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Cover and table of contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended January 1, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-16153
Tapestry, Inc.
(Exact name of registrant as specified in its charter)
| Maryland | 52-2242751 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
10 Hudson Yards, New York, NY 10001
(Address of principal executive offices); (Zip Code)
(212) 946-8400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol | Name of Each Exchange on which Registered | ||||||||||||
| Common Stock, par value $.01 per share | TPR | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||||||||||||||||
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
On January 28, 2022, the Registrant had 263,989,719 outstanding shares of common stock, which is the Registrant’s only class of common stock.
TAPESTRY, INC.
INDEX
| Page Number | ||||||||
| PART I – FINANCIAL INFORMATION (unaudited) | ||||||||
| ITEM 1. | Financial Statements: | |||||||
| Condensed Consolidated Balance Sheets | 1 | |||||||
| Condensed Consolidated Statements of Operations | 2 | |||||||
| Condensed Consolidated Statements of Comprehensive Income (Loss) | 3 | |||||||
| Condensed Consolidated Statements of Cash Flows | 4 | |||||||
| Notes to Condensed Consolidated Financial Statements | 5 | |||||||
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | ||||||
| ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk | 44 | ||||||
| ITEM 4. | Controls and Procedures | 45 | ||||||
| PART II – OTHER INFORMATION | ||||||||
| ITEM 1. | Legal Proceedings | 46 | ||||||
| ITEM 1A. | Risk Factors | 46 | ||||||
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 47 | ||||||
| ITEM 4. | Mine Safety Disclosures | 48 | ||||||
| ITEM 6. | Exhibits | 48 | ||||||
| SIGNATURE | 49 |
In this Form 10-Q, references to “we,” “our,” “us,” "Tapestry" and the “Company” refer to Tapestry, Inc., including consolidated subsidiaries. References to "Coach," "Kate Spade," "kate spade new york" or "Stuart Weitzman" refer only to the referenced brand.
SPECIAL NOTE ON FORWARD-LOOKING INFORMATION
This document, and the documents incorporated by reference in this document, our press releases and oral statements made from time to time by us or on our behalf, may contain certain "forward-looking statements" within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are based on management's current expectations, that involve risks and uncertainties that could cause our actual results to differ materially from our current expectations. In this context, forward-looking statements often address expected future business and financial performance and financial condition, and often contain words such as "may," "can," "continue," "project," "should," "expect," "confidence," "trends," "anticipate," "intend," "estimate," "on track," "well positioned to," "plan," "potential," "position," "believe," "seek," "see," "will," "would," "target," similar expressions, and variations or negatives of these words. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Such statements involve risks, uncertainties and assumptions. If such risks or uncertainties materialize or such assumptions prove incorrect, the results of Tapestry, Inc. and its consolidated subsidiaries could differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Tapestry, Inc. assumes no obligation to revise or update any such forward-looking statements for any reason, except as required by law.
Tapestry, Inc.’s actual results could differ materially from the results contemplated by these forward-looking statements and are subject to a number of risks, uncertainties, estimates and assumptions that may cause actual results to differ materially from current expectations due to a number of factors, including, but not limited to: (i) the impact of the novel coronavirus ("Covid-19") global pandemic on our business and financial results, including impacts on our supply chain due to temporary closures of our manufacturing partners and shipping and fulfillment constraints; (ii) our ability to successfully execute our multi-year growth agenda under our Acceleration Program; (iii) the impact of economic conditions; (iv) our ability to control costs; (v) our exposure to international risks, including currency fluctuations and changes in economic or political conditions in the markets where we sell or source our products; (vi) the risk of cyber security threats and privacy or data security breaches; (vii) the effect of existing and new competition in the marketplace; (viii) our ability to retain the value of our brands and to respond to changing fashion and retail trends in a timely manner, including our ability to execute on our e-commerce and digital strategies; (ix) the effect of seasonal and quarterly fluctuations on our sales or operating results; (x) our ability to protect against infringement of our trademarks and other proprietary rights; (xi) the impact of tax and other legislation; (xii) our ability to achieve intended benefits, cost savings and synergies from acquisitions; (xiii) the risks associated with potential changes to international trade agreements and the imposition of additional duties on importing our products; (xiv) the impact of pending and potential future legal proceedings; and (xv) the risks associated with climate change and other corporate responsibility issues and (xvi) such other risk factors as set forth in Part II, Item 1A. "Risk Factors" and elsewhere in this report and in the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2021. These factors are not necessarily all of the factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements.
WHERE YOU CAN FIND MORE INFORMATION
Tapestry's quarterly financial results and other important information are available by calling the Investor Relations Department at (212) 629-2618.
Tapestry maintains its website at www.tapestry.com where investors and other interested parties may obtain, free of charge, press releases and other information as well as gain access to our periodic filings with the SEC.
TAPESTRY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| January 1, 2022 | July 3, 2021 | ||||||||||
| (millions) | |||||||||||
| (unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | 1,257.4 | $ | 2,007.7 | |||||||
| Short-term investments | 390.3 | 8.1 | |||||||||
| Trade accounts receivable, less allowances for credit losses of $3.7 and $4.2, respectively | 292.7 | 200.2 | |||||||||
| Inventories | 750.0 | 734.8 | |||||||||
| Income tax receivable | 181.5 | 254.6 | |||||||||
| Prepaid expenses | 104.2 | 93.8 | |||||||||
| Other current assets | 82.4 | 76.1 | |||||||||
| Total current assets | 3,058.5 | 3,375.3 | |||||||||
| Property and equipment, net | 647.7 | 678.1 | |||||||||
| Operating lease right-of-use assets | 1,403.6 | 1,496.6 | |||||||||
| Goodwill | 1,285.2 | 1,297.3 | |||||||||
| Intangible assets | 1,370.1 | 1,373.4 | |||||||||
| Other assets | 164.3 | 161.7 | |||||||||
| Total assets | $ | 7,929.4 | $ | 8,382.4 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable | $ | 468.2 | $ | 445.2 | |||||||
| Accrued liabilities | 643.0 | 609.2 | |||||||||
| Current portion of operating lease liabilities | 308.0 | 319.4 | |||||||||
| Accrued income taxes | 24.5 | 52.0 | |||||||||
| Current debt | 400.0 | — | |||||||||
| Total current liabilities | 1,843.7 | 1,425.8 | |||||||||
| Long-term debt | 1,189.1 | 1,590.7 | |||||||||
| Long-term operating lease liabilities | 1,414.8 | 1,525.9 | |||||||||
| Deferred income taxes | 206.8 | 203.9 | |||||||||
| Other liabilities | 347.6 | 376.8 | |||||||||
| Total liabilities | 5,002.0 | 5,123.1 | |||||||||
| See Note 15 on commitments and contingencies | |||||||||||
| Stockholders' Equity: | |||||||||||
| Preferred stock: (authorized 25.0 million shares; $0.01 par value per share) none issued | — | — | |||||||||
| Common stock: (authorized 1.0 billion shares; $0.01 par value per share) issued and outstanding - 264.0 million and 279.5 million shares, respectively | 2.6 | 2.8 | |||||||||
| Additional paid-in-capital | 3,521.5 | 3,487.0 | |||||||||
| Retained earnings (accumulated deficit) | (501.0) | (158.5) | |||||||||
| Accumulated other comprehensive income (loss) | (95.7) | (72.0) | |||||||||
| Total stockholders' equity | 2,927.4 | 3,259.3 | |||||||||
| Total liabilities and stockholders' equity | $ | 7,929.4 | $ | 8,382.4 |
See accompanying Notes.
TAPESTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| January 1, 2022 | December 26, 2020 | January 1, 2022 | December 26, 2020 | |||||||||||||||||||||||
| (millions, except per share data) | (millions, except per share data) | |||||||||||||||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||||||||||||
| Net sales | $ | 2,141.2 | $ | 1,685.4 | $ | 3,622.1 | $ | 2,857.6 | ||||||||||||||||||
| Cost of sales | 683.8 | 511.7 | 1,096.0 | 853.7 | ||||||||||||||||||||||
| Gross profit | 1,457.4 | 1,173.7 | 2,526.1 | 2,003.9 | ||||||||||||||||||||||
| Selling, general and administrative expenses | 994.6 | 784.3 | 1,768.3 | 1,412.3 | ||||||||||||||||||||||
| Operating income (loss) | 462.8 | 389.4 | 757.8 | 591.6 | ||||||||||||||||||||||
| Loss on extinguishment of debt | 53.7 | — | 53.7 | — | ||||||||||||||||||||||
| Interest expense, net | 15.9 | 18.7 | 32.0 | 38.1 | ||||||||||||||||||||||
| Other expense (income) | 3.1 | (3.6) | 5.3 | (6.2) | ||||||||||||||||||||||
| Income (loss) before provision for income taxes | 390.1 | 374.3 | 666.8 | 559.7 | ||||||||||||||||||||||
| Provision (benefit) for income taxes | 72.2 | 63.3 | 122.0 | 17.0 | ||||||||||||||||||||||
| Net income (loss) | $ | 317.9 | $ | 311.0 | $ | 544.8 | $ | 542.7 | ||||||||||||||||||
| Net income (loss) per share: | ||||||||||||||||||||||||||
| Basic | $ | 1.17 | $ | 1.12 | $ | 1.98 | $ | 1.96 | ||||||||||||||||||
| Diluted | $ | 1.15 | $ | 1.11 | $ | 1.94 | $ | 1.94 | ||||||||||||||||||
| Shares used in computing net income (loss) per share: | ||||||||||||||||||||||||||
| Basic | 271.1 | 277.5 | 274.5 | 277.1 | ||||||||||||||||||||||
| Diluted | 277.2 | 281.0 | 281.0 | 279.4 | ||||||||||||||||||||||
See accompanying Notes.
TAPESTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| January 1, 2022 | December 26, 2020 | January 1, 2022 | December 26, 2020 | |||||||||||||||||||||||
| (millions) | (millions) | |||||||||||||||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||||||||||||
| Net income (loss) | $ | 317.9 | $ | 311.0 | $ | 544.8 | $ | 542.7 | ||||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||
| Unrealized gains (losses) on cash flow hedging derivatives, net | (0.2) | (1.8) | (0.6) | (5.3) | ||||||||||||||||||||||
| Unrealized gains (losses) on available-for-sale investments, net | (0.1) | — | (0.3) | — | ||||||||||||||||||||||
| Foreign currency translation adjustments | (13.3) | 27.9 | (22.8) | 47.1 | ||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | (13.6) | 26.1 | (23.7) | 41.8 | ||||||||||||||||||||||
| Comprehensive income (loss) | $ | 304.3 | $ | 337.1 | $ | 521.1 | $ | 584.5 |
See accompanying Notes.
TAPESTRY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Six Months Ended | |||||||||||
| January 1, 2022 | December 26, 2020 | ||||||||||
| (millions) | |||||||||||
| (unaudited) | |||||||||||
| CASH FLOWS PROVIDED BY OPERATING ACTIVITIES | |||||||||||
| Net income (loss) | $ | 544.8 | $ | 542.7 | |||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | 99.6 | 102.4 | |||||||||
| Provision for bad debt | 13.5 | (1.7) | |||||||||
| Loss on extinguishment of debt | 53.7 | — | |||||||||
| Share-based compensation | 33.5 | 28.9 | |||||||||
| Acceleration Program charges | 6.0 | (0.9) | |||||||||
| Changes to lease related balances, net | (26.3) | (86.1) | |||||||||
| Deferred income taxes | 5.2 | (41.2) | |||||||||
| Gain on sale of building | — | (13.2) | |||||||||
| Gain on deferred purchase price | — | (12.5) | |||||||||
| Other non-cash charges, net | 17.7 | 8.3 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Trade accounts receivable | (88.9) | (143.2) | |||||||||
| Inventories | (17.4) | 144.3 | |||||||||
| Accounts payable | (0.7) | 253.8 | |||||||||
| Accrued liabilities | 3.4 | 54.4 | |||||||||
| Other liabilities | (26.4) | (12.9) | |||||||||
| Other assets | 50.4 | (76.8) | |||||||||
| Net cash provided by operating activities | 668.1 | 746.3 | |||||||||
| CASH FLOWS USED IN INVESTING ACTIVITIES | |||||||||||
| Proceeds from sale of building | — | 23.9 | |||||||||
| Purchases of investments | (502.3) | (0.2) | |||||||||
| Proceeds from maturities and sales of investments | 118.3 | 0.2 | |||||||||
| Purchases of property and equipment | (71.7) | (49.7) | |||||||||
| Net cash used in investing activities | (455.7) | (25.8) | |||||||||
| CASH FLOWS USED IN FINANCING ACTIVITIES | |||||||||||
| Dividend payments | (137.5) | — | |||||||||
| Repurchase of common stock | (750.0) | — | |||||||||
| Proceeds from issuance of debt, net of discount | 498.5 | — | |||||||||
| Payment of debt issuance costs | (4.5) | — | |||||||||
| Payment of debt extinguishment costs | (50.7) | — | |||||||||
| Proceeds from share-based awards | 23.6 | 6.2 | |||||||||
| Repayment of debt | (500.0) | (11.5) | |||||||||
| Repayment of revolving credit facility | — | (500.0) | |||||||||
| Payment of deferred purchase price | — | (4.8) | |||||||||
| Taxes paid to net settle share-based awards | (31.0) | (8.4) | |||||||||
| Payments of finance lease liabilities | (0.5) | (0.4) | |||||||||
| Net cash used in financing activities | (952.1) | (518.9) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (10.6) | 14.7 | |||||||||
| Net (decrease) increase in cash and cash equivalents | (750.3) | 216.3 | |||||||||
| Cash and cash equivalents at beginning of period | 2,007.7 | 1,426.3 | |||||||||
| Cash and cash equivalents at end of period | $ | 1,257.4 | $ | 1,642.6 | |||||||
| Supplemental information: | |||||||||||
| Cash paid for income taxes, net | $ | 78.6 | $ | 191.8 | |||||||
| Cash paid for interest | $ | 36.6 | $ | 37.2 | |||||||
| Noncash investing activity - property and equipment obligations | $ | 11.2 | $ | 19.7 |
See accompanying Notes.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. NATURE OF OPERATIONS
Tapestry, Inc. (the "Company") is a leading New York-based house of 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 Coach segment 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.
The Kate Spade segment includes global sales primarily of kate spade new york brand products to customers through Kate Spade operated stores, including e-commerce sites, sales to wholesale customers, through concession shop-in-shops and through independent third party distributors.
The Stuart Weitzman segment includes global sales of Stuart Weitzman brand products primarily through Stuart Weitzman operated stores, including e-commerce sites, sales to wholesale customers and through numerous independent third party distributors.
2. BASIS OF PRESENTATION AND ORGANIZATION
Interim Financial Statements
These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and are unaudited. In the opinion of management, such condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the condensed consolidated financial position, results of operations, comprehensive income (loss) and cash flows of the Company for the interim periods presented. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") have been condensed or omitted from this report as is permitted by the SEC's rules and regulations. However, the Company believes that the disclosures provided herein are adequate to prevent the information presented from being misleading. This report should be read in conjunction with the audited consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended July 3, 2021 ("fiscal 2021") and other filings filed with the SEC.
The results of operations, cash flows and comprehensive income for the six months ended January 1, 2022 are not necessarily indicative of results to be expected for the entire fiscal year, which will end on July 2, 2022 ("fiscal 2022").
Fiscal Periods
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to June 30. Fiscal 2022 will be a 52-week period. Fiscal 2021, ended on July 3, 2021, was a 53-week period. The second quarter of fiscal 2022 ended on January 1, 2022 and the second quarter of fiscal 2021 ended on December 26, 2020, both of which were 13-week periods.
Covid-19 Pandemic
The outbreak of a novel strain of coronavirus ("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 temporary closure of certain third-party manufacturers and increased freight costs.
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. As the full magnitude of the effects on the Company's business is difficult to predict, the Covid-19 pandemic has and may continue to have a material adverse impact on the Company's business, financial condition, results of operations and cash flows for the foreseeable future. The Company believes
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
that cash flows from operations, access to the credit and capital markets and our credit lines, on-hand cash and cash equivalents and our investments provide adequate funds to support our operating, capital, and debt service requirements. There can be no assurance, however, that any such capital will be available to the Company on acceptable terms or at all. The Company could experience other potential adverse impacts as a result of the Covid-19 pandemic, including, but not limited to, further charges from adjustments to the carrying amount of goodwill and other intangible assets, long-lived asset impairment charges, reserves for uncollectible accounts receivable and reserves for the realizability of inventory.
In response to the Covid-19 pandemic, the Company took actions to reinforce its liquidity and financial flexibility. If stores are required to close again for an extended period of time due to a resurgence of increased infections, the Company's liquidity may be negatively impacted.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and footnotes thereto. Actual results could differ from estimates in amounts that may be material to the financial statements.
Significant estimates inherent in the preparation of the condensed consolidated financial statements include reserves for the realizability of inventory; customer returns, end-of-season markdowns and operational chargebacks; useful lives and impairments of long-lived tangible and intangible assets; accounting for income taxes and related uncertain tax positions; accounting for business combinations; the valuation of stock-based compensation awards and related expected forfeiture rates; reserves for restructuring; and reserves for litigation and other contingencies, amongst others.
