UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
 
þ

 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2018
OR
o
 
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) 594-1850
(Registrant’s telephone number, including area code)
 
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on which Registered
Common Stock, par value $.01 per share
 
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
Emerging growth company o
 
 
 
 
 
 
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 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Act).Yes o No þ
The aggregate market value of Tapestry, Inc. common stock held by non-affiliates as of December 29, 2017 (the last business day of the most recently completed second fiscal quarter) was approximately $12.4 billion. For purposes of determining this amount only, the registrant has excluded shares of common stock held by directors and officers. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant.
On August 3, 2018, the Registrant had 288,038,993 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents
 
Form 10-K Reference
Proxy Statement for the 2018 Annual Meeting of Stockholders
 
Part III, Items 10 – 14



TAPESTRY, INC.

TABLE OF CONTENTS

 
 
 
 
 
Page Number
 
PART I
 
 
PART II
 
 
PART III
 
 
PART IV
 


i


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 due to a number of factors, including those discussed in the sections of this Form 10-K filing entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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.


1


In this Form 10-K, references to “we,” “our,” “us,” "Tapestry" and the “Company” refer to Tapestry, Inc., including consolidated subsidiaries as of June 30, 2018 ("fiscal 2018"). References to "Coach," "Kate Spade," "kate spade new york" or "Stuart Weitzman" refer only to the referenced brand. The fiscal years ended June 30, 2018 ("fiscal 2018") and July 1, 2017 ("fiscal 2017") were 52-week periods, and the fiscal year ended July 2, 2016 (“fiscal 2016”) was a 53-week period.
PART I
ITEM 1. BUSINESS
Tapestry, Inc., previously known as Coach, Inc., is a leading New York-based house of modern luxury accessories and lifestyle brands. Tapestry is powered by optimism, innovation and inclusivity. Our brands are approachable and inviting and create joy every day for people around the world. Defined by quality, craftsmanship and creativity, the brands that make up our house give global audiences the opportunity for exploration and self-expression. Tapestry is comprised of the Coach, Kate Spade and Stuart Weitzman brands, all of which have been part of the American fashion landscape for over 25 years.
GENERAL DEVELOPMENT OF BUSINESS
Founded in 1941, Coach, Inc., the predecessor company to Tapestry, Inc., was acquired by Sara Lee Corporation (“Sara Lee”) in 1985. In June 2000, Coach, Inc. was incorporated in the state of Maryland. In October 2000, Coach, Inc. was listed on the New York Stock Exchange and sold approximately 19.5% of the then outstanding shares. In April 2001, Sara Lee completed a distribution of its remaining ownership in Coach, Inc. via an exchange offer, which allowed Sara Lee stockholders to tender Sara Lee common stock for Coach, Inc. common stock.
Since October 2000, the Company's international expansion strategy for Coach has been to enter into joint ventures and establish distributor relationships to build market presence and capability. To further accelerate brand awareness, aggressively grow market share and to exercise greater control of our brand, the Company has historically acquired its joint venture partner’s interests or distributor rights in these international regions. Such regions include Japan, Greater China, Singapore, Taiwan, Malaysia, South Korea and Europe. During the third quarter of fiscal 2018, the Company acquired designated assets of its Coach distributor in Australia and New Zealand.
During fiscal 2015, the Company acquired Stuart Weitzman Holdings LLC, a luxury women's footwear company, to complement its leadership position in premium handbags and accessories. During fiscal 2016, the Company acquired the Stuart Weitzman Canadian retail distributor. During the third quarter of fiscal 2018, the Company acquired designated assets of its Stuart Weitzman distributor in Northern China.
During the first quarter of fiscal 2018, the Company completed its acquisition of Kate Spade & Company, a lifestyle accessories and ready-to-wear company, for $18.50 per share in cash for a total of $2.4 billion. As a result of this acquisition, on October 31, 2017, the Company changed its name to Tapestry, Inc., a leading luxury lifestyle company with a diverse multi-brand portfolio supported by significant expertise in handbag design, merchandising, supply chain and retail operations as well as solid financial acumen. During the third quarter of fiscal 2018, the Company entered into an agreement to take operational control of the KS China Co., Limited and KS HMT Co., Limited joint ventures ("Kate Spade Joint Ventures") that operate in mainland China, Hong Kong, Macau and Taiwan in which the Company has 50% interest.
OUR BRANDS
Prior to fiscal 2018, the Company had three reportable segments: North America (Coach brand), International (Coach brand) and Stuart Weitzman. Beginning in fiscal 2018 and as a result of the Kate Spade acquisition, the Company aligned its reportable segments with the new structure of its business. As a result, the Company has three reportable segments:
Coach includes global sales of Coach brand products to customers through Coach operated stores, including the Internet and concession shop-in-shops, and sales to wholesale customers and through independent third party distributors. This segment represented 71.8% of total net sales in fiscal 2018.
Kate Spade includes global sales primarily of kate spade new york brand products to customers through Kate Spade operated stores, including the Internet, to wholesale customers, through concession shop-in-shops and through independent third party distributors. This segment represented 21.8% of total net sales in fiscal 2018.
Stuart Weitzman includes global sales of Stuart Weitzman brand products primarily through Stuart Weitzman operated stores, including the Internet, to wholesale customers and through numerous independent third party distributors. This segment represented 6.4% of total net sales in fiscal 2018.
Corporate, which is not a reportable segment, represents certain costs that are not directly attributable to a brand. These costs primarily include administrative and information systems expense.

2


Coach
Coach is a leading design house of modern luxury accessories and lifestyle collections, with a long-standing reputation built on quality craftsmanship. As a pioneer in the leather goods and accessories space, the brand established itself as the original American house of leather. Coach remains inspired by its rich heritage, with the spirit of innovation it has had for more than 75 years. Defined by a free-spirited, all-American attitude, the brand approaches design with a modern vision, reimagining luxury for today with an authenticity that is uniquely Coach. All over the world, the Coach name is synonymous with effortless New York style. We present a sophisticated, modern and inviting environment, both in bricks & mortar stores and online, to showcase our product assortment and reinforce a consistent brand positioning.

3


Stores Coach operates freestanding flagship, retail, outlet stores and concession shop-in-shop locations. These stores are located in regional shopping centers, metropolitan areas throughout the world and established outlet centers.
Coach flagship stores, which offer the fullest expression of the Coach brand, are located in tourist-heavy, densely populated cities globally. Retail stores carry an assortment of products depending on their size, location and customer preferences. Coach outlet stores serve as an efficient means to sell manufactured-for-outlet product and discontinued retail inventory outside the retail channel. The outlet store design, visual presentations and customer service levels support and reinforce the brand's image. Through these outlet stores, we target value-oriented customers in established outlet centers that are close to major markets.
The change in the number of Coach stores and their total and average square footage is shown in the following table:
 
 
Coach
 
 
North America
 
International(1)
 
Total
Store Count
 
 
 
 
 
 
Fiscal 2018
 
402

 
585

 
987

Net change vs. prior year
 
(17
)
 
42

 
25

% change vs. prior year
 
(4.1
)%
 
7.7
%
 
2.6
 %
 
 
 
 
 
 
 
Fiscal 2017
 
419

 
543

 
962

Net change vs. prior year
 
(13
)
 
21

 
8

% change vs. prior year
 
(3.0
)%
 
4.0
%
 
0.8
 %
 
 


 


 
 
Fiscal 2016
 
432

 
522

 
954

Net change vs. prior year
 
(30
)
 
19

 
(11
)
% change vs. prior year
 
(6.5
)%
 
3.8
%
 
(1.1
)%
 
 
 
 
 
 
 
Square Footage
 
 
 
 
 
 
Fiscal 2018
 
1,835,543

 
1,256,525

 
3,092,068

Net change vs. prior year
 
(48,661
)
 
89,605

 
40,944

% change vs. prior year
 
(2.6
)%
 
7.7
%
 
1.3
 %
 
 
 
 
 
 
 
Fiscal 2017
 
1,884,204

 
1,166,920

 
3,051,124

Net change vs. prior year
 
(7,942
)
 
80,605

 
72,663

% change vs. prior year
 
(0.4
)%
 
7.4
%
 
2.4
 %
 
 
 
 
 
 
 
Fiscal 2016
 
1,892,146

 
1,086,315

 
2,978,461

Net change vs. prior year
 
(25,705
)
 
55,620

 
29,915

% change vs. prior year
 
(1.3
)%
 
5.4
%
 
1.0
 %
 
 
 
 
 
 
 
Average Square Footage
 
 
 
 
 
 
Fiscal 2018
 
4,566

 
2,148

 
3,133

Fiscal 2017
 
4,497

 
2,149

 
3,172

Fiscal 2016
 
4,380

 
2,081

 
3,122

 
(1) 
Fiscal 2018 includes the addition of 21 retail stores acquired as a result of the Coach distributor acquisition in Australia and New Zealand completed during the third quarter of fiscal 2018.
In fiscal 2019, we expect to close a select number of stores in North America. We expect to modestly grow our store count over the next few years, particularly within Greater China. Furthermore, we expect to continue investing in the elevation of our existing store environments.
Internet — We view our www.coach.com website as a key communications vehicle for the brand to promote traffic in retail stores and department store locations and build brand awareness, as well as an additional channel to sell Coach brand products

4


directly to customers. Consumers also have the ability to place e-commerce orders through point-of-sale mobile devices located within our retail stores. Our online store provides a showcase environment where consumers can browse through a selected offering of the latest styles and colors. To a lesser extent, our e-commerce programs also include our invitation-only outlet flash sales site.
Wholesale — Coach began as a U.S. wholesaler to department stores, and this channel continues to remain a part of our overall consumer reach. Today, we work closely with our partners to ensure a clear and consistent product presentation. We enhance our presentation through the creation of shop-in-shops with proprietary Coach brand fixtures within the department store environment. We custom tailor our assortments through wholesale product planning and allocation processes to match the attributes of our department store consumers in each local market. We continue to closely manage inventories in this channel given the current highly promotional environment at point-of-sale. We utilize automatic replenishment with major accounts in an effort to optimize inventory levels across wholesale doors.
As of June 30, 2018, Coach's products are sold in approximately 1,630 wholesale and distributor locations globally. Coach's most significant wholesale partnerships are with department stores including Macy's (including Bloomingdale's), Dillard's, Hudson's Bay Company (including Lord & Taylor and Saks 5th Ave), Nordstrom, Zappos, Von Maur, The Bay and Neiman Marcus. Coach products are also available on these customers' websites.
Coach has developed relationships with a select group of distributors who sell Coach products through travel retail locations and in certain international countries where Coach does not have directly operated retail locations. As of June 30, 2018, Coach's most significant distributors are the DFS Group, King Power Thailand, Ever Rich Duty Free and Al Tayer Insignia.
As of June 30, 2018 and July 1, 2017, Coach did not have any customers who individually accounted for more than 10% of the segment's total net sales.
Kate Spade
Established in 1993, the Kate Spade brand is known for its crisp color, graphic prints and playful sophistication. The brand's exuberant approach to the everyday encourages personal style with a dash of incandescent charm. From handbags and clothing to decor and fragrance our products invite women around the world to live every day uniquely and to the fullest.
Stores Kate Spade operates freestanding flagship, specialty retail, outlet stores and concession shop-in-shops. These stores are located in regional shopping centers, metropolitan areas throughout the world and established outlet centers.
Kate Spade flagship locations, which offer the fullest expression of the Kate Spade brand, are located in high-visibility locations. Retail stores carry an assortment of products depending on their size, location and customer preferences. Kate Spade outlet stores serve as an efficient means to sell manufactured-for-outlet product and discontinued retail inventory outside the retail channel. Through these outlet stores, we target value-oriented customers in established outlet centers that are close to major markets.
The number of Kate Spade stores as of June 30, 2018 and their total and average square footage is shown in the following table:
 
 
Kate Spade
 
 
North America
 
International(2)
 
Total
Store Count
 
 
 
 
 
 
Fiscal 2018(1)
 
200

 
142

 
342

 
 
 
 
 
 
 
Square Footage
 
 
 
 
 
 
Fiscal 2018(1)
 
495,121

 
171,754

 
666,875

 
 
 
 
 
 
 
Average Square Footage
 
 
 
 
 
 
Fiscal 2018(1)
 
2,476

 
1,210

 
1,950

 
     
(1)
The Kate Spade business was acquired in the first quarter of fiscal 2018 which included the addition of 180 stores in North America and 95 international stores.
(2)
Includes the addition of 50 retail stores related to taking operational control of the Kate Spade Joint Ventures that operate in mainland China, Hong Kong, Macau and Taiwan in the third quarter of fiscal 2018.

