COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
SFAS No.
133, “
Accounting for
Derivative Instruments and Hedging Activities
” requires companies to
recognize all derivative instruments as either assets or liabilities at fair
value in the balance sheet. In accordance with SFAS 133, the
derivative instruments are designated as cash flow hedges. The
effective portion of gains or losses on the derivative instruments are reported
as a component of other comprehensive income and reclassified into earnings in
the same periods during which the hedged transaction affects
earnings. Gains and losses on the derivatives representing hedge
ineffectiveness are recognized in current earnings. Cash flows on
derivatives are included within net cash provided by operating
activities.
The
following tables provide information related to the Company’s
derivatives:
Derivatives designated as
hedging
|
|
Balance
Sheet
|
|
Fair Value
|
|
instruments under Statement
133
|
|
Classification
|
|
At March 28,
2009
|
|
|
At June 28,
2009
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
contracts
|
|
Other Current
Assets
|
|
$
|
5
|
|
|
$
|
7,906
|
|
Total derivative
assets
|
|
|
|
$
|
5
|
|
|
$
|
7,906
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
contracts
|
|
Accrued
Liabilities
|
|
$
|
30,605
|
|
|
$
|
5,540
|
|
Total derivative
liabilities
|
|
|
|
$
|
30,605
|
|
|
$
|
5,540
|
|
|
|
Amount of Gain or (Loss)
Recognized in OCI on Derivatives
(Effective
Portion)
|
|
|
|
Quarter
Ended
|
|
|
Nine Months
Ended
|
|
Derivatives in Statement 133 Cash
Flow Hedging
Relationships
|
|
Marc
h 28,
2009
|
|
|
March 29,
2008
|
|
|
March 28,
2009
|
|
|
March 29,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
contracts
|
|
$
|
2,868
|
|
|
$
|
(4,630
|
)
|
|
$
|
(9,664
|
)
|
|
$
|
(3,298
|
)
|
Total
|
|
$
|
2,868
|
|
|
$
|
(4,630
|
)
|
|
$
|
(9,664
|
)
|
|
$
|
(3,298
|
)
|
For the
third quarter of fiscal 2009 and fiscal 2008, the amounts above are net of tax
of $1,963 and $(3,157), respectively. For the first nine months of
fiscal 2009 and fiscal 2008, the amounts above are net of tax of $(6,633) and
$(2,262), respectively.
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
|
|
Amount of Gain or (Loss)
Reclassified from
Accumulated OCI into Income
(Effective Portion)
|
|
Location of Gain or
(Loss)
|
|
Quarter
Ended
|
|
|
Nine Months
Ended
|
|
Reclassified from Accumulated OCI
into Income (Effective
Portion)
|
|
March 28,
2009
|
|
|
March 29,
2008
|
|
|
March 28,
2009
|
|
|
March 29,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
Sales
|
|
$
|
(1,915
|
)
|
|
$
|
(1,481
|
)
|
|
$
|
(936
|
)
|
|
$
|
(27
|
)
|
Total
|
|
$
|
(1,915
|
)
|
|
$
|
(1,481
|
)
|
|
$
|
(936
|
)
|
|
$
|
(27
|
)
|
During
the nine months ended March 28, 2009 and March 29, 2008, there were no material
gains or losses recognized in income due to hedge ineffectiveness.
The
Company expects that $6,468 of net derivative losses included in accumulated
other comprehensive loss at March 28, 2009 will be reclassified into earnings
within the next 12 months. This amount will vary due to fluctuations
in the yen exchange rate.
Hedging
activity affected accumulated other comprehensive (loss) income, net of tax, as
follows:
|
|
Period
Ended
|
|
|
|
March 28,
2009
|
|
|
June 28,
2008
|
|
|
|
|
|
|
|
|
Balance at beginning of
period
|
|
$
|
6,943
|
|
|
$
|
1,161
|
|
Net losses transferred to
earnings
|
|
|
555
|
|
|
|
2,411
|
|
Change in fair value, net of
tax expense
|
|
|
(9,664
|
)
|
|
|
3,371
|
|
Balance at end of
period
|
|
$
|
(2,166
|
)
|
|
$
|
6,943
|
|
11.
Goodwill and Intangible Assets
The
change in the carrying value of goodwill for the first nine months of fiscal
2009 ended March 28, 2009, by operating segment, is as follows:
|
|
Direct-to-
Consumer
|
|
|
Indirect
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill balance at June 28,
2008
|
|
$
|
247,602
|
|
|
$
|
1,516
|
|
|
$
|
249,118
|
|
Acquisition of
Hong Kong & Macau retail
businesses
|
|
|
3,554
|
|
|
|
-
|
|
|
|
3,554
|
|
Foreign exchange
impact
|
|
|
20,269
|
|
|
|
-
|
|
|
|
20,269
|
|
Goodwill balance at March 28,
2009
|
|
$
|
271,425
|
|
|
$
|
1,516
|
|
|
$
|
272,941
|
|
At
March 28, 2009 and
June 28, 2008, intangible assets not
subject to amortization con
sisted of
$9,788
of trademarks.
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
12.
Retirement Plans
In the
first quarter of fiscal 2009, the Company adopted the measurement provision of
SFAS 158, "
Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106 and 132R,
" which requires an
employer to measure defined benefit plan assets and obligations as of the date
of the employer's fiscal year-end statement of financial
position. Previously, the Company had measured its defined benefit
plan assets and obligations three months prior to the fiscal
year-end. The impact of this change resulted in a non-cash charge to
retained earnings of $183 and an increase to accumulated other comprehensive
income of $22.
The
components of net periodic pension cost for the Coach sponsored benefit plans
are:
|
|
Quarter
Ended
|
|
|
Nine Months
Ended
|
|
|
|
March 28,
|
|
|
March
29,
|
|
|
March 28,
|
|
|
March 29,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
290
|
|
|
$
|
202
|
|
|
$
|
823
|
|
|
$
|
574
|
|
Interest
cost
|
|
|
106
|
|
|
|
96
|
|
|
|
316
|
|
|
|
287
|
|
Expect
ed return on plan
assets
|
|
|
(89
|
)
|
|
|
(79
|
)
|
|
|
(267
|
)
|
|
|
(237
|
)
|
Recognized actuarial
loss
|
|
|
37
|
|
|
|
67
|
|
|
|
111
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension
cost
|
|
$
|
344
|
|
|
$
|
286
|
|
|
$
|
983
|
|
|
$
|
821
|
|
13.
Segment Information
The
Company operates its business in two reportable segments: Direct-to-Consumer and
Indirect. The Company's reportable segments represent channels of
distribution that offer similar merchandise and service and utilize similar
marketing strategies. Sales of Coach products through
Company-operated stores in North America, Japan, Hong Kong and Macau, the
Internet and the Coach catalog constitute the Direct-to-Consumer
segment. The Indirect segment includes sales to wholesale customers
in over 20 countries, including the United States, and royalties earned on
licensed product. In deciding how to allocate resources and assess
performance, the Company's executive officers regularly evaluate the sales and
operating income of these segments. Operating income is the gross
margin of the segment less direct expenses of the
segment. Unallocated corporate expenses include production variances,
general marketing, administration and information systems expenses, as well as
distribution and consumer service expenses.
In connection with the
acquisition
of the retail businesses in Hong Kong
and Macau, the Company evaluated the composition of its reportable segments and
concluded that sales in these regions should be included in the
Direct-to-Consumer segment
.
Accordingly, prior year
comparable sales and operating income
have been
reclassified
to conform to
the current year presentation
.