Principles of Consolidation
These unaudited interim condensed consolidated financial statements include the accounts of the Company and all 100% owned and controlled subsidiaries. All intercompany transactions and balances are eliminated in consolidation.
Share Repurchases
The Company accounts for stock repurchases by allocating the repurchase price to common stock and retained earnings. Under Maryland law, the Company's state of incorporation, there are no treasury shares. The Company accrues for the shares purchased under the share repurchase plan based on the trade date. Purchases of the Company's common stock are executed through open market purchases, including through a purchase agreement under Rule 10b5-1. The Company may terminate or limit the share repurchase program at any time. As a result, all repurchased shares are authorized but unissued shares. The Company may terminate or limit the stock repurchase program at any time.
3. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". The ASU simplifies the accounting for income taxes by, among other things, eliminating certain existing exceptions related to the general approach in Topic 740 relating to franchise taxes, reducing complexity in the interim-period accounting for year-to-date loss limitations and changes in tax laws, and clarifying the accounting for the step-up in the tax basis of goodwill. The Company adopted ASU 2019-12 as of the beginning of fiscal 2022. The adoption of ASU 2019-12 did not have a material impact on the Company's condensed consolidated financial statements and notes thereto.
Recently Issued Accounting Pronouncements
The Company has considered all new accounting pronouncements and have concluded that there are no new pronouncements that may have a material impact on our results of operations, financial condition or cash flows based on current information.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
4. REVENUE
The Company recognizes revenue primarily from sales of the products of its brands through retail and wholesale channels, including e-commerce sites. The Company also generates revenue from royalties related to licensing its trademarks, as well as sales in ancillary channels. In all cases, revenue is recognized upon the transfer of control of the promised products or services to the customer, which may be at a point in time or over time. Control is transferred when the customer obtains the ability to direct the use of and obtain substantially all of the remaining benefits from the products or services. The amount of revenue recognized is the amount of consideration to which the Company expects to be entitled, including estimation of sale terms that may create variability in the consideration. Revenue subject to variability is constrained to an amount which will not result in a significant reversal in future periods when the contingency that creates variability is resolved.
The Company recognizes revenue in its retail stores, including concession shop-in-shops, at the point-of-sale when the customer obtains physical possession of the products. Digital revenue from sales of products ordered through the Company's e-commerce sites is recognized upon delivery and receipt of the shipment by its customers and includes shipping and handling charges paid by customers. Retail and digital revenues are recorded net of estimated returns, which are estimated by developing an expected value based on historical experience. Payment is due at the point of sale.
Gift cards issued by the Company are recorded as a liability until redeemed by the customer, at which point revenue is recognized. The Company also uses historical information to estimate the amount of gift card balances that will never be redeemed and recognizes that amount as revenue over time in proportion to actual customer redemptions if the Company does not have a legal obligation to remit unredeemed gift cards to any jurisdiction as unclaimed property.
Certain of the Company's retail operations use sales incentive programs, such as customer loyalty programs and the issuance of coupons. Loyalty programs provide the customer a material right to acquire additional products and give rise to the Company having a separate performance obligation. Additionally, certain products sold by the Company include an assurance warranty that is not considered a separate performance obligation. These programs are immaterial individually and in the aggregate.
The Company recognizes revenue within the wholesale channel at the time title passes and risk of loss is transferred to customers, which is generally at the point of shipment of products but may occur upon receipt of the shipment by the customer in certain cases. Payment is generally due 30 to 90 days after shipment. Wholesale revenue is recorded net of estimates for returns, discounts, end-of-season markdowns, cooperative advertising allowances and other consideration provided to the customer. Discounts are based on contract terms with the customer, while cooperative advertising allowances and other consideration may be based on contract terms or negotiated on a case-by-case basis. Returns and markdowns generally require approval from the Company and are estimated based on historical trends, current season results and inventory positions at the wholesale locations, current market and economic conditions as well as, in select cases, contractual terms. The Company's historical estimates of these variable amounts have not differed materially from actual results.
The Company recognizes licensing revenue over time during the contract period in which licensees are granted access to the Company's trademarks. These arrangements require licensees to pay a sales-based royalty and may include a contractually guaranteed minimum royalty amount. Revenue for contractually guaranteed minimum royalty amounts is recognized ratably over the license year and any excess sales-based royalties are recognized as earned once the minimum royalty threshold is achieved. Payments from the customer are generally due quarterly in an amount based on the licensee's sales of goods bearing the licensed trademarks during the period, which may differ from the amount of revenue recorded during the period thereby generating a contract asset or liability. Contract assets and liabilities and contract costs related to the licensing arrangements are immaterial as the licensing business represents approximately 1% of total net sales in the six months ended January 1, 2022.
The Company has elected a practical expedient not to disclose the remaining performance obligations that are unsatisfied as of the end of the period related to contracts with an original duration of one year or less or variable consideration related to sales-based royalty arrangements. There are no other contracts with transaction price allocated to remaining performance obligations other than future minimum royalties as discussed above, which are not material.
Other practical expedients elected by the Company include (i) assuming no significant financing component exists for any contract with a duration of one year or less, (ii) accounting for shipping and handling as a fulfillment activity within SG&A expense regardless of the timing of the shipment in relation to the transfer of control and (iii) excluding sales and value added tax from the transaction price.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
Disaggregated Net Sales
The following table disaggregates the Company's net sales into geographies that depict how economic factors may impact the revenues and cash flows for the periods presented. Each geography presented includes net sales related to the Company's directly operated channels, global travel retail business and to wholesale customers, including distributors, in locations within the specified geographic area.
| North America | Greater China**(1)** | Other Asia**(2)** | Other**(3)** | Total | |||||||||||||||||||||||||
| (millions) | |||||||||||||||||||||||||||||
| Three Months Ended January 1, 2022 | |||||||||||||||||||||||||||||
| Coach | $ | 1,011.2 | $ | 258.7 | $ | 201.6 | $ | 53.5 | $ | 1,525.0 | |||||||||||||||||||
| Kate Spade | 415.7 | 11.6 | 42.4 | 30.7 | 500.4 | ||||||||||||||||||||||||
| Stuart Weitzman | 67.2 | 38.2 | — | 10.4 | 115.8 | ||||||||||||||||||||||||
| Total | $ | 1,494.1 | $ | 308.5 | $ | 244.0 | $ | 94.6 | $ | 2,141.2 | |||||||||||||||||||
| Three Months Ended December 26, 2020 | |||||||||||||||||||||||||||||
| Coach | $ | 742.6 | $ | 242.6 | $ | 188.0 | $ | 52.1 | $ | 1,225.3 | |||||||||||||||||||
| Kate Spade | 303.7 | 13.4 | 35.6 | 22.9 | 375.6 | ||||||||||||||||||||||||
| Stuart Weitzman | 41.9 | 35.6 | 0.3 | 6.7 | 84.5 | ||||||||||||||||||||||||
| Total | $ | 1,088.2 | $ | 291.6 | $ | 223.9 | $ | 81.7 | $ | 1,685.4 | |||||||||||||||||||
| Six Months Ended January 1, 2022 | |||||||||||||||||||||||||||||
| Coach | $ | 1,692.9 | $ | 500.7 | $ | 338.5 | $ | 107.8 | $ | 2,639.9 | |||||||||||||||||||
| Kate Spade | 647.9 | 23.3 | 69.2 | 59.5 | 799.9 | ||||||||||||||||||||||||
| Stuart Weitzman | 102.9 | 60.9 | 0.3 | 18.2 | 182.3 | ||||||||||||||||||||||||
| Total | $ | 2,443.7 | $ | 584.9 | $ | 408.0 | $ | 185.5 | $ | 3,622.1 | |||||||||||||||||||
| Six Months Ended December 26, 2020 | |||||||||||||||||||||||||||||
| Coach | $ | 1,209.3 | $ | 438.8 | $ | 350.3 | $ | 102.3 | $ | 2,100.7 | |||||||||||||||||||
| Kate Spade | 476.0 | 27.2 | 70.0 | 42.8 | 616.0 | ||||||||||||||||||||||||
| Stuart Weitzman | 68.2 | 53.3 | 2.8 | 16.6 | 140.9 | ||||||||||||||||||||||||
| Total | $ | 1,753.5 | $ | 519.3 | $ | 423.1 | $ | 161.7 | $ | 2,857.6 |
(1) Greater China includes mainland China, Hong Kong SAR, Taiwan and Macao SAR.
(2) Other Asia includes Japan, Australia, New Zealand, South Korea, Thailand and other countries within Asia.
(3) Other sales primarily represents sales in Europe, the Middle East and royalties related to licensing.