5


We expect to modestly grow the number of North America stores in fiscal 2019, as we continue to optimize our real estate position. Furthermore, we expect to continue investing in the elevation of our existing store environments. Internationally, we expect to continue to modestly grow in store count over the next few years, particularly within mainland China and Europe.
Internet — We view our www.katespade.com website as a key communications vehicle for the brand to promote traffic in retail stores and department store locations and build brand awareness, as well as an additional channel to sell Kate Spade brand products directly to customers. Consumers also have the ability to place e-commerce orders through point-of-sale mobile devices located within our retail stores. To a lesser extent, our e-commerce programs also include our invitation-only outlet flash sales site.
Wholesale — As of June 30, 2018, Kate Spade brand's products are sold in approximately 1,260 wholesale and distributor locations, primarily in the U.S, Canada and Europe. The most significant wholesale partnerships primarily include sales of kate spade new york products. These partnerships include Nordstrom, The TJX Companies Inc., Macy's (including Bloomingdale's), Dillard's and Hudson's Bay Company (including Lord & Taylor and Saks 5th Ave). Kate Spade products are also available on these customers' websites.
Kate Spade has developed relationships with a select group of distributors who sell Kate Spade products through travel retail locations and in certain international countries where Kate Spade does not have directly operated retail locations. As of June 30, 2018, Kate Spade's most significant distributors are Valiram Group, Al-Futtaim Group, Luxury Concept Limited, Pangea and Stores Specialists, Inc.
As of June 30, 2018, Kate Spade did not have any customers who individually accounted for more than 10% of the segment's total net sales.
Stuart Weitzman
Stuart Weitzman offers beautiful shoes that combine form and function. For more than 30 years, every pair has been handcrafted using the finest materials and meticulously engineered for a flawless fit. The brand is one of the most recognizable names in footwear; its award-winning shoes are worn by stylish women around the globe and by celebrities both on and off the red carpet. Stuart Weitzman is currently evolving into a multi-category accessories brand with the expansion of handbags and introduction of jewelry.
Stores —Stuart Weitzman products are also sold in freestanding flagship, retail and outlet stores located in North America, Europe and Northern China.

6


The following table shows the number of Stuart Weitzman directly-operated locations and their total and average square footage:
 
 
Stuart Weitzman
 
 
North America(1)
 
International(2)
 
Total
Store Count
 
 
 
 
 
 
Fiscal 2018
 
68

 
35

 
103

Net change vs. prior year
 
(1
)
 
23

 
22

% change vs. prior year
 
(1.4
)%
 
191.7
%
 
27.2
%
 
 
 
 
 
 
 
Fiscal 2017
 
69

 
12

 
81

Net change vs. prior year
 
5

 
1

 
6

% change vs. prior year
 
7.8
 %
 
9.1
%
 
8.0
%
 
 
 
 
 
 
 
Fiscal 2016
 
64

 
11

 
75

Net change vs. prior year
 
18

 
3

 
21

% change vs. prior year
 
39.1
 %
 
37.5
%
 
38.9
%
 
 
 
 
 
 
 
Square Footage
 
 
 
 
 
 
Fiscal 2018
 
117,869

 
47,498

 
165,367

Net change vs. prior year
 
(75
)
 
28,690

 
28,615

% change vs. prior year
 
(0.1
)%
 
152.5
%
 
20.9
%
 
 
 
 
 
 
 
Fiscal 2017
 
117,944

 
18,808

 
136,752

Net change vs. prior year
 
12,680

 
6,252

 
18,932

% change vs. prior year
 
12.0
 %
 
49.8
%
 
16.1
%
 
 
 
 
 
 
 
Fiscal 2016
 
105,264

 
12,556

 
117,820

Net change vs. prior year
 
23,387

 
3,332

 
26,719

% change vs. prior year
 
28.6
 %
 
36.1
%
 
29.3
%
 
 
 
 
 
 
 
Average Square Footage
 
 
 
 
 
 
Fiscal 2018
 
1,733

 
1,357

 
1,606

Fiscal 2017
 
1,709

 
1,567

 
1,688

Fiscal 2016
 
1,645

 
1,141

 
1,571

 
     
(1) Includes the addition of 14 retail stores related to the Canadian retail distributor acquisition in the fourth quarter of fiscal 2016.
(2) Includes the addition of 20 retail stores related to the Northern China distributor acquisition in the third quarter of fiscal 2018.
In fiscal 2019, we expect modest growth in North America store count and square footage. Furthermore, we expect to continue to grow the store count and square footage over the next few years as we grow our business internationally.
Internet — We view our www.stuartweitzman.com website as a key communications vehicle for the brand to promote traffic in retail stores and department store locations and build brand awareness, as well as an additional channel to sell Stuart Weitzman brand products directly to customers.
Wholesale — Stuart Weitzman brand products are primarily sold through approximately 620 wholesale and distributor locations globally. Stuart Weitzman's most significant wholesale partnerships include Nordstrom, Saks 5th Ave, Bloomingdale's (including Macy's) and Neiman Marcus.
Stuart Weitzman has developed relationships with a select group of distributors who sell Stuart Weitzman products through travel retail locations and in certain international countries where Stuart Weitzman does not have directly operated retail locations. As of June 30, 2018, Stuart Weitzman's most significant distributors are Pedder Group and Hermanns Imports.

7


As of June 30, 2018, Stuart Weitzman did not have any customers who individually accounted for more than 10% of the segment's total net sales.
Refer to Note 16, "Segment Information," for further information about the Company's segments.
LICENSING
Our brands take an active role in the design process and control the marketing and distribution of products in our worldwide licensing relationships. Licensing revenue for the Company was $53.6 million and $40.4 million in fiscal 2018 and fiscal 2017, respectively. Our key licensing relationships as of June 30, 2018 are as follows:
Brand
 
Category
 
Partner
 
Expiration
Coach
 
Eyewear
 
Luxottica
 
2020
Coach
 
Watches
 
Movado
 
2020
Coach
 
Fragrance
 
Interparfums
 
2026
Kate Spade
 
Fashion Bedding
 
HTA
 
2019
Kate Spade
 
Eyewear
 
Safilo
 
2020
Kate Spade
 
Footwear
 
Steve Madden
 
2020
Kate Spade
 
Tableware
 
Lenox
 
2020
Kate Spade
 
Stationery and Gift
 
Lifeguard Press
 
2020
Kate Spade
 
Tech Accessories
 
Incipio
 
2021
Kate Spade
 
Watches
 
Fossil
 
2025
Products made under license are, in most cases, sold through stores and wholesale channels and, with the Company's approval, the licensees have the right to distribute products selectively through other venues, which provide additional, yet controlled, exposure of our brands. Our licensing partners pay royalties on their net sales of our branded products. Such royalties currently comprise approximately 1% of Tapestry's total net sales. The licensing agreements generally give our brands the right to terminate the license if specified sales targets are not achieved.
PRODUCTS
The following table shows net sales for each of our product categories by segment:
 
 Fiscal Year Ended
 
June 30, 2018
 
July 1, 2017
 
July 2, 2016
 
(millions)
 
Amount
 
% of total
net sales
 
Amount
 
% of total
net sales
 
Amount
 
% of total
net sales
Coach:
 
 
 
 
 
 
 
 
 
 
 
Women's Handbags
$
2,298.2

 
39
%
 
$
2,308.0

 
52
%
 
$
2,392.9

 
53
%
Men's
844.6

 
14

 
808.0

 
18

 
725.7

 
16

Women's Accessories
747.1

 
13

 
721.0

 
16

 
721.6

 
16

Other Products
331.6

 
6

 
277.7

 
6

 
306.9

 
7

Total Coach
$
4,221.5

 
72
%
 
$
4,114.7

 
92
%
 
$
4,147.1

 
92
%
Kate Spade:(1)
 
 
 
 
 
 
 
 
 
 
 
Women's Handbags
$
703.4

 
12
%
 
$

 
%
 
$

 
%
Other Products
311.6

 
5

 

 

 

 

Women's Accessories
269.7

 
5

 

 

 

 

Total Kate Spade
$
1,284.7

 
22
%
 
$

 
%
 
$

 
%
Stuart Weitzman(2)
$
373.8

 
6
%
 
$
373.6

 
8
%
 
$
344.7

 
8
%
Total Net Sales
$
5,880.0

 
100
%
 
$
4,488.3

 
100
%
 
$
4,491.8

 
100
%
 
(1) 
On July 11, 2017, the Company completed its acquisition of Kate Spade. The operating results of the Kate Spade brand have been consolidated in the Company's operating results commencing on July 11, 2017.

8


(2) 
The significant majority of sales for Stuart Weitzman is attributable to women's footwear.
Women’s Handbags — Women’s handbag collections feature classically inspired designs as well as fashion designs. These collections are designed to meet the fashion and functional requirements of our broad and diverse consumer base.
Women’s Accessories — Women’s accessories include small leather goods, which complement our handbags, including wallets, money pieces, wristlets and cosmetic cases. Also included in this category are novelty accessories (including address books, time management accessories, travel accessories, sketchbooks and portfolios), key rings and charms.
Men’s — Men’s includes bag collections (including business cases, computer bags, messenger-style bags, backpacks and totes), small leather goods (including wallets, card cases, travel organizers and belts), footwear, watches, sunglasses, novelty accessories and ready-to-wear.
Other Products — These products primarily include women's footwear, eyewear (such as sunglasses), jewelry (including bracelets, necklaces, rings and earrings), fragrances, watches, certain women's seasonal lifestyle apparel collections, including outerwear, ready-to-wear and cold weather accessories, such as gloves, scarves and hats. In addition, Kate Spade brand kids ready-to-wear items, housewares and home accessories, such as fashion bedding and tableware, and stationery and gifts are included in this category.
DESIGN AND MERCHANDISING
Our creative leaders are responsible for conceptualizing and implementing the design direction for our brands across the consumer touchpoints of product, stores and marketing. At Tapestry, each brand has a dedicated design and merchandising team; this ensures that Coach, Kate Spade and Stuart Weitzman speak to their customers with a voice and positioning unique to their brand. Designers have access to the brands' extensive archives of product designs, which are a valuable resource for new product concepts. Our designers are also supported by strong merchandising teams that analyze sales, market trends and consumer preferences to identify market opportunities that help guide each season's design process and create a globally relevant product assortment. Merchandisers also manage the product life cycle to maximize sales and profitability across all channels. The product category teams, each comprised of design, merchandising, product development and sourcing specialists help each brand execute design concepts that are consistent with the brand's strategic direction.
Our design and merchandising teams also work in close collaboration with all of our licensing partners to ensure that the licensed products are conceptualized and designed to address the intended market opportunity and convey the distinctive perspective and lifestyle associated with our brands.
MARKETING
We use a 360-degree approach to marketing for each of our brands, synchronizing our efforts across all channels to ensure consistency at every touchpoint. Our global marketing strategy is to deliver a consistent, relevant and multi-layered message every time the consumer comes in contact with our brands through our communications and visual merchandising. Each brand's distinctive positioning is communicated by our creative marketing, visual merchandising and public relations teams, as well as outside creative agencies. We also have a sophisticated consumer and market research capability, which helps us assess consumer attitudes and trends.
We engage in several consumer communication initiatives globally, including direct marketing activities at a national, regional and local level. Total expenses attributable to the Company's marketing-related events in fiscal 2018 were $228.4 million, or approximately 4% of net sales, compared to $178.3 million in fiscal 2017, or approximately 4% of net sales.
Our wide range of marketing activities include direct mail tiered to our database of best, new, lapsed and prospective customers. In addition, to drive engagement and build awareness, we utilize a variety of media, including print, digital, social and out-of-home. Our respective brand websites serve as effective communication vehicles by providing an immersive brand experience, showcasing the fullest expression across all product categories.
As part of our direct marketing strategy, we use databases of consumers to generate personalized communications. Email contacts and direct mail pieces are an important part of our communication and are sent to selected consumers to stimulate consumer purchases and build brand awareness. Visitors to our e-commerce sites provide an opportunity to increase the size of these databases, as well as point of transactions globally, except where restricted. For Coach, we have e-commerce sites in certain countries throughout the world, including the U.S., Canada, Japan, mainland China, several throughout Europe, and South Korea. For Kate Spade, we have e-commerce sites in the U.S., Canada, Japan, mainland China and throughout Europe. For Stuart Weitzman, we have e-commerce sites in the U.S, Canada, Europe, Hong Kong and mainland China.
In fiscal 2018, Coach had informational websites in Hong Kong, Korea, Malaysia, Singapore and Taiwan, as well as a global informational website where customers from other countries are directed. In fiscal 2018, Kate Spade had an informational website in mainland China. The Company utilizes and continues to explore digital technologies such as blogs and social media websites,