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
|
|
Direct-to-
Consumer
|
|
|
Indirect
|
|
|
Corporate
Unallocated
|
|
|
Total
|
|
Quarter Ended March 28,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
634,033
|
|
|
$
|
105,906
|
|
|
$
|
-
|
|
|
$
|
739,939
|
|
Operating income
(loss)
|
|
|
211,153
|
|
|
|
56,381
|
|
|
|
(82,157
|
)
|
|
|
185,377
|
|
Income (loss) before provision
for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes and discontinued
operations
|
|
|
211,153
|
|
|
|
56,381
|
|
|
|
(82,278
|
)
|
|
|
185,256
|
|
Depreciation and amortization
expense
|
|
|
19,694
|
|
|
|
2,483
|
|
|
|
8,554
|
|
|
|
30,731
|
|
Additions to long-lived
assets
|
|
|
18,487
|
|
|
|
783
|
|
|
|
3,784
|
|
|
|
23,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended March 29,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
582,274
|
|
|
$
|
162,248
|
|
|
$
|
-
|
|
|
$
|
744,522
|
|
Operating income
(loss)
|
|
|
229,197
|
|
|
|
103,089
|
|
|
|
(75,594
|
)
|
|
|
256,692
|
|
Income (loss) before provision
fo
r
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes and discontinued
operations
|
|
|
229,197
|
|
|
|
103,089
|
|
|
|
(66,047
|
)
|
|
|
266,239
|
|
Depreciation and amortization
expense
|
|
|
18,340
|
|
|
|
2,478
|
|
|
|
4,991
|
|
|
|
25,809
|
|
Additions to long-l
ived assets
|
|
|
22,710
|
|
|
|
2,571
|
|
|
|
7,229
|
|
|
|
32,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 28,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,043,790
|
|
|
$
|
408,934
|
|
|
$
|
-
|
|
|
$
|
2,452,724
|
|
Operating income
(loss)
|
|
|
762,206
|
|
|
|
239,022
|
|
|
|
(234,002
|
)
|
|
|
767,226
|
|
Income (loss) before provision
for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes and discontinued
operations
|
|
|
762,206
|
|
|
|
239,022
|
|
|
|
(230,945
|
)
|
|
|
770,283
|
|
Depreciation and amortization
exp
ense
|
|
|
62,095
|
|
|
|
7,490
|
|
|
|
22,238
|
|
|
|
91,823
|
|
Additions to long-lived
assets
|
|
|
53,711
|
|
|
|
5,061
|
|
|
|
151,464
|
|
|
|
210,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 29,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,895,568
|
|
|
$
|
503,689
|
|
|
$
|
-
|
|
|
$
|
2,399,257
|
|
Operating income
(loss)
|
|
|
818,407
|
|
|
|
325,261
|
|
|
|
(245,155
|
)
|
|
|
898,513
|
|
Income (loss) before provision
for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes and discontinued
operations
|
|
|
81
8,407
|
|
|
|
325,261
|
|
|
|
(210,044
|
)
|
|
|
933,624
|
|
Depreciation and amortization
expense
|
|
|
51,098
|
|
|
|
7,166
|
|
|
|
16,684
|
|
|
|
74,948
|
|
Additions to long-lived
assets
|
|
|
80,864
|
|
|
|
12,686
|
|
|
|
21,549
|
|
|
|
115,099
|
|
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
The following is a summary of the common
costs not allocated in the determination of segment
performance:
|
|
Quarter
Ended
|
|
|
Nine Months
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28,
|
|
|
March 29,
|
|
|
March 28,
|
|
|
March 29,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
variances
|
|
$
|
8,509
|
|
|
$
|
12,354
|
|
|
$
|
17,627
|
|
|
$
|
19,330
|
|
Advertising, marketing
and
design
|
|
|
(37,390
|
)
|
|
|
(32,818
|
)
|
|
|
(114,186
|
)
|
|
|
(96,101
|
)
|
Administration and information
systems
|
|
|
(40,870
|
)
|
|
|
(44,081
|
)
|
|
|
(99,266
|
)
|
|
|
(134,187
|
)
|
Distribution and customer
service
|
|
|
(12,406
|
)
|
|
|
(11,049
|
)
|
|
|
(38,177
|
)
|
|
|
(34,197
|
)
|
Total corporate
unallocated
|
|
$
|
(82,157
|
)
|
|
$
|
(75,594
|
)
|
|
$
|
(234,002
|
)
|
|
$
|
(245,155
|
)
|
14.
Revolving Credit Facility
On
February 20, 2009, the Company’s wholly owned subsidiary, Coach Shanghai
Limited, entered into a $10,000 revolving credit facility with HSBC Bank Company
Limited (the “HSBC facility”). The HSBC facility expires on January
30, 2010. Under the HSBC facility, the Company pays a commitment fee
of 10 basis points on the daily unused amount if the daily unused amount exceeds
60% of the total facility. Interest is based on the People's Bank of
China rate plus 2%, per annum.
The HSBC
facility is available for working capital requirements and may be prepaid
without penalty or premium. As of March 28, 2009 and June 28, 2008,
there were $1,896 and $0 outstanding borrowings under the HSBC facility,
respectively.
The HSBC
facility contains various covenants and customary events of
default. Coach Shanghai Limited has been in compliance with all
covenants since the inception of the facility.
15.
Recent Accounting Developments
In
September 2006, the FASB issued SFAS 157, “
Fair Value
Measurements
.” SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. The Company
adopted the provisions of SFAS 157 related to financial assets and liabilities
in the first quarter of fiscal 2009. The adoption of these provisions
did not have a material impact on our consolidated financial
statements. The remaining provisions of SFAS 157 are effective for
the first quarter of the fiscal year that will end on July 3,
2010. For further information about the fair value measurements of
our financial assets and liabilities see Note 8.
In
December 2007, the FASB issued SFAS 141 (revised 2007), “
Business Combinations.
” Under
SFAS 141(R), an acquiring entity will be required to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions. SFAS 141(R) will change the accounting
treatment for certain specific acquisition-related items, including expensing
acquisition-related costs as incurred, valuing noncontrolling interests
(minority interests) at fair value at the acquisition date, and expensing
restructuring costs associated with an acquired business. SFAS 141(R)
also includes expanded disclosure requirements. SFAS 141(R) is to be
applied prospectively to business combinations for which the acquisition date is
on or after June 28, 2009. The Company does not expect the adoption
of SFAS 141(R) to have a material impact on the Company’s consolidated financial
statements.
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
In March
2008, the FASB issued SFAS 161, “
Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133
.” SFAS 161 requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value
amounts of and gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements. This statement is effective for Coach’s financial
statements issued for the interim period of this report. SFAS 161 did
not have a material impact on the Company's consolidated financial
statements. See Note 10 for the required disclosures.
On
October 10, 2008, the FASB issued Staff Position (“FSP”) No. SFAS 157-3, “
Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active
” which
amends SFAS 157 by incorporating an example to illustrate key considerations in
determining the fair value of a financial asset in an inactive
market. FSP 157-3 was effective on October 10, 2008. The
Company has adopted the provisions of SFAS 157 and incorporated the
considerations of this FSP in determining the fair value of its financial
assets. FSP 157-3 did not have a material impact on the Company's
consolidated financial statements.
On
December 30, 2008, the FASB issued FSP No. SFAS 132(R)-1, “
Employers’ Disclosures about
Postretirement Benefit Plan Assets
” which provides guidance on employer’s
disclosures about plan assets of a defined benefit pension or other
postretirement plan. FSP 132(R)-1 is effective for fiscal years
ending after December 15, 2009. The Company does not expect the
application of this FSP to have a material impact on the Company’s consolidated
financial statements.
On April
9, 2009, the FASB issued FSP No. SFAS 157-4, “
Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly
” which amends
SFAS 157 by incorporating a two-step process to determine whether a market is
not active and a transaction is not distressed. FSP 157-4 is
effective for interim and annual periods ending after June 15,
2009. The Company does not expect the adoption of FSP 157-4 to have a
material impact on the Company's consolidated financial statements.