Deferred Revenue
Deferred revenue results from cash payments received or receivable from customers prior to the transfer of the promised goods or services, and is generally comprised of unredeemed gift cards, net of breakage which has been recognized. Additional deferred revenue may result from sales-based royalty payments received or receivable which exceed the revenue recognized during the contractual period. The balance of such amounts as of January 1, 2022 and July 3, 2021 was $38.7 million and $32.4 million, respectively, which were primarily recorded within Accrued liabilities on the Company's Condensed Consolidated Balance Sheets and are generally expected to be recognized as revenue within a year. For the six months ended January 1, 2022, net sales of $8.1 million were recognized from amounts recorded as deferred revenue as of July 3, 2021. For the six months ended December 26, 2020, net sales of $7.6 million were recognized from amounts recorded as deferred revenue as of June 27, 2020.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
5. RESTRUCTURING ACTIVITIES
Acceleration Program
The Company has implemented a strategic growth plan after undergoing a review of its business under its multi-year growth agenda. This multi-faceted, multi-year strategic growth plan (the "Acceleration Program") reflects: (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. Under the Acceleration Program, the Company expects to incur total pre-tax charges of approximately $215 million - $220 million. The Acceleration Program is expected to be substantially complete by the end of fiscal 2022.
Under the Acceleration Program, the Company incurred charges of $13.3 million and $25.4 million during the three and six months ended January 1, 2022, respectively, all of which was recorded within SG&A expenses. Of the $13.3 million and $25.4 million recorded within SG&A expenses, $7.2 million and $16.1 million was recorded within Corporate, $1.1 million and $2.5 million was recorded within the Coach segment, $2.1 million and $3.5 million was recorded within the Kate Spade segment and $2.9 million and $3.3 million was recorded within the Stuart Weitzman segment.
For the three and six months ended December 26, 2020, the Company incurred charges of $21.7 million and $48.3 million, respectively, all of which was recorded within SG&A expenses. Of the $21.7 million and $48.3 million recorded within SG&A expenses, $15.8 million and $33.1 million was recorded within Corporate, $5.8 million and $16.5 million was recorded within the Coach segment, $2.4 million and $3.4 million was recorded within the Kate Spade segment and a reduction of expense of $2.3 million and $4.7 million was recorded within the Stuart Weitzman segment, respectively.
A summary of charges and related liabilities under the Acceleration Program is as follows:
| Organization-Related**(1)** | Store Closure**(2)** | Other**(3)** | Total | ||||||||||||||||||||
| (millions) | |||||||||||||||||||||||
| Fiscal 2020 charges | $ | 44.7 | $ | 32.3 | $ | 10.0 | $ | 87.0 | |||||||||||||||
| Cash payments | (15.8) | (11.0) | (7.1) | (33.9) | |||||||||||||||||||
| Non-cash charges | (4.0) | (20.8) | — | (24.8) | |||||||||||||||||||
| Liability balance as of June 27, 2020 | $ | 24.9 | $ | 0.5 | $ | 2.9 | $ | 28.3 | |||||||||||||||
| Fiscal 2021 charges | 16.6 | 5.9 | 67.1 | 89.6 | |||||||||||||||||||
| Cash payments | (38.2) | (11.9) | (36.6) | (86.7) | |||||||||||||||||||
| Non-cash charges | — | 5.8 | (10.9) | (5.1) | |||||||||||||||||||
| Liability balance as of July 3, 2021 | $ | 3.3 | $ | 0.3 | $ | 22.5 | $ | 26.1 | |||||||||||||||
| Fiscal 2022 charges | $ | — | $ | 3.3 | $ | 22.1 | $ | 25.4 | |||||||||||||||
| Cash payments | (1.2) | (2.0) | (11.8) | (15.0) | |||||||||||||||||||
| Non-cash charges | — | 2.4 | (8.4) | (6.0) | |||||||||||||||||||
| Liability balance as of January 1, 2022 | $ | 2.1 | $ | 4.0 | $ | 24.4 | $ | 30.5 |
(1) Organization-related charges, recorded within SG&A expenses, primarily relates to severance and other related costs.
(2) Store closure charges represent lease termination penalties, removal or modification of lease assets and liabilities, establishing inventory reserves, accelerated depreciation and severance.
(3) Other charges, recorded within SG&A, primarily relates to professional fees and share-based compensation.
The Company expects to incur approximately $15 million in additional charges under the Acceleration Program in fiscal 2022.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The change in the carrying amount of the Company’s goodwill by segment is as follows:
| Coach | Kate Spade | Stuart Weitzman**(1)** | Total | ||||||||||||||||||||
| (millions) | |||||||||||||||||||||||
| Balance at July 3, 2021 | $ | 656.3 | $ | 641.0 | $ | — | $ | 1,297.3 | |||||||||||||||
| Foreign exchange impact | (10.1) | (2.0) | — | (12.1) | |||||||||||||||||||
| Balance at January 1, 2022 | $ | 646.2 | $ | 639.0 | $ | — | $ | 1,285.2 |
(1) Amount is net of accumulated goodwill impairment charges of $210.7 million as of January 1, 2022 and July 3, 2021.
Intangible Assets
Intangible assets consist of the following:
| January 1, 2022 | July 3, 2021 | ||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accum. Amort. | Net | Gross Carrying Amount | Accum. Amort. | Net | ||||||||||||||||||||||||||||||
| (millions) | |||||||||||||||||||||||||||||||||||
| Intangible assets subject to amortization: | |||||||||||||||||||||||||||||||||||
| Customer relationships | $ | 100.5 | $ | (40.2) | $ | 60.3 | $ | 100.5 | $ | (36.9) | $ | 63.6 | |||||||||||||||||||||||
| Intangible assets not subject to amortization: | |||||||||||||||||||||||||||||||||||
| Trademarks and trade names | 1,309.8 | — | 1,309.8 | 1,309.8 | — | 1,309.8 | |||||||||||||||||||||||||||||
| Total intangible assets | $ | 1,410.3 | $ | (40.2) | $ | 1,370.1 | $ | 1,410.3 | $ | (36.9) | $ | 1,373.4 |
As of January 1, 2022, the expected amortization expense for intangible assets is as follows:
| Amortization Expense | |||||
| (millions) | |||||
| Remainder of fiscal 2022 | $ | 3.2 | |||
| Fiscal 2023 | 6.5 | ||||
| Fiscal 2024 | 6.5 | ||||
| Fiscal 2025 | 6.5 | ||||
| Fiscal 2026 | 6.5 | ||||
| Fiscal 2027 | 6.5 | ||||
| Thereafter | 24.6 | ||||
| Total | $ | 60.3 |
The expected amortization expense above reflects remaining useful lives ranging from approximately 8.3 to 10.5 years for customer relationships.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
7. STOCKHOLDERS' EQUITY
A reconciliation of stockholders' equity is presented below:
| Shares of Common Stock | Common Stock | Additional Paid-in- Capital | Retained Earnings / (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
| (millions, except per share data) | |||||||||||||||||||||||||||||||||||
| Balance at June 27, 2020 | 276.2 | $ | 2.8 | $ | 3,358.5 | $ | (992.7) | $ | (92.2) | $ | 2,276.4 | ||||||||||||||||||||||||
| Net income (loss) | — | — | — | 231.7 | — | 231.7 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | 15.7 | 15.7 | |||||||||||||||||||||||||||||
| Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes | 1.2 | — | (8.3) | — | — | (8.3) | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | 14.6 | — | — | 14.6 | |||||||||||||||||||||||||||||
| Balance at September 26, 2020 | 277.4 | $ | 2.8 | $ | 3,364.8 | $ | (761.0) | $ | (76.5) | $ | 2,530.1 | ||||||||||||||||||||||||
| Net income (loss) | — | — | — | 311.0 | — | 311.0 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | 26.1 | 26.1 | |||||||||||||||||||||||||||||
| Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes | 0.4 | — | 6.1 | — | — | 6.1 | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | 17.4 | — | — | 17.4 | |||||||||||||||||||||||||||||
| Balance at December 26, 2020 | 277.8 | $ | 2.8 | $ | 3,388.3 | $ | (450.0) | $ | (50.4) | $ | 2,890.7 | ||||||||||||||||||||||||
| Shares of Common Stock | Common Stock | Additional Paid-in- Capital | Retained Earnings / (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||
| (millions, except per share data) | |||||||||||||||||||||||||||||||||||
| Balance at July 3, 2021 | 279.5 | $ | 2.8 | $ | 3,487.0 | $ | (158.5) | $ | (72.0) | $ | 3,259.3 | ||||||||||||||||||||||||
| Net income (loss) | — | — | — | 226.9 | — | 226.9 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | (10.1) | (10.1) | |||||||||||||||||||||||||||||
| Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes | 1.6 | — | (26.4) | — | — | (26.4) | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | 19.9 | — | — | 19.9 | |||||||||||||||||||||||||||||
| Repurchase of common stock | (6.1) | — | — | (250.0) | — | (250.0) | |||||||||||||||||||||||||||||