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including Twitter, Facebook, Instagram, Pinterest, WeChat and Sina Weibo, as a cost effective consumer communication opportunity to increase on-line and store sales, acquire new customers and build brand awareness.
MANUFACTURING
Tapestry carefully balances its commitments to a limited number of “better brand” partners that have demonstrated integrity, quality and reliable delivery. The Company continues to evaluate new manufacturing sources and geographies to deliver the finest quality products at the best cost and to mitigate the impact of manufacturing in inflationary markets.
Before partnering with a new vendor, the Company evaluates each facility by conducting a quality and business practice standards audit. Periodic evaluations of existing, previously approved facilities are conducted on a recurring basis. We believe that our manufacturing partners are in material compliance with the Company’s integrity standards.
These independent manufacturers each or in aggregate support a broad mix of product types, materials and a seasonal influx of new, fashion-oriented styles, which allows us to meet shifts in marketplace demand and changes in consumer preferences.
Our raw material suppliers, independent manufacturers and licensing partners must achieve and maintain high quality standards, which are an integral part of our brands' identity. One of our keys to success lies in the rigorous selection of raw materials. We have longstanding relationships with purveyors of fine leathers and hardware. Although our products are manufactured by independent manufacturers, we maintain a strong level of oversight in the selection of the raw materials that are used in all of our products. Compliance with quality control standards is monitored through on-site quality inspections at independent manufacturing facilities.
We maintain control of the supply chain process for each of our brands from design through manufacture. We are able to do this by maintaining sourcing management offices in Vietnam, mainland China, Hong Kong, the Philippines, Singapore and Spain that work closely with our independent manufacturers. This broad-based, global manufacturing strategy is designed to optimize the mix of cost, lead times and construction capabilities.
Manufacturers of Coach products were primarily located in Vietnam, the Philippines, mainland China and India. During fiscal 2018, Coach had one vendor, located in Vietnam, who individually provided over 10% of the brand's total units (or approximately 15% in the aggregate). During fiscal 2018, Kate Spade products were manufactured primarily in mainland China, Vietnam and the Philippines. Kate Spade had one vendor, located in Vietnam, who individually provided over 10% of the brand's total units (or approximately 13% in the aggregate). The Company expects that the level of products manufactured in each country will change during fiscal 2019 as it continues to further diversify the brand’s supply chain globally. Stuart Weitzman products were primarily manufactured in Spain. During fiscal 2018, Stuart Weitzman had three vendors, all located in Spain, who individually provided over 10% of the brands total units (or approximately 40% in the aggregate).
DISTRIBUTION
Each brand's products are shipped from manufacturers to distribution centers around the world for inspection, storage, order processing and shipment. These facilities for our brands use a bar code scanning warehouse management system. Our distribution center employees use handheld scanners to read product bar codes, which allow accurate storage and the various steps to process orders and generally provide excellent service to their customers. Each brand's products are primarily shipped to the retail stores and wholesale customers via express delivery providers and common carriers. The facilities also ship direct to consumer orders.
In North America, the Company operates an 850,000 square foot distribution and consumer care facility in Jacksonville, Florida for Coach brand products. For Coach, North America product fulfillment is facilitated by our automated warehouse management system and electronic data interchange system, while the unique requirements of the Internet business are supported by Coach's order management and e-commerce sites. Outside of North America, the Company has established regional distribution centers through third-parties for each brand. For Coach brand products, these centers are located in mainland China and Netherlands. Additional facilities are located in Japan, Hong Kong, mainland China, Macau, South Korea, Taiwan, Malaysia and Singapore to support directly operated local markets.
The Company distributes Kate Spade brand products through facilities that are operated by third parties in the United States. For Kate Spade, product fulfillment in North America is facilitated by our automated warehouse management system and electronic data interchange system, while the unique requirements of the Internet business are supported by selective warehouse and distribution systems operated by third-parties. Furthermore, Kate Spade product is distributed through a third party regional distribution center in the U.K. The Company also operates local distribution centers through third-parties in Japan and Hong Kong for Kate Spade brand product.
The Company distributes Stuart Weitzman brand products through facilities that are operated by third parties globally. These facilities are located in the United States, Canada, Spain, Italy and mainland China.

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INFORMATION SYSTEMS
Each of our brands currently operates on their respective legacy systems that support finance and accounting, procurement, inventory control, point-of-sale transactions, store replenishment, supply chain management which support product development, procurement, inventory planning and reporting functions. In the fourth quarter of fiscal 2016, the Company announced a series of operational efficiency initiatives focused on creating an agile and scalable business model, including the replacing and updating of our core technology platforms and the retirement of certain information systems. Efforts are currently underway to harmonize and consolidate these systems across the current three brands, as well as serving as a common platform for future acquisitions. This project is a key area of focus and priority and is expected to be substantially completed during fiscal 2019. The Company expects to incur charges of approximately $10-15 million in fiscal 2019 related to this project.
During fiscal 2018, the Company implemented a global consolidation system which provides a common platform for financial reporting. The Company also began implementing a point-of-sale system which supports all in-store transactions, distributes management reporting for each store, and collects sales and payroll information on a daily basis. This daily collection of store sales and inventory information results in early identification of business trends and provides a detailed baseline for store inventory replenishment. This system began rolling out for Coach in North America, and will be extended to other brands and regions in the future.
Refer to Item 1A. "Risk Factors," for further information as it relates to the Company's Enterprise Resource Planning ("ERP") system implementation efforts.
TRADEMARKS AND PATENTS
Tapestry owns all of the material worldwide trademark rights used in connection with the production, marketing, distribution and sale of all branded products for Coach, Stuart Weitzman and Kate Spade. In addition, it licenses trademarks and copyrights used in connection with the production, marketing and distribution of certain categories of goods and limited edition collaborative special projects. Tapestry also owns and maintains worldwide registrations for trademarks in relevant classes of products in each of the countries in which its products are sold. Major trademarks include TAPESTRY, COACH, STUART WEITZMAN, KATE SPADE and kate spade new york. It also owns brand-specific trademarks such as COACH and Horse & Carriage Design, COACH and Story Patch Design, COACH and Lozenge Design, COACH and Tag Design, Signature C Design, COACH EST. 1941 and Design for the COACH brand; kate spade new york and Spade Design, live colorfully, Walk on Air and In Full Bloom for the kate spade new york brand; and In Our Shoes and SW Logo for the Stuart Weitzman brand. Tapestry is not dependent on any one particular trademark or design patent although Tapestry believes that the Coach, Stuart Weitzman and Kate Spade names are important for its business. In addition, Tapestry owns several design patents and utility patents for its branded products. Tapestry aggressively polices its trademarks and trade dress, and pursues infringers both domestically and internationally. It also pursues counterfeiters domestically and internationally through leads generated internally, as well as through its network of investigators, the respective online reporting tools for each brand, the Tapestry hotline and business partners around the world.
The Company expects that its material trademarks will remain in full force and effect for as long as we continue to use and renew them.
SEASONALITY
The Company's results are typically affected by seasonal trends. During the first fiscal quarter, we build inventory for the winter and holiday 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 season.
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.
GOVERNMENT REGULATION
Most of the Company's imported products are subject to duties, indirect taxes, quotas and non-tariff trade barriers that may limit the quantity of products that we may import into the U.S. and other countries or may impact the cost of such products. The Company is not materially restricted by quotas or other government restrictions in the operation of its business, however customs duties do represent a component of total product cost. To maximize opportunities, the Company operates complex supply chains through foreign trade zones, bonded logistic parks and other strategic initiatives such as free trade agreements. Additionally, the Company operates a direct import business in many countries worldwide. As a result, the Company is subject to stringent government regulations and restrictions with respect to its cross-border activity either by the various customs and border protection agencies or by other government agencies which control the quality and safety of the Company’s products. The Company maintains an internal global trade, customs and product compliance organization to help manage its import/export and regulatory affairs activity.

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COMPETITION
The global premium women's and men's handbag, accessories and footwear categories are highly competitive. Tapestry, Inc. competes primarily with European and American luxury and accessible luxury brands as well as private label retailers. Over the last several years these industries have grown, encouraging the entry of new competitors as well as increasing the competition from existing competitors. This increased competition drives interest in these brand loyal categories.
EMPLOYEES
As of June 30, 2018, the Company employed approximately 20,800 globally, including both full and part time employees, but excluding seasonal and temporary employees. Of these employees, approximately 9,400 and 7,800 were full time and part time employees, respectively, in the global retail field.
The Company believes that its relations with its employees are good, and has never encountered a strike or work stoppage.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
Refer to Note 16, "Segment Information," presented in the Notes to the Consolidated Financial Statements for geographic information.
AVAILABLE INFORMATION
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our investor website, located at www.tapestry.com/investors under the caption “SEC Filings,” as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission. These reports are also available on the Securities and Exchange Commission’s website at www.sec.gov. No information contained on any of our websites is intended to be included as part of, or incorporated by reference into, this Annual Report on Form 10-K.
The Company has included the Chief Executive Officer (“CEO”) and Chief Financial Officer certifications regarding its public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibit 31.1 to this Form 10-K. Additionally, the Company filed with the New York Stock Exchange (“NYSE”) the CEO’s certification regarding the Company’s compliance with the NYSE’s Corporate Governance Listing Standards (“Listing Standards”) pursuant to Section 303A.12(a) of the Listing Standards, which indicated that the CEO was not aware of any violations of the Listing Standards by the Company.

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ITEM 1A. RISK FACTORS
You should consider carefully all of the information set forth or incorporated by reference in this document and, in particular, the following risk factors associated with the business of the Company and forward-looking information in this document. Please also see “Special Note on Forward-Looking Information” at the beginning of this report. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently deem immaterial may also have an adverse effect on us. If any of the risks below actually occur, our business, results of operations, cash flows or financial condition could suffer.
Acquisitions may not be successful in achieving intended benefits, cost savings and synergies and may disrupt current operations.
One component of our growth strategy is acquisitions, such as our acquisition of Stuart Weitzman Holdings, LLC during fiscal 2015 and our acquisition of Kate Spade & Company during the first quarter of fiscal 2018. Our management team has and will consider growth strategies and expected synergies when considering any acquisition, and while we continually review potential acquisition opportunities, there can be no assurance that we will be able to identify suitable candidates or consummate these transactions on acceptable terms.
The integration process of any newly acquired company may be complex, costly and time-consuming. The potential difficulties of integrating the operations of an acquired business, such as Stuart Weitzman and Kate Spade, and realizing our expectations for an acquisition, including the benefits that may be realized, include, among other things:
failure of the business to perform as planned following the acquisition or achieve anticipated revenue or profitability targets;
delays, unexpected costs or difficulties in completing the integration of acquired companies or assets;
higher than expected costs, lower than expected cost savings or synergies and/or a need to allocate resources to manage unexpected operating difficulties;
difficulties assimilating the operations and personnel of acquired companies into our operations;
diversion of the attention and resources of management or other disruptions to current operations;
the impact on our or an acquired business’ internal controls and compliance with the requirements under the Sarbanes-Oxley Act of 2002;
unanticipated changes in applicable laws and regulations;
unanticipated changes in the combined business due to potential divestitures or other requirements imposed by antitrust regulators;
retaining key customers, suppliers and employees;
retaining and obtaining required regulatory approvals, licenses and permits;
operating risks inherent in the acquired business and our business;
consumers’ failure to accept product offerings by us or our licensees;
assumption of liabilities not identified in due diligence; and
other unanticipated issues, expenses and liabilities.
Our failure to successfully complete the integration of any acquired business, including Stuart Weitzman and/or Kate Spade, and any adverse consequences associated with future acquisition activities, could have an adverse effect on our business, financial condition and operating results.
Completed acquisitions may result in additional goodwill and/or an increase in other intangible assets on our balance sheet. We are required annually, or as facts and circumstances exist, to assess goodwill and other intangible assets to determine if impairment has occurred. If the testing performed indicates that impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value of the goodwill or other intangible assets and the implied fair value of the goodwill or the fair value of other intangible assets in the period the determination is made. We determined there was no impairment in fiscal 2018, fiscal 2017 and fiscal 2016; however, we cannot accurately predict the amount and timing of any potential future impairment of assets. Should the value of goodwill or other intangible assets become impaired, there could be a material adverse effect on our financial condition and results of operations.
A delay, disruption in, failure of, or inability to upgrade our information technology systems precisely and efficiently could materially adversely affect our business, financial condition or results of operations and cash flow.
We rely heavily on various information and other business systems to manage our operations, including management of our supply chain, point-of-sale processing in our brands’ stores, our online businesses associated with each brand and various other processes. We are continually evaluating and implementing upgrades and changes to our systems.

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The Company has embarked on a multi-year ERP implementation. The Company began this implementation in fiscal 2017 and it is expected to be substantially complete during fiscal 2019. Implementing new systems carries substantial risk, including failure to operate as designed, failure to properly integrate with other systems, potential loss of data or information, cost overruns, implementation delays and disruption of operations. Third-party vendors are also relied upon to design, program, maintain and service our ERP implementation program. Any failures of these vendors to properly deliver their services could similarly have a material effect on our business. Other substantial risks associated with the multi-year ERP implementation include the inability to deliver the optimal level of merchandise to our brands’ stores or customers in a timely manner. In addition, any disruptions or malfunctions affecting our ERP implementation plan could cause critical information upon which we rely to be delayed, defective, corrupted, inadequate or inaccessible. Furthermore, failure of the computer systems due to inadequate system capacity, computer viruses, human error, changes in programming, security breaches, system upgrades or migration of these services, as well as consumer privacy concerns and new global government regulations, individually or in accumulation, could have a material effect on our business, financial condition or results of operations and cash flow.
The growth of our business depends on the successful execution of our growth strategies, including our efforts to expand internationally into a global house of lifestyle brands.
Our growth depends on the continued success of existing products, as well as the successful design and introduction of new products. Our ability to create new products and to sustain existing products is affected by whether we can successfully anticipate and respond to consumer preferences and fashion trends. The failure to develop and launch successful new products could hinder the growth of our business. Also, any delay in the development or launch of a new product could result in our company not being the first to bring product to market, which could compromise our competitive position.
Additionally, our current growth strategy includes plans to expand in a number of international regions, including Asia and Europe. We currently plan to open additional Coach, Kate Spade and Stuart Weitzman stores throughout Asia and other international markets, both directly and through strategic partners. Our brands may not be well-established or widely sold in some of these markets, and we may have limited experience operating directly or working with our partners there. In addition, some of these markets have different operational characteristics, including but not limited to employment and labor, transportation, logistics, real estate, environmental regulations and local reporting or legal requirements.
Furthermore, consumer demand and behavior, as well as tastes and purchasing trends may differ in these countries, and as a result, sales of our product may not be successful, or the margins on those sales may not be in line with those we currently anticipate. Further, such markets will have upfront investment costs that may not be accompanied by sufficient revenues to achieve typical or expected operational and financial performance and therefore may be dilutive to our brands in the short-term. In many of these countries, there is significant competition to attract and retain experienced and talented employees.
Consequently, if our international expansion plans are unsuccessful, or we are unable to retain and/or attract key personnel, our business, financial condition and results of operation could be materially adversely affected.
The successful execution of our operational efficiency and multi-year transformation initiatives is key to the long-term growth of our business.
During the fourth quarter of fiscal 2016, we announced a plan to enhance organizational efficiency, update core technology platforms and optimize international supply chain and office locations. These initiatives were adopted as a result of a strategic review of the Company’s corporate structure which focused on creating an agile and scalable business model. The charges under this plan began in the fourth quarter of fiscal 2016. There is no assurance these actions will be successful in achieving our intended results.
During the fourth quarter of fiscal 2014, we announced a multi-year strategic plan with the objective of transforming the brand and reinvigorating growth. Key operational and cost elements in order to fund and execute this plan concluded during fiscal 2016. The Company believes that long-term growth will be realized through these transformational efforts over time, however there is no assurance that such efforts will be successful in the long-term.
Actual costs incurred and the timeline of these initiatives may differ from our expectations. Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 5, "Restructuring Activities" for further information regarding these initiatives.
We face risks associated with operating in international markets.
We operate on a global basis, with approximately 41.2% of our net sales coming from operations outside of United States. While geographic diversity helps to reduce the Company’s exposure to risks in any one country, we are subject to risks associated with international operations, including, but not limited to:

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political or economic instability or changing macroeconomic conditions in our major markets, including the potential impact of (1) new policies that may be implemented by the U.S. or other jurisdictions, particularly with respect to tax and trade policies or (2) the United Kingdom ("U.K.") voting to leave the European Union ("E.U."), commonly known as Brexit. On March 29, 2017, the U.K. triggered Article 50 of the Lisbon Treaty formally starting negotiations with the E.U. The U.K. and E.U. announced in March 2018 an agreement in principle to transitional provisions under which E.U. law would remain in force in the U.K. until the end of December 2020, but this remains subject to the successful conclusion of a final withdrawal agreement between the parties. In the absence of such an agreement there would be no transitional provisions and a "hard" Brexit would occur on March 29, 2019. Although the terms of the U.K.'s future relationship with the E.U. are still unknown, it is possible that there will be increased regulatory and legal complexities, including potentially divergent national laws and regulations between the U.K. and E.U. Brexit may also cause disruption and create uncertainty surrounding our business, including affecting our relationship with our existing and future customers, suppliers and employees and resulting in increased cost by way of new or elevated Customs duties or financial implications from operational challenges;
changes to the U.S.'s participation in, withdrawal out of, renegotiation of certain international trade agreements or other major trade related issues including the non-renewal of expiring favorable tariffs granted to developing countries, tariff quotas, and retaliatory tariffs (including, but not limited to, the Trump Administration's tariffs on China and China's retaliatory tariffs on certain products from the U.S.), trade sanctions, new or onerous trade restrictions, embargoes and other stringent government controls;
changes in exchange rates for foreign currencies, which may adversely affect the retail prices of our products, result in decreased international consumer demand, or increase our supply costs in those markets, with a corresponding negative impact on our gross margin rates;
compliance with laws relating to foreign operations, including the Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act, and other global anti-corruption laws, which in general concern the bribery of foreign public officials;
changes in tourist shopping patterns, particularly that of the Chinese consumer;
natural and other disasters;
changes in legal and regulatory requirements, including, but not limited to safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change and other environmental legislation, product safety regulations or other charges or restrictions
Economic conditions could materially adversely affect our financial condition, results of operations and consumer purchases of luxury items.
Our results can be impacted by a number of macroeconomic factors, including but not limited to consumer confidence and spending levels, unemployment, consumer credit availability, raw materials costs, fuel and energy costs (including oil prices), global factory production, commercial real estate market conditions, credit market conditions and the level of customer traffic in malls and shopping centers.
Demand for our products, and consumer spending in the premium handbag, footwear and accessories categories generally, is significantly impacted by trends in consumer confidence, general business conditions, interest rates, foreign currency exchange rates, the availability of consumer credit, and taxation. Consumer purchases of discretionary luxury items, such as the Company's products, tend to decline during recessionary periods or periods of sustained high unemployment, when disposable income is lower.
Unfavorable economic conditions may also reduce consumers’ willingness and ability to travel to major cities and vacation destinations in which our stores are located.
A decline in the volume of traffic to our stores could have a negative impact on our net sales.
The success of our retail stores located within malls and shopping centers may be impacted by (1) the location of the store within the mall or shopping center; (2) surrounding tenants or vacancies; (3) increased competition in areas where malls or shopping centers are located; (4) the amount spent on advertising and promotion to attract consumers to the mall; and (5) a shift towards online shopping resulting in a decrease in mall traffic. Declines in consumer traffic could have a negative impact on our net sales and could materially adversely affect our financial condition and results of operations. Furthermore, declines in traffic could result in store impairment charges if expected future cash flows of the related asset group do not exceed the carrying value.
Our business may be subject to increased costs due to excess inventories and a decline in profitability as a result of increasing pressure on margins if we misjudge the demand for our products.
Our industry is subject to significant pricing pressure caused by many factors, including intense competition and a highly promotional environment, fragmentation in the retail industry, pressure from retailers to reduce the costs of products, and changes

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in consumer spending patterns. If we misjudge the market for our products we may be faced with significant excess inventories for some products and missed opportunities for other products. If that occurs, we may be forced to rely on destruction, donation, markdowns or promotional sales to dispose of excess, slow-moving inventory, which may negatively impact our gross margin, overall profitability and efficacy of our brands.
Increases in our costs, such as raw materials, labor or freight could negatively impact our gross margin. Labor costs at many of our manufacturers have been increasing significantly and, as the middle class in developing countries continues to grow, it is unlikely that such cost pressure will abate. Furthermore, the cost of transportation may fluctuate significantly if oil prices show volatility. We may not be able to offset such increases in raw materials, labor or transportation costs through pricing measures or other means.
Computer system disruption and cyber security threats, including a privacy or data security breach, could damage our relationships with our customers, harm our reputation, expose us to litigation and adversely affect our business.
We depend on digital technologies for the successful operation of our business, including corporate email communications to and from employees, customers and stores, the design, manufacture and distribution of our finished goods, digital marketing efforts, collection and retention of customer data, employee information, the processing of credit card transactions, online e-commerce activities and our interaction with the public in the social media space. The possibility of a cyber-attack on any one or all of these systems is a serious threat. The retail industry, in particular, has been the target of many recent cyber-attacks. As part of our business model, we collect, retain, and transmit confidential information over public networks. In addition to our own databases, we use third party service providers to store, process and transmit this information on our behalf. Although we contractually require these service providers to implement and use reasonable security measures, we cannot control third parties and cannot guarantee that a security breach will not occur in the future either at their location or within their systems. We also store all designs, goods specifications, projected sales and distribution plans for our finished products digitally. We have confidential security measures in place to protect both our physical facilities and digital systems from attacks. Despite these efforts, however, we may be vulnerable to targeted or random security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events.
Awareness and sensitivity to privacy breaches and cyber security threats by consumers, employees and lawmakers is at an all-time high. Any misappropriation of confidential or personally identifiable information gathered, stored or used by us, be it intentional or accidental, could have a material impact on the operation of our business, including severely damaging our reputation and our relationships with our customers, employees and investors. We may also incur significant costs implementing additional security measures to protect against new or enhanced data security or privacy threats, or to comply with current and new state, federal and international laws governing the unauthorized disclosure of confidential information which are continuously being enacted and proposed such as the General Data Protection Regulation in the E.U. and the California Consumer Privacy Act in California, U.S.A., as well as increased cyber security protection costs such as organizational changes, deploying additional personnel and protection technologies, training employees, engaging third party experts and consultants and lost revenues resulting from unauthorized use of proprietary information including our intellectual property. Lastly, we could face sizable fines, significant breach-notification costs and increased litigation as a result of cyber security breaches.
In addition, we have e-commerce sites in certain countries throughout the world, including the U.S., Canada, Japan, mainland China, several throughout Europe and South Korea and have plans for additional e-commerce sites in other parts of the world. Additionally, Tapestry has informational websites in various countries, as described in Item I, "Business." Our e-commerce programs also include an invitation-only Coach outlet flash sale site and invitation-only Kate Spade flash sale site. Given the robust nature of our e-commerce presence and digital strategy, it is imperative that we and our e-commerce partners maintain uninterrupted operation of our: (i) computer hardware, (ii) software systems, (iii) customer marketing databases, and (iv) ability to email our current and potential customers. Despite our preventative efforts, our systems are vulnerable from time-to-time to damage, disruption or interruption from, among other things, physical damage, natural disasters, inadequate system capacity, system issues, security breaches, email blocking lists, computer viruses or power outages. Any material disruptions in our e-commerce presence or information technology systems could have a material adverse effect on our business, financial condition and results of operations.
Significant competition in our industry could adversely affect our business.
We face intense competition in the product lines and markets in which we operate. Our competitors are European and American luxury brands, as well as private label retailers, including some of the Company's wholesale customers. There is a risk that our competitors may develop new products or product categories that are more popular with our customers. We may be unable to anticipate the timing and scale of such product introductions by competitors, which could harm our business. Our ability to compete also depends on the strength of our brand, whether we can attract and retain key talent, and our ability to protect our trademarks and design patents. A failure to compete effectively could adversely affect our growth and profitability.

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The success of our business depends on our ability to retain the value of our brands and to respond to changing fashion and retail trends in a timely manner.
Tapestry, Inc. is a New York-based house of modern luxury lifestyle brands. Our Company and our brands are founded upon a consumer-led view of luxury that stands for inclusivity and approachability. We believe that the Coach brand, established over 75 years ago, is regarded as America's preeminent designer, producer, and marketer of fine accessories and gifts for women and men. We attribute the prominence of the Coach brand to the unique combination of our original American attitude and design, our heritage of fine leather goods and custom fabrics, our superior product quality and durability and our commitment to customer service. Kate Spade is known for its crisp color, graphic prints, and playful sophistication; its exuberant approach to the everyday encourages personal style with a dash of incandescent charm. Furthermore, the Stuart Weitzman brand is viewed as a leading design house of women's luxury footwear within North America, with a strong opportunity for growth globally, and is built upon the idea of crafting a beautifully-constructed shoe, merging fashion and function. Any misstep in product quality or design, customer service, marketing, unfavorable publicity or excessive product discounting could negatively affect the image of our brands with our customers. Furthermore, the product lines we have historically marketed and those that we plan to market in the future are becoming increasingly subject to rapidly changing fashion trends and consumer preferences, including the increasing shift to digital brand engagement and social media communication. If we do not anticipate and respond promptly to changing customer preferences and fashion trends in the design, production, and styling of our products, as well as create compelling marketing campaigns that appeal to our customers, our sales and results of operations may be negatively impacted. Our success also depends in part on our ability to execute on our plans and strategies, including our operational efficiency initiatives and Transformation Plan. Even if our products, marketing campaigns and retail environments do meet changing customer preferences and/or stay ahead of changing fashion trends, our brand image could become tarnished or undesirable in the minds of our customers or target markets, which could materially adversely impact our business, financial condition, and results of operations.
Our business is exposed to foreign currency exchange rate fluctuations.
We monitor our global foreign currency exposure. In order to minimize the impact on earnings related to foreign currency rate movements, we hedge a portion of our subsidiaries’ U.S. dollar-denominated inventory purchases in Japan, Canada and China and Euro-denominated inventory purchases in Spain, as well as the Company's cross currency denominated intercompany loan portfolio. We cannot ensure, however, that these hedges will fully offset the impact of foreign currency rate movements. Additionally, our international subsidiaries primarily use local currencies as the functional currency and translate their financial results from the local currency to U.S. dollars. If the U.S. dollar strengthens against these subsidiaries’ foreign currencies, the translation of their foreign currency denominated transactions may decrease consolidated net sales and profitability. Our continued international expansion will increase our exposure to foreign currency fluctuations. The majority of the Company's purchases and sales involving international parties, excluding international consumer sales, are denominated in U.S. dollars.
As a result of having operations outside of the U.S., we are also exposed to market risk from fluctuations in foreign currency exchange rates. Substantial changes in foreign currency exchange rates could cause our sales and profitability to be negatively impacted.
Our stock price may periodically fluctuate based on the accuracy of our earnings guidance or other forward-looking statements regarding our financial performance, including our ability to return value to investors.
Our business and long-range planning process is designed to maximize our long-term strength, growth, and profitability, and not to achieve an earnings target in any particular fiscal quarter. We believe that this longer-term focus is in the best interests of the Company and our stockholders. At the same time, however, we recognize that it is helpful to provide investors with guidance as to our forecast of net sales, operating income, net interest expense, earnings per diluted share and other financial metrics or projections. While we generally expect to provide updates to our financial guidance when we report our results each fiscal quarter, we do not have any responsibility to update any of our forward-looking statements at such times or otherwise. In addition, any longer-term guidance that we provide is based on goals that we believe, at the time guidance is given, are reasonably attainable for growth and performance over a number of years. However, such long-range targets are more difficult to predict than our current quarter and fiscal year expectations. If, or when, we announce actual results that differ from those that have been predicted by us, outside investment analysts, or others, our stock price could be adversely affected. Investors who rely on these predictions when making investment decisions with respect to our securities do so at their own risk. We take no responsibility for any losses suffered as a result of such changes in our stock price.
We periodically return value to investors through payment of quarterly dividends. Investors may have an expectation that we will continue to pay our quarterly dividend at certain levels. The market price of our securities could be adversely affected if our cash dividend rate differs from investors’ expectations. Refer to “If we are unable to pay quarterly dividends at intended levels, our reputation and stock price may be harmed” for addition discussion of our quarterly dividend.