On April
9, 2009, the FASB issued FSP No. SFAS 115-2 and SFAS 124-2, “
Recognition and Presentation of
Other-Than-Temporary Impairments
” which amends the other-than-temporary
impairment indicators to (a) management has no intent to sell the security and
(b) it is more likely than not management will not have to sell the security
before recovery. This FSP is effective for interim and annual periods
ending after June 15, 2009. The Company does not expect the adoption
of this FSP to have a material impact on the Company’s consolidated financial
statements.
On April
9, 2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “
Interim Disclosures about Fair Value
of Financial Statements
” which amends the interim disclosure requirements
in scope for FAS 107, “
Disclosures about Fair Value of
Financial Instruments
”. This FSP is effective for interim and
annual periods ending after June 15, 2009. The Company does not
expect the adoption of this FSP to have a material impact on the Company’s
consolidated financial statements.
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
16.
Subsequent Event – Acquisition of Mainland China Retail Business
On April
1, 2009, Coach acquired 100% of its domestic retail business in mainland China
for approximately $11,000 from the former distributor, the ImagineX
group. The results of the acquired business will be included in the
consolidated financial statements, within the Direct-to-Consumer segment, from
April 1, 2009 onward. This acquisition will provide the Company with
greater control over the brand in mainland China, enabling Coach to raise brand
awareness and aggressively grow market share with the Chinese
consumer. Unaudited pro forma information related to this acquisition
is not included as the impact of this transaction is not material to the
consolidated results of the Company.
17.
Subsequent Event – Declaration of Dividend
In April
2009, Coach’s Board of Directors voted to declare a cash dividend, at an
expected annual rate of $0.30 per share.
The first quarterly
payment, of $0.075 per share, will be paid on June 29, 2009 to stockholders of
record as of June 8, 2009.
ITEM 2.
|
Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
|
The
following discussion of Coach’s financial condition and results of operations
should be read together with Coach’s condensed consolidated financial statements
and notes to those statements, included elsewhere in this
document. When used herein, the terms “Coach,” “Company,” “we,” “us”
and “our” refer to Coach, Inc., including consolidated
subsidiaries. The fiscal year ending June 27, 2009 (“fiscal 2009”)
will be a 52-week period. The fiscal year ending July 3, 2010
(“fiscal 2010”) will be a 53-week period.
EXECUTIVE
OVERVIEW
Coach is
a leading American marketer of fine accessories and gifts for women and
men. Our product offerings include handbags, women’s and men’s
accessories, footwear, outerwear, business cases, sunwear, watches, travel bags,
jewelry and fragrance. Coach operates in two segments:
Direct-to-Consumer and Indirect. The Direct-to-Consumer segment
includes sales to consumers through Company-operated stores in North America,
Japan, Hong Kong and Macau, the Internet and the Coach catalog. The
Indirect segment includes sales to wholesale customers in over 20 countries,
including the United States, and royalties earned on licensed
product. As Coach’s business model is based on multi-channel
international distribution, our success does not depend solely on the
performance of a single channel or geographic area.
In order
to drive growth within our global framework, we continue to focus on two key
growth strategies: increased global distribution, with an emphasis on our direct
retail distribution in North America and China and improved
productivity. To that end, we are focused on four key
initiatives:
|
·
|
Build
market share in the North American women’s accessories
market. As part of our culture of innovation and continuous
improvement we are implementing a number of initiatives to accelerate the
level of newness, elevate our product offering and enhance the in-store
experience. These initiatives will enable us to continue to
leverage our leadership position in the
market.
|
|
·
|
Continue
to grow our North American retail store base primarily by opening stores
in new markets and adding stores in existing markets. We
believe that North America can support about 500 retail stores in total,
including up to 30 in Canada. During fiscal 2009, we plan to
open 39 retail stores, of which 13 will be in new markets. We
currently plan to open approximately 20 new retail stores in fiscal 2010,
of which 13 will be in new markets. The pace of our future
retail store openings will depend upon the economic environment and
reflect opportunities in the
marketplace.
|
|
·
|
Continue
to expand market share with the Japanese consumer, driving growth in Japan
primarily by opening new retail locations. We believe that
Japan can support about 180 locations in
total.
|
|
·
|
Raise
brand awareness in emerging markets, notably in China, where our brand is
taking hold and the category is developing rapidly. In
September 2008, Coach successfully completed the first phase of our
acquisition of our retail businesses in China, transitioning eight stores
in Hong Kong and two stores in Macau. The acquisition of our
retail business in mainland China was completed in April 2009,
transitioning 15 stores.
|
We
believe the growth strategies outlined above will allow us to deliver long-term
returns on our investments and drive increased cash flows from operating
activities. However, the current macroeconomic environment has
created a very challenging retail market in which it is difficult to achieve
productivity gains. The Company believes long-term growth can still
be achieved through a combination of expanded distribution, a focus on
innovation to support productivity and disciplined expense
control. Our multi-channel distribution model is diversified and
includes substantial international and factory businesses, which reduces our
reliance upon our full-price U.S. business. With an essentially
debt-free balance sheet and significant cash position, we believe we are well
positioned to manage through this economic downturn.
THIRD
QUARTER OF FISCAL 2009
The key
metrics of the third quarter of fiscal 2009 were:
|
·
|
Earnings
per diluted share fell 22.6% to $0.36. Excluding one-time
charges of $0.03 per diluted share, earnings per diluted share decreased
17.0% to $0.38 per diluted share.
|
|
·
|
Net
sales decreased 0.6% to $739.9
million.
|
|
·
|
Direct-to-consumer
sales rose 8.9% to $634.0 million.
|
|
·
|
Comparable
store sales in North America declined 4.2%, primarily due to the
challenging retail environment which resulted in decreased traffic in our
full-priced stores.
|
|
·
|
Coach
Japan sales, when translated into U.S. dollars, rose 14.2% to $177.0
million. This increase includes a 13.4% positive impact from
currency translation.
|
|
·
|
In
North America, Coach opened two new retail stores, opened three new
factory stores and closed two retail stores, bringing the total number of
retail and factory stores to 324 and 109, respectively, at the end of the
third quarter of fiscal 2009. We also expanded one retail store
and one factory store in North
America.
|
|
·
|
In
Japan, Coach opened one new location, bringing the total number of Coach
Japan-operated locations at the end of the third quarter of fiscal 2009 to
156.
|
During
the third quarter of fiscal 2009, the Company recorded certain one-time charges
related to cost savings initiatives. These initiatives increased
total expenses in the third quarter of fiscal 2009 by $13.4 million, or $8.3
million after tax and related to the following: the elimination of approximately
150 positions from the Company’s corporate offices in New York, New Jersey and
Jacksonville, the planned closure of four underperforming retail stores and the
planned closure of Coach Europe Services, the Company’s sample-making facility
in Italy.