| Dividends declared ($0.25 per share) | — | — | — | (69.6) | — | (69.6) | |||||||||||||||||||||||||||||
| Balance at October 2, 2021 | 275.0 | $ | 2.8 | $ | 3,480.5 | $ | (251.2) | $ | (82.1) | $ | 3,150.0 | ||||||||||||||||||||||||
| Net income (loss) | — | — | — | 317.9 | — | 317.9 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | (13.6) | (13.6) | |||||||||||||||||||||||||||||
| Shares issued, pursuant to stock-based compensation arrangements, net of shares withheld for taxes | 0.7 | — | 19.0 | — | — | 19.0 | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | 22.0 | — | — | 22.0 | |||||||||||||||||||||||||||||
| Repurchase and retirement of common stock | (11.7) | (0.2) | — | (499.8) | — | (500.0) | |||||||||||||||||||||||||||||
| Dividends declared ($0.25 per share) | — | — | — | (67.9) | — | (67.9) | |||||||||||||||||||||||||||||
| Balance at January 1, 2022 | 264.0 | $ | 2.6 | $ | 3,521.5 | $ | (501.0) | $ | (95.7) | $ | 2,927.4 | ||||||||||||||||||||||||
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The components of accumulated other comprehensive income (loss) ("AOCI"), as of the dates indicated, are as follows:
| Unrealized Gains (Losses) on Cash Flow Hedging Derivatives**(1)** | Unrealized Gains (Losses) on Available- for-Sale Investments | Cumulative Translation Adjustment | Total | ||||||||||||||||||||||||||
| (millions) | |||||||||||||||||||||||||||||
| Balances at June 27, 2020 | $ | 1.1 | $ | — | $ | (93.3) | $ | (92.2) | |||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (6.1) | — | 47.1 | 41.0 | |||||||||||||||||||||||||
| Less: amounts reclassified from accumulated other comprehensive income to earnings | (0.8) | — | — | (0.8) | |||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | (5.3) | — | 47.1 | 41.8 | |||||||||||||||||||||||||
| Balances at December 26, 2020 | $ | (4.2) | $ | — | $ | (46.2) | $ | (50.4) | |||||||||||||||||||||
| Balances at July 3, 2021 | $ | (0.7) | $ | — | $ | (71.3) | $ | (72.0) | |||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (1.6) | (0.3) | (22.8) | (24.7) | |||||||||||||||||||||||||
| Less: amounts reclassified from accumulated other comprehensive income to earnings | (1.0) | — | — | (1.0) | |||||||||||||||||||||||||
| Net current-period other comprehensive income (loss) | (0.6) | (0.3) | (22.8) | (23.7) | |||||||||||||||||||||||||
| Balances at January 1, 2022 | $ | (1.3) | $ | (0.3) | $ | (94.1) | $ | (95.7) |
(1) The ending balances of AOCI related to cash flow hedges are net of tax of $0.6 million and less than $0.1 million as of January 1, 2022 and December 26, 2020, respectively. The amounts reclassified from AOCI are net of tax of $0.3 million and less than $0.1 million as of January 1, 2022 and December 26, 2020, respectively.
8. LEASES
The Company leases retail space, office space, warehouse facilities, fulfillment centers, storage space, machinery, equipment and certain other items under operating leases. The Company's leases have initial terms ranging from 1 to 20 years and may have renewal or early termination options ranging from 1 to 10 years. These leases may also include rent escalation clauses or lease incentives. In determining the lease term used in the lease right-of-use ("ROU") asset and lease liability calculations, the Company considers various factors such as market conditions and the terms of any renewal or termination options that may exist. When deemed reasonably certain, the renewal and termination options are included in the determination of the lease term and calculation of the lease ROU asset and lease liability. The Company is typically required to make fixed minimum rent payments, variable rent payments primarily based on performance (i.e., percentage-of-sales-based payments), or a combination thereof, directly related to its ROU asset. The Company is also often required, by the lease, to pay for certain other costs including real estate taxes, insurance, common area maintenance fees, and/or certain other costs, which may be fixed or variable, depending upon the terms of the respective lease agreement. To the extent these payments are fixed, the Company has included them in calculating the lease ROU assets and lease liabilities.
The Company calculates lease ROU assets and lease liabilities as the present value of fixed lease payments over the reasonably certain lease term beginning at the commencement date. The Company is required to use the implicit rate to determine the present value of lease payments. As the rate implicit in the Company's leases is not readily determinable, the Company uses its incremental borrowing rate based on the information available at the lease commencement date, including the Company's credit rating, credit spread and adjustments for the impact of collateral, lease tenors, economic environment and currency.
For operating leases, fixed lease payments are recognized as operating lease cost on a straight-line basis over the lease term. For finance leases and impaired operating leases, the ROU asset is depreciated on a straight-line basis over the remaining lease term, along with recognition of interest expense associated with accretion of the lease liability. For leases with a lease term of 12 months or less ("short-term lease"), any fixed lease payments are recognized on a straight-line basis over such term,
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
and are not recognized on the Condensed Consolidated Balance Sheets. Variable lease cost for both operating and finance leases, if any, is recognized as incurred.
The Company acts as sublessor in certain leasing arrangements, primarily related to a sublease of a portion the Company's leased headquarters space as well as certain retail locations. Fixed sublease payments received are recognized on a straight-line basis over the sublease term.
ROU assets, along with any other related long-lived assets, are periodically evaluated for impairment.
The following table summarizes the ROU assets and lease liabilities recorded on the Company's Condensed Consolidated Balance Sheets as of January 1, 2022 and July 3, 2021:
| January 1, 2022 | July 3, 2021 | Location Recorded on Balance Sheet | ||||||||||||||||||
| (millions) | ||||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Operating leases | $ | 1,403.6 | $ | 1,496.6 | Operating lease right-of-use assets | |||||||||||||||
| Finance leases | 2.2 | 2.6 | Property and equipment, net | |||||||||||||||||
| Total lease assets | $ | 1,405.8 | $ | 1,499.2 | ||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Operating leases: | ||||||||||||||||||||
| Current lease liabilities | $ | 308.0 | $ | 319.4 | Current lease liabilities | |||||||||||||||
| Long-term lease liabilities | 1,414.8 | 1,525.9 | Long-term lease liabilities | |||||||||||||||||
| Total operating lease liabilities | $ | 1,722.8 | $ | 1,845.3 | ||||||||||||||||
| Finance leases: | ||||||||||||||||||||
| Current lease liabilities | $ | 1.0 | $ | 1.0 | Accrued liabilities | |||||||||||||||
| Long-term lease liabilities | 3.0 | 3.4 | Other liabilities | |||||||||||||||||
| Total finance lease liabilities | $ | 4.0 | $ | 4.4 | ||||||||||||||||
| Total lease liabilities | $ | 1,726.8 | $ | 1,849.7 |
The following table summarizes the composition of net lease costs, primarily recorded within SG&A expenses on the Company's Condensed Consolidated Statements of Operations for the three and six months January 1, 2022 and December 26, 2020:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| January 1, 2022 | December 26, 2020 | January 1, 2022 | December 26, 2020 | |||||||||||||||||||||||
| (millions) | ||||||||||||||||||||||||||
| Finance lease cost: | ||||||||||||||||||||||||||
| Amortization of right-of-use assets | $ | 0.3 | $ | 0.2 | $ | 0.5 | $ | 0.4 | ||||||||||||||||||
| Interest on lease liabilities(1) | 0.1 | 0.2 | 0.2 | 0.3 | ||||||||||||||||||||||
| Total finance lease cost | 0.4 | 0.4 | 0.7 | 0.7 | ||||||||||||||||||||||
| Operating lease cost | 85.8 | 89.1 | 170.7 | 175.9 | ||||||||||||||||||||||
| Short-term lease cost | 5.1 | 7.0 | 9.6 | 13.1 | ||||||||||||||||||||||
| Variable lease cost(2) | 55.2 | 16.4 | 98.8 | 57.3 | ||||||||||||||||||||||
| Operating lease right-of-use impairment | — | 2.1 | — | 2.1 | ||||||||||||||||||||||
| Less: sublease income | (5.2) | (5.0) | (10.1) | (9.2) | ||||||||||||||||||||||
| Total net lease cost | $ | 141.3 | $ | 110.0 | $ | 269.7 | $ | 239.9 |
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(1) Interest on lease liabilities is recorded within Interest expense, net on the Company's Condensed Consolidated Statement of Operations.