17


Failure to adequately protect our intellectual property and curb the sale of counterfeit merchandise could injure our brands and negatively affect sales.
We believe our trademarks, copyrights, patents, and other intellectual property rights are extremely important to our success and our competitive position. We devote significant resources to the registration and protection of our trademarks and to anti-counterfeiting efforts worldwide. In spite of our efforts, counterfeiting still occurs and if we are unsuccessful in challenging a third-party’s rights related to trademark, copyright, or patent this could adversely affect our future sales, financial condition, and results of operations. We are aggressive in pursuing entities involved in the trafficking and sale of counterfeit merchandise through legal action or other appropriate measures. We cannot guarantee that the actions we have taken to curb counterfeiting and protect our intellectual property will be adequate to protect the brand and prevent counterfeiting in the future. Our trademark applications may fail to result in registered trademarks or provide the scope of coverage sought. Furthermore, our efforts to enforce our intellectual property rights are often met with defenses and counterclaims attacking the validity and enforceability of our intellectual property rights. Unplanned increases in legal fees and other costs associated with defending our intellectual property rights could result in higher operating expenses. Finally, many countries’ laws do not protect intellectual property rights to the same degree as U.S. laws.
Our business is subject to the risks inherent in global sourcing activities.
As a Company engaged in sourcing on a global scale, we are subject to the risks inherent in such activities, including, but not limited to:
unavailability of, or significant fluctuations in the cost of, raw materials;
compliance by us and our independent manufacturers and suppliers with labor laws and other foreign governmental regulations;
imposition of additional duties, taxes and other charges on imports or exports;
increases in the cost of labor, fuel (including volatility in the price of oil), travel and transportation;
compliance with our Global Business Integrity Program;
compliance by our independent manufacturers and suppliers with our Global Operating Principles and/or Supplier Code of Conduct, as applicable;
compliance with U.S. laws regarding the identification and reporting on the use of “conflict minerals” sourced from the Democratic Republic of the Congo in the Company’s products and the FCPA, U.K. Bribery Act and other global anti-corruption laws, as applicable;
disruptions or delays in shipments;
loss or impairment of key manufacturing or distribution sites;
inability to engage new independent manufacturers that meet the Company’s cost-effective sourcing model;
product quality issues;
political unrest;
unforeseen public health crises, such as pandemic and epidemic diseases;
natural disasters or other extreme weather events, whether as a result of climate change or otherwise; and
acts of war or terrorism and other external factors over which we have no control.
If the Trump Administration follows through on its proposed China tariffs, or if additional tariffs or trade restrictions are implemented by other countries or by the U.S., the cost of our products manufactured in China or other countries and imported into the U.S. or other countries could increase. This could in turn adversely affect the profitability for these products and have an adverse effect on our business, financial conditions and results of operations.
We are subject to labor laws governing relationships with employees, including minimum wage requirements, overtime, working conditions, and citizenship requirements. Compliance with these laws may lead to increased costs and operational complexity and may increase our exposure to governmental investigations or litigation.
In addition, we require our independent manufacturers and suppliers to operate in compliance with applicable laws and regulations, as well as our Global Operating Principles and/or Supplier Code of Conduct; however, we do not control these manufacturers or suppliers or their labor, environmental or other business practices. Copies of our Global Business Integrity Program, Global Operating Principles and Supplier Code of Conduct are available through our website, www.tapestry.com. The violation of labor, environmental or other laws by an independent manufacturer or supplier, or divergence of an independent

18


manufacturer’s or supplier’s labor practices from those generally accepted as ethical or appropriate in the U.S., could interrupt or otherwise disrupt the shipment of our products, harm our trademarks or damage our reputation. The occurrence of any of these events could materially adversely affect our business, financial condition and results of operations.
We are dependent on a limited number of distribution and sourcing centers. Our ability to meet the needs of our customers and our retail stores and e-commerce sites depends on the proper operation of these centers. If any of these centers were to shut down or otherwise become inoperable or inaccessible for any reason, we could suffer a substantial loss of inventory and/or disruptions of deliveries to our retail and wholesale customers. While we have business continuity and contingency plans for our sourcing and distribution center sites, significant disruption of manufacturing or distribution for any of the above reasons could interrupt product supply, result in a substantial loss of inventory, increase our costs, disrupt deliveries to our customers and our retail stores, and, if not remedied in a timely manner, could have a material adverse impact on our business. Because our distribution centers include automated and computer controlled equipment, they are susceptible to risks including power interruptions, hardware and system failures, software viruses, and security breaches. We maintain a distribution center in Jacksonville, Florida, operated by Tapestry. To support our growth in mainland China and Europe, we established distribution centers in mainland China and the Netherlands, owned and operated by a third-party, allowing us to better manage the logistics in these regions while reducing costs. We also operate distribution centers, through third-parties, in Japan, mainland China, Hong Kong, Macau, Singapore, Taiwan, Malaysia, the U.S., Spain, Italy, the U.K., Canada and South Korea. The warehousing of the Company's merchandise, store replenishment and processing direct-to-customer orders is handled by these centers and a prolonged disruption in any center’s operation could materially adversely affect our business and operations.
We are subject to risks associated with leasing retail space subject to long-term and non-cancelable leases. We may be unable to renew leases at the end of their terms. If we close a leased retail space, we remain obligated under the applicable lease.
We do not own any of our retail store locations. We lease the majority of our stores under long-term, non-cancelable leases, which usually have initial terms ranging from five and ten years, often with renewal options. We believe that the majority of the leases we enter into in the future will likely be long-term and non-cancelable. Generally, our leases are “net” leases, which require us to pay our proportionate share of the cost of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases at our option. If we determine that it is no longer economical to operate a retail store subject to a lease and decide to close it as we have done in the past and will do in the future, we may remain obligated under the applicable lease for, among other things, payment of the base rent for the balance of the lease term. In some instances, we may be unable to close an underperforming retail store due to continuous operation clauses in our lease agreements. In addition, as each of our leases expire, we may be unable to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close retail stores in desirable locations. Our inability to secure desirable retail space or favorable lease terms could impact our ability to grow. Likewise, our obligation to continue making lease payments in respect of leases for closed retail spaces could have a material adverse effect on our business, financial condition and results of operations.
Our success depends, in part, on attracting, developing and retaining qualified employees, including key personnel.
The ability to successfully execute against our goals is heavily dependent on attracting, developing and retaining qualified employees, including our senior management team. Competition in our industry to attract and retain these employees is intense and is influenced by: our ability to offer competitive compensation and benefits, employee morale, our reputation, recruitment by other employers, perceived internal opportunities, non-competition and non-solicitation agreements and macro unemployment rates. Our operational efficiency initiatives as well as acquisitions and related integration activity may intensify this risk.
We depend on the guidance of our senior management team and other key employees who have significant experience and expertise in our industry and our operations. In recent years, we have evolved our senior leadership team and have focused on retaining key roles. The unexpected loss of one or more of our key personnel or any negative public perception with respect to these individuals could have a material adverse effect on our business, results of operations and financial condition. We do not maintain key-person or similar life insurance policies on any of senior management team or other key personnel.
Our wholesale business could suffer as a result of consolidations, liquidations, restructurings and other ownership changes in the retail industry.
Our wholesale business comprised approximately 13% of total net sales for fiscal 2018. Continued fragmentation in the retail industry could further decrease the number of, or concentrate the ownership of, stores that carry our and our licensees’ products. Furthermore, a decision by the controlling owner of a group of stores or any other significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease or eliminate the amount of merchandise purchased from us or our licensing partners could result in an adverse effect on the sales and profitability within this channel.
Additionally, certain of our wholesale customers, particularly those located in the U.S., have become highly promotional and have aggressively marked down their merchandise. Despite our continued reduction in markdown allowances during fiscal 2018, such promotional activity could negatively impact our brands, which could affect our business, results of operations, and financial condition.

19


As we outsource functions, we will become more dependent on the third parties performing these functions.
As part of our long-term strategy, we look for opportunities to cost effectively enhance capability of business services. While we believe we conduct appropriate due diligence before entering into agreements with these third parties, the failure of any of these third parties to provide the expected services, provide them on a timely basis or to provide them at the prices we expect could disrupt or harm our business. Any significant interruption in the operations of these service providers, over which we have no control, could also have an adverse effect on our business. Furthermore, we may be unable to provide these services or implement substitute arrangements on a timely and cost-effective basis on terms favorable to us.
Fluctuations in our tax obligations and effective tax rate may result in volatility of our financial results and stock price.
On December 22, 2017, “H.R.1,” formerly known as the Tax Cuts and Jobs Act (the “Tax Legislation”) was signed into law. The Tax Legislation, which became effective on January 1, 2018, significantly revised the U.S. tax code. Refer to Item 2, Management’s Discussion and Analysis of Financial Condition & Results of Operations - Executive Overview and Note 14, “Income Taxes,” for further information on the provisions of the Tax Legislation and the currently expected impact on the Company. The Company has recorded its best estimate of impact of the Tax Legislation through its provision for income taxes in the fiscal year ended June 30, 2018 pursuant to Accounting Standards Codification ("ASC") 740, Income Taxes, and the SEC Staff Accounting Bulletin (“SAB”) 118. All amounts recorded were based on available guidance on interpretation of the Tax
Legislation and, the Company believes, reasonable approaches to estimating its impact; however, such amounts are the Company’s
provisional estimates at this time. For elements of the Tax Legislation where the Company was not yet able to make reasonable estimates of the impact, the Company has not recorded any adjustments and has continued accounting for these elements in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Legislation. The Company cannot determine the amount of any such impacts at this time and amounts that have been estimated and recorded in the fiscal year ended June 30, 2018 are subject to adjustment as future guidance becomes available, additional facts become known or estimation approaches are refined. The overall impact of the Tax Legislation is currently uncertain, and the Company’s business and financial condition could be adversely affected. 
We are subject to income taxes in many jurisdictions. We record tax expense based on our estimates of taxable income and required reserves for uncertain tax positions in multiple tax jurisdictions. At any one time, multiple tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may result in a settlement which differs from our original estimate. As a result, we expect that throughout the year there could be ongoing variability in our quarterly tax rates as events occur and exposures are evaluated. In addition, our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of earnings. Further, proposed tax changes that may be enacted in the future could impact our current or future tax structure and effective tax rates.
Our operating results are subject to seasonal and quarterly fluctuations, which could adversely affect the market price of the Company's common stock.
The Company's results are typically affected by seasonal trends. We have historically realized, and expect to continue to realize, higher sales and operating income in the second quarter of our fiscal year. Poor sales in the Company's second fiscal quarter would have a material adverse effect on its full year operating results and result in higher inventories. In addition, 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.
We rely on our licensing partners to preserve the value of our licenses and the failure to maintain such partners could harm our business.
Our brands currently have multi-year agreements with licensing partners for certain products. Refer to Item 1 - “Business - Licensing” for additional discussion of our key licensing arrangements. In the future, we may enter into additional licensing arrangements. The risks associated with our own products also apply to our licensed products as well as unique problems that our licensing partners may experience, including risks associated with each licensing partner’s ability to obtain capital, manage its labor relations, maintain relationships with its suppliers, manage its credit and bankruptcy risks, and maintain customer relationships. While we maintain significant control over the products produced for us by our licensing partners, any of the foregoing risks, or the inability of any of our licensing partners to execute on the expected design and quality of the licensed products or otherwise exercise operational and financial control over its business, may result in loss of revenue and competitive harm to our operations in the product categories where we have entered into such licensing arrangements. Further, while we believe that we could replace our existing licensing partners if required, our inability to do so for any period of time could adversely affect our revenues and harm our business.
We also may decide not to renew our agreements with our licensing partners. For example, we did not renew our agreement with our prior footwear licensing partner when it expired in late fiscal 2017 and brought the category in-house. While we believe we have the infrastructure and systems in place to successfully bring this category in-house, we may face unexpected difficulties or costs in connection with this process or any future action to bring currently licensed categories in-house.