RESULTS
OF OPERATIONS
THIRD
QUARTER FISCAL 2009 COMPARED TO THIRD QUARTER FISCAL 2008
The
following table summarizes results of operations for the third quarter of fiscal
2009 compared to the third quarter of fiscal 2008:
|
|
Quarter
Ended
|
|
|
|
March 28,
2009
|
|
|
March 29,
2008
|
|
|
Variance
|
|
|
|
(dollars in millio
ns, except per share
data)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
% of
net sales
|
|
|
Amount
|
|
|
% of
net sales
|
|
|
Amount
|
|
|
%
|
|
Net sales
|
|
$
|
739.9
|
|
|
|
100.0
|
%
|
|
$
|
744.5
|
|
|
|
100.0
|
%
|
|
$
|
(4.6
|
)
|
|
|
(0.6
|
)
%
|
Gross
profit
|
|
|
525.1
|
|
|
|
71.0
|
|
|
|
558.3
|
|
|
|
75.0
|
|
|
|
(33.3
|
)
|
|
|
(6.0
|
)
|
Selling, general
and administrative
expenses
|
|
|
339.7
|
|
|
|
45.9
|
|
|
|
301.6
|
|
|
|
40.5
|
|
|
|
38.1
|
|
|
|
12.6
|
|
Operating
income
|
|
|
185.4
|
|
|
|
25.1
|
|
|
|
256.7
|
|
|
|
34.5
|
|
|
|
(71.3
|
)
|
|
|
(27.8
|
)
|
Interest (expense) income,
net
|
|
|
(0.1
|
)
|
|
|
(0.0
|
)
|
|
|
9.5
|
|
|
|
1.3
|
|
|
|
(9.7
|
)
|
|
|
(101.3
|
)
|
Provision for income
taxes
|
|
|
70.4
|
|
|
|
9.5
|
|
|
|
103.8
|
|
|
|
13.9
|
|
|
|
(33.
4
|
)
|
|
|
(32.2
|
)
|
Income from continuing
operations
|
|
|
114.9
|
|
|
|
15.5
|
|
|
|
162.4
|
|
|
|
21.8
|
|
|
|
(47.6
|
)
|
|
|
(29.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
|
|
|
|
|
$
|
0.47
|
|
|
|
|
|
|
$
|
(0.11
|
)
|
|
|
(23.1
|
)
%
|
Diluted
|
|
$
|
0.36
|
|
|
|
|
|
|
$
|
0.46
|
|
|
|
|
|
|
$
|
(0.10
|
)
|
|
|
(22.6
|
)
%
|
Net
Sales
Net sales
by business segment in the third quarter of fiscal 2009 compared to the third
quarter of fiscal 2008 were as follows:
|
|
Quarter
Ended
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of
|
|
|
|
Net Sales
|
|
|
Total Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28,
|
|
|
Mar
ch 29,
|
|
|
Rate of
|
|
|
March 28,
|
|
|
March 29,
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase
|
|
|
2009
|
|
|
2008
|
|
|
|
(dollars in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct-to-consumer
|
|
$
|
634.0
|
|
|
$
|
582.3
|
|
|
|
8.9
|
%
|
|
|
85.7
|
%
|
|
|
78.2
|
%
|
Indirect
|
|
|
105.9
|
|
|
|
162.2
|
|
|
|
(34.7
|
)
|
|
|
14.3
|
|
|
|
21.8
|
|
Total net
sales
|
|
$
|
739.9
|
|
|
$
|
744.5
|
|
|
|
(0.6
|
)
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Direct-to-Consumer
Net sales
increased 8.9% to $634.0 million during the third quarter of fiscal 2009 from
$582.3 million during the same period in fiscal 2008, driven by sales from new
and expanded stores, partially offset by a decline in comparable store
sales.
In North
America, net sales increased 6.8% as sales from new and expanded stores were
partially offset by a 4.2% decline in comparable store sales. Since
the end of the third quarter of fiscal 2008, Coach opened 37 net new retail
stores and eight new factory stores, and expanded 14 retail stores and 16
factory stores in North America. In Japan, net sales increased 14.2%
driven primarily by an approximately $20.8 million or 13.4% positive impact from
foreign currency exchange. Since the end of the third quarter of
fiscal 2008, Coach opened 14 new locations and expanded four locations in
Japan.
Indirect
Net sales
decreased 34.7% to $105.9 million in the third quarter of fiscal 2009 from
$162.2 million during the same period of fiscal 2008. The decrease
was driven primarily by a 40.0% decrease in U.S. wholesale as the Company
reduced shipments into U.S. department stores in order to manage customer
inventory levels due to a weaker sales environment. International
shipments also declined 18.5%; however, sales at retail rose slightly, driven by
an increase in location square footage. Licensing revenue of
approximately $5.9 million and $5.6 million in the third quarter of fiscal 2009
and fiscal 2008, respectively, is included in Indirect sales.
Operating
Income
Operating
income decreased 27.8% to $185.4 million in the third quarter of fiscal 2009 as
compared to $256.7 million in the third quarter of fiscal
2008. Excluding one-time charges of $13.4 million, operating income
decreased 22.6% to $198.8 million. Operating margin decreased to
25.1% as compared to 34.5% in the same period of the prior year, as gross margin
declined while selling, general, and administrative expenses
increased. Excluding one-time charges, operating margin was
26.9%.
Gross
profit decreased 6.0% to $525.1 million in the third quarter of fiscal 2009 from
$558.3 million during the same period of fiscal 2008. Gross margin
was 71.0% in the third quarter of fiscal 2009 as compared to 75.0% during the
same period of fiscal 2008. The change in gross margin was driven
primarily by promotional activities in Coach-operated North American factory
stores and channel mix. Gross margin was also negatively impacted by
our sharper pricing initiative, in which retail prices on handbags and women’s
accessories have been reduced in response to consumers’ reluctance to spend, and
an increase in average unit cost.
Selling,
general and administrative expenses increased 12.6% to $339.7 million in the
third quarter of fiscal 2009 as compared to $301.6 million in the third quarter
of fiscal 2008. Excluding one-time charges of $13.4 million, selling,
general and administrative expenses were $326.3 million. As a
percentage of net sales, selling, general and administrative expenses increased
to 45.9% during the third quarter of fiscal 2009 as compared to 40.5% during the
third quarter of fiscal 2008. Excluding one-time charges, selling
general and administrative expenses as a percentage of net sales increased to
44.1%. The increase as a percentage of net sales was primarily driven
by the further deleveraging of expenses due to negative comparable store sales,
investment spending associated with the acquisition of our retail businesses in
Hong Kong and Macau and new merchandising initiatives.
Selling
expenses were $245.2 million, or 33.1% of net sales, in the third quarter of
fiscal 2009 compared to $208.6 million, or 28.0% of net sales, in the third
quarter of fiscal 2008. Excluding one-time charges of $5.0 million
related to the planned closure of four underperforming stores, selling expenses
were $240.2 million, representing 32.5% of net sales. The dollar
increase in selling expenses was primarily due to an increase in operating
expenses of Coach Japan, North American stores and the newly formed Coach
China. The increase in Coach Japan operating expenses was driven
primarily by the impact of foreign currency exchange rates which increased
reported expenses by approximately $8.5 million. The increase in
North American store expenses was primarily attributable to expenses from new
and expanded stores opened since the end of the third quarter of fiscal
2008. The third quarter of fiscal 2009 includes operating expenses of
the newly formed Coach China, which consisted of investments in stores,
marketing, organization and infrastructure.
Advertising,
marketing, and design costs were $40.5 million, or 5.5% of net sales, in the
third quarter of fiscal 2009, compared to $37.2 million, or 5.0% of net sales,
during the same period of fiscal 2008. The increase was primarily due
to development costs for new merchandising initiatives and design
expenditures.
Distribution
and consumer service expenses were $13.1 million, or 1.8% of net sales, in the
third quarter of fiscal 2009, compared to $11.7 million, or 1.6% of net sales,
in the third quarter of fiscal 2008. The increase was primarily the
result of an increase in fixed occupancy costs related to the expansion of our
distribution center that was completed in August 2008.
Administrative
expenses were $40.9 million, or 5.5% of net sales, in the third quarter of
fiscal 2009 compared to $44.1 million, or 5.9% of net sales, during the same
period of fiscal 2008. Excluding one-time charges of $8.4 million,
expenses were $32.5 million, representing 4.4% of net sales. The
decrease in administrative expenses was primarily due to a decrease in
performance-based compensation expense.
