberate actions to mitigate the impact of these closures, such as shifting production to other countries, adjusting its merchandising strategies, where possible, and increasing the use of air freight to expedite delivery. In October 2021, some of these third-party manufacturers have begun to increase production capacity. The Company currently expects that these third-party manufacturers will return to full capacity in fiscal 2022, however the exact timing remains uncertain. If capacity restrictions in our third-party manufacturer facilities persist beyond our current expectations, our outlook might be negatively impacted from that which is currently expected.

The Company has been experiencing other global logistics challenges, such as delays as a result of port congestion, vessel availability, container shortages for imported products and rising freight costs. These challenges are expected to persist throughout fiscal 2022. The Company expects both ocean and air freight costs will continue to be higher as a result of elevated demand globally. The Company is working to mitigate delays through the strategic use of air freight with greater frequency than in the past.

However, there is still uncertainty associated with 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 adjust our operating plan. Refer to Part II, Item 1A. "Risk Factors" herein and as disclosed in our Annual Report on Form 10-K for the year ended July 3, 2021.

The Company continues to take strategic actions in response to the current environment. The Company remains committed to driving SG&A savings, including actions taken under the Acceleration Program. 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.

Acceleration Program

The Company has implemented a strategic growth plan after undergoing a review of its business under the Acceleration Program, resulting in certain costs to date 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 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 fiscal 2021, the 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 5, "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 outbreak of a novel strain of Covid-19 continues to impact a significant majority of the regions in which we operate, resulting in significant global business disruptions. The widespread impact of Covid-19 resulted in temporary closures of directly operated stores globally, as well as at our wholesale and licensing partners starting in fiscal 2020. Since then, certain directly operated stores and the stores of our wholesale and licensing partners have experienced temporary re-closures or are operating under tighter restrictions in compliance with local government regulation. Covid-19 has also resulted in ongoing supply chain challenges, such as logistic constraints, the closure of certain third-party manufacturers and increased freight costs. Refer to "Recent Developments," herein, for further information.

The global Covid-19 pandemic is continuously evolving and the extent to which this impacts the Company - including unforeseen increased costs to the Company's business - will depend on future developments, which cannot be predicted, including the ultimate duration, severity and geographic resurgence of the virus and the success of actions to contain the virus, including variants of the novel strain, or treat its impact, among others.

While pressures from supply chain disruptions and public health concerns due to mutations of Covid-19 virus linger, the International Monetary Fund continues to forecast growth in the global economy, which is contingent on multilateral vaccination efforts by members of the organization. Additionally, economists expect inflationary pressures to become more pronounced over the next year, which may be exacerbated if supply chain disruptions continue to impact businesses, among other factors, such as increasing real-estate and rental rates as well as higher prices on imported goods. However, these inflationary pressures may normalize to pre-pandemic levels during calendar year 2022, in the absence of unpredicted factors, based on current recovery and supported by ample labor supply through wage increases in advanced economies.

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.

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.

For a detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, see Part II, Item 1A. "Risk Factors" herein and as disclosed in our Annual Report on Form 10-K for the year ended July 3, 2021.

FIRST QUARTER FISCAL 2022 COMPARED TO FIRST QUARTER FISCAL 2021

The following table summarizes results of operations for the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021. All percentages shown in the table below and the discussion that follows have been calculated using unrounded numbers.


	Three Months Ended
	October 2, 2021				September 26, 2020				Variance
	(millions, except per share data)
	Amount		% of net sales		Amount		% of net sales		Amount		%
Net sales	$	1,480.9	100.0	%	$	1,172.2	100.0	%	$	308.7	26.3	%
Gross profit	1,068.7		72.2		830.2		70.8		238.5		28.7
SG&A expenses	773.7		52.2		628.0		53.6		145.7		23.2
Operating income (loss)	295.0		19.9		202.2		17.3		92.8		45.9
Interest expense, net	16.1		1.1		19.4		1.7		(3.3)		(16.9)
Other expense (income)	2.2		0.2		(2.6)		(0.2)		4.8		NM
Provision (benefit) for income taxes	49.8		3.4		(46.3)		(4.0)		96.1		NM
Net income (loss)	226.9		15.3		231.7		19.8		(4.8)		(2.1)
Net income (loss) per share:
Basic	$	0.82			$	0.84			$	(0.02)	(2.5)
Diluted	$	0.80			$	0.83			$	(0.03)	(4.6)

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 the first quarter of fiscal 2022 and fiscal 2021 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.