20


If we are unable to pay quarterly dividends at intended levels, our reputation and stock price may be harmed.
The dividend program requires the use of a moderate portion of our cash flow. Our ability to pay dividends will depend on our ability to generate sufficient cash flows from operations in the future. This ability may be subject to certain economic, financial, competitive and other factors that are beyond our control. Our Board of Directors (“Board”) may, at its discretion, decrease the intended level of dividends or entirely discontinue the payment of dividends at any time. Any failure to pay dividends, or pay dividends at expected levels, after we have announced our intention to do so may negatively impact our reputation, investor confidence in us and negatively impact our stock price.
We have incurred a substantial amount of indebtedness, which could restrict our ability to engage in additional transactions or incur additional indebtedness.
As of June 30, 2018, our consolidated indebtedness was approximately $1.6 billion. We also have the capacity to borrow up to $900 million of additional indebtedness under our undrawn revolving credit facility, which may be used to finance our working capital needs, capital expenditures, permitted investments, share purchases, dividends and other general corporate purposes. This substantial level of indebtedness could have important consequences to our business including making it more difficult to satisfy our debt obligations, increasing our vulnerability to general adverse economic and industry conditions, limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate and restricting us from pursuing certain business opportunities. In addition, the terms of our credit facility contain affirmative and negative covenants, including a leverage ratio, as well as limitations on our ability to incur debt, grant liens, engage in mergers and dispose of assets. These consequences and limitations could reduce the benefits we expect to achieve from the acquisition of Kate Spade or impede our ability to engage in future business opportunities or strategic acquisitions.
Our ability to make payments on and to refinance our debt obligations and to fund planned capital expenditures depends on our ability to generate cash from our operations. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot guarantee that our business will generate sufficient cash flow from our operations or that future borrowings will be available to us in an amount sufficient to enable us to make payments of our debt, fund other liquidity needs and make planned capital expenditures. In addition, our ability to access the credit and capital markets in the future as a source of funding, and the borrowing costs associated with such financing, is dependent upon market conditions and our credit rating and outlook.
Provisions in the Company's charter, bylaws and Maryland law may delay or prevent an acquisition of the Company by a third party.
The Company's charter, bylaws and Maryland law contain provisions that could make it more difficult for a third party to acquire the Company without the consent of our Board. The Company's charter permits a majority of its entire Board, without stockholder approval, to amend the charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that the Company has the authority to issue. In addition, the Company's Board may classify or reclassify any unissued shares of common stock or preferred stock and may set the preferences, rights and other terms of the classified or reclassified shares. Although the Company's Board has no intention to do so at the present time, it could establish a class or series of preferred stock that could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for the Company's common stock or otherwise be in the best interest of the Company's stockholders.
The Company's bylaws can be amended by our Board or by the approval of a majority of our stockholders. The Company's bylaws provide that nominations of persons for election to the Company's Board and the proposal of business to be considered at an annual meeting of stockholders may be made only in the notice of the meeting, by the Company's Board or by a stockholder who is a stockholder of record as of the record date set by the Company's Board for purposes of determining stockholders entitled to vote at the meeting, at the time of giving notice and at the time of the meeting and has complied with the advance notice procedures of the Company's bylaws. Also, under Maryland law, business combinations, including mergers, consolidations, share exchanges, or, in circumstances specified in the statute, asset transfers or issuances or reclassifications of equity securities, between the Company and any interested stockholder, generally defined as any person who beneficially owns, directly or indirectly, 10% or more of the Company's common stock, or any affiliate of an interested stockholder are prohibited for a five-year period, beginning on the most recent date such person became an interested stockholder. After this period, a combination of this type must be approved by two super-majority stockholder votes, unless common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The statute permits various exemptions from its provisions, including business combinations that are exempted by our Board prior to the time that the interested stockholder becomes an interested stockholder.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

21


ITEM 2. PROPERTIES
The following table sets forth the location, use and size of the Company's key distribution, corporate and product development facilities as of June 30, 2018. The majority of the properties are leased, with the leases expiring at various times through 2037, subject to renewal options.
Location
 
Use
 
Approximate
Square Footage
Jacksonville, Florida
 
Coach North America distribution and customer service
 
850,000

New York, New York
 
Corporate, design, sourcing and product development
 
695,000

Westchester, Ohio
 
Kate Spade North America distribution and customer service
 
601,000

New York, New York
 
Kate Spade corporate management
 
135,000

North Bergen, New Jersey
 
Corporate office
 
106,000

Carlstadt, New Jersey
 
Corporate office
 
65,000

Tokyo, Japan
 
Coach Japan regional management
 
24,900

Hong Kong, China
 
Corporate regional management
 
23,900

Shanghai, China
 
Coach Greater China (including Hong Kong, Macau, and mainland China) regional management
 
23,000

Elda, Spain
 
Stuart Weitzman regional management, sourcing and quality control
 
19,000

Seoul, South Korea
 
Coach South Korea regional management
 
18,000

Hong Kong, China
 
Coach sourcing and quality control
 
17,000(1)

Dongguan, China
 
Coach sourcing, quality control and product development
 
16,700

Tokyo, Japan
 
Kate Spade Japan regional management
 
14,200

London, U.K.
 
Coach Europe regional management
 
12,300

Fort Lauderdale, Florida
 
Stuart Weitzman corporate office
 
12,100

Shanghai, China
 
Coach Asia regional management
 
10,400

Montreal, Canada
 
Stuart Weitzman Canada regional management and distribution
 
9,100

Ho Chi Minh City, Vietnam
 
Coach sourcing and quality control
 
8,600

Taipei City, Taiwan
 
Coach Taiwan regional management
 
6,400

Paris, France
 
Coach Europe regional management
 
5,900

London, England
 
Kate Spade Europe regional management
 
5,000

Singapore
 
Coach Singapore regional management, sourcing and quality control
 
5,000

Kuala Lumpur, Malaysia
 
Coach Malaysia regional management
 
3,800

Beijing, China
 
Coach Greater China regional management
 
3,000

Shanghai, China
 
Kate Spade regional management
 
2,700

Milan, Italy
 
Stuart Weitzman corporate office
 
2,700

Lincoln, Rhode Island
 
Kate Spade regional management
 
2,500

Clark, Philippines
 
Coach sourcing and quality control
 
2,400

 
(1) 
Represents a Company-owned location.
In addition to the above properties, the Company occupies leased retail and outlet store locations located in North America and internationally for each of our brands. These leases expire at various times through 2032. The Company considers these properties to be in generally good condition, and believes that its facilities are adequate for its operations and provide sufficient capacity to meet its anticipated requirements. Refer to Item 1. "Business," and Item 6. "Selected Financial Data," for further information.


22


ITEM 3. LEGAL PROCEEDINGS
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, Inc.'s intellectual property rights, litigation instituted by persons alleged to have been injured by advertising claims or upon premises within the Company's control, 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 a defendant is routine and incidental to the conduct of Tapestry’s business, as well as for any business of its size, 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 consolidated financial statements.
Tapestry has not entered into any transactions that have been identified by the IRS as abusive or that have a significant tax avoidance purpose. Accordingly, we have not been required to pay a penalty to the IRS for failing to make disclosures required with respect to certain transactions that have been identified by the IRS as abusive or that have a significant tax avoidance purpose.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.


23


PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market and Dividend Information
Tapestry, Inc.’s common stock is listed on the New York Stock Exchange and is traded under the symbol “TPR.” The following table sets forth, for the fiscal periods indicated, the high, low and closing prices per share of the Company's common stock as reported on the New York Stock Exchange Composite Index.
 
High
 
Low
 
Closing
 
Dividends Declared per Common Share
Fiscal 2018 Quarter ended:
 
 
 
 
 
 
 
September 30, 2017
$
48.85

 
$
39.11

 
 
 
$
0.3375

December 30, 2017
45.28

 
38.70

 
 
 
0.3375

March 31, 2018
53.57

 
44.23

 
 
 
0.3375

June 30, 2018
55.50

 
43.54

 
46.71

 
0.3375

 
 
 
 
 
 
 
 
Fiscal 2017 Quarter ended:
 

 
 

 
 

 
 

October 1, 2016
$
43.71

 
$
34.55

 
 
 
$
0.3375

December 31, 2016
38.86

 
34.07

 
 
 
0.3375

April 1, 2017
41.70

 
34.33

 
 
 
0.3375

July 1, 2017
47.76

 
38.47

 
$
47.34

 
0.3375

As of August 3, 2018, there were 2,325 holders of record of Tapestry’s common stock.
Any future determination to pay cash dividends will be at the discretion of Tapestry’s Board and will be dependent upon Tapestry’s financial condition, operating results, capital requirements and such other factors as the Board deems relevant.
The information under the principal heading “Securities Authorized For Issuance Under Equity Compensation Plans” in the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on November 8, 2018, to be filed with the Securities and Exchange Commission (The “Proxy Statement”), is incorporated herein by reference.

24


Performance Graph
The following graph compares the cumulative total stockholder return (assuming reinvestment of dividends) of the Company's common stock with the cumulative total return of the S&P 500 Stock Index and the “peer set" companies listed below over the five-fiscal-year period ending June 30, 2018, the last day of Tapestry’s most recent fiscal year. The graph assumes that $100 was invested on June 29, 2013 at the per share closing price in each of Tapestry’s common stock, the S&P 500 Stock Index and a peer set index tracking the peer group companies listed below, and that all dividends were reinvested. The stock performance shown in the graph is not intended to forecast or be indicative of future performance.
During fiscal 2018, the Company established a new peer group consisting of:
L Brands, Inc.,
PVH Corp.,
Ralph Lauren Corporation,
Tiffany & Co.,
V.F. Corporation,
Estee Lauder, Inc.,
Michael Kors Holdings Limited
The Company's old peer group consisted of:
L Brands, Inc.,
PVH Corp.,
Ralph Lauren Corporation,
Tiffany & Co.,
V.F. Corporation,
Estee Lauder, Inc.,
Kate Spade & Company,
Abercrombie & Fitch Co., and
Michael Kors Holdings Limited
The Company removed Kate Spade & Company from the peer set due to our acquisition. Furthermore, Tapestry management selected the "revised peer set" on an industry/line-of-business basis and believes this updated set of companies represent good faith comparables based on their history, size, and business models in relation to Tapestry, Inc.


25


performancegraph19.jpg
 
 
Fiscal 2013
 
Fiscal 2014
 
Fiscal 2015
 
Fiscal 2016
 
Fiscal 2017
 
Fiscal 2018
TPR
 
$100.00
 
$62.10
 
$67.47
 
$79.15
 
$95.17
 
$96.80
Revised Peer Set
 
$100.00
 
$126.45
 
$146.61
 
$136.88
 
$136.80
 
$190.10
Former Set
 
$100.00
 
$127.88
 
$146.25
 
$137.03
 
$136.15
 
$189.61
S&P 500
 
$100.00
 
$124.65
 
$136.33
 
$139.50
 
$164.11
 
$187.70


26


ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below as of and for each of the fiscal years in the five-year period ended June 30, 2018 has been derived from the Company’s audited Consolidated Financial Statements. The financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Consolidated Financial Statements and Notes thereto and other financial data included elsewhere herein.
 
Fiscal Year Ended(5)
 
June 30,
2018(1)
 
July 1,
2017
 
July 2,
2016(2)
 
June 27,
2015(3)
 
June 28,
2014
(4)
 
(millions, except per share data)
Consolidated Statements of Operations:
 

 
 

 
 

 
 

 
 

Net sales
$
5,880.0

 
$
4,488.3

 
$
4,491.8

 
$
4,191.6

 
$
4,806.2

Gross profit
3,853.9

 
3,081.1

 
3,051.3

 
2,908.6

 
3,297.0

Selling, general and administrative ("SG&A") expenses
3,183.1

 
2,293.7

 
2,397.8

 
2,290.6

 
2,176.9

Operating income
670.8

 
787.4

 
653.5

 
618.0

 
1,120.1

Net income
397.5

 
591.0

 
460.5

 
402.4

 
781.3

Net income per share:
 
 
 

 
 

 
 

 
 

Basic
$
1.39

 
$
2.11

 
$
1.66

 
$
1.46

 
$
2.81

Diluted
$
1.38

 
$
2.09

 
$
1.65

 
$
1.45

 
$
2.79

Weighted-average basic shares outstanding
285.4

 
280.6

 
277.6

 
275.7

 
277.8

Weighted-average diluted shares outstanding
288.6

 
282.8

 
279.3

 
277.2

 
280.4

Dividends declared per common share
$
1.350

 
$
1.350

 
$
1.350

 
$
1.350

 
$
1.350

 
 
 
 
 
 
 
 
 
 
Consolidated Percentage of Net Sales Data:
 
 
 

 
 

 
 

 
 

Gross margin
65.5
%
 
68.6
%
 
67.9
%
 
69.4
%
 
68.6
%
SG&A expenses
54.1
%
 
51.1
%
 
53.4
%
 
54.6
%
 
45.3
%
Operating margin
11.4
%
 
17.5
%
 
14.5
%
 
14.7
%
 
23.3
%
Net income
6.8
%
 
13.2
%
 
10.3
%
 
9.6
%
 
16.3
%
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet Data:
 
 
 

 
 

 
 

 
 

Working capital
$
1,494.4

 
$
3,199.5

 
$
1,346.2

 
$
1,671.8

 
$
1,042.1

Total assets
6,678.3

 
5,831.6

 
4,892.7

 
4,666.9

 
3,663.1

Cash, cash equivalents and investments
1,250.0

 
3,158.7

 
1,878.0

 
1,931.8

 
1,353.1

Inventory
673.8

 
469.7

 
459.2

 
485.1

 
526.2

Total debt
1,600.6

 
1,579.5

 
876.2

 
890.4

 
140.5

Stockholders' equity
3,244.6

 
3,001.9

 
2,682.9

 
2,489.9

 
2,420.6


27


 
Fiscal Year Ended
 
June 30,
2018(1)
 