Interest
(Expense)/Income, Net
Net
interest expense was $0.1 million in the third quarter of fiscal 2009 as
compared to income of $9.5 million in the third quarter of fiscal
2008. The change is primarily due to a decrease in interest income,
as a result of lower interest rates and lower average cash
balances.
Provision
for Income Taxes
The
effective tax rate was 38.0% in the third quarter of fiscal 2009 as compared to
39.0% in the third quarter of fiscal 2008. The decrease in the
effective tax rate is primarily attributable to an increase in foreign-source
income, which is taxed at a lower rate.
Income
from Continuing Operations
Net
income from continuing operations was $114.9 million in the third quarter of
fiscal 2009 as compared to $162.4 million in the third quarter of fiscal
2008. Excluding one-time charges of $8.3 million discussed above,
income from continuing operations was $123.2 million in the third quarter of
fiscal 2009, a 24.2% decrease compared to third quarter of fiscal
2008. This decrease was primarily due to a decline in operating
income and interest income, partially offset by a lower provision for income
taxes.
FIRST
NINE MONTHS FISCAL 2009 COMPARED TO FIRST NINE MONTHS FISCAL 2008
The
following table summarizes results of operations for the first nine months of
fiscal 2009 compared to the first nine months of fiscal 2008:
|
|
Nine Months
Ended
|
|
|
|
March 28,
2009
|
|
|
March 29,
2008
|
|
|
Variance
|
|
|
|
(dollars in millions, except per
share data)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
% of
net sales
|
|
|
Amount
|
|
|
% of
net sales
|
|
|
Amount
|
|
|
%
|
|
Net sales
|
|
$
|
2,452.7
|
|
|
|
100.0
|
%
|
|
$
|
2,399.3
|
|
|
|
100.0
|
%
|
|
$
|
53.5
|
|
|
|
2.2
|
%
|
Gross
profit
|
|
|
1,775.3
|
|
|
|
72.4
|
|
|
|
1,813.8
|
|
|
|
75.6
|
|
|
|
(38.5
|
)
|
|
|
(2.1
|
)
|
Selling, general and
administrative expenses
|
|
|
1,008.1
|
|
|
|
41.1
|
|
|
|
915.3
|
|
|
|
38.1
|
|
|
|
92.8
|
|
|
|
10.1
|
|
Operating
income
|
|
|
767.2
|
|
|
|
31.3
|
|
|
|
898.5
|
|
|
|
37.4
|
|
|
|
(131.3
|
)
|
|
|
(14.6
|
)
|
Interest income,
net
|
|
|
3.1
|
|
|
|
0.1
|
|
|
|
35.1
|
|
|
|
1.5
|
|
|
|
(32.1
|
)
|
|
|
(91.3
|
)
|
Provision for income
taxes
|
|
|
292.7
|
|
|
|
11.9
|
|
|
|
364.1
|
|
|
|
15.2
|
|
|
|
(71.4
|
)
|
|
|
(19.6
|
)
|
Income from continuing
operations
|
|
|
477.6
|
|
|
|
19.5
|
|
|
|
569.5
|
|
|
|
23.7
|
|
|
|
(91.9
|
)
|
|
|
(16.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.47
|
|
|
|
|
|
|
$
|
1.58
|
|
|
|
|
|
|
$
|
(0.11
|
)
|
|
|
(7.1
|
)
%
|
Diluted
|
|
$
|
1.46
|
|
|
|
|
|
|
$
|
1.56
|
|
|
|
|
|
|
$
|
(0.10
|
)
|
|
|
(6.3
|
)
%
|
Net
Sales
Net sales
by business segment in the first nine months of fiscal 2009 compared to the
first nine months of fiscal 2008 were as follows:
|
|
Nine Months
Ended
|
|
|
|
(unaudited)
|
|
|
|
Net Sales
|
|
|
Percentage of
Total Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28,
2009
|
|
|
March 29,
2008
|
|
|
Rate of
Increase
|
|
|
March 28,
2009
|
|
|
March 29,
2008
|
|
|
|
(dollars in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct-to-consumer
|
|
$
|
2,043.8
|
|
|
$
|
1,895.6
|
|
|
|
7.8
|
%
|
|
|
83.3
|
%
|
|
|
79.0
|
%
|
Indirect
|
|
|
408.9
|
|
|
|
503.7
|
|
|
|
(18.8
|
)
|
|
|
16.7
|
|
|
|
21.0
|
|
Tot
al net
sales
|
|
$
|
2,452.7
|
|
|
$
|
2,399.3
|
|
|
|
2.2
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Direct-to-Consumer
Net sales
increased 7.8% to $2.0 billion during the first nine months of fiscal 2009 from
$1.9 billion during the same period in fiscal 2008, driven by sales from new and
expanded stores, partially offset by a decline in comparable store
sales.
In North
America, net sales increased 5.6% as sales from new and expanded stores were
partially offset by a 7.1% decline in comparable store sales. Since
the end of the first nine months of fiscal 2008, Coach opened 37 net new retail
stores and eight new factory stores, and expanded 14 retail stores and 16
factory stores in North America. In Japan, net sales increased 16.7%
driven primarily by an approximately $59.6 million or 13.8% increase as a result
of foreign currency exchange, and by sales from new and expanded
stores. Since the end of the first nine months of fiscal 2008, Coach
opened 14 new locations and expanded four locations in Japan.
Indirect
Net sales
decreased 18.8% to $408.9 million in the first nine months of fiscal 2009 from
$503.7 million during the same period of fiscal 2008. The decrease
was driven primarily by a 21.1% decrease in U.S. wholesale as the Company
reduced shipments into U.S. department stores in order to manage customer
inventory levels due to a weaker sales environment. International
shipments also declined 6.0%; however, sales at retail rose slightly, driven by
an increase in location square footage. Licensing revenue of
approximately $14.8 million and $17.2 million in the first nine months of fiscal
2009 and fiscal 2008, respectively, is included in Indirect sales.
Operating
Income
Operating
income decreased 14.6% to $767.2 million in the first nine months of fiscal 2009
as compared to $898.5 million in the first nine months of fiscal
2008. Excluding one-time charges of $13.4 million, operating income
decreased 13.1% to $780.6 million. Operating margin decreased to
31.3% as compared to 37.4% in the same period of the prior year, as gross margin
declined while selling, general, and administrative expenses
increased. Excluding one-time charges, operating margin was
31.8%.
Gross
profit was $1.8 billion in the first nine months of fiscal 2009 and fiscal
2008. Gross margin was 72.4% in the first nine months of fiscal 2009
as compared to 75.6% during the same period of fiscal 2008. The
change in gross margin was driven primarily by promotional activities in
Coach-operated North American factory stores and channel mix. Gross
margin was also negatively impacted by our sharper pricing initiative, in which
retail prices on handbags and women’s accessories have been reduced in response
to consumers’ reluctance to spend, and an increase in average unit
cost.
Selling,
general and administrative expenses increased 10.1% to $1.0 billion in the first
nine months of fiscal 2009 as compared to $915.3 million in the first nine
months of fiscal 2008. Excluding one-time charges of $13.4 million,
selling, general and administrative expenses were $994.7 million. As
a percentage of net sales, selling, general and administrative expenses
increased to 41.1% during the first nine months of fiscal 2009 as compared to
38.1% during the first nine months of fiscal 2008. Excluding one-time
charges, selling general and administrative expenses as a percentage of net
sales increased to 40.6%. The increase as a percentage of net sales
was primarily driven by deleveraging of expenses as cost cutting initiatives did
not keep pace with lower-than-expected sales, investment spending associated
with the acquisition of our retail businesses in Hong Kong and Macau and new
merchandising initiatives.