First Quarter Fiscal 2022 Items


	Three Months Ended October 2, 2021
			Item Affecting Comparability
	GAAP Basis (As Reported)		Acceleration Program		Non-GAAP Basis (Excluding Items)
	(millions, except per share data)
Coach	831.0		—		831.0
Kate Spade	199.2		—		199.2
Stuart Weitzman	38.5		—		38.5
Gross profit(1)	$	1,068.7	$	—	$	1,068.7

Coach	465.3		1.4		463.9
Kate Spade	162.0		1.4		160.6
Stuart Weitzman	40.0		0.4		39.6
Corporate	106.4		8.9		97.5
SG&A expenses	$	773.7	$	12.1	$	761.6

Coach	365.7		(1.4)		367.1
Kate Spade	37.2		(1.4)		38.6
Stuart Weitzman	(1.5)		(0.4)		(1.1)
Corporate	(106.4)		(8.9)		(97.5)
Operating income (loss)	$	295.0	$	(12.1)	$	307.1



Provision for income taxes	49.8		(3.9)		53.7
Net income (loss)	$	226.9	$	(8.2)	$	235.1
Net income (loss) per diluted common share	$	0.80	$	(0.02)	$	0.82

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

In the first quarter of fiscal 2022 the Company incurred charges as follows:

*•*Acceleration Program - Total charges incurred under the Acceleration Program are primarily share-based compensation and professional fees incurred as a result of the development and execution of the Company's comprehensive strategic initiatives. Refer to the "Executive Overview" herein and Note 5, "Restructuring Activities," for further information.

These actions taken together increased the Company's SG&A expenses by $12.1 million and reduced Provision for income taxes by $3.9 million, negatively impacting Net income by $8.2 million or $0.02 per diluted share.

First Quarter Fiscal 2021 Items


	Three Months Ended September 26, 2020
			Items Affecting Comparability
	GAAP Basis (As Reported)		CARES Act Tax Impact		Acceleration Program		Non-GAAP Basis (Excluding Items)
	(millions, except per share data)
Coach	644.9		—		—		644.9
Kate Spade	154.1		—		—		154.1
Stuart Weitzman	31.2		—		—		31.2
Gross profit(1)	$	830.2	$	—	$	—	$	830.2

Coach	374.9		—		10.7		364.2
Kate Spade	130.9		—		1.0		129.9
Stuart Weitzman	31.2		—		(2.4)		33.6
Corporate	91.0		—		17.3		73.7
SG&A expenses	$	628.0	$	—	$	26.6	$	601.4

Coach	270.0		—		(10.7)		280.7
Kate Spade	23.2		—		(1.0)		24.2
Stuart Weitzman	—		—		2.4		(2.4)
Corporate	(91.0)		—		(17.3)		(73.7)
Operating income (loss)	$	202.2	$	—	$	(26.6)	$	228.8

Provision for income taxes	(46.3)		(91.7)		(5.8)		51.2
Net income (loss)	$	231.7	$	91.7	$	(20.8)	$	160.8
Net income (loss) per diluted common share	$	0.83	$	0.33	$	(0.08)	$	0.58

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

In the first quarter of fiscal 2021, the Company incurred charges as follows:

CARES Act Tax Impact - Total amount primarily relates to the income tax benefits, most notably as a result of the Net Operating Loss ("NOL") carryback claim. Refer to Note 14, "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 strategic initiatives, as well as actions to streamline the Company's organization, which include severance. Refer to the "Executive Overview" herein and Note 5, "Restructuring Activities," for further information.

These actions taken together increased the Company's SG&A expenses by $26.6 million and reduced Provision for income taxes by $97.5 million, positively impacting Net income by $70.9 million or $0.25 per diluted share.

Tapestry, Inc. Summary – First Quarter of Fiscal 2022

Currency Fluctuation Effects

The change in net sales and gross margin for the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 has been presented both including and excluding currency fluctuation effects. All percentages shown in the tables below and the discussion that follows have been calculated using unrounded numbers.