July 1,
2017
 
July 2,
2016
(2)
 
June 27,
2015
(3)
 
June 28,
2014
(4)
Store Data:
 

 
 

 
 

 
 
 
 

Stores open at fiscal year-end:
 
 
 
 
 
 
 
 
 
Coach North America stores
402

 
419

 
432

 
462

 
539

Coach International stores
585

 
543

 
522

 
503

 
475

Kate Spade North America stores
200

 

 

 

 

Kate Spade International stores
142

 

 

 

 

Stuart Weitzman North America stores
68

 
69

 
64

 
46

 

Stuart Weitzman International stores
35

 
12

 
11

 
8

 

Total stores open at fiscal year-end
1,432

 
1,043

 
1,029

 
1,019

 
1,014

 
 
 
 
 
 
 
 
 
 
Store square footage at fiscal year-end:
 
 
 
 
 
 
 
 
 
Coach North America stores
1,835,543

 
1,884,204

 
1,892,146

 
1,917,851

 
2,042,717

Coach International stores
1,256,525

 
1,166,920

 
1,086,315

 
1,030,695

 
918,995

Kate Spade North America stores
495,121

 

 

 

 

Kate Spade International stores
171,754

 

 

 

 

Stuart Weitzman North America stores
117,869

 
117,944

 
105,264

 
81,877

 

Stuart Weitzman International stores
47,498

 
18,808

 
12,556

 
9,224

 

Total store square footage at fiscal year-end
3,924,310

 
3,187,876

 
3,096,281

 
3,039,647

 
2,961,712

 
 
 
 
 
 
 
 
 
 
Average store square footage at fiscal year-end:
 
 
 

 
 

 
 

 
 

Coach North America stores
4,566

 
4,497

 
4,380

 
4,151

 
3,790

Coach International stores
2,148

 
2,149

 
2,081

 
2,049

 
1,935

Kate Spade North America stores
2,476

 

 

 

 

Kate Spade International stores
1,210

 

 

 

 

Stuart Weitzman North America stores
1,733

 
1,709

 
1,645

 
1,780

 

Stuart Weitzman International stores
1,357

 
1,567

 
1,141

 
1,153

 

 
(1) 
The Company acquired Kate Spade & Company in the first quarter of fiscal 2018 (which included the impact of an additional 180 stores in North America and 95 stores internationally). During the third quarter of fiscal 2018, the Company acquired designated assets of its Stuart Weitzman distributor in Northern China (which included the impact of an additional 20 stores internationally), entered into an agreement to obtain operational control of the Kate Spade Joint Ventures (which included the impact of an additional 50 stores) and acquired designated assets of its Coach distributor in Australia and New Zealand (which included the impact of an additional 21 stores internationally).
(2) 
The Company acquired the Stuart Weitzman Canada distributor in the fourth quarter of fiscal 2016 (which included the impact of an additional 14 retail stores in North America).
(3) 
The Company acquired Stuart Weitzman Holdings LLC in the fourth quarter of fiscal 2015.
(4) 
The Company acquired the remaining 50% interest in its Europe business for Coach from its former joint venture partner in the first quarter of fiscal 2014.
(5)
For all fiscal years presented below, the Company recorded certain items which affect the comparability of our results. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for further information on the items related to fiscal 2018, fiscal 2017 and fiscal 2016. During fiscal 2015, the Company recorded adjustments in cost of sales and SG&A expenses of $5.0 million and $140.9 million, respectively, related to accelerated depreciation and lease termination charges as a result of store updates and closures within North America and select international stores, organizational efficiency charges and charges related to the destruction of inventory. In fiscal 2015 the Company also recorded adjustments in cost of sales and SG&A expenses of $4.7 million and $19.9 million, respectively, related to the acquisition of Stuart Weitzman. During fiscal 2014, the Company recorded adjustments in cost of sales and SG&A expenses of $82.2 million and

28


$49.3 million, respectively, related to inventory and fleet related costs, including impairment, accelerated depreciation and severance related to store closures. The following table reconciles the Company's reported results presented in accordance with accounting principles generally accepted in the United States of America ("GAAP") to our adjusted results that exclude these items:
 
 
 
 
 
 
 
Net Income
Fiscal 2018
Gross Profit
 
SG&A Expenses
 
Operating Income
 
Amount
 
Per Diluted Share
As Reported: (GAAP Basis)
$
3,853.9

 
$
3,183.1

 
$
670.8

 
$
397.5

 
$
1.38

Excluding Non-GAAP Adjustments
116.4

 
(204.7
)
 
321.1

 
362.4

 
1.25

Adjusted: (Non-GAAP Basis)
$
3,970.3

 
$
2,978.4

 
$
991.9

 
$
759.9

 
$
2.63

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
Fiscal 2017
Gross Profit
 
SG&A Expenses
 
Operating Income
 
Amount
 
Per Diluted Share
As Reported: (GAAP Basis)
$
3,081.1

 
$
2,293.7

 
$
787.4

 
$
591.0

 
$
2.09

Excluding Non-GAAP Adjustments
2.9

 
(22.3
)
 
25.2

 
18.3

 
0.06

Adjusted: (Non-GAAP Basis)
$
3,084.0

 
$
2,271.4

 
$
812.6

 
$
609.3

 
$
2.15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
Fiscal 2016
Gross Profit
 
SG&A Expenses
 
Operating Income
 
Amount
 
Per Diluted Share
As Reported: (GAAP Basis)
$
3,051.3

 
$
2,397.8

 
$
653.5

 
$
460.5

 
$
1.65

Excluding Non-GAAP Adjustments
1.1

 
(122.0
)
 
123.1

 
91.2

 
0.33

Adjusted: (Non-GAAP Basis)
$
3,052.4

 
$
2,275.8

 
$
776.6

 
$
551.7

 
$
1.98

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
Fiscal 2015
Gross Profit
 
SG&A Expenses
 
Operating Income
 
Amount
 
Per Diluted Share
As Reported: (GAAP Basis)
$
2,908.6

 
$
2,290.6

 
$
618.0

 
$
402.4

 
$
1.45

Excluding Non-GAAP Adjustments
9.7

 
(160.8
)
 
170.5

 
128.8

 
0.47

Adjusted: (Non-GAAP Basis)
$
2,918.3

 
$
2,129.8

 
$
788.5

 
$
531.2

 
$
1.92

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
Fiscal 2014
Gross Profit
 
SG&A Expenses
 
Operating Income
 
Amount
 
Per Diluted Share
As Reported: (GAAP Basis)
$
3,297.0

 
$
2,176.9

 
$
1,120.1

 
$
781.3

 
$
2.79

Excluding Non-GAAP Adjustments
82.2

 
(49.3
)
 
131.5

 
88.3

 
0.31

Adjusted: (Non-GAAP Basis)
$
3,379.2

 
$
2,127.6

 
$
1,251.6

 
$
869.6

 
$
3.10



29


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results of operations should be read together with the Company’s consolidated financial statements and notes thereto, included elsewhere in this document. When used herein, the terms “the Company,” "Tapestry," “we,” “us” and “our” refer to Tapestry, Inc., including consolidated subsidiaries. References to "Coach," "Stuart Weitzman," "Kate Spade" or "kate spade new york" refer only to the referenced brand.
EXECUTIVE OVERVIEW
The fiscal years ended June 30, 2018 and July 1, 2017 were each 52-week periods, and the fiscal year ended July 2, 2016 was a 53-week period.
Tapestry is a leading New York-based house of modern luxury accessories and lifestyle brands. Tapestry is powered by optimism, innovation and inclusivity. Our brands are approachable and inviting and create joy every day for people around the world. Defined by quality, craftsmanship and creativity, the brands that make up our house give global audiences the opportunity for exploration and self-expression. Tapestry is comprised of the Coach, Kate Spade and Stuart Weitzman brands, all of which have been part of the American landscape for over 25 years.
Prior to fiscal 2018, the Company had three reportable segments: North America (Coach brand), International (Coach brand) and Stuart Weitzman. Beginning in fiscal 2018 and as a result of the Kate Spade acquisition, the Company aligned its reportable segments with the new structure of its business. As a result, the Company has three reportable segments:
Coach - Includes global sales of Coach brand products to customers through Coach operated stores, including the Internet and concession shop-in-shops, and sales to wholesale customers and through independent third party distributors.
Kate Spade - Includes global sales primarily of kate spade new york brand products to customers through Kate Spade operated stores, including the Internet, to wholesale customers, through concession shop-in-shops and through independent third party distributors.
Stuart Weitzman - Includes global sales of Stuart Weitzman brand products primarily through Stuart Weitzman operated stores, including the Internet, to wholesale customers and through numerous independent third party distributors.
 Each of our brands is unique and independent, while sharing a commitment to innovation and authenticity defined by distinctive products and differentiated customer experiences across channels and geographies. Our success does not depend solely on the performance of a single channel, geographic area or brand.
Fiscal 2019 Strategic Initiatives
The company is focused first and foremost on execution in fiscal 2019. The goal is to deliver strong revenue and operating income growth in fiscal 2019, while making the right strategic investments to support our long-term vision. Specifically, in fiscal 2019, the Company intends to:
Capture the full benefit of multi-brand structure and synergies
Fuel brand innovation by accelerating product newness across all brands
Drive global growth with an emphasis on the Chinese consumer
Advance our digital and data analytic capabilities
Recent Developments
Stuart Weitzman Production Challenges
During the third quarter of fiscal 2018, Stuart Weitzman results were negatively impacted by supply chain operational challenges including production delays, which caused lower than expected sales, as the brand was not prepared for the level of complexity and new development as it transitions to a new creative vision. The Company added infrastructure and capacity to support this vision with quality and on-time deliveries. The Company expects to experience some negative impacts through the Fall/Winter Season in fiscal 2019.
Impact of Tax Legislation
On December 22, 2017, H.R.1, formerly known as the Tax Cuts and Jobs Act (the "Tax Legislation") was enacted. The Tax Legislation significantly revises the U.S. tax code by (i) lowering the U.S. federal statutory income tax rate from 35% to 21%, (ii) implementing a territorial tax system, (iii) imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries ("Transition Tax"), (iv) requiring current inclusion of global intangible low taxed income ("GILTI") of certain earnings of controlled foreign corporations in U.S. federal taxable income, (v) creating the base erosion anti-abuse tax ("BEAT"),

30


(vi) implementing bonus depreciation that will allow for full expensing of qualified property, (vii) enacting a beneficial rate to be applied against Foreign Derived Intangible Income (“FDII”) and (viii) limiting deductibility of interest and executive compensation expense, among other changes. Notable changes include the following:
The Company expects to receive the full benefit of the rate reduction in fiscal 2019, as compared with the partial rate reduction during fiscal 2018 based on the pro-rated number of days the new rate applied in fiscal 2018. In the current year, the U.S federal statutory income tax rate was approximately 28%, which is expected to decline to 21% in fiscal 2019.
Foreign earnings that may exist after December 31, 2017 will generally be eligible for a 100% dividends received exemption, however companies may be subject to the alternative BEAT and GILTI tax provisions which could increase the global effective tax rate. Conversely, Companies may be eligible for a reduced rate to the extent their earnings qualify as FDII, which would reduce their global effective tax rate. These tax provisions are expected to impact the Company in fiscal year 2019. Based on current facts and circumstances the Company believes that GILTI is the tax provision most likely to apply. Under GILTI, a portion of the Company’s foreign earnings will be subject to U.S. taxation. To the extent a company’s foreign operations are subject to GILTI and there is an existing outside basis difference in the Company’s foreign investments that exists within the reporting period, the Company may need to record a deferred tax liability for some portion of the anticipated additional tax resulting from future GILTI inclusions. Outside-basis difference is generally defined as the difference between an entity’s financial statement carrying amount and the tax basis of the parent’s investment in that entity’s stock. Outside basis differences typically arise from things such as the entity earning income, that has yet to be distributed to the parent company, or from purchase accounting adjustments not recognized for tax purposes. For companies subject to GILTI, the Financial Accounting Standards Board ("FASB") has indicated that companies are allowed to record tax associated with GILTI as a period cost in the period the earnings are included on the U.S. tax return. The Company has chosen to adopt this policy.
The Tax Legislation includes, what many believe, is an unintended consequence that results in certain leasehold improvements, being ineligible for bonus depreciation. The Company has estimated fiscal year 2018 depreciation expense based on how the law was drafted, with no consideration of the perceived legislative intent. The Company has estimated its capital expenditures by class to estimate depreciation expense for purposes of calculating the rate change adjustment of our deferred tax balance. If Tax Legislation for QIP is adjusted in fiscal 2019 or beyond, it will impact the rate change adjustment, which in turn will impact the Company’s estimated annual effective tax rate in the year the legislation is revised.
At this time, it is unknown whether certain states in which the Company operates will conform to the Tax Legislation or adopt an alternative regime. The Company continues to monitor developments; at this time all material aspects of its provision for income tax for the fiscal year ended June 30, 2018 are recorded based on recent guidance or its historical approach to state tax expense.
Other provisions of the new legislation that are not applicable to the Company until fiscal 2019 include, but are not limited to, the provisions limiting deductibility of interest and executive compensation expense. Based on current facts and circumstances, we do not anticipate the impact of these provisions to be material to the overall financial statements.
Integration and Acquisition Costs
During the first quarter of fiscal 2018, the Company completed its acquisition of Kate Spade & Company. During the third quarter of fiscal 2018, the Company completed its acquisition of certain distributors for the Coach and Stuart Weitzman brands and obtained operational control of the Kate Spade Joint Ventures. The operating results of the respective entities have been consolidated in the Company's operating results commencing on the date of each acquisition. As a result, the Company incurred charges related to the integration and acquisition of the businesses. These charges are primarily associated with purchase price accounting adjustments, acquisition costs, inventory-related charges, contractual payments and organization-related expenses. The Company currently estimates that it will incur approximately $50-60 million in pre-tax charges, of which approximately $5-10 million are expected to be non-cash charges, in fiscal 2019. Refer to Note 4, "Integration and Acquisition Costs," and "GAAP to Non-GAAP Reconciliation," herein, for further information.
Strategic Repositioning of Coach Brand in North America Department Stores
In the beginning of fiscal 2017, the Company implemented a deliberate and strategic decision to elevate Coach's positioning in the channel by limiting participation in promotional events and closing approximately 25% of its wholesale doors during fiscal 2017.
Operational Efficiency Plan
During the fourth quarter of fiscal 2016, the Company announced a series of operational efficiency initiatives focused on creating an agile and scalable business model (the "Operational Efficiency Plan"). The significant majority of the charges under