Selling
expenses were $742.5 million, or 30.3% of net sales, in the first nine months of
fiscal 2009 compared to $634.6 million, or 26.4% of net sales, in the first nine
months of fiscal 2008. Excluding one-time charges of $5.0 million
related to the planned closure of four underperforming stores, selling expenses
were $737.5 million, representing 30.1% of net sales. The dollar
increase in selling expenses was primarily due to an increase in operating
expenses of North American stores, Coach Japan and the newly formed Coach
China. The increase in North American store expenses was primarily
attributable to expenses from new and expanded stores opened since the end of
the first nine months of fiscal 2008. The increase in Coach Japan
operating expenses was driven primarily by the impact of foreign currency
exchange rates which increased reported expenses by approximately $25.1
million. Finally, the first nine months of fiscal 2009 includes
operating expenses of Coach China, which consisted of investments in stores,
marketing, organization and infrastructure.
Advertising,
marketing, and design costs were $126.1 million, or 5.2% of net sales, in the
first nine months of fiscal 2009, compared to $110.3 million, or 4.6% of net
sales, during the same period of fiscal 2008. The increase was
primarily due to design expenditures and development costs for new merchandising
initiatives.
Distribution
and consumer service expenses were $40.2 million, or 1.6% of net sales, in the
first nine months of fiscal 2009, compared to $36.2 million, or 1.5%, in the
first nine months of fiscal 2008. The increase was primarily the
result of an increase in fixed occupancy costs related to the expansion of our
distribution center that was completed in August 2008.
Administrative
expenses were $99.3 million, or 4.0% of net sales, in the first nine months of
fiscal 2009 compared to $134.2 million, or 5.6% of net sales, during the same
period of fiscal 2008. Excluding one-time charges of $8.4 million,
expenses were $90.9 million, representing 3.7% of net sales. The
decrease in administrative expenses was primarily due to a decrease in
performance-based compensation expense and lower rent expense as a result of the
purchase of our corporate headquarters building.
Interest
Income, Net
Net
interest income was $3.1 million in the first nine months of fiscal 2009 as
compared to $35.1 million in the first nine months of fiscal
2008. This decrease is attributable to lower returns on our
investments due to lower interest rates and lower average cash
balances.
Provision
for Income Taxes
The
effective tax rate was 38.0% in the first nine months of fiscal 2009 as compared
to 39.0% in the first nine months of fiscal 2008. The decrease in the
effective tax rate is primarily attributable to an increase in foreign-source
income, which is taxed at a lower rate.
Income
from Continuing Operations
Net
income from continuing operations was $477.6 million in the first nine months of
fiscal 2009 as compared to $569.5 million in the first nine months of fiscal
2008. Excluding one-time charges of $8.3 million discussed above,
income from continuing operations was $485.9 million in the first nine months of
fiscal 2009, a 14.7% decrease compared to the first nine months of fiscal
2008. This decrease was primarily due to a decline in operating
income and interest income, net, partially offset by a lower provision for
income taxes.
Non-GAAP
Measures
The
Company’s reported results are presented in accordance with U.S. Generally
Accepted Accounting Principles (“GAAP”). The reported selling,
general, and administrative expenses, operating income, income from continuing
operations and earnings per diluted share from continuing operations reflect
certain one-time charges recorded in the third quarter of fiscal
2009. These metrics are also reported on a non-GAAP basis to exclude
the impact of these one-time charges. The Company believes these
non-GAAP financial measures are useful to investors in evaluating the Company’s
ongoing operating and financial results and understanding how such results
compare with the Company’s historical performance. The non-GAAP
financial measures should be considered in addition to, and not in lieu of, U.S.
GAAP financial measures.
FINANCIAL
CONDITION
Cash
Flow
Net cash
provided by operating activities was $539.0 million in the first nine months of
fiscal 2009 compared to $600.3 million in the first nine months of fiscal
2008. The decrease of $61.3 million was primarily the result of a
decrease of $92.0 million in net income. This decrease was partially
offset by changes in operating assets and liabilities that were attributable to
normal operating conditions.
Net cash
used in investing activities was $229.3 million in the first nine months of
fiscal 2009 compared to $500.4 million provided by investing activities in the
first nine months of fiscal 2008. The $729.7 million change was
primarily attributable to a $620.2 million decrease in the net proceeds from
maturities of investments, a $103.3 million use of cash related to the purchase
of Coach’s corporate headquarters building and a $14.5 million use of cash
related to the acquisition of our retail businesses in Hong Kong and
Macau.
Net cash
used in financing activities was $449.3 million in the first nine months of
fiscal 2009 as compared to $1.1 billion in the first nine months of fiscal
2008. The decrease of $605.4 million in net cash used was
attributable to a $712.8 million decrease in funds expended to repurchase common
stock in the first nine months of fiscal 2009 as compared to the first nine
months of fiscal 2008. This decrease was partially offset by a $79.3
million decrease in proceeds from the exercise of share-based awards and a
$20.4 million decrease in the excess tax benefit from share-based
compensation.
Revolving
Credit Facilities
On July
26, 2007, the Company renewed its $100 million revolving credit facility with
certain lenders and Bank of America, N.A. as the primary lender and
administrative agent (the “Bank of America facility”), extending the facility
expiration to July 26, 2012. At Coach’s request, the Bank of America
facility can be expanded to $200 million. The facility can also be
extended for two additional one-year periods, at Coach’s request.
Coach’s
Bank of America facility is available for seasonal working capital requirements
or general corporate purposes and may be prepaid without penalty or
premium. During the first nine months of fiscal 2009 and fiscal 2008,
there were no borrowings under the Bank of America facility. As of
March 28, 2009 and June 28, 2008, there were no outstanding borrowings under the
Bank of America facility.
Coach
pays a commitment fee of 6 to 12.5 basis points on any unused amounts of the
Bank of America facility and interest of LIBOR plus 20 to 55 basis points on any
outstanding borrowings. Both the commitment fee and the LIBOR margin
are based on the Company’s fixed charge coverage ratio. At March 28,
2009, the commitment fee was 7 basis points and the LIBOR margin was 30 basis
points.
The Bank
of America facility contains various covenants and customary events of
default. The Company has been in compliance with all covenants since
the inception of the Bank of America facility.
To
provide funding for working capital and general corporate purposes, Coach Japan
has available credit facilities with several Japanese financial
institutions. These facilities allow a maximum borrowing of 7.6
billion yen or approximately $77.6 million at March 28,
2009. Interest is based on the Tokyo Interbank Rate plus a margin of
up to 50 basis points. During the first nine months of fiscal 2009
and fiscal 2008, the peak borrowings under these facilities were $0 and $24.2
million, respectively. As of March 28, 2009 and June 28, 2008, there
were no outstanding borrowings under these facilities.
To
provide funding for working capital and general corporate purposes, Coach
Shanghai Limited maintains a credit facility that allows a maximum borrowing of
$10 million at March 28, 2009. Coach Shanghai pays a commitment fee
of 10 basis points on the daily unused amount if the daily unused amount exceeds
60% of the total facility. Interest is based on the People's Bank of
China rate plus 2%, per annum. During the first nine months of fiscal
2009 and fiscal 2008, the peak borrowings under this credit facility were $1.9
and $0 million, respectively. At March 28, 2009 and June 28, 2008,
the Company had outstanding borrowings under this facility of $1.9 million and
$0, respectively.
Common
Stock Repurchase Program
On August 19, 2008, the
Company
completed its
$
1.0
bi
llion common stock repurchase program,
which was put into place in
November
200
7
.
On August 25, 2008
, the Coach Board of Directors approved
a new common stock repurchase program to acquire up to $1.0 billion of Coach’s
outstanding common stock through
June 2010
.
