Tapestry (TPR; Baa2, BBB+; double Neg) CPR 4Q Results (3m to March

Negative read-through for TPR & some to KERFP/LVMH.

Capri CEO; "Overall, we were disappointed with our results as performance in the fourth quarter continued to be impacted by softening demand globally for fashion luxury goods. In our retail channel, sales trends improved sequentially in the Americas and EMEA while trends slowed in Asia. In our wholesale channel, sales remained challenged."

• Constant currency sales down -7.9% (c-3.5%) in 4Q driven by Michael Kors (68% of group sales) at -9.2% (c-4%), & Jimmy Choo's (20%) -9.3% drop (c-2.7%). Versace (12%) held up better -2.9% (c-1.2%) but smallest business & comes off low operating margins to end this year (2.4% vs. 13.7% last year). 4Q results are in line with falls for FY group sales at cc-8.4% yoy; Michael Kors (-9.5%) & Versace (-7.9%) the weakest.
• Wasn't much relief in gross margins at 62.7% vs. c64.3% and 64.9% prior year, operating margin falling across all three brands on discounting & margin deleveraging on falling sales. FY gross margin ends at 64.5% down from 66.3% last yr.
• Net loss of -$472m in Q4 impacted by non-cash impairments, adj it says is +$50m. Operating cash flows +$44m, FCF -$6m. 4Q. Leaves FY cash flow from operations at $309m & FCF $120m, latter down from the mid $500m it was running over the last 3 years. It sees "normalisation" in FCF in FY25, outside that continues to give no guidance given pending TPR acquisition.
• Debt load that TPR will inherit on close was little changed at $1.72b (reported) & another $1.8b in lease liabilities against $200m in cash. It single traded bond, a Michael Kors $450m line, is due in Nov.

• Re. TPR; reiterates strongly disagrees with FTC, sees merit of acquisition, will vigorously defend in court etc.
• Reminder Tapestry has agreed to acquire it at $57/share. Bad performance not only makes the price tag look expensive (see LVMH on Tiffany during Covid) but also on deal close makes deleveraging (required for IG ratings) tougher. TPR standalone is runs gross low 2x but will rise to 4.5x pro-forma including the ~$7.5b its issued in new bonds to fund the deal. TPR has committed to 2.5x within 2yrs of closing. Reminder Capri is sizeable acquisition (~80% of TPR in sales & 50% in EBITDA)/its operating performance does matter (for longs).
• New TPR lines have special mandatory redemption clause on deal failure at €101 - we expect cash px to drift towards that as event risk approaches (close by Feb required) on 1) fading carry protection & 2) capri equities still pricing (EPS adj.) 70% chance of failure.