Net Sales

In addition to comparisons to fiscal year 2021 results, the Company has provided comparisons to certain fiscal year 2020 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, which started in the second half of fiscal year 2020.


	Three Months Ended				Variance
	October 2, 2021		September 26, 2020		Amount		%		Constant Currency Change		% Change versus FY20
	(millions)
Coach	$	1,114.9	$	875.4	$	239.5	27.4	%	25.6	%	15.4	%
Kate Spade	299.5		240.4		59.1		24.5		23.8		(2.0)
Stuart Weitzman	66.5		56.4		10.1		17.9		14.8		(23.1)
Total Tapestry	$	1,480.9	$	1,172.2	$	308.7	26.3		24.7		9.1

Net sales in the first quarter of fiscal 2022 increased 26.3% or $308.7 million to $1.48 billion. Excluding the effects of foreign currency, net sales increased by 24.7% or $289.6 million.

Coach Net Sales increased 27.4% or $239.5 million to $1.11 billion in the first quarter of fiscal 2022. Excluding the impact of foreign currency, net sales increased 25.6% or $223.9 million. This increase in net sales is primarily attributed to an increase of $183.9 million in net global retail sales driven by higher global e-commerce sales and store sales in North America, partially offset by lower store sales in Other Asia, including Japan, due to the impact of Covid-19. This increase in net sales is also partially attributed to a $37.9 million increase in wholesale sales.

*•*Kate Spade Net Sales increased 24.5% or $59.1 million to $299.5 million in the first quarter of fiscal 2022. Excluding the impact of foreign currency, net sales increased 23.8% or $57.3 million. This increase is primarily due to an increase of $43.2 million in net global retail sales driven by higher store sales and global e-commerce sales in North America, partially offset by lower store sales in Other Asia, notably Japan, as well as Greater China. This increase in net sales is also partially attributed to a $15.3 million increase in wholesale sales.

*•*Stuart Weitzman Net Sales increased 17.9% or $10.1 million to $66.5 million in the first quarter of fiscal 2022. Excluding the impact of foreign currency, net sales increased 14.8% or $8.4 million. This increase was primarily due to a net increase of $5.0 million in the retail business, which is attributed to an increase in global e-commerce sales and an increase in store sales in North America and mainland China, partially offset by store closures. This increase in net sales is also partially attributed to a $3.4 million increase in wholesale sales.

Gross Profit


	Three Months Ended
	October 2, 2021				September 26, 2020				Variance
	(millions)
	Amount		% of Net Sales		Amount		% of Net Sales		Amount		%
Coach	$	831.0	74.5	%	$	644.9	73.7	%	$	186.1	28.8	%
Kate Spade	199.2		66.5		154.1		64.1		45.1		29.3
Stuart Weitzman	38.5		57.9		31.2		55.3		7.3		23.4
Tapestry	$	1,068.7	72.2		$	830.2	70.8		$	238.5	28.7

Gross profit increased 28.7% or $238.5 million to $1.07 billion in the first quarter of fiscal 2022 from $830.2 million in the first quarter of fiscal 2021. Gross margin for the first quarter of fiscal 2022 was 72.2% as compared to 70.8% in the first quarter of fiscal 2021. Gross margin increased 140 basis points and on a constant currency basis, gross margin increased 130 basis points from the first quarter of fiscal 2021.