Purchases of Coach stock are made from
time to time, subject to market conditions and at prevailing market prices,
through open market purchases.
Repurchased shares become authorized
but unissued shares and may be issued in the future for general corporate and
other uses.
The Company may terminate or limit the
stock repurchase program at any time.
During
the first nine
months
of
fiscal 200
9
and fiscal 200
8
, the Company repurchased and retired
20.2
million and
34.9
million shares of common stock,
respectively, at an average cost of
$
22.51
and $
33.47
per share,
respectively.
As of
March 28, 2009, $709.6
million
remained available
for future repurchases under the existing program.
Liquidity
and Capital Resources
We expect
that fiscal 2009 capital expenditures will be approximately $265 million and
will relate primarily to new stores and expansions in North America, Japan and
China. We will also continue to invest in department store and
distributor locations and corporate infrastructure. This projection
includes $103.3 million related to the purchase of the Company’s corporate
headquarters building in New York City. These investments have been
and will be financed primarily from on hand cash and operating cash flows.
Coach’s future capital
expenditures will depend on the timing and rate of expansion of our businesses,
new store openings, store renovations, international expansion opportunities and
investments in corporate infrastructure. We expect fiscal 2010
capital expenditures to decline as a result of fewer store openings, the
suspension of retail store expansions and the non-recurrence of the purchase of
the Company’s corporate headquarters building.
Coach
experiences significant seasonal variations in its working capital
requirements. During the first fiscal quarter Coach builds inventory
for the holiday selling season, opens new retail stores and generates higher
levels of trade receivables. In the second fiscal quarter, working
capital requirements are reduced substantially as Coach generates greater
consumer sales and collects wholesale accounts receivable. During the
first nine months of fiscal 2009, Coach purchased approximately $717 million of
inventory, which was funded by operating cash flow.
In April
2009, Coach’s Board of Directors voted to declare a cash dividend, at an
expected annual rate of $0.30 per share. The first quarterly payment, of $0.075
per share, will be paid on June 29, 2009 to stockholders of record as of June 8,
2009.
Management
believes that cash flow from continuing
operations and on hand
cash will provide adequate funds for the foreseeable working capital needs,
planned capital expenditures, common stock repurchase program and planned
dividend payments. Any future acquisitions, joint ventures or other
similar transactions may require additional capital and there can be no
assurance that any such capital will be available to Coach on acceptable terms
or at all. Coach’s ability to fund its working capital needs, planned
capital expenditures and scheduled debt payments, and to comply with all of the
financial covenants under its debt agreements, depends on its future operating
performance and cash flow, which in turn are subject to prevailing economic
conditions and to financial, business and other factors, some of which are
beyond Coach’s control.
Reference
should be made to our most recent Annual Report on Form 10-K for additional
information regarding liquidity and capital resources.
Seasonality
Because
Coach products are frequently given as gifts, the Company has historically
realized, and expects to continue to realize, higher sales and operating income
in the second quarter of its fiscal year, which includes the holiday months of
November and December. In addition, fluctuations in sales and
operating income in any fiscal quarter are affected by the timing of seasonal
wholesale shipments and other events affecting retail sales. However,
over the past several years, we have achieved higher levels of growth in the
non-holiday quarters, which has reduced these seasonal
fluctuations. We expect that these trends will continue and we will
continue to balance our year round business.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
discussion of results of operations and financial condition relies on our
consolidated financial statements that are prepared based on certain critical
accounting policies that require management to make judgments and estimates that
are subject to varying degrees of uncertainty. We believe that
investors need to be aware of these policies and how they impact our financial
statements as a whole, as well as our related discussion and analysis presented
herein. While we believe that these accounting policies are based on
sound measurement criteria, actual future events can and often do result in
outcomes that can be materially different from these estimates or
forecasts. The accounting policies and related risks described in our
Annual Report on Form 10-K for the year ended June 28, 2008 are those that
depend most heavily on these judgments and estimates. As of March 28,
2009, there have been no material changes to any of the critical accounting
policies contained therein, except for the change in accounting with respect to
inventories of Coach Japan. See Note 2 for further
information.
Recent
Accounting Developments
In
September 2006, the FASB issued SFAS 157, “
Fair Value
Measurements
.” SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. The Company
adopted the provisions of SFAS 157 related to financial assets and liabilities
in the first quarter of fiscal 2009. The adoption of these provisions
did not have a material impact on our consolidated financial
statements. The remaining provisions of SFAS 157 are effective for
the first quarter of the fiscal year that will end on July 3,
2010. For further information about the fair value measurements of
our financial assets and liabilities see Note 8.
In
December 2007, the FASB issued SFAS 141 (revised 2007), “
Business Combinations
.” Under
SFAS 141(R), an acquiring entity will be required to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions. SFAS 141(R) will change the accounting
treatment for certain specific acquisition-related items, including expensing
acquisition-related costs as incurred, valuing noncontrolling interests
(minority interests) at fair value at the acquisition date, and expensing
restructuring costs associated with an acquired business. SFAS 141(R)
also includes expanded disclosure requirements. SFAS 141(R) is to be
applied prospectively to business combinations for which the acquisition date is
on or after June 28, 2009. The Company does not expect the adoption
of SFAS 141(R) to have a material impact on the Company’s consolidated financial
statements.
In March
2008, the FASB issued SFAS 161, “
Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133
.” SFAS 161 requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value
amounts of and gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements. This statement is effective for Coach’s financial
statements issued for the interim period of this report. SFAS 161 did
not have a material impact on the Company's consolidated financial
statements. See Note 10 for the required
disclosures.
On
October 10, 2008, the FASB issued Staff Position (“FSP”) No. SFAS 157-3, “
Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active
” which
amends SFAS 157 by incorporating an example to illustrate key considerations in
determining the fair value of a financial asset in an inactive
market. FSP 157-3 was effective on October 10, 2008. The
Company has adopted the provisions of SFAS 157 and incorporated the
considerations of this FSP in determining the fair value of its financial
assets. FSP 157-3 did not have a material impact on the Company's
consolidated financial statements.
On
December 30, 2008, the FASB issued FSP No. SFAS 132(R)-1, “
Employers’ Disclosures about
Postretirement Benefit Plan Assets
” which provides guidance on employer’s
disclosures about plan assets of a defined benefit pension or other
postretirement plan. FSP 132(R)-1 is effective for fiscal years
ending after December 15, 2009. The Company does not expect the
application of this FSP to have a material impact on the Company’s consolidated
financial statements.
On April
9, 2009, the FASB issued FSP No. SFAS 157-4, “
Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly
” which amends
SFAS 157 by incorporating a two-step process to determine whether a market is
not active and a transaction is not distressed. FSP 157-4 is
effective for interim and annual periods ending after June 15,
2009. The Company does not expect the adoption of FSP 157-4 to have a
material impact on the Company's consolidated financial
statements.
On April
9, 2009, the FASB issued FSP No. SFAS 115-2 and SFAS 124-2, “
Recognition and Presentation of
Other-Than-Temporary Impairments
” which amends the other-than-temporary
impairment indicators to (a) management has no intent to sell the security and
(b) it is more likely than not management will not have to sell the security
before recovery. This FSP is effective for interim and annual periods
ending after June 15, 2009. The Company does not expect the adoption
of this FSP to have a material impact on the Company’s consolidated financial
statements.
On April
9, 2009, the FASB issued FSP No. SFAS 107-1 and APB 28-1, “
Interim Disclosures about Fair Value
of Financial Statements
” which amends the interim disclosure requirements
in scope for FAS 107, “
Disclosures about Fair Value of
Financial Instruments
”. This FSP is effective for interim and
annual periods ending after June 15, 2009. The Company does not
expect the adoption of this FSP to have a material impact on the Company’s
consolidated financial statements.