(2) Rent concessions negotiated related to Covid-19 are recorded in variable lease expense.
The following table summarizes certain cash flow information related to the Company's leases for the six months January 1, 2022 and December 26, 2020:
| Six Months Ended | ||||||||||||||
| January 1, 2022 | December 26, 2020 | |||||||||||||
| (millions) | ||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash flows from operating leases | $ | 214.3 | $ | 269.0 | ||||||||||
| Operating cash flows from finance leases | 0.2 | 0.3 | ||||||||||||
| Financing cash flows from finance leases | 0.5 | 0.4 | ||||||||||||
| Non-cash transactions: | ||||||||||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | 65.4 | 39.8 | ||||||||||||
Additionally, the Company had approximately $157.2 million of future payment obligations related to executed lease agreements for which the related lease had not yet commenced as of January 1, 2022. This obligation primarily relates to a lease agreement for a fulfillment center to be located in Las Vegas, Nevada.
9. EARNINGS PER SHARE
Basic net income per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted net income per share is calculated similarly but includes potential dilution from the exercise of stock options and restricted stock units and any other potentially dilutive instruments, only in the periods in which such effects are dilutive under the treasury stock method.
The following is a reconciliation of the weighted-average shares outstanding and calculation of basic and diluted earnings per share:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| January 1, 2022 | December 26, 2020 | January 1, 2022 | December 26, 2020 | ||||||||||||||||||||
| (millions, except per share data) | |||||||||||||||||||||||
| Net income (loss) | $ | 317.9 | $ | 311.0 | $ | 544.8 | $ | 542.7 | |||||||||||||||
| Weighted-average basic shares | 271.1 | 277.5 | 274.5 | 277.1 | |||||||||||||||||||
| Dilutive securities: | |||||||||||||||||||||||
| Effect of dilutive securities | 6.1 | 3.5 | 6.5 | 2.3 | |||||||||||||||||||
| Weighted-average diluted shares | 277.2 | 281.0 | 281.0 | 279.4 | |||||||||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||||
| Basic | $ | 1.17 | $ | 1.12 | $ | 1.98 | $ | 1.96 | |||||||||||||||
| Diluted | $ | 1.15 | $ | 1.11 | $ | 1.94 | $ | 1.94 |
Earnings per share amounts have been calculated based on unrounded numbers. Options to purchase shares of the Company's common stock at an exercise price greater than the average market price of the common stock during the reporting period are anti-dilutive and therefore not included in the computation of diluted net income (loss) per common share. In addition, the Company has outstanding restricted stock unit awards that are issuable only upon the achievement of certain performance goals. Performance-based restricted stock unit awards are included in the computation of diluted shares only to the
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
extent that the underlying performance conditions and any applicable market condition modifiers (i) are satisfied as of the end of the reporting period or (ii) would be considered satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive under the treasury stock method. As of January 1, 2022 and December 26, 2020, there were 5.2 million and 11.5 million, respectively, of additional shares issuable upon exercise of anti-dilutive options and contingent vesting of performance-based restricted stock unit awards, which were excluded from the diluted share calculations.
10. SHARE-BASED COMPENSATION
The following table shows the share-based compensation expense and the related tax benefits recognized in the Company's Condensed Consolidated Statements of Operations for the periods indicated:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| January 1, 2022 | December 26, 2020 | January 1, 2022 | December 26, 2020 | ||||||||||||||||||||
| (millions) | |||||||||||||||||||||||
| Share-based compensation expense(1) | $ | 22.0 | $ | 17.4 | $ | 41.9 | $ | 32.0 | |||||||||||||||
| Income tax benefit related to share-based compensation expense | 4.2 | 3.2 | 8.0 | 5.8 |
(1) During the three and six months ended January 1, 2022, the company incurred $3.4 million and $8.4 million of share-based compensation expense related to its Acceleration Program. During the three and six months ended December 26, 2020, the Company incurred $2.5 million and $3.1 million of share-based compensation expense related to its Acceleration Program.
Stock Options
A summary of stock option activity during the six months ended January 1, 2022 is as follows:
| Number of Options Outstanding | |||||||||||
| (millions) | |||||||||||
| Outstanding at July 3, 2021 | 13.3 | ||||||||||
| Granted | 0.7 | ||||||||||
| Exercised | (0.8) | ||||||||||
| Forfeited or expired | (0.8) | ||||||||||
| Outstanding at January 1, 2022 | 12.4 | ||||||||||
The weighted-average grant-date fair value of options granted during the six months ended January 1, 2022 and December 26, 2020 was $13.94 and $7.03, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model and the following weighted-average assumptions:
| January 1, 2022 | December 26, 2020 | ||||||||||
| Expected term (years) | 5.0 | 5.1 | |||||||||
| Expected volatility | 46.9 | % | 48.8 | % | |||||||
| Risk-free interest rate | 0.8 | % | 0.3 | % | |||||||
| Dividend yield | 2.4 | % | — | % |
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
Service-based Restricted Stock Unit Awards ("RSUs")
A summary of service-based RSU activity during the six months ended January 1, 2022 is as follows:
| Number of Non-vested RSUs | |||||||||||
| (millions) | |||||||||||
| Non-vested at July 3, 2021 | 7.3 | ||||||||||
| Granted | 1.8 | ||||||||||
| Vested | (2.2) | ||||||||||
| Forfeited | (0.3) | ||||||||||
| Non-vested at January 1, 2022 | 6.6 |
The weighted-average grant-date fair value of share awards granted during the six months ended January 1, 2022 and December 26, 2020 was $42.15 and $15.92, respectively.
Performance-based Restricted Stock Unit Awards ("PRSUs")
A summary of PRSU activity during the six months ended January 1, 2022 is as follows:
| Number of Non-vested PRSUs | |||||||||||
| (millions) | |||||||||||
| Non-vested at July 3, 2021 | 1.0 | ||||||||||
| Granted | 0.3 | ||||||||||
| Change due to performance condition achievement | (0.1) | ||||||||||
| Vested | — | ||||||||||
| Forfeited | — | ||||||||||
| Non-vested at January 1, 2022 | 1.2 |
The PRSU awards included in the non-vested amount are based on certain Company-specific financial metrics. The effect of the change due to performance condition on the non-vested amount is recognized at the conclusion of the performance period, which may differ from the date on which the award vests.
The weighted-average grant-date fair value per share of PRSU awards granted during the six months ended January 1, 2022 and December 26, 2020 was $42.23 and $16.62, respectively.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
11. DEBT
The following table summarizes the components of the Company’s outstanding debt:
| January 1, 2022 | July 3, 2021 | ||||||||||
| (millions) | |||||||||||
| Current debt: | |||||||||||
| 3.000% Senior Notes due 2022 | $ | 400.0 | $ | — | |||||||
| Total current debt | $ | 400.0 | $ | — | |||||||
| Long-term debt: | |||||||||||
| 3.050% Senior Notes due 2032 | $ | 500.0 | $ | — | |||||||
| 4.125% Senior Notes due 2027 | 396.6 | 600.0 | |||||||||
| 3.000% Senior Notes due 2022 | — | 400.0 | |||||||||
| 4.250% Senior Notes due 2025 | 303.4 | 600.0 | |||||||||
| Total long-term debt | 1,200.0 | 1,600.0 | |||||||||
| Less: Unamortized discount and debt issuance costs on Senior Notes | (10.9) | (9.3) | |||||||||
| Total long-term debt, net | $ | 1,189.1 | $ | 1,590.7 |
During the three and six months ended January 1, 2022, the Company recognized interest expense related to its debt of $16.3 million and $33.1 million, respectively. During the three and six months ended December 26, 2020, the Company recognized interest expense related to its debt of $19.2 million and $39.3 million, respectively.
3.050% Senior Notes due 2032
On December 1, 2021, the Company issued $500.0 million aggregate principal amount of 3.050% senior unsecured notes due March 15, 2032 at 99.705% of par (the "2032 Senior Notes"). Interest is payable semi-annually on March 15 and September 15 beginning March 15, 2022. Prior to December 15, 2031 (the date that is three months prior to the scheduled maturity date), the Company may redeem the 2032 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the 2032 Senior Notes to be redeemed or (2) as determined by a Quotation Agent, the sum of the present values of the remaining scheduled payments of principal and interest thereon that would have been payable in respect of the 2032 Senior Notes calculated as if the maturity date of the 2032 Senior Notes was December 15, 2031 (not including any portion of payments of interest accrued to the date of redemption), discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as defined in the Prospectus Supplement) plus 25 basis points, plus, in the case of each of (1) and (2), accrued and unpaid interest to the redemption date.