31


this plan were recorded within SG&A expense. These charges were associated with organizational efficiencies, primarily related to the reduction of corporate staffing levels globally, as well as accelerated depreciation, mainly associated with information systems retirement, technology infrastructure charges related to the initial costs of replacing and updating our core technology platforms, and international supply chain and office location optimization. The Company incurred charges life to date of $87.4 million. The plan was completed in fiscal 2018.
Refer to Note 5, "Restructuring Activities," and "GAAP to Non-GAAP Reconciliation," herein, for further information.
Transformation Plan
During the fourth quarter of fiscal 2014, the Company announced a multi-year strategic plan with the objective of transforming the Coach brand and reinvigorating growth (the "Transformation Plan"). Key operational and cost measures of the Transformation Plan included: (i) the investment in capital improvements in our stores and wholesale locations to drive comparable sales improvement; (ii) the optimization and streamlining of our organizational model as well as the closure of underperforming stores in North America, and select International stores; (iii) the realignment of inventory levels and mix to reflect our elevated product strategy and consumer preferences; (iv) the investment in incremental advertising costs to elevate consumer perception of the Coach brand, drive sales growth and promote our new strategy, which started in fiscal 2015; and (v) the significant scale-back of our promotional cadence in an increased global promotional environment, particularly within our outlet Internet sales site, which began in fiscal 2014. The Company's execution of these key operational and cost measures was concluded during fiscal 2016, and we believe that long-term growth will be realized through these transformational efforts over time.
Refer to Note 5, "Restructuring Activities," and "GAAP to Non-GAAP Reconciliation," herein, for further information.
Current Trends and Outlook
The environment in which we operate is subject to a number of different factors driving global consumer spending. Consumer preferences, macroeconomic conditions, foreign currency fluctuations and geopolitical events continue to impact overall levels of consumer travel and spending on discretionary items, with inconsistent patterns across channels and geographies.
Global consumer retail traffic trends remain under pressure. This, along with other factors, has led to a more promotional environment in the fragmented retail industry due to increased competition and a desire to offset traffic declines with increased levels of conversion. Further declines in traffic could result in store impairment charges if expected future cash flows of the related asset group do not exceed the carrying value.
After strong economic performance in calendar 2017 and the first half of 2018, including improvements in the labor market as well as modest growth in overall consumer spending, the U.S. economic outlook has improved and moderate economic growth is expected to continue in the next year. Several organizations that monitor the world’s economy, including the International Monetary Fund, observed economic strengthening across the majority of the globe recently and are projecting continued economic strengthening over the next year, but anticipate that the growth will be inconsistent among different markets. It is still, however, too early to understand what kind of sustained impact these trends or changes in trade agreements and tax legislation will have on consumer discretionary spending.
Risk of volatility or a worsening of the macroeconomic environment remains due to political uncertainty and potential changes to international trade agreements. The Trump Administration recently announced that the U.S. is beginning the process to impose duties related to Chinese made imported products. Certain of the Company's offerings are included in this proposal, however the Company believes that there will be minimal impact given the diversity of its sourcing activities.
Additional macroeconomic impacts include but are not limited to the United Kingdom ("U.K.") voting to leave the European Union ("E.U."), commonly known as "Brexit." On March 29, 2017, the U.K. triggered Article 50 of the Lisbon Treaty formally starting negotiations with the E.U. The U.K. and E.U. announced in March 2018 an agreement in principle to transitional provisions under which E.U. law would remain in force in the U.K. until the end of December 2020, but this remains subject to the successful conclusion of a final withdrawal agreement between the parties. In the absence of such an agreement, there would be no transitional provisions and a "hard" Brexit would occur on March 29, 2019.
We will continue to monitor these trends and evaluate and adjust our operating strategies and cost management opportunities to mitigate the related impact on our results of operations, while remaining focused on the long-term growth of our business and protecting the value of our brands.
Furthermore, refer to Part I, Item 1 - "Business" for additional discussion on our expected store openings and closures within each of our segments. For a detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, refer to Part I, Item 1A - "Risk Factors".

32


FISCAL 2018 COMPARED TO FISCAL 2017
The following table summarizes results of operations for fiscal 2018 compared to fiscal 2017. All percentages shown in the tables below and the related discussion that follows have been calculated using unrounded numbers.
 
Fiscal Year Ended
 
June 30, 2018
 
July 1, 2017
 
Variance
 
(millions, except per share data)
 
Amount
 
% of
net sales
 
Amount
 
% of
net sales
 
Amount
 
%
Net sales
$
5,880.0

 
100.0
%
 
$
4,488.3

 
100.0
%
 
$
1,391.7

 
31.0
 %
Gross profit
3,853.9

 
65.5

 
3,081.1

 
68.6

 
772.8

 
25.1

SG&A expenses
3,183.1

 
54.1

 
2,293.7

 
51.1

 
889.4

 
38.8

Operating income
670.8

 
11.4

 
787.4

 
17.5

 
(116.6
)
 
(14.8
)
Interest expense, net
74.0

 
1.3

 
28.4

 
0.6

 
45.6

 
160.8

Income before provision for income taxes
596.8

 
10.2

 
759.0

 
16.9

 
(162.2
)
 
(21.4
)
Provision for income taxes
199.3

 
3.4

 
168.0

 
3.7

 
31.3

 
18.6

Net income
397.5

 
6.8

 
591.0

 
13.2

 
(193.5
)
 
(32.7
)
Net income per share:
 
 
 

 
 
 
 

 
 
 
 
     Basic
$
1.39

 
 

 
$
2.11

 
 

 
$
(0.72
)
 
(33.9
)%
     Diluted
$
1.38

 
 

 
$
2.09

 
 

 
$
(0.71
)
 
(34.1
)%
GAAP to Non-GAAP Reconciliation
The Company’s reported results are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The reported results during fiscal 2018 and fiscal 2017 reflect the impact of the Operational Efficiency Plan, Integration and Acquisition costs and the impact of the new Tax Legislation in fiscal 2018, as noted in the following tables. Refer to "Non-GAAP Measures" herein for further discussion on the Non-GAAP measures.
Fiscal 2018 Items

 
June 30, 2018
 
GAAP Basis
(As Reported)
 
Operational Efficiency Plan
 
Integration & Acquisition
 
Impact of Tax Legislation
 
Non-GAAP Basis
(Excluding Items)
 
(millions, except per share data)
Gross profit
$
3,853.9

 
$

 
$
(116.4
)
 
$

 
$
3,970.3

SG&A expenses
3,183.1

 
19.5

 
185.2

 

 
2,978.4

Operating income
670.8

 
(19.5
)
 
(301.6
)
 

 
991.9

Income before provision for income taxes
596.8

 
(19.5
)
 
(301.6
)
 

 
917.9

Provision for income taxes
199.3

 
(6.2
)
 
(130.7
)
 
178.2

 
158.0

Net income
397.5

 
(13.3
)
 
(170.9
)
 
(178.2
)
 
759.9

Diluted net income per share
1.38

 
(0.05
)
 
(0.58
)
 
(0.62
)
 
2.63

In fiscal 2018 the Company incurred charges as follows:
Operational Efficiency Plan - Total charges of $19.5 million primarily related to technology infrastructure costs. Refer to the "Executive Overview" herein and Note 5, "Restructuring Activities," for further information regarding this plan.

33


Integration & Acquisition - Total charges of $301.6 million, primarily attributable to the integration and acquisition of Kate Spade, and to a lesser extent the acquisition of certain distributors for the Coach and Stuart Weitzman brands and assumed operational control of the Kate Spade Joint Ventures. Provision for income taxes includes a one-time benefit of $40.7 million as a result of the reversal of certain valuation allowances that relate, in part, to the enactment of Tax Legislation. These charges include:
Limited life purchase accounting adjustments
Professional fees
Severance and other costs related to contractual agreements with certain Kate Spade executives
Organizational costs as a result of integration
Inventory reserves established primarily for the destruction of inventory
Refer to the "Executive Overview" herein and Note 4, "Integration & Acquisitions Costs," for more information.
Impact of Tax Legislation - Total charges of $178.2 million primarily related to the net impact of the transition tax and re-measurement of deferred tax balances. Refer to the "Executive Overview" herein and Note 14, "Income Taxes," for further information.
These actions taken together increased the Company's SG&A expenses by $204.7 million, cost of sales by $116.4 million and provision for income taxes by $41.3 million, negatively impacting net income by $362.4 million, or $1.25 per diluted share.
The following table summarizes the GAAP to Non-GAAP Reconciliation by reportable segment through operating income for fiscal 2018:
 
June 30, 2018
 
GAAP Basis
(As Reported)
 
Coach
 
Kate Spade
 
Stuart Weitzman
 
Corporate
 
Non-GAAP Basis
(Excluding Items)
 
(millions)
COGS
 
 
 
 
 
 
 
 
 
 
 
Integration & Acquisition(1)
 
 
(4.1
)
 
(106.5
)
 
(5.8
)
 

 
 
Gross profit
$
3,853.9

 
$
(4.1
)
 
$
(106.5
)
 
$
(5.8
)
 
$

 
$
3,970.3

 
 
 
 
 
 
 
 
 
 
 
 
SG&A
 
 
 
 
 
 
 
 
 
 
 
Integration & Acquisition(1)
 
 
0.5

 
113.7

 
7.8

 
63.2

 
 
Operational Efficiency Plan
 
 

 

 

 
19.5

 
 
SG&A
$
3,183.1

 
$
0.5

 
$
113.7

 
$
7.8

 
$
82.7

 
$
2,978.4

 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
670.8

 
$
(4.6
)
 
$
(220.2
)
 
$
(13.6
)
 
$
(82.7
)
 
$
991.9


(1) 
During the first quarter of fiscal 2018, the Company completed its acquisition of Kate Spade & Company. During the third quarter of fiscal 2018, the Company completed its acquisition of certain distributors for the Coach and Stuart Weitzman brands and obtained operational control of the Kate Spade Joint Ventures. The operating results of the respective entity have been consolidated in the Company's operating results commencing on the date of each acquisition.


34


Fiscal 2017 Items
 
July 1, 2017
 
GAAP Basis
(As Reported)
 
Operational Efficiency Plan
 
Integration & Acquisition
 
Non-GAAP Basis
(Excluding Items)
 
(millions, except per share data)
Gross profit
$
3,081.1

 
$

 
$
(2.9
)
 
$
3,084.0

SG&A expenses
2,293.7

 
24.0

 
(1.7
)
 
2,271.4

Operating income
787.4

 
(24.0
)
 
(1.2
)
 
812.6

Income before provision for income taxes
759.0

 
(24.0
)
 
(10.7
)
 
793.7

Provision for income taxes
168.0

 
(8.3
)
 
(8.1
)
 
184.4

Net income
591.0

 
(15.7
)
 
(2.6
)
 
609.3

Diluted net income per share
2.09

 
(0.05
)
 
(0.01
)
 
2.15

In fiscal 2017 the Company incurred adjustments as follows:
Operational Efficiency Plan - Total charges of $24.0 million primarily related to organizational efficiency costs, technology infrastructure costs and, to a lesser extent, network optimization costs.
Integration & Acquisition - Total charges of $10.7 million, related to $29.0 million of Stuart Weitzman integration-related costs, which were more than offset by the reversal of a $35.2 million accrual related to estimated contingent purchase price payments which were not paid, and $16.9 million of Kate Spade integration-related costs.
These actions taken together increased the Company's SG&A expenses by $22.3 million, interest expense by $9.5 million and cost of sales by $2.9 million, negatively impacting net income by $18.3 million, or $0.06 per diluted share.
The following table summarizes the GAAP to Non-GAAP Reconciliation by reportable segment through operating income for fiscal 2017:
 
July 1, 2017
 
GAAP Basis
(As Reported)
 
Coach
 
Stuart Weitzman
 
Corporate(1)
 
Non-GAAP Basis
(Excluding Items)
 
(millions)
COGS
 
 
 
 
 
 
 
 
 
Integration & Acquisition
 
 

 
(2.9
)
 

 
 
Gross profit
$
3,081.1

 
$

 
$
(2.9
)
 
$

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