ITEM 3.
|
Quantitative and Qualitative
Disclosures about Market
Risk
|
The
market risk inherent in our financial instruments represents the potential loss
in fair value, earnings or cash flows arising from adverse changes in interest
rates or foreign currency exchange rates. Coach manages these
exposures through operating and financing activities and, when appropriate,
through the use of derivative financial instruments with respect to Coach
Japan. The use of derivative instruments is in accordance with
Coach’s risk management policies. Coach does not enter into
derivative transactions for speculative or trading purposes.
The
following quantitative disclosures are based on quoted market prices obtained
through independent pricing sources for the same or similar types of financial
instruments, taking into consideration the underlying terms and maturities and
theoretical pricing models. These quantitative disclosures do not
represent the maximum possible loss or any expected loss that may occur, since
actual results may differ from those estimates.
Foreign
Currency Exchange
Foreign
currency exposures arise from transactions, including firm commitments and
anticipated contracts, denominated in a currency other than the entity’s
functional currency, and from foreign-denominated revenues and expenses
translated into U.S. dollars.
Substantially
all of Coach’s non-licensed product needs are purchased from independent
manufacturers in countries other than the United States. These
countries include China, Italy, Hong Kong, India, Thailand, Turkey, Philippines,
Vietnam, Malaysia, Mauritius, Peru, Spain, and Taiwan. Additionally,
sales are made through international channels to third party
distributors. However, substantially all purchases and sales
involving international parties are denominated in U.S. dollars and therefore
are not subject to foreign currency exchange risk.
In Japan,
Coach is exposed to market risk from foreign currency exchange rate fluctuations
as a result of Coach Japan’s U.S. dollar denominated inventory
purchases. Coach Japan enters into certain foreign currency
derivative contracts, primarily zero-cost collar options, to manage these
risks.
Coach is
also exposed to market risk from foreign currency exchange rate fluctuations
with respect to Coach Japan as a result of its $231.0 million U.S.
dollar-denominated fixed rate intercompany loan from Coach. To manage
this risk, on July 1, 2005, Coach Japan entered into a cross currency swap
transaction, the terms of which include an exchange of a U.S. dollar fixed
interest rate for a yen fixed interest rate. The loan matures in
2010, at which point the swap requires an exchange of yen and U.S. dollar based
principals.
The fair
value of open foreign currency derivatives included in current assets at March
28, 2009 and June 28, 2008 was $0 and $7.9 million, respectively. The
fair value of open foreign currency derivatives included in current liabilities
at March 28, 2009 and June 28, 2008 was $30.6 million and $5.5 million,
respectively. The fair value of these contracts is sensitive to
changes in yen exchange rates as well as credit risk.
Interest
Rate
Coach is
exposed to interest rate risk in relation to its investments, revolving credit
facilities and long-term debt.
The
Company’s investment portfolio is maintained in accordance with the Company’s
investment policy, which identifies allowable investments, specifies credit
quality standards and limits the credit exposure of any single
issuer. The primary objective of our investment activities is the
preservation of principal while maximizing interest income and minimizing
risk. We do not hold any investments for trading
purposes. At March 28, 2009 and June 28, 2008, the Company’s
investments, classified as available-for-sale, consisted of an auction rate
security, valued at $6.0 million and $8.0 million,
respectively. During the first nine months of fiscal 2009, the
Company recorded a $2.0 million loss on the auction rate security based on its
change in fair value. As auction rate securities’ adjusted book value
equals its fair value, there were no unrealized gains or losses associated with
this investment.
As of
March 28, 2009, the Company had outstanding borrowings on its revolving credit
facilities of $1.9 million. A hypothetical 10% change in the interest
rate applied to the fair value of debt would not have a material impact on
earnings or cash flows of Coach.
As of
March 28, 2009, Coach’s outstanding long-term debt, including the current
portion, was $25.6 million. A hypothetical 10% change in the interest
rate applied to the fair value of debt would not have a material impact on
earnings or cash flows of Coach.
ITEM 4.
|
Controls and
Procedures
|
Based on
the evaluation of the Company's disclosure controls and procedures, as that term
is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended, each of Lew Frankfort, the Chairman and Chief Executive Officer of the
Company, and Michael F. Devine, III, Executive Vice President and Chief
Financial Officer of the Company, have concluded that the Company's disclosure
controls and procedures are effective as of March 28, 2009.
There
were no changes in the Company’s internal control over financial reporting that
occurred during the Company’s most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Reference
should be made to our most recent Annual Report on Form 10-K for additional
information regarding discussion of the effectiveness of the Company’s controls
and procedures.
PART II
– OTHER INFORMATION
ITEM 1.
|
Legal
Proceedings
|
Coach is
involved in various routine legal proceedings as both plaintiff and defendant
incident to the ordinary course of its business, such as proceedings to protect
Coach’s intellectual property rights, litigation instituted by persons alleged
to have been injured upon premises within Coach’s control and litigation with
present or former employees.
Although
Coach’s litigation with present or former employees is routine and incidental to
the conduct of Coach’s business, as well as for any business employing
significant numbers of U.S.-based employees, such litigation can result in large
monetary awards when a civil jury is allowed to determine compensatory and/or
punitive damages for actions claiming discrimination on the basis of age,
gender, race, religion, disability or other legally protected characteristic or
for termination of employment that is wrongful or in violation of implied
contracts. As part of its policing program for its intellectual
property rights, from time to time, Coach files lawsuits in the U.S. and abroad
alleging acts of trademark counterfeiting, trademark infringement, patent
infringement, trade dress infringement, trademark dilution and/or state or
foreign law claims. At any given point in time, Coach may have one or
more 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 Coach’s intellectual properties.
Coach
believes that the outcome of all pending legal proceedings in the aggregate will
not have a material adverse effect on Coach’s
business or consolidated financial statements.
The
Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2008
contains a detailed discussion of certain risk factors that could materially
adversely affect our business, our operating results, or our financial
condition. Set forth below is an additional risk factor that we have
recently identified in light of the current economic conditions.
The
current economic conditions could materially adversely affect our financial
condition and results of operations.
The
current economic crisis is having a significant negative impact on businesses
around the world. 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, fuel and energy costs, 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 is significantly impacted by negative trends in consumer
confidence and other economic factors affecting consumer spending behavior. The
downturn in the economy may continue to affect consumer purchases of our
products for the foreseeable future and adversely impact our results of
operations.
ITEM 2.
|
Unregistered Sales of Equity
Securities and Use of
Proceeds
|
The
Company’s share repurchases during the third quarter of fiscal 2009 were as
follows:
Period
|
|
Total
Number
of
Shares
Purchased
|
|
|
Average
Price
Paid
per
Share
|
|
|
Total
Number of
Shares
Purchased
as
Part of Publicly
Announced
Plans
or
Programs (1)
|
|
|
Approximate
Dollar
Value
of Shares that
May
Yet be Purchased
Under
the Plans or
Programs
(1)
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
7 (12/28/08 - 1/31/09)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
759,623
|
|
Period
8 (2/1/09 - 2/28/09)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
759,623
|
|
Period
9 (3/1/09 - 3/28/09)
|
|
|
3,577
|
|
|
|
13.98
|
|
|
|
3,577
|
|
|
|
709,625
|
|
Total
|
|
|
3,577
|
|
|
$
|
13.98
|
|
|
|
3,577
|
|
|
|
|
|
(1)
|
The
Company repurchases its common shares under repurchase programs that were
approved by the Board of Directors as
follows:
|
Date Share
Repurchase
Programs were
Publicly
Announced
|
|
Total Dollar
Amount
Approved
|
|
Expiration Date of
Plan
|
August 25,
2008
|
|
$ 1.0
billion
|
|
June
2010
|