Cash Tender Offer
The proceeds from the 2032 Senior Notes were utilized to complete a cash tender offer of $203.4 million and $296.6 million of the outstanding aggregate principal amount of the Company's 2027 Senior Notes (defined below under "4.125% Senior Notes due 2027") and 2025 Senior Notes (defined below under "4.250% Senior Notes due 2025"), respectively. As a result of these cash tender offers completed prior to their scheduled maturities, the transactions were subject to a premium of $22.4 million and $26.8 million for the 2027 Senior Notes and 2025 Senior Notes, respectively. Additionally, the Company recognized $4.5 million of debt issuance costs, tender fees, and unamortized original discount in connection with the transaction. These premiums and costs, which totaled $53.7 million, were recorded as a pre-tax debt extinguishment charge during the second quarter of fiscal 2022. Refer to the "GAAP to Non-GAAP Reconciliation," in Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for additional information.
4.125% Senior Notes due 2027
On June 20, 2017, the Company issued $600.0 million aggregate principal amount of 4.125% senior unsecured notes due July 15, 2027 at 99.858% of par (the "2027 Senior Notes"). Interest is payable semi-annually on January 15 and July 15 beginning January 15, 2018. Prior to April 15, 2027 (the date that is three months prior to the scheduled maturity date), the Company may redeem the 2027 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the 2027 Senior Notes to be redeemed or (2) as determined by a Quotation Agent, the sum of the present values of the remaining scheduled payments of principal and interest thereon that
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
would have been payable in respect of the 2027 Senior Notes calculated as if the maturity date of the 2027 Senior Notes was April 15, 2027 (not including any portion of payments of interest accrued to the date of redemption), discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as defined in the Prospectus Supplement) plus 30 basis points, plus, in the case of each of (1) and (2), accrued and unpaid interest to the redemption date. On December 1, 2021, the Company completed a cash tender offer for $203.4 million of the outstanding aggregate principal amount of its 2027 Senior Notes.
3.000% Senior Notes due 2022
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"). Interest is payable semi-annually on January 15 and July 15 beginning January 15, 2018. Prior to June 15, 2022 (one month prior to the scheduled maturity date), the Company may redeem the 2022 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the 2022 Senior Notes to be redeemed or (2) as determined by a Quotation Agent, the sum of the present values of the remaining scheduled payments of principal and interest thereon that would have been payable in respect of the 2022 Senior Notes calculated as if the maturity date of the 2022 Senior Notes was June 15, 2022 (not including any portion of payments of interest accrued to the date of redemption), discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate (as defined in the Prospectus Supplement) plus 25 basis points, plus, in the case of each of (1) and (2), accrued and unpaid interest to the redemption date.
4.250% Senior Notes due 2025
On March 2, 2015, the Company issued $600.0 million aggregate principal amount of 4.250% senior unsecured notes due April 1, 2025 at 99.445% of par (the “2025 Senior Notes”). Interest is payable semi-annually on April 1 and October 1 beginning October 1, 2015. Prior to January 1, 2025 (90 days prior to the scheduled maturity date), the Company may redeem the 2025 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to the greater of (1) 100% of the principal amount of the 2025 Senior Notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon that would have been payable in respect of the 2025 Senior Notes calculated as if the maturity date of the 2025 Senior Notes was January 1, 2025 (not including any portion of payments of interest accrued to the date of redemption), discounted to the redemption date on a semi-annual basis at the Adjusted Treasury Rate (as defined in the indenture for the 2025 Senior Notes) plus 35 basis points, plus, in the case of each of (1) and (2), accrued and unpaid interest to the redemption date. On and after January 1, 2025 (90 days prior to the scheduled maturity date), the Company may redeem the 2025 Senior Notes in whole or in part, at its option at any time or from time to time, at a redemption price equal to 100% of the principal amount of the 2025 Senior Notes to be redeemed, plus accrued and unpaid interest to the redemption date. On December 1, 2021, the Company completed a cash tender offer for $296.6 million of the outstanding aggregate principal amount of its 2025 Senior Notes.
At January 1, 2022, the fair value of the 2032, 2027, 2022, and 2025 Senior Notes was approximately $502.3 million, $428.0 million, $404.0 million, and $322.4 million, respectively, based on external pricing data, including available quoted market prices of these instruments, and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as a Level 2 measurement within the fair value hierarchy. At July 3, 2021, the fair value of the 2027, 2022, and 2025 Senior Notes was approximately $659.3 million, $407.4 million, and $651.9 million, respectively.
Revolving Credit Facility
On October 24, 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 ("Revolving Credit Facility"), including sub-facilities for letters of credit, with a maturity date of October 24, 2024. The Revolving Credit Facility may be used to finance the working capital needs, capital expenditures, permitted investments, share purchases, dividends and other general corporate purposes of the Company and its subsidiaries (which may include commercial paper back-up). Letters of credit and swing line loans may be issued under the Revolving Credit Facility as described below.
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, as defined in the Credit Agreement, based on the ratio of (a) consolidated debt plus operating lease liability
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
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 maintained 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 was subject to during the period from the Effective Date until the compliance certificate was delivered for the fiscal quarter ending July 3, 2021 (the “Covenant Relief Period”), has 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. There were no outstanding borrowings on the Revolving Credit Facility as of January 1, 2022.
12. FAIR VALUE MEASUREMENTS
The Company categorizes its assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. The three levels of the hierarchy are defined as follows:
Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for substantially the full term of the asset or liability.
Level 3 — Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability. The Company does not have any Level 3 investments.
The following table shows the fair value measurements of the Company’s financial assets and liabilities at January 1, 2022 and July 3, 2021:
| Level 1 | Level 2 | ||||||||||||||||||||||||||||||||||
| January 1, 2022 | July 3, 2021 | January 1, 2022 | July 3, 2021 | ||||||||||||||||||||||||||||||||
| (millions) | |||||||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||
| Cash equivalents(1) | $ | 104.3 | $ | 662.0 | $ | 0.4 | $ | 0.4 | |||||||||||||||||||||||||||
| Short-term investments: | |||||||||||||||||||||||||||||||||||
| Time deposits(2) | — | — | 0.7 | 0.7 | |||||||||||||||||||||||||||||||
| Commercial paper(2) | — | — | 113.6 | — | |||||||||||||||||||||||||||||||
| Government securities - U.S.(2) | 97.5 | — | 9.0 | — | |||||||||||||||||||||||||||||||
| Corporate debt securities - U.S.(2) | — | — | 160.0 | — | |||||||||||||||||||||||||||||||
| Other | — | — | 9.5 | 7.4 | |||||||||||||||||||||||||||||||
| Long-term investments: | |||||||||||||||||||||||||||||||||||
| Other | — | — | 0.1 | 0.1 | |||||||||||||||||||||||||||||||
| Derivative assets: | |||||||||||||||||||||||||||||||||||
| Intercompany loan and payable hedges(3) | — | — | 0.1 | 0.3 | |||||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||
| Derivative liabilities: | |||||||||||||||||||||||||||||||||||
| Inventory-related instruments(3) | — | — | 1.5 | 1.2 | |||||||||||||||||||||||||||||||
| Intercompany loan and payable hedges(3) | — | — | 0.7 | — | |||||||||||||||||||||||||||||||
(1)Cash equivalents consist of money market funds and time deposits with maturities of three months or less at the date of purchase. Due to their short-term maturity, management believes that their carrying value approximates fair value.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
(2)Short-term investments are recorded at fair value, which approximates their carrying value, and are primarily based upon quoted vendor or broker priced securities in active markets.
(3)The fair value of these hedges is primarily based on the forward curves of the specific indices upon which settlement is based and includes an adjustment for the counterparty’s or Company’s credit risk.
Refer to Note 11, "Debt," for the fair value of the Company's outstanding debt instruments.
Non-Financial Assets and Liabilities
The Company’s non-financial instruments, which primarily consist of goodwill, intangible assets, right-of-use assets and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written-down to and recorded at fair value, considering market participant assumptions.
There were no impairment charges recorded during the three and six months ended January 1, 2022 and December 26, 2020.