The Company includes inbound product-related transportation costs from our service providers within Cost of sales. The Company, similar to some companies, 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 28.8% or $186.1 million to $831.0 million in the first quarter of fiscal 2022 from $644.9 million in the first quarter of fiscal 2021. Gross margin increased to 74.5% in the first quarter of fiscal 2022 from 73.7% in the first quarter of fiscal 2021. Gross margin increased 80 basis points and gross margin was not materially impacted by foreign currency. This increase in gross margin was primarily due to reduced promotional activity and higher AUR, partially offset by unfavorable geography mix and higher inbound freight expense.
Kate Spade Gross Profit increased 29.3% or $45.1 million to $199.2 million in the first quarter of fiscal 2022 from $154.1 million in the first quarter of fiscal 2021. Gross margin increased to 66.5% in the first quarter of fiscal 2022 from 64.1% in the first quarter of fiscal 2021. Gross margin increased 240 basis points and gross margin was not materially impacted by foreign currency. This increase in gross margin was primarily due to reduced promotional activity and higher AUR, partially offset by unfavorable geography mix and higher inbound freight expense.
Stuart Weitzman Gross Profit increased 23.4% or $7.3 million to $38.5 million during the first quarter of fiscal 2022 from $31.2 million in the first quarter of fiscal 2021. Gross margin increased to 57.9% in the first quarter of fiscal 2022 from 55.3% in the first quarter of fiscal 2021. Gross margin increased 260 basis points and on a constant currency basis, gross margin increased 210 basis points from the first quarter of fiscal 2021. This increase in gross margin was primarily due to reduced promotional activity and favorable geography mix, partially offset by higher inbound freight expense.

Selling, General and Administrative Expenses ("SG&A")


	Three Months Ended
	October 2, 2021				September 26, 2020				Variance
	(millions)
	Amount		% of Net Sales		Amount		% of Net Sales		Amount		%
Coach	$	465.3	41.7	%	$	374.9	42.8	%	$	90.4	24.1	%
Kate Spade	162.0		54.1		130.9		54.5		31.1		23.7
Stuart Weitzman	40.0		60.2		31.2		55.2		8.8		28.4
Corporate	106.4		NA		91.0		NA		15.4		17.0
Tapestry	$	773.7	52.2		$	628.0	53.6		$	145.7	23.2

SG&A expenses increased 23.2% or $145.7 million to $773.7 million in the first quarter of fiscal 2022 as compared to $628.0 million in the first quarter of fiscal 2021. As a percentage of net sales, SG&A expenses decreased to 52.2% during the first quarter of fiscal 2022 from 53.6% in the first quarter of fiscal 2021. Excluding items affecting comparability of $12.1 million and $26.6 million in the first quarter of fiscal 2022 and fiscal 2021, respectively, SG&A expenses increased 26.6% or $160.2 million to $761.6 million from $601.4 million in the first quarter of fiscal 2021. SG&A as a percentage of sales increased to 51.4% as compared to 51.3% during the first quarter of fiscal 2021.

Coach SG&A Expenses increased 24.1% or $90.4 million to $465.3 million in the first quarter of fiscal 2022 as compared to $374.9 million in the first quarter of fiscal 2021. SG&A expenses as a percentage of net sales decreased to 41.7% during the first quarter of fiscal 2022 from 42.8% during the first quarter of fiscal 2021. Excluding items affecting comparability of $1.4 million and $10.7 million in the first quarter of fiscal 2022 and fiscal 2021, respectively, SG&A expenses increased 27.3% or $99.7 million to $463.9 million during the first quarter of fiscal 2022; and SG&A expenses as a percentage of net sales remained flat at 41.6% in the first quarter of fiscal 2022. This increase in SG&A expenses is primarily due to increased marketing spend, most notably in digital, increased selling and operational costs in support of higher e-commerce sales and increased compensation costs due to stores trending back to normal operations in the first quarter of fiscal 2022 as compared to the first quarter of fiscal 2021, where stores were more notably impacted by Covid-19.
Kate Spade SG&A Expenses increased 23.7% or $31.1 million to $162.0 million in the first quarter of fiscal 2022 as compared to $130.9 million in the first quarter of fiscal 2021. As a percentage of net sales, SG&A expenses decreased to 54.1% during the first quarter of fiscal 2022 as compared to 54.5% during the first quarter of fiscal 2021. Excluding items affecting comparability of $1.4 million and $1.0 million in the first quarter of fiscal 2022 and fiscal 2021, respectively, SG&A expenses increased 23.7% or $30.7 million to $160.6 million during the first quarter of fiscal 2022; and SG&A expenses as a percentage of net sales decreased to 53.7% in the first quarter of fiscal 2022 from 54.0% in the first quarter of fiscal 2021. This increase in SG&A expenses is primarily due to higher marketing spend most notably in digital, and increased compensation costs due to stores trending back to normal operations in the first quarter of fiscal 2022 as compared to the first quarter of fiscal 2021, where stores were more notably impacted by Covid-19 and increased selling and operational costs in support of higher e-commerce sales.
Stuart Weitzman SG&A Expenses increased 28.4% or $8.8 million to $40.0 million in the first quarter of fiscal 2022 as compared to $31.2 million in the first quarter of fiscal 2021. As a percentage of net sales, SG&A expenses increased to 60.2% during the first quarter of fiscal 2022 as compared to 55.2% during the first quarter of fiscal 2021. Excluding items affecting comparability of $0.4 million and $(2.4) million in the first quarter of fiscal 2022 and fiscal 2021, respectively, SG&A expenses increased 17.9% or $6.0 million to $39.6 million during the first quarter of fiscal 2022 from $33.6 million during the first quarter of fiscal 2021; and SG&A expenses as a percentage of net sales decreased to 59.4% in the first quarter of fiscal 2022 from 59.5% in the first quarter of fiscal 2021. This increase is primarily due to a true up of reserves in the first quarter of fiscal 2021 and higher marketing spend most notably in digital in the first quarter of fiscal 2022.
Corporate expenses, which are included within SG&A expenses discussed above but are not directly attributable to a reportable segment, increased 17.0% or $15.4 million to $106.4 million in the first quarter of fiscal 2022 as compared to $91.0 million in the first quarter of fiscal 2021. Excluding items affecting comparability of $8.9 million and $17.3 million in the first quarter of fiscal 2022 and fiscal 2021, respectively, SG&A expenses increased 32.3% or $23.8 million to $97.5 million in the first quarter of fiscal 2022 as compared to $73.7 million in the first quarter of fiscal 2021. This increase in SG&A expenses was primarily driven by the gain on the sale of our corporate office in Hong Kong SAR, China in the first quarter of fiscal 2021 and higher compensation costs.

Operating Income (Loss)


	Three Months Ended
	October 2, 2021				September 26, 2020				Variance
	(millions)
	Amount		% of Net Sales		Amount		% of Net Sales		Amount		%
Coach	$	365.7	32.8	%	$	270.0	30.8	%	$	95.7	35.4	%
Kate Spade	37.2		12.4		23.2		9.6		14.0		60.8
Stuart Weitzman	(1.5)		(2.3)		—		—		(1.5)		NM
Corporate	(106.4)		NA		(91.0)		NA		(15.4)		17.0
Tapestry	$	295.0	19.9		$	202.2	17.3		$	92.8	45.9

Operating income increased 45.9% or $92.8 million to $295.0 million in the first quarter of fiscal 2022 as compared to an operating income of $202.2 million in the first quarter of fiscal 2021. Operating margin was 19.9% in the first quarter of fiscal 2022 as compared to 17.3% in the first quarter of fiscal 2021. Excluding items affecting comparability of $12.1 million and $26.6 million in the first quarter of fiscal 2022 and fiscal 2021, respectively, operating income increased 34.2% or $78.3 million to $307.1 million in the first quarter of fiscal 2022 from $228.8 million in the first quarter of fiscal 2021; and operating margin increased to 20.7% in the first quarter of fiscal 2022 as compared to 19.5% in the first quarter of fiscal 2021.

Coach Operating Income increased 35.4% or $95.7 million to $365.7 million in the first quarter of fiscal 2022, resulting in an operating margin of 32.8%, as compared to $270.0 million and 30.8%, respectively, in the first quarter of fiscal 2021. Excluding items affecting comparability, Coach operating income increased 30.8% or $86.4 million to $367.1 million from $280.7 million in the first quarter of fiscal 2021; and operating margin was 32.9% in the first quarter of fiscal 2022 as compared to 32.1% in the first quarter of fiscal 2021.
Kate Spade Operating Income increased 60.8% or $14.0 million to $37.2 million in the first quarter of fiscal 2022, resulting in an operating margin of 12.4%, as compared to an operating income of $23.2 million and operating margin of 9.6% in the first quarter of fiscal 2021. Excluding items affecting comparability, Kate Spade operating income increased 59.2% or $14.4 million to $38.6 million from $24.2 million in the first quarter of fiscal 2021; and operating margin was 12.9% in the first quarter of fiscal 2022 as compared to 10.1% in the first quarter of fiscal 2021.
Stuart Weitzman Operating Loss increased $1.5 million to $1.5 million in the first quarter of fiscal 2022, resulting in an operating margin of (2.3)%, as compared to an operating loss of $0.0 million in the first quarter of fiscal 2021. Excluding items affecting comparability, Stuart Weitzman operating loss decreased $1.3 million to $1.1 million, resulting in an operating margin of (1.6)%, as compared to operating loss of $2.4 million and operating margin of (4.2)% in the first quarter of fiscal 2021.

Interest Expense, net

Interest expense, net decreased 16.9% or $3.3 million to $16.1 million in the first quarter of fiscal 2022 as compared to $19.4 million in the first quarter of fiscal 2021. This decrease in interest expense, net is mainly due to lower interest expense due to the repayment of the Revolving Credit Facility during fiscal 2021.

Other Expense (Income)

Other expense increased $4.8 million to $2.2 million in the first quarter of fiscal 2022 as compared to income of $2.6 million in the first quarter of fiscal 2021. This increase in other expense is related to an increase in foreign exchange losses.

Provision (Benefit) for Income Taxes

The effective tax rate was 18.0% in the first quarter of fiscal 2022 as compared to (25.0)% in the first quarter of fiscal 2021. Excluding items affecting comparability, the effective tax rate was 18.6% in the first quarter of 2022 as compared to 24.1% in the first quarter of fiscal 2021. This decrease in our effective tax rate was primarily attributable to the impact of vesting of equity compensation awards during the period and geographic mix of earnings.

Net Income (Loss)

Net income decreased 2.1% or $4.8 million to $226.9 million in the first quarter of fiscal 2022 as compared to $231.7 million in the first quarter of fiscal 2021. Excluding items affecting comparability, net income increased 46.2% or $74.3 million to a net income of $235.1 million in the first quarter of fiscal 2022 as compared to $160.8 million in the first quarter of fiscal 2021. This increase was primarily due to higher operating income.

Net Income (Loss) per Share

Net income per diluted share decreased 4.6% or $0.03 to $0.80 in the first quarter of fiscal 2022 as compared to $0.83 in the first quarter of fiscal 2021. Excluding items affecting comparability, net income per diluted share increased 42.4% or $0.24 to $0.82 in the first quarter of fiscal 2022 as compared to $0.58 in the first quarter of fiscal 2021. This change was primarily due to higher net income.

NON-GAAP MEASURES

The Company’s reported results are presented in accordance with GAAP. The reported SG&A expenses, operating income, provision for income taxes, net income and earnings per diluted share in the first quarter of fiscal 2022 and fiscal 2021 reflect certain items, including Acceleration Program costs in fiscal 2022 and fiscal 2021 and the CARES Act Tax Impact in fiscal 2021. 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.

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 impact of the Covid-19 pandemic, comparable store sales are not reported for the three months ended October 2, 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 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations."

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows


	Three Months Ended
	October 2, 2021		September 26, 2020		Change
	(millions)

Net cash provided by (used in) operating activities	$	21.8	$	90.0	$	(68.2)
Net cash used in investing activities	(428.4)		(2.0)		(426.4)
Net cash used in financing activities	(346.2)		(8.4)		(337.8)
Effect of exchange rate changes on cash and cash equivalents	(2.3)		8.0		(10.3)
Net increase/ (decrease) in cash and cash equivalents	$	(755.1)	$	87.6	$	(842.7)

The Company’s cash and cash equivalents decreased by $755.1 million in the first quarter of fiscal 2022 as compared to an increase of $87.6 million in the first three months ended of fiscal 2021, as discussed below.

Net cash provided by (used in) operating activities

Net cash provided by operating activities decreased $68.2 million due to changes in operating assets and liabilities of $178.4 million and lower net income of $4.8 million, partially off by the impact of non-cash adjustments of $115.0 million.

The $178.4 million decrease in changes in operating asset and liability balances were primarily driven by the following:

Accounts payable were a use of cash of $32.7 million in the first three months ended of fiscal 2022 compared to a source of cash of $135.1 million in the first three months ended of fiscal 2021, primarily due to the extension of payment terms to certain vendors in the first quarter of fiscal 2021.
Accrued liabilities were a use of cash of $140.3 million in the first three months ended of fiscal 2022 compared to a use of cash of $61.2 million in the first three months ended of fiscal 2021, primarily attributed to the Annual Incentive Plan payment as the Company did not pay out under its Annual Incentive Plan during fiscal 2021, partially offset by the timing of tax payments and employee-related costs.
Inventories were a use of cash of $84.8 million in the first three months ended of fiscal 2022 compared to a use of cash of $57.5 million in the first three months ended of fiscal 2021, primarily driven by increased inbound freight costs.
Other assets were a source of cash of $48.5 million in the first three months ended of fiscal 2022 compared to a use of cash of $66.4 million in the first three months ended of fiscal 2021, primarily related to the income tax receivable filed in the first quarter of fiscal 2021 primarily due to the NOL carryback claim under the CARES Act.

Net cash used in investing activities

Net cash used in investing activities in the first three months ended of fiscal 2022 was $428.4 million as compared to a use of cash of $2.0 million in the first three months ended of fiscal 2021, resulting in a $426.4 million increase in net cash used in investing activities.

The $428.4 million use of cash in the first three months ended of fiscal 2022 is primarily due to purchases of investments of $402.9 million and purchases of property and equipment of $33.4 million, partially offset by proceeds from maturities and sales of investments $7.9 million.

The $2.0 million use of cash in the first three months ended of fiscal 2021 is primarily due to capital expenditures of $26.0 million, offset by the sale of building of $23.9 million.

Net cash used in financing activities

Net cash used in financing activities was $346.2 million in the first three months ended of fiscal 2022 as compared to a use of cash of $8.4 million in the first three months ended of fiscal 2021, resulting in a net increase in use of cash for financing activities of $337.8 million.

The $346.2 million of cash used in the first three months ended of fiscal 2022 was primarily due to repurchase of common stock of $250.0 million and dividend payments of $69.6 million.

The $8.4 million use of cash in the first three months ended of fiscal 2021 was primarily due to taxes paid to net settle share-based awards of $8.2 million.

Working Capital and Capital Expenditures

As of October 2, 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)	$	1,252.6	$	—	$	1,252.6
Short-term investments(1)	402.6		—		402.6

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	$	4,155.2	$	1,600.0	$	2,555.2

(1) As of October 2, 2021, approximately 21% of our cash and short-term investments were held outside the United States. The Company will likely repatriate some portion of available foreign cash in the foreseeable future, and has recorded deferred taxes on certain earnings of non-US subsidiaries that are deemed likely to be repatriated.

(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 less excess cash above $300 million 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 "Effective Date"), 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). This requirement, among others that the Company is subject to during the period from the Effective Date until the compliance certificate is delivered for the fiscal quarter ending July 3, 2021 (the “Covenant Relief Period”) have been fulfilled. Going forward, the Company must comply on a quarterly basis with a maximum net leverage ratio of 4.0 to 1.0. The $900 million aggregate commitment amount under the Revolving Credit Facility remained unchanged under the amendment. As of October 2, 2021, there were no borrowings outstanding under the Revolving Credit Facility. Refer to Note 11, "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, in June 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 October 2, 2021, no known events of default have occurred. Refer to Note 11, "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 October 2, 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 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 the remainder of fiscal 2022 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.

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.

Reference should be made to our most recent Annual Report on Form 10-K and other filings with the SEC for additional information regarding liquidity and capital resources. The Company expects total fiscal 2022 capital expenditures to be approximately $220 million.

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. Accordingly, the Company’s net sales, operating income and operating cash flows for the three months ended October 2, 2021 are not necessarily indicative of that expected for the full fiscal 2022. However, 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's significant accounting policies are described in Note 3 to the audited consolidated financial statements in our Annual Report on Form 10-K for fiscal 2021. Our discussion of results of operations and financial condition relies on our condensed consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates which are subject to varying degrees of uncertainty. While we believe that these accounting policies are based on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts.

For a complete discussion of our critical accounting policies and estimates, see the "Critical Accounting Policies and Estimates" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal 2021. As of October 2, 2021, there have been no material changes to any of the critical accounting policies.

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. 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 2021 testing date exceeded their respective 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 those assets.

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