13. INVESTMENTS
The following table summarizes the Company’s U.S. dollar-denominated investments, recorded within the Company's Condensed Consolidated Balance Sheets as of January 1, 2022 and July 3, 2021:
| January 1, 2022 | July 3, 2021 | ||||||||||||||||||||||||||||||||||
| Short-term | Long-term | Total | Short-term | Long-term | Total | ||||||||||||||||||||||||||||||
| (millions) | |||||||||||||||||||||||||||||||||||
| Available-for-sale investments: | |||||||||||||||||||||||||||||||||||
| Commercial paper(1) | $ | 113.6 | $ | — | $ | 113.6 | $ | — | $ | — | $ | — | |||||||||||||||||||||||
| Government securities - U.S.(2) | 106.5 | — | 106.5 | — | — | — | |||||||||||||||||||||||||||||
| Corporate debt securities - U.S.(2) | 160.0 | — | 160.0 | — | — | — | |||||||||||||||||||||||||||||
| Available-for-sale investments, total | $ | 380.1 | $ | — | $ | 380.1 | $ | — | $ | — | $ | — | |||||||||||||||||||||||
| Other: | |||||||||||||||||||||||||||||||||||
| Time deposits(1) | $ | 0.7 | $ | — | $ | 0.7 | $ | 0.7 | $ | — | $ | 0.7 | |||||||||||||||||||||||
| Other | 9.5 | 0.1 | 9.6 | 7.4 | 0.1 | 7.5 | |||||||||||||||||||||||||||||
| Total Investments | $ | 390.3 | $ | 0.1 | $ | 390.4 | $ | 8.1 | $ | 0.1 | $ | 8.2 |
(1)These securities have original maturities greater than three months and are recorded at fair value.
(2)These securities as of January 1, 2022 have maturity dates during the 2022 calendar year and are recorded at fair value.
There were no material gross unrealized gains or losses on available-for-sale investments as of the periods ended January 1, 2022 and July 3, 2021.
14. INCOME TAXES
The Company's effective tax rate for the three months ended January 1, 2022 was 18.5%, as compared to 16.9% for the three months ended December 26, 2020. The increase in effective tax rate is primarily due to geographic mix of earnings. The Company's effective tax rate for the six months ended January 1, 2022 was 18.3%, as compared to 3.0% for the six months ended December 26, 2020. This increase in the effective tax rate primarily resulted from the net operating loss ("NOL") carryback claim recognized under the Coronavirus Aid, Relief and Economic Security ("CARES") Act during the six months ended December 26, 2020.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
15. COMMITMENTS AND CONTINGENCIES
Letters of Credit
The Company had standby letters of credit, surety bonds and bank guarantees totaling $39.0 million and $40.5 million outstanding at January 1, 2022 and July 3, 2021, respectively. The agreements, which expire at various dates through calendar 2027, primarily collateralize the Company's obligation to third parties for duty, leases, insurance claims and materials used in product manufacturing. The Company pays certain fees with respect to these instruments that are issued.
Other
The Company had other contractual cash obligations as of January 1, 2022 related to debt repayments. Refer to Note 11, "Debt," for further information. Additionally, the Company had future payment obligations related to executed lease agreements for which the related lease had not yet commenced. Refer to Note 8, "Leases," for further information.
The Company is involved in various routine legal proceedings as both plaintiff and defendant incident to the ordinary course of its business, including proceedings to protect Tapestry's intellectual property rights, litigation instituted by persons alleged to have been injured by advertising claims or upon premises within the Company’s control, contractual disputes, insurance claims and litigation with present or former employees.
As part of Tapestry’s policing program for its intellectual property rights, from time to time, the Company files lawsuits in the U.S. and abroad alleging acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, copyright infringement, unfair competition, trademark dilution and/or state or foreign law claims. At any given point in time, Tapestry may have a number of such actions pending. These actions often result in seizure of counterfeit merchandise and/or out of court settlements with defendants. From time to time, defendants will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of Tapestry’s intellectual properties.
Although the Company's litigation as described above is routine and incidental to the conduct of Tapestry’s business, such litigation can result in large monetary awards, such as when a civil jury is allowed to determine compensatory and/or punitive damages.
The Company believes that the outcome of all pending legal proceedings in the aggregate will not have a material effect on the Company's business or condensed consolidated financial statements.
16. SEGMENT INFORMATION
The Company has three reportable segments:
-
Coach - Includes global sales of Coach products to customers through Coach operated stores, including e-commerce sites and concession shop-in-shops, 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.
In deciding how to allocate resources and assess performance, the Company's chief operating decision maker regularly evaluates the sales and operating income of these segments. Operating income is the gross margin of the segment less direct expenses of the segment.
TAPESTRY, INC.
Notes to Condensed Consolidated Financial Statements (continued)
The following table summarizes segment performance for the three and six months ended January 1, 2022 and December 26, 2020:
| Coach | Kate Spade | Stuart Weitzman | Corporate**(1)** | Total | |||||||||||||||||||||||||||||||
| (millions) | |||||||||||||||||||||||||||||||||||
| Three Months Ended January 1, 2022 | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 1,525.0 | $ | 500.4 | $ | 115.8 | $ | — | $ | 2,141.2 | |||||||||||||||||||||||||
| Gross profit | 1,078.2 | 308.0 | 71.2 | — | 1,457.4 | ||||||||||||||||||||||||||||||
| Operating income (loss) | 473.3 | 83.7 | 13.3 | (107.5) | 462.8 | ||||||||||||||||||||||||||||||
| Income (loss) before provision for income taxes | 473.3 | 83.7 | 13.3 | (180.2) | 390.1 | ||||||||||||||||||||||||||||||
| Depreciation and amortization expense**(2)** | 19.4 | 10.2 | 2.1 | 17.1 | 48.8 | ||||||||||||||||||||||||||||||
| Additions to long-lived assets**(3)** | 17.7 | 5.7 | 0.9 | 14.0 | 38.3 | ||||||||||||||||||||||||||||||
| Three Months Ended December 26, 2020 | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 1,225.3 | $ | 375.6 | $ | 84.5 | $ | — | $ | 1,685.4 | |||||||||||||||||||||||||
| Gross profit | 888.1 | 233.1 | 52.5 | — | 1,173.7 | ||||||||||||||||||||||||||||||
| Operating income (loss) | 412.0 | 58.8 | 11.9 | (93.3) | 389.4 | ||||||||||||||||||||||||||||||
| Income (loss) before provision for income taxes | 412.0 | 58.8 | 11.9 | (108.4) | 374.3 | ||||||||||||||||||||||||||||||
| Depreciation and amortization expense(2) | 23.5 | 11.3 | 3.0 | 13.7 | 51.5 | ||||||||||||||||||||||||||||||
| Additions to long-lived assets(3) | 8.8 | 4.0 | 0.8 | 10.1 | 23.7 | ||||||||||||||||||||||||||||||
| Six Months Ended January 1, 2022 | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 2,639.9 | $ | 799.9 | $ | 182.3 | $ | — | $ | 3,622.1 | |||||||||||||||||||||||||
| Gross profit | 1,909.2 | 507.2 | 109.7 | — | 2,526.1 | ||||||||||||||||||||||||||||||
| Operating income (loss) | 839.0 | 120.9 | 11.8 | (213.9) | 757.8 | ||||||||||||||||||||||||||||||
| Income (loss) before provision for income taxes | 839.0 | 120.9 | 11.8 | (304.9) | 666.8 | ||||||||||||||||||||||||||||||
| Depreciation and amortization expense**(2)** | 40.1 | 21.0 | 4.3 | 34.2 | 99.6 | ||||||||||||||||||||||||||||||
| Additions to long-lived assets**(3)** | 30.5 | 6.7 | 1.1 | 33.4 | 71.7 | ||||||||||||||||||||||||||||||
| Six Months Ended December 26, 2020 | |||||||||||||||||||||||||||||||||||
| Net sales | $ | 2,100.7 | $ | 616.0 | $ | 140.9 | $ | — | $ | 2,857.6 | |||||||||||||||||||||||||
| Gross profit | 1,533.0 | 387.2 | 83.7 | — | 2,003.9 | ||||||||||||||||||||||||||||||
| Operating income (loss) | 682.0 | 82.0 | 11.9 | (184.3) | 591.6 | ||||||||||||||||||||||||||||||
| Income (loss) before provision for income taxes | 682.0 | 82.0 | 11.9 | (216.2) | 559.7 | ||||||||||||||||||||||||||||||
| Depreciation and amortization expense(2) | 48.3 | 21.7 | 5.4 | 27.3 | 102.7 | ||||||||||||||||||||||||||||||
| Additions to long-lived assets(3) | 19.7 | 8.6 | 1.3 | 20.1 | 49.7 |
(1) Corporate, which is not a reportable segment, represents certain costs that are not directly attributable to a brand. These costs primarily include administration and certain information systems expense.
(2) Depreciation and amortization expense includes $0.3 million of Acceleration Program costs for the three and six months ended December 26, 2020. Depreciation and amortization expense for the segments includes an allocation of expense related to assets which support multiple segments.
(3) Additions to long-lived assets for the reportable segments primarily includes store assets as well as assets that support a specific brand. Corporate additions include all other assets which include a combination of Corporate assets, as well as assets that may support all segments. As such, depreciation expense for these assets may be subsequently allocated to a reportable segment.
Next: Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS