UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the Quarterly Period Ended October 2, 2010
or
¨
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission
file number: 1-16153
Coach,
Inc.
(Exact
name of registrant as specified in its charter)
Maryland
|
|
52-2242751
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
516
West 34
th
Street,
New York, NY 10001
(Address
of principal executive offices); (Zip Code)
(212)
594-1850
(Registrant’s
telephone number, including area code)
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.
þ
Yes
¨
No
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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
þ
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “small reporting company” in Rule 12b-2 of the Exchange
Act.
Large
Accelerated Filer
þ
|
|
Accelerated
Filer
¨
|
Non-accelerated
filer
¨
|
(Do
not check if a smaller reporting company)
|
Small
Reporting Company
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨
Yes
þ
No
On
October 29, 2010, the Registrant had 296,381,251 outstanding shares of common
stock, which is the Registrant’s only class of common stock.
The
document contains 33 pages excluding exhibits.
COACH,
INC.
TABLE
OF CONTENTS
|
Page Number
|
PART
I – FINANCIAL INFORMATION
|
|
|
|
|
|
|
ITEM 1.
|
Financial
Statements
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets –
|
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|
|
At
October 2, 2010 and July 3, 2010
|
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4
|
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|
|
|
Condensed
Consolidated Statements of Income –
|
|
|
|
For
the Quarters Ended
|
|
|
|
October
2, 2010 and September 26, 2009
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5
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows –
|
|
|
|
For
the Quarters Ended
|
|
|
|
October
2, 2010 and September 26, 2009
|
|
6
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
7
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|
ITEM
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
20
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|
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|
|
ITEM
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
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29
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|
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|
ITEM
4.
|
Controls
and Procedures
|
|
30
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PART
II – OTHER INFORMATION
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|
|
|
|
|
|
ITEM
1.
|
Legal
Proceedings
|
|
31
|
|
|
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|
ITEM
1A.
|
Risk
Factors
|
|
31
|
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|
|
|
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
31
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|
ITEM
6.
|
Exhibits
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32
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SIGNATURE
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33
|
SPECIAL
NOTE ON FORWARD-LOOKING INFORMATION
This Form
10-Q contains certain “forward-looking statements,” based on current
expectations, that involve risks and uncertainties that could cause our actual
results to differ materially from our management’s current
expectations. These forward-looking statements can be identified by
the use of forward-looking terminology such as “may,” “will,” “should,”
“expect,” “intend,” “estimate,” “are positioned to,” “continue,” “project,”
“guidance,” “target,” “forecast,” “anticipated,” or comparable
terms. Future results will vary from historical results and
historical growth is not indicative of future trends, which will depend upon a
number of factors, including but not limited to: (i) the successful execution of
our growth strategies; (ii) the effect of existing and new competition in the
marketplace; (iii) our exposure to international risks, including currency
fluctuations; (iv) changes in economic or political conditions in the markets
where we sell or source our products; (v) our ability to successfully anticipate
consumer preferences for accessories and fashion trends; (vi) our ability to
control costs; (vii) the effect of seasonal and quarterly fluctuations in our
sales on our operating results; (viii) our ability to protect against
infringement of our trademarks and other proprietary rights; and such other risk
factors as set forth in the Company’s Annual Report on Form 10-K for the fiscal
year ended July 3, 2010. Coach, Inc. assumes no obligation to update
or revise any such forward-looking statements, which speak only as of their
date, even if experience, future events or changes make it clear that any
projected financial or operating results will not be realized.
WHERE
YOU CAN FIND MORE INFORMATION
Coach’s
quarterly financial results and other important information are available by
calling the Investor Relations Department at (212) 629-2618.
Coach
maintains a website at
www.coach.com
where
investors and other interested parties may obtain, free of charge, press
releases and other information as well as gain access to our periodic filings
with the SEC.
PART
I – FINANCIAL INFORMATION
ITEM
1. Financial Statements
COACH,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(amounts
in thousands, except share data)
(unaudited)
|
|
October
2,
|
|
|
July
3,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
621,371
|
|
|
$
|
596,470
|
|
Short-term
investments
|
|
|
90,592
|
|
|
|
99,928
|
|
Trade
accounts receivable, less allowances of $8,287 and $6,965,
respectively
|
|
|
133,173
|
|
|
|
109,068
|
|
Inventories
|
|
|
458,920
|
|
|
|
363,285
|
|
Other
current assets
|
|
|
121,194
|
|
|
|
133,890
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
1,425,250
|
|
|
|
1,302,641
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
546,246
|
|
|
|
548,474
|
|
Goodwill
|
|
|
321,671
|
|
|
|
305,861
|
|
Other
assets
|
|
|
316,663
|
|
|
|
310,139
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,609,830
|
|
|
$
|
2,467,115
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
105,448
|
|
|
$
|
105,569
|
|
Accrued
liabilities
|
|
|
463,453
|
|
|
|
422,725
|
|
Current
portion of long-term debt
|
|
|
750
|
|
|
|
742
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
569,651
|
|
|
|
529,036
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
24,064
|
|
|
|
24,159
|
|
Other
liabilities
|
|
|
433,442
|
|
|
|
408,627
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,027,157
|
|
|
|
961,822
|
|
|
|
|
|
|
|
|
|
|
See
note on commitments and contingencies
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
Preferred
stock: (authorized 25,000,000 shares; $0.01 par value) none
issued
|
|
|
-
|
|
|
|
-
|
|
Common
stock: (authorized 1,000,000,000 shares; $0.01 par value)
issued
|
|
|
|
|
|
|
|
|
and
outstanding - 295,677,161 and 296,867,247 shares,
respectively
|
|
|
2,957
|
|
|
|
2,969
|
|
Additional
paid-in-capital
|
|
|
1,567,364
|
|
|
|
1,502,982
|
|
Accumulated
deficit
|
|
|
(22,935
|
)
|
|
|
(30,053
|
)
|
Accumulated
other comprehensive income
|
|
|
35,287
|
|
|
|
29,395
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
1,582,673
|
|
|
|
1,505,293
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
2,609,830
|
|
|
$
|
2,467,115
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
COACH,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(amounts
in thousands, except per share data)
(unaudited)
|
|
Quarter Ended
|
|
|
|
October 2,
|
|
|
September 26,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
911,669
|
|
|
$
|
761,437
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
235,498
|
|
|
|
211,259
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
676,171
|
|
|
|
550,178
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
390,511
|
|
|
|
326,931
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
285,660
|
|
|
|
223,247
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
|
248
|
|
|
|
1,835
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
(810
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
285,098
|
|
|
|
225,082
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
96,222
|
|
|
|
84,255
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
188,876
|
|
|
$
|
140,827
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.64
|
|
|
$
|
0.44
|
|
Diluted
|
|
$
|
0.63
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
Shares
used in computing net income per share
|
|
|
|
|
|
|
|
|
Basic
|
|
|
296,304
|
|
|
|
318,286
|
|
Diluted
|
|
|
301,249
|
|
|
|
321,115
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
COACH,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts
in thousands)
(unaudited)
|
|
Quarter Ended
|
|
|
|
October
2,
|
|
|
September 26,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
|
$
|
188,876
|
|
|
$
|
140,827
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
32,251
|
|
|
|
33,380
|
|
Provision
for bad debt
|
|
|
2,015
|
|
|
|
845
|
|
Share-based
compensation
|
|
|
22,342
|
|
|
|
18,968
|
|
Excess
tax benefit from share-based compensation
|
|
|
(2,587
|
)
|
|
|
(362
|
)
|
Deferred
income taxes
|
|
|
9,896
|
|
|
|
(9,047
|
)
|
Other,
net
|
|
|
(4,408
|
)
|
|
|
(5,251
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase)
decrease in trade accounts receivable
|
|
|
(23,749
|
)
|
|
|
5,238
|
|
Increase
in inventories
|
|
|
(97,681
|
)
|
|
|
(6,331
|
)
|
Decrease
(increase) in other assets
|
|
|
4,443
|
|
|
|
(9,818
|
)
|
Decrease
in accounts payable
|
|
|
(1,935
|
)
|
|
|
(10,906
|
)
|
Increase
in accrued liabilities
|
|
|
15,093
|
|
|
|
69,631
|
|
Increase
in other liabilities
|
|
|
32,900
|
|
|
|
13,365
|
|
Net
cash provided by operating activities
|
|
|
177,456
|
|
|
|
240,539
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Acquisition
of interest in equity method investment
|
|
|
(776
|
)
|
|
|
-
|
|
Purchases
of property and equipment
|
|
|
(23,080
|
)
|
|
|
(20,034
|
)
|
Purchases
of investments
|
|
|
(90,592
|
)
|
|
|
-
|
|
Proceeds
from maturities and sales of investments
|
|
|
99,928
|
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(14,520
|
)
|
|
|
(20,034
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Dividend
payment
|
|
|
(44,774
|
)
|
|
|
(23,843
|
)
|
Repurchase
of common stock
|
|
|
(137,500
|
)
|
|
|
-
|
|
Repayment
of long-term debt
|
|
|
(86
|
)
|
|
|
(447
|
)
|
Repayments
of revolving credit facilities
|
|
|
-
|
|
|
|
(7,496
|
)
|
Proceeds
from share-based awards, net
|
|
|
39,477
|
|
|
|
(1,010
|
)
|
Excess
tax benefit from share-based compensation
|
|
|
2,587
|
|
|
|
362
|
|
Net
cash used in financing activities
|
|
|
(140,296
|
)
|
|
|
(32,434
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of changes in foreign exchange rates on cash and cash
equivalents
|
|
|
2,261
|
|
|
|
6,247
|
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
24,901
|
|
|
|
194,318
|
|
Cash
and cash equivalents at beginning of period
|
|
|
596,470
|
|
|
|
800,362
|
|
Cash
and cash equivalents at end of period
|
|
$
|
621,371
|
|
|
$
|
994,680
|
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
1.
|
Basis
of Presentation and Organization
|
The
accompanying unaudited condensed consolidated financial statements include the
accounts of Coach, Inc. (“Coach” or the “Company”) and all 100% owned
subsidiaries. These condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted from this report as is permitted by SEC rules and
regulations. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. This
report should be read in conjunction with the audited consolidated financial
statements and notes thereto, included in the Company’s Annual Report on Form
10-K filed with the SEC for the year ended July 3, 2010 (“fiscal
2010”).
In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all normal and recurring adjustments necessary to
present fairly the consolidated financial condition, results of operations and
changes in cash flows of the Company for the interim periods
presented. The results of operations for the quarter ended October 2,
2010 are not necessarily indicative of results to be expected for the entire
fiscal year, which will end on July 2, 2011 (“fiscal 2011”).
The
Company evaluated subsequent events through the date these financial statements
were issued, and concluded there were no events to recognize or
disclose.
Activity
for the quarters ended October 2, 2010 and September 26, 2009 in the accounts of
Stockholders’ Equity is summarized below:
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
|
|
|
Additional
|
|
|
Earnings/
|
|
|
Other
|
|
|
Total
|
|
|
|
Stockholders'
|
|
|
Paid-in-
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders'
|
|
|
|
Equity
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Income
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at June 27, 2009
|
|
$
|
3,180
|
|
|
$
|
1,189,060
|
|
|
$
|
499,951
|
|
|
$
|
3,851
|
|
|
$
|
1,696,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
140,827
|
|
|
|
-
|
|
|
|
140,827
|
|
Unrealized
losses on cash flow hedging derivatives, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(89
|
)
|
|
|
(89
|
)
|
Translation
adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,763
|
|
|
|
9,763
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for stock options and employee benefit plans
|
|
|
6
|
|
|
|
(1,016
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,010
|
)
|
Share-based
compensation
|
|
|
-
|
|
|
|
18,968
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,968
|
|
Excess
tax benefit from share-based compensation
|
|
|
-
|
|
|
|
362
|
|
|
|
-
|
|
|
|
-
|
|
|
|
362
|
|
Dividend
declared
|
|
|
-
|
|
|
|
-
|
|
|
|
(23,882
|
)
|
|
|
-
|
|
|
|
(23,882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at September 26, 2009
|
|
$
|
3,186
|
|
|
$
|
1,207,374
|
|
|
$
|
616,896
|
|
|
$
|
13,525
|
|
|
$
|
1,840,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at July 3, 2010
|
|
$
|
2,969
|
|
|
$
|
1,502,982
|
|
|
$
|
(30,053
|
)
|
|
$
|
29,395
|
|
|
$
|
1,505,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
188,876
|
|
|
|
-
|
|
|
|
188,876
|
|
Unrealized
losses on cash flow hedging derivatives, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,364
|
)
|
|
|
(5,364
|
)
|
Translation
adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,256
|
|
|
|
11,256
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for stock options and employee benefit plans
|
|
|
24
|
|
|
|
39,453
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,477
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
22,342
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,342
|
|
Excess
tax benefit from share-based compensation
|
|
|
-
|
|
|
|
2,587
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,587
|
|
Repurchase
of common stock
|
|
|
(36
|
)
|
|
|
-
|
|
|
|
(137,464
|
)
|
|
|
-
|
|
|
|
(137,500
|
)
|
Dividend
declared
|
|
|
-
|
|
|
|
-
|
|
|
|
(44,294
|
)
|
|
|
-
|
|
|
|
(44,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at October 2, 2010
|
|
$
|
2,957
|
|
|
$
|
1,567,364
|
|
|
$
|
(22,935
|
)
|
|
$
|
35,287
|
|
|
$
|
1,582,673
|
|
The
components of accumulated other comprehensive income, as of the dates indicated,
are as follows:
|
|
October 2,
|
|
|
July 3,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustments
|
|
$
|
46,317
|
|
|
$
|
35,061
|
|
Cumulative
effect of previously adopted accounting pronouncements and minimum pension
liability, net of taxes
|
|
|
(3,574
|
)
|
|
|
(3,574
|
)
|
Unrealized
losses on cash flow hedging derivatives, net of taxes of $5,389 and
$1,920
|
|
|
(7,456
|
)
|
|
|
(2,092
|
)
|
Accumulated
other comprehensive income
|
|
$
|
35,287
|
|
|
$
|
29,395
|
|
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
Basic net
income per share is calculated by dividing net income by the weighted-average
number of shares outstanding during the period. Diluted net income
per share is calculated similarly but includes potential dilution from the
exercise of stock options and employee benefit and share awards.
The
following is a reconciliation of the weighted-average shares outstanding and
calculation of basic and diluted net income per share:
|
|
Quarter Ended
|
|
|
|
October 2,
|
|
|
September 26,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
188,876
|
|
|
$
|
140,827
|
|
|
|
|
|
|
|
|
|
|
Total
weighted-average basic shares
|
|
|
296,304
|
|
|
|
318,286
|
|
|
|
|
|
|
|
|
|
|
Dilutive
securities:
|
|
|
|
|
|
|
|
|
Employee
benefit and share award plans
|
|
|
1,380
|
|
|
|
812
|
|
Stock
option programs
|
|
|
3,565
|
|
|
|
2,017
|
|
|
|
|
|
|
|
|
|
|
Total
weighted-average diluted shares
|
|
|
301,249
|
|
|
|
321,115
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.64
|
|
|
$
|
0.44
|
|
Diluted
|
|
$
|
0.63
|
|
|
$
|
0.44
|
|
At
October 2, 2010, options to purchase 7,235 shares of common stock were
outstanding but not included in the computation of diluted earnings per share,
as these options’ exercise prices, ranging from $38.41 to $51.56, were greater
than the average market price of the common shares.
At
September 26, 2009, options to purchase
22,157
shares of common stock
were outstanding but not included in the computation of diluted earnings per
share, as these options’ exercise prices, ranging from $28.80 to $51.56, were
greater than the average market price of the common shares.
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
4.
|
Share-Based
Compensation
|
The
following table shows the total compensation cost charged against income for
share-based compensation plans and the related tax benefits recognized in the
income statement for the periods indicated:
|
|
Quarter Ended
|
|
|
|
October 2,
|
|
|
September 26,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Share-based
compensation expense
|
|
$
|
22,342
|
|
|
$
|
18,968
|
|
Income
tax benefit related to share-based compensation expense
|
|
|
7,828
|
|
|
|
6,665
|
|
Stock
Options
A summary
of option activity under the Coach stock option plans as of October 2, 2010 and
changes during the period then ended is as follows:
|
|
Number of
|
|
|
Weighted-
|
|
|
|
Options
|
|
|
Average
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding
at July 3, 2010
|
|
|
24,905
|
|
|
$
|
30.87
|
|
Granted
|
|
|
3,330
|
|
|
|
38.45
|
|
Exercised
|
|
|
(1,774
|
)
|
|
|
28.26
|
|
Forfeited
or expired
|
|
|
(139
|
)
|
|
|
33.57
|
|
Outstanding
at October 2, 2010
|
|
|
26,322
|
|
|
|
31.99
|
|
Vested
and expected to vest at October 2, 2010
|
|
|
26,207
|
|
|
|
31.96
|
|
Exercisable
at October 2, 2010
|
|
|
17,581
|
|
|
|
31.59
|
|
At
October 2, 2010, $70,848 of total unrecognized compensation cost related to
non-vested stock option awards is expected to be recognized over a
weighted-average period of 1.2 years.
The
weighted-average grant-date fair value of individual options granted during the
first quarter of fiscal 2011 and fiscal 2010 was $11.17 and $9.56,
respectively. The total intrinsic value of options exercised during
the first quarter of fiscal 2010 and fiscal 2009 was $21,361 and $4,183,
respectively. The total cash received from these option exercises was
$50,117 and $4,622, respectively, and the actual tax benefit realized from these
option exercises was $7,892 and $1,639, respectively.
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
Share Unit
Awards
The
grant-date fair value of each Coach share unit award is equal to the fair value
of Coach stock at the grant date. The following table summarizes
information about non-vested share units as of and for the period ended October
2, 2010:
|
|
Number of
Non-vested
Share Units
|
|
|
Weighted-Average Grant-Date Fair Value
|
|
|
|
|
|
|
|
|
Non-vested
at July 3, 2010
|
|
|
3,780
|
|
|
$
|
29.40
|
|
Granted
|
|
|
1,795
|
|
|
|
38.45
|
|
Vested
|
|
|
(893
|
)
|
|
|
32.33
|
|
Forfeited
|
|
|
(47
|
)
|
|
|
30.35
|
|
Non-vested
at October 2, 2010
|
|
|
4,635
|
|
|
|
32.31
|
|
At
October 2, 2010, $108,554 of total unrecognized compensation cost related to
non-vested share awards is expected to be recognized over a weighted-average
period of 1.3 years.
The
weighted-average grant-date fair value of share awards granted during the first
quarter of fiscal 2011 and fiscal 2010 was $38.45 and $29.31,
respectively. The total fair value of shares vested during the first
quarter of fiscal 2011 and fiscal 2010 was $34,608 and $16,175,
respectively.
5.
|
Fair
Value Measurements
|
In
accordance with Accounting Standards Codification (“ASC”) 820-10, “
Fair Value Measurements and
Disclosures
,” the Company categorizes its assets and liabilities, based
on the priority of the inputs to the valuation technique, into a three-level
fair value hierarchy as set forth below. The three levels of the
hierarchy are defined as follows:
Level 1 —
Unadjusted quoted prices in active markets for identical assets or
liabilities. Coach currently does not have any Level 1 financial
assets or liabilities.
Level 2 —
Observable inputs other than quoted prices included in Level 1. Level
2 inputs include quoted prices for identical assets or liabilities in non-active
markets, quoted prices for similar assets or liabilities in active markets, and
inputs other than quoted prices that are observable for substantially the full
term of the asset or liability.
Level 3 —
Unobservable inputs reflecting management’s own assumptions about the input used
in pricing the asset or liability.
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
The
following table shows the fair value measurements of the Company’s assets and
liabilities at October 2, 2010 and July 3, 2010:
|
|
Level 2
|
|
|
Level 3
|
|
|
|
October 2,
|
|
|
July 3,
|
|
|
October 2,
|
|
|
July 3,
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
investment - auction rate security
(a)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
Derivative
assets - zero-cost collar options
(b)
|
|
|
394
|
|
|
|
2,052
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
394
|
|
|
$
|
2,052
|
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities - zero-cost collar options
(b)
|
|
$
|
10,065
|
|
|
$
|
5,120
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Derivative
liabilities - cross-currency swap
(c)
|
|
|
-
|
|
|
|
-
|
|
|
|
9,323
|
|
|
|
2,418
|
|
Total
|
|
$
|
10,065
|
|
|
$
|
5,120
|
|
|
$
|
9,323
|
|
|
$
|
2,418
|
|
(
a
)
The fair
value of the security is determined using a model that takes into consideration
the financial conditions of the issuer and the bond insurer, current market
conditions and the value of the collateral bonds.
(
b
)
The
Company enters into zero-cost collar options to manage its exposure to foreign
currency exchange rate fluctuations resulting from Coach Japan's and Coach
Canada’s U.S. dollar-denominated inventory purchases. The fair value
of these cash flow hedges is primarily based on the forward curves of the
specific indices upon which settlement is based and includes an adjustment for
the counterparty’s or Company’s credit risk.
(c
)
The
Company is a party to a cross-currency swap transaction to manage its exposure
to foreign currency exchange rate fluctuations resulting from Coach Japan's U.S.
dollar-denominated fixed rate intercompany loan. The fair value of
this cash flow hedge is primarily based on the forward curves of the specific
indices upon which settlement is based and includes an adjustment for the
Company's credit risk.
As of
October 2, 2010 and July 3, 2010, the Company’s investments included an auction
rate security (“ARS”), deemed a long-term investment classified within other
assets, as the auction for this security has been unsuccessful. The
underlying investments of the ARS are scheduled to mature in 2035. This
auction rate security is currently rated A, an investment grade rating
afforded by credit rating agencies. We have determined that the
significant majority of the inputs used to value this security fall within Level
3 of the fair value hierarchy as the inputs are based on unobservable
estimates. The fair value of the Company’s ARS has been $6,000 since
the beginning of the Company’s first quarter of fiscal 2010.
As of
October 2, 2010 and July 3, 2010, the fair value of the Company’s cross-currency
swap derivatives were included within accrued liabilities. The
Company uses a management model, to value these derivatives, which includes a
combination of observable inputs, such as tenure of the agreement and notional
amount, and unobservable inputs, such as the Company’s credit rating. The
table below presents the changes in the fair value of the cross-currency
swaps during the first quarters of fiscal 2011 and 2010:
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
|
|
Cross-Currency
Swaps
|
|
Balance
at July 3, 2010
|
|
$
|
2,418
|
|
Unrealized
loss, recorded in accumulated other comprehensive income
|
|
|
6,905
|
|
Balance
at October 2, 2010
|
|
$
|
9,323
|
|
|
|
|
|
|
Balance
at June 27, 2009
|
|
$
|
36,118
|
|
Unrealized
loss, recorded in accumulated other comprehensive income
|
|
|
15,059
|
|
Balance
at September 26, 2009
|
|
$
|
51,177
|
|
The
Company’s short-term investments of $90,592 and $99,928 as of October 2, 2010
and July 3, 2010, respectively, consist of U.S. treasury bills and commercial
paper which are classified as held-to-maturity based on our positive intent and
ability to hold the securities to maturity. They are stated at
amortized cost, which approximates fair market value due to their short
maturities.
6.
|
Commitments
and Contingencies
|
At
October 2, 2010, the Company had letters of credit outstanding totaling
$147,380. The letters of credit, which expire at various dates
through 2013, primarily collateralize the Company’s obligation to third parties
for the purchase of inventory.
In the
ordinary course of business, Coach is a party to several pending legal
proceedings and claims. Although the outcome of such items cannot be
determined with certainty, Coach’s General Counsel and management are of the
opinion that the final outcome will not have a material effect on Coach’s
financial position, results of operations or cash flows.
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
7.
|
Derivative
Instruments and Hedging Activities
|
Substantially
all purchases and sales involving international parties are denominated in U.S.
dollars, which limits the Company’s exposure to foreign currency exchange rate
fluctuations. However, the Company is exposed to foreign currency
exchange risk related to Coach Japan’s and Coach Canada’s U.S.
dollar-denominated inventory purchases and Coach Japan’s $139,400 U.S.
dollar-denominated fixed rate intercompany loan. Coach uses
derivative financial instruments to manage these risks. These
derivative transactions are in accordance with the Company’s risk management
policies. Coach does not enter into derivative transactions for speculative or
trading purposes.
Coach
Japan and Coach Canada enter into certain foreign currency derivative contracts,
primarily zero-cost collar options, to manage the exchange rate risk related to
their inventory purchases. As of October 2, 2010 and July 3, 2010,
$185,593 and $248,555 of foreign currency forward contracts were outstanding,
respectively.
On July
1, 2005, to manage the exchange rate risk related to its $231,000 intercompany
loan, Coach Japan entered into a cross-currency swap transaction. The
terms of the cross-currency swap transaction included an exchange of a Japanese
Yen fixed interest rate for a U.S. dollar fixed interest rate and an exchange of
Japanese Yen and U.S. dollar-based notional values. On July 2, 2010,
the maturity date of the original intercompany loan, Coach Japan repaid the loan
and settled the cross-currency swap, and entered into a new $139,400
intercompany loan agreement. Concurrently, to manage the exchange
rate risk on the new loan, Coach Japan entered into a new cross-currency swap
transaction, the terms of which included an exchange of a Japanese Yen fixed
interest rate for a U.S. dollar fixed interest rate. The loan matures
on June 30, 2011, at which point the swap requires an exchange of Japanese Yen
and U.S. dollar based notional values.
The
Company’s 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. The
ineffective portion of gains or losses on the derivative instruments are
recognized in current earnings and are included within net cash provided by
operating activities.
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
The
following tables provide information related to the Company’s
derivatives:
Derivatives Designated
as Hedging
|
|
Balance Sheet
|
|
Fair Value
|
|
Instruments
|
|
Classification
|
|
At October 2, 2010
|
|
|
At July, 3, 2010
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts
|
|
Other
Current Assets
|
|
$
|
394
|
|
|
$
|
2,052
|
|
Total
derivative assets
|
|
|
|
$
|
394
|
|
|
$
|
2,052
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts
|
|
Accrued
Liabilities
|
|
$
|
19,388
|
|
|
$
|
7,538
|
|
Total
derivative liabilities
|
|
|
|
$
|
19,388
|
|
|
$
|
7,538
|
|
|
|
Amount of Gain or (Loss)
Recognized in OCI on
Derivatives (Effective Portion)
|
|
|
|
Quarter Ended
|
|
Derivatives in Cash Flow
|
|
October 2,
|
|
|
September
26,
|
|
Hedging Relationships
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Foreign
exchange contracts
|
|
$
|
(5,816
|
)
|
|
$
|
(1,359
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(5,816
|
)
|
|
$
|
(1,359
|
)
|
For the
first quarters of fiscal 2011 and fiscal 2010, the amounts above are net of tax
of $3,882 and $985, respectively.
Location of Gain or (Loss)
|
|
Amount of Gain or (Loss)
Reclassified from Accumulated
OCI into Income (Effective
Portion)
|
|
Reclassified from
|
|
Quarter Ended
|
|
Accumulated OCI into Income
|
|
October 2,
|
|
|
September
26,
|
|
(Effective Portion)
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
$
|
(840
|
)
|
|
$
|
(2,189
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(840
|
)
|
|
$
|
(2,189
|
)
|
During
the quarters ended October 2, 2010 and September 26, 2009, there were no
material gains or losses recognized in income due to hedge
ineffectiveness.
The
Company expects that $12,072 of net derivative losses included in accumulated
other comprehensive income at October 2, 2010 will be reclassified into earnings
within the next 12 months. This amount will vary due to fluctuations
in the Japanese Yen and Canadian Dollar exchange rates.
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
Hedging
activity affected accumulated other comprehensive (loss) income, net of tax, as
follows:
|
|
October
2,
|
|
|
July
3,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
(2,092
|
)
|
|
$
|
(335
|
)
|
Net
losses transferred to earnings
|
|
|
452
|
|
|
|
1,606
|
|
Change
in fair value, net of tax
|
|
|
(5,816
|
)
|
|
|
(3,363
|
)
|
Balance
at end of period
|
|
$
|
(7,456
|
)
|
|
$
|
(2,092
|
)
|
8.
|
Goodwill
and Intangible Assets
|
The
change in the carrying value of goodwill for the first quarter of fiscal 2011
ended October 2, 2010, by operating segment, is as follows:
|
|
Direct-to-
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
Indirect
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
balance at July 3, 2010
|
|
$
|
304,345
|
|
|
$
|
1,516
|
|
|
$
|
305,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
exchange impact
|
|
|
15,810
|
|
|
|
-
|
|
|
|
15,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
balance at October 2, 2010
|
|
$
|
320,155
|
|
|
$
|
1,516
|
|
|
$
|
321,671
|
|
At
October 2, 2010 and July 3, 2010, intangible assets not subject to amortization
consisted of $9,788 of trademarks.
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, Macau and mainland
China, 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 net 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.
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
|
|
Direct-to-
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
Consumer
|
|
|
Indirect
|
|
|
Unallocated
|
|
|
Total
|
|
Quarter Ended October 2,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
775,469
|
|
|
$
|
136,200
|
|
|
$
|
-
|
|
|
$
|
911,669
|
|
Operating
income
|
|
|
300,333
|
|
|
|
76,064
|
|
|
|
(90,737
|
)
|
|
|
285,660
|
|
Income
before provision for income taxes
|
|
|
300,333
|
|
|
|
76,064
|
|
|
|
(91,299
|
)
|
|
|
285,098
|
|
Depreciation
and amortization expense
|
|
|
21,220
|
|
|
|
3,036
|
|
|
|
7,995
|
|
|
|
32,251
|
|
Additions
to long-lived assets
|
|
|
20,026
|
|
|
|
2,171
|
|
|
|
4,593
|
|
|
|
26,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 26,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
653,892
|
|
|
$
|
107,545
|
|
|
$
|
-
|
|
|
$
|
761,437
|
|
Operating
income
|
|
|
246,821
|
|
|
|
62,267
|
|
|
|
(85,841
|
)
|
|
|
223,247
|
|
Income
before provision for income taxes
|
|
|
246,821
|
|
|
|
62,267
|
|
|
|
(84,006
|
)
|
|
|
225,082
|
|
Depreciation
and amortization expense
|
|
|
20,636
|
|
|
|
2,800
|
|
|
|
9,944
|
|
|
|
33,380
|
|
Additions
to long-lived assets
|
|
|
14,636
|
|
|
|
754
|
|
|
|
3,782
|
|
|
|
19,172
|
|
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
|
|
|
|
October 2,
|
|
|
September 26,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Production
variances
|
|
$
|
16,367
|
|
|
$
|
5,353
|
|
Advertising,
marketing and design
|
|
|
(37,406
|
)
|
|
|
(32,366
|
)
|
Administration
and information systems
|
|
|
(57,496
|
)
|
|
|
(48,141
|
)
|
Distribution
and customer service
|
|
|
(12,202
|
)
|
|
|
(10,687
|
)
|
|
|
|
|
|
|
|
|
|
Total
corporate unallocated
|
|
$
|
(90,737
|
)
|
|
$
|
(85,841
|
)
|
10.
|
Stock
Repurchase Program
|
Purchases
of Coach’s common stock are made from time to time, subject to market conditions
and at prevailing market prices, through the open market. Repurchased
shares of common stock become authorized but unissued shares and may be issued
in the future for general corporate and other purposes. The Company
may terminate or limit the stock repurchase program at any time.
Coach
accounts for stock repurchases and retirements by allocating the repurchase
price to common stock, additional paid-in-capital and retained
earnings. The repurchase price allocation is based upon the equity
contribution associated with historical issuances, beginning with the earliest
issuance. During the fourth quarter of fiscal 2010, cumulative stock
repurchases allocated to retained earnings have resulted in an accumulated
deficit balance. Since its initial public offering, the Company has
not experienced a net loss in any fiscal year, and the net accumulated deficit
balance in stockholders’ equity is attributable to the cumulative stock
repurchase activity.
For the
first quarter of fiscal 2011, the Company repurchased and retired 3,585 shares
of common stock at an average cost of $38.35 per share. The Company
did not repurchase any shares of common stock during the first quarter of fiscal
2010. As of October 2, 2010, Coach had $422,128 remaining in the
stock repurchase program.
11.
|
Change
in Accounting Principle
|
Coach
adopted the FASB’s guidance for accounting for uncertainty in income taxes,
codified within ASC 740 “
Income Taxes,”
on July 1,
2007, the first day of fiscal 2008. At adoption, Coach elected to
classify interest and penalties related to uncertain tax positions as a
component of interest expense included within Interest income,
net. On July 4, 2010, the Company changed its method of accounting to
include such amounts as a component of the provision for income
taxes. The Company believes this change is preferable because: it
will improve Coach’s comparability with its industry peers; it is more
consistent with the way in which the Company manages the settlement of uncertain
tax positions as one overall amount inclusive of interest and penalties; and it
will provide more meaningful information to investors by including only interest
expense related to revolving credit facilities and long-term debt financing
activities within Interest income, net.
COACH,
INC.
Notes
to Condensed Consolidated Financial Statements
(dollars
and shares in thousands, except per share data)
(unaudited)
The
change in accounting method for presentation of interest and penalties for
uncertain tax positions was completed in accordance with ASC 250, “
Accounting Changes and Error
Corrections
.” Accordingly, the change in accounting principle
has been applied retrospectively by adjusting the financial statement amounts
for the prior periods presented. The change to current or historical
periods presented herein due to the change in accounting principle was limited
to income statement classification, with no effect on net income.
The
following table details the retrospective application impact on previously
reported amounts:
For the Quarter Ended
September 26, 2009
|
|
As Previously
Reported
|
|
|
Effect of
Accounting
Principle
Change
|
|
|
Adjusted
|
|
Interest
(expense) income, net
|
|
$
|
(596
|
)
|
|
$
|
2,431
|
|
|
$
|
1,835
|
|
Provision
for income taxes
|
|
|
81,824
|
|
|
|
2,431
|
|
|
|
84,255
|
|
The
following table shows the impact of the accounting principle change on reported
balances for the quarter ended October 2, 2010:
For the Quarter Ended
October 2, 2010
|
|
As Computed
Under Prior
Method
|
|
|
Effect of
Accounting
Principle
Change
|
|
|
As Reported
Under Current
Method
|
|
Interest
income, net
|
|
$
|
(1,842
|
)
|
|
$
|
2,090
|
|
|
$
|
248
|
|
Provision
for income taxes
|
|
|
94,132
|
|
|
|
2,090
|
|
|
|
96,222
|
|
12.
|
Recent
Accounting Developments
|
ASC
820-10 “
Fair Value
Measurements and Disclosures
,” was amended in January 2010 to require
additional disclosures related to recurring and nonrecurring fair value
measurements. The guidance requires disclosure of transfers of assets and
liabilities between Levels 1 and 2 of the fair value hierarchy, including the
reasons and the timing of the transfers and information on purchases, sales,
issuances, and settlements on a gross basis in the reconciliation of the assets
and liabilities measured under Level 3 of the fair value hierarchy. The guidance
was effective for the Company beginning on December 27, 2009, except for certain
disclosures about purchases, sales, issuances, and settlements related to Level
3 fair value measurements, which are effective for the Company beginning on
January 2, 2011. The disclosure guidance adopted on December 27, 2009
did not have a material impact on our consolidated financial statements and we
do not expect the additional disclosure requirements, effective for the Company
beginning on January 2, 2011, to have a material impact on our consolidated
financial statements.
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 July 2, 2011 (“fiscal 2011”) is
a 52-week period. The fiscal year ended July 3, 2010 (“fiscal 2010”)
was 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, jewelry, wearables, business cases, sunwear, travel bags,
fragrance and watches. 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, and mainland China, 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 sustain growth within our global framework, we continue to focus on two key
growth strategies: increased global distribution, with an emphasis on North
America and China, and improved store sales 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 implemented a number of initiatives to accelerate the
level of newness, elevate our product offering and enhance the in-store
and online experience. These initiatives, supported by a
comprehensive digital media strategy, 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 under-penetrated existing
markets. We believe that North America can support about 500
retail stores in total, including up to 30 in Canada. Through
the first quarter of fiscal 2011, we opened three new retail
locations. The pace of our future retail store openings will
depend upon the economic environment and reflect opportunities in the
marketplace, with a focus on new
markets.
|
|
·
|
Build
Men’s market share globally, with a focus in North American, Japan and the
rest of Asia. The Men’s market is a global multichannel
opportunity for locations in retail stores, factory locations and through
distributor locations. We have implemented a number of
initiatives to elevate our men’s product offering through image-enhancing
and accessible locations. During the first quarter of fiscal 2011, we
opened our first five men’s standalone factory stores. In
addition, based on our initial success with our men’s store on Bleecker
Street, we will be opening additional men’s retail store locations later
during fiscal 2011 in select markets in North
America.
|
|
·
|
Raise
brand awareness in emerging markets, notably in China, where our brand
awareness is increasing and the category is developing
rapidly. China represents the single largest emerging market
for Coach and the pace of our future retail store openings will reflect
this opportunity.
|
We
believe the growth strategies outlined above will allow us to deliver long-term
superior returns on our investments and drive increased cash flows from
operating activities. However, the current macroeconomic environment,
while improving, continues to present a challenging retail market in which
consumers, notably in North America and Japan, remain cautious. The
Company believes long-term growth can still be achieved through a combination of
expanded distribution with an emphasis on China, along with 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 complement 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 our
business to take advantage of profitable growth opportunities.
FIRST
QUARTER OF FISCAL 2011 HIGHLIGHTS
The key
metrics of the first quarter of fiscal 2011 were:
|
·
|
Earnings
per diluted share increased 43.0% to
$0.63.
|
|
·
|
Net
sales increased 19.7% to $911.7
million.
|
|
·
|
Direct-to-consumer
sales rose 18.6% to $775.5 million.
|
|
·
|
Comparable
store sales in North America increased 8.5%, primarily due to improved
conversion in our factory and full-priced
stores.
|
|
·
|
In
North America, Coach opened three new retail and seven new factory stores,
including five Men’s stand-alone factory stores, bringing the total number
of retail and factory stores to 345 and 128, respectively, at the end of
the first quarter of fiscal 2011.
|
|
·
|
Coach
China results continued to be strong with double-digit growth in
comparable stores. Coach China opened eight new locations,
bringing the total number of locations at the end of the first quarter of
fiscal 2011 to 49.
|
|
·
|
Coach
Japan opened two new locations, bringing the total number of locations at
the end of the first quarter of fiscal 2010 to
163.
|
|
·
|
Coach
Japan sales, when translated into U.S. dollars, rose 13.8% to $173.1
million. This increase includes a 10.6% positive impact from
currency translation.
|
RESULTS
OF OPERATIONS
FIRST
QUARTER FISCAL 2011 COMPARED TO FIRST QUARTER FISCAL 2010
The
following table summarizes results of operations for the first quarter of fiscal
2011 compared to the first quarter of fiscal 2010:
|
|
Quarter Ended
|
|
|
|
October 2, 2010
|
|
|
September 26, 2009
|
|
|
Variance
|
|
|
|
(dollars in millions, except per share data)
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
net sales
|
|
|
Amount
|
|
|
net sales
|
|
|
Amount
|
|
|
%
|
|
Net
sales
|
|
$
|
911.7
|
|
|
|
100.0
|
%
|
|
$
|
761.4
|
|
|
|
100.0
|
%
|
|
$
|
150.2
|
|
|
|
19.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
676.2
|
|
|
|
74.2
|
|
|
|
550.2
|
|
|
|
72.3
|
|
|
|
126.0
|
|
|
|
22.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
390.5
|
|
|
|
42.8
|
|
|
|
326.9
|
|
|
|
42.9
|
|
|
|
63.6
|
|
|
|
19.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
285.7
|
|
|
|
31.3
|
|
|
|
223.2
|
|
|
|
29.3
|
|
|
|
62.4
|
|
|
|
28.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income, net
|
|
|
0.2
|
|
|
|
0.0
|
|
|
|
1.8
|
|
|
|
0.2
|
|
|
|
(1.6
|
)
|
|
nm
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
0.8
|
|
|
|
0.1
|
|
|
|
-
|
|
|
|
0.0
|
|
|
|
0.8
|
|
|
nm
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
96.2
|
|
|
|
10.6
|
|
|
|
84.3
|
|
|
|
11.1
|
|
|
|
12.0
|
|
|
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
188.9
|
|
|
|
20.7
|
|
|
|
140.8
|
|
|
|
18.5
|
|
|
|
48.0
|
|
|
|
34.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.64
|
|
|
|
|
|
|
$
|
0.44
|
|
|
|
|
|
|
$
|
0.19
|
|
|
|
44.1
|
%
|
Diluted
|
|
|
0.63
|
|
|
|
|
|
|
|
0.44
|
|
|
|
|
|
|
|
0.19
|
|
|
|
43.0
|
|
* -
Percentage change is not meaningful
Net
Sales
Net sales
by business segment in the first quarter of fiscal 2011, compared to the first
quarter of fiscal 2010, were as follows:
|
|
Quarter Ended
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
of
|
|
|
|
Net Sales
|
|
|
Total Net Sales
|
|
|
|
October 2,
|
|
|
September 26,
|
|
|
Rate of
|
|
|
October
2,
|
|
|
September
26,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct-to-Consumer
|
|
$
|
775.5
|
|
|
$
|
653.9
|
|
|
|
18.6
|
%
|
|
|
85.1
|
%
|
|
|
85.9
|
%
|
Indirect
|
|
|
136.2
|
|
|
|
107.5
|
|
|
|
26.7
|
|
|
|
14.9
|
|
|
|
14.1
|
|
Total
net sales
|
|
$
|
911.7
|
|
|
$
|
761.4
|
|
|
|
19.7
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Direct-to-Consumer
Net sales
increased 18.6% to $775.5 million during the first quarter of fiscal 2011 from
$653.9 million during the same period in fiscal 2010, driven by sales increases
in our Company-operated stores in North America, Japan and China.
In North
America, net sales increased 17.0% driven by a 8.5% increase in comparable store
sales and sales from new and expanded stores. Since the end of the
first quarter of fiscal 2010, Coach opened 5 net new retail stores and 12 new
factory stores, and expanded three factory stores in North
America. In Japan, net sales increased 13.8% driven by an
approximately $16.1 million or 10.6% positive impact from foreign currency
exchange. Since the end of the first quarter of fiscal 2010, Coach
opened six net new locations and expanded two locations in
Japan. Coach China results continued to be strong with double-digit
growth in comparable store sales. Since the end of the first quarter
of fiscal 2010, Coach opened 16 net new stores in Hong Kong and mainland
China.
Indirect
Net sales
increased 26.7% to $136.2 million in the first quarter of fiscal 2011 from
$107.5 million during the same period of fiscal 2010. The increase
was driven primarily by a 23.1% and 35.7% increase in U.S. Wholesale and Coach
International Wholesale, respectively. Licensing revenue of
approximately $4.2 million and $3.5 million in the first quarter of fiscal 2011
and fiscal 2010, respectively, is included in Indirect sales.
Operating
Income
Operating
income increased 28.0% to $285.7 million in the first quarter of fiscal 2011 as
compared to $223.2 million in the first quarter of fiscal
2010. Operating margin increased to 31.3% as compared to 29.3% in the
same period of the prior year, mainly due to an improvement in gross
margin.
Gross
profit increased 22.9% to $676.2 million in the first quarter of fiscal 2011
from $550.2 million during the same period of fiscal 2010. Gross
margin was 74.2% in the first quarter of fiscal 2011 as compared to 72.3% during
the same period of fiscal 2010. The gross margin improvement was
primarily due to sourcing cost improvements, notably in the factory channel
where product mix continued to favor higher margin, made-for-factory
product.
Selling,
general and administrative expenses increased 19.4% to $390.5 million in the
first quarter of fiscal 2011 as compared to $326.9 million in the first quarter
of fiscal 2010, driven primarily by increased selling
expenses. However, as a percentage of net sales, selling, general and
administrative expenses decreased to 42.8% during the first quarter of fiscal
2011 as compared to 42.9% during the first quarter of fiscal 2010 as we
leveraged our selling expense base on higher sales.
Selling
expenses were $269.1 million, or 29.5% of net sales, in the first quarter of
fiscal 2011 compared to $232.9 million, or 30.6% of net sales, in the first
quarter of fiscal 2010. The dollar increase in selling expenses was
due to higher operating expenses in North American stores, Coach China and
Japan, due to openings. North American store expenses as a percentage
of sales decreased primarily due to operating efficiencies achieved since the
end of the first quarter of fiscal 2010. The decrease in Coach Japan
operating expenses in constant currency of $0.6 million was offset by the impact
of foreign currency exchange rates which increased reported expenses by
approximately $6.1 million.
Advertising,
marketing, and design costs were $51.0 million, or 5.6% of net sales, in the
first quarter of fiscal 2011, compared to $34.6 million, or 4.5% of net sales,
during the same period of fiscal 2010. The increase was primarily due
to new design expenditures and development costs for new merchandising
initiatives. Also contributing to the increase were marketing
expenses related to consumer communications, coach.com, our global e-commerce
sites, marketing sites and social networking websites. The Company
utilizes and continues to explore implementing new technologies such as our
sites, social networking websites and blogs as cost-effective consumer
communication opportunities to increase on-line and store sales and build brand
awareness.
Distribution
and consumer service expenses were $12.9 million, or 1.4% of net sales, in the
first quarter of fiscal 2011, compared to $11.3 million, or 1.5% of net sales,
in the first quarter of fiscal 2010.
Administrative
expenses were $57.5 million, or 6.3% of net sales, in the first quarter of
fiscal 2011 compared to $48.1 million, or 6.3% of net sales, during the same
period of fiscal 2010. The increase in administrative expenses was
primarily due to higher share-based compensation and performance-based
compensation.
Interest
Income, Net
Net
interest income was $0.2 million in the first quarter of fiscal 2011 as compared
to $1.8 million in the first quarter of fiscal 2010. The decrease is
attributable to lower returns on our investments primarily due to changes in
interest rates, including interest rates on the cross-currency swaps, and lower
cash and investment balances.
Provision
for Income Taxes
The
effective tax rate was 33.75% in the first quarter of fiscal 2011 as compared to
37.43% in the first quarter of fiscal 2010. The decrease in the
effective tax rate is primarily attributable to higher profitability in lower
tax rate jurisdictions in which income is earned and a lower effective state tax
rate.
Net
Income
Net
income was $188.9 million in the first quarter of fiscal 2011 as compared to
$140.8 million in the first quarter of fiscal 2010. This increase was
primarily due to an improvement in operating income as well as a decrease in the
Company's effective tax rate.
FINANCIAL
CONDITION
Cash
Flow
Net cash
provided by operating activities was $177.5 million in the first quarter of
fiscal 2011 compared to $240.5 million in the first quarter of fiscal
2010. The decrease of $63.1 million was primarily the result of
working capital changes between the two periods, the most significant of which
occurred in inventory, accrued liabilities and accounts receivable, partially
offset by the increase in net income of $48.0 million in the current
period. Changes during the period in inventory balances resulted in a
use of cash of $97.7 million in the current fiscal period compared to a source
of cash of $5.2 million in the prior fiscal period, primarily due to higher
inventory levels year over year driven by the improved overall economic
conditions. Changes during the period in accrued liabilities balances
provided cash of $15.1 million in the current fiscal period, compared to $69.6
million in the prior fiscal period, primarily due to higher bonus payouts in the
current year. Changes during the period in accounts receivable
balances used cash of $23.7 million in the current fiscal period compared to
providing cash of $5.2 million in the prior fiscal period, primarily driven by
an increase in net sales in the current period, as well as the timing of sales
and receipts.
Net cash
used in investing activities was $14.5 million in the first quarter of fiscal
2011 compared to $20.0 million in the first quarter of fiscal
2010. Proceeds from maturities and sales of investments, net of
purchases of investments, resulted in investing cash inflows of $9.3 million in
the current fiscal period. The Company had no comparable investment
activity in the prior fiscal year period. Purchases of property and
equipment were $23.1 million in the current fiscal period, which was $3.0
million higher than the prior year period, reflecting planned increased capital
investment.
Net cash
used in financing activities was $140.3 million in the first quarter of fiscal
2011 as compared to $32.4 million in the first quarter of fiscal
2010. The increase of $107.9 million in net cash used was
attributable to $137.5 million in funds expended in the first three months of
fiscal 2011 for repurchases of common stock, with no repurchases occurring in
the prior fiscal period, as well as $20.9 million higher dividend payments, due
to the higher dividend payment rate in the current fiscal period. The
overall increase in net cash used in financing activities was partially offset
by $40.5 million higher proceeds from exercises of share-based awards in the
current fiscal period.
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 and the lenders’
consent, 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 and the lenders’ consent.
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 quarter of fiscal 2011 and fiscal 2010
there were no borrowings under the Bank of America
facility. Accordingly, as of October 2, 2010 and September 26, 2009,
there were no outstanding borrowings under the Bank of America
facility. The Company’s borrowing capacity as of October 2, 2010 was
$90.0 million, due to outstanding letters of credit.
Coach
pays a commitment fee of 6 to 12.5 basis points on any unused amounts 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 October 2, 2010, 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. Coach has been in compliance with all covenants since its
inception.
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 4.1
billion Japanese Yen, or approximately $49.2 million, at October 2,
2010. Interest is based on the Tokyo Interbank rate plus a margin of
30 basis points. During the first quarter of fiscal 2011 and fiscal
2010, there were no borrowings under the Japanese credit
facilities. As of October 2, 2010 and July 3, 2010, there were no
outstanding borrowings under the Japanese credit facilities.
To
provide funding for working capital and general corporate purposes, Coach
Shanghai Limited has a credit facility that allows a maximum borrowing of 67
million Chinese Renminbi, or approximately $10 million, at October 2,
2010. Interest is based on the People's Bank of China
rate. During the first quarter of fiscal 2011 and fiscal 2010, the
peak borrowings under this credit facility were $0 and $7.5 million,
respectively. As of October 2, 2010 and July 3, 2010, there were no
outstanding borrowings under this facility.
Common
Stock Repurchase Program
In April
2010, the Company completed its $1.0 billion common stock repurchase program,
which was put into place in August 2008. In April 2010, the Company’s
Board approved a new common stock repurchase program to acquire up to $1.0
billion of Coach’s outstanding common stock through June
2012. 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 quarter of fiscal 2011, the Company repurchased and retired 3.6
million shares, or $137.5 million of common stock, at an average cost of
$38.35. The Company did not repurchase any common stock during the
first quarter of fiscal 2010. As of October 2, 2010,
$422.1 million remained available for future purchases under the existing
program.
Liquidity
and Capital Resources
The
Company expects total capital expenditures for the fiscal year ending July 2,
2011 to be approximately $150 million. Capital expenditures will be
primarily for new stores in North America, Japan, Hong Kong and mainland
China. We will also continue to invest in corporate infrastructure
and department store and distributor locations. These investments
will be financed primarily from on hand cash and operating cash
flows.
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 quarter fiscal 2010, Coach purchased approximately $331 million of
inventory, which was funded by operating cash flow.
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, dividend payments and the common stock repurchase
program. Any future acquisitions, joint ventures or other similar
transactions may require additional capital. 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, dividend payments and scheduled debt payments, as well as
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, Coach 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. Over the past several years,
we have achieved higher levels of growth in the non-holiday quarters, which has
reduced these seasonal fluctuations.
NON-GAAP
MEASURES
Currency
Fluctuation Effects
Percentage
increase in sales in the first quarter of fiscal 2011 for Coach Japan has been
presented both including and excluding currency fluctuation effects from
translating foreign-denominated sales into U.S. dollars and compared to the same
period in the prior fiscal year.
We
believe that presenting Coach Japan sales increases, including and excluding
currency fluctuation effects, will help investors and analysts to understand the
effect on this valuable performance measure of significant year-over-year
currency fluctuations.
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 July 3, 2010 are those that depend
most heavily on these judgments and estimates. As of October 2, 2010,
there have been no material changes to any of the critical accounting policies
contained therein other than the Company’s change in accounting method for
interest and penalties related to uncertain tax positions. See the
footnote on Change in Accounting Principle.
Recent
Accounting Developments
ASC
820-10 “
Fair Value
Measurements and Disclosures
,” was amended in January 2010 to require
additional disclosures related to recurring and nonrecurring fair value
measurements. The guidance requires disclosure of transfers of assets and
liabilities between Levels 1 and 2 of the fair value hierarchy, including the
reasons and the timing of the transfers and information on purchases, sales,
issuances, and settlements on a gross basis in the reconciliation of the assets
and liabilities measured under Level 3 of the fair value hierarchy. The guidance
was effective for the Company beginning on December 27, 2009, except for certain
disclosures about purchases, sales, issuances, and settlements related to Level
3 fair value measurements, which are effective for the Company beginning on
January 2, 2011. The disclosure guidance adopted on December 27, 2009
did not have a material impact on our consolidated financial statements and we
do not expect the additional disclosure requirements, effective for the Company
beginning on January 2, 2011, to have a material impact on our 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
and Coach Canada. The use of derivative financial 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 fiscal 2011 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, Vietnam, Peru, Philippines, Turkey, Ecuador, Great Britain, Macau and
Malaysia. Additionally, sales are made through international channels
to third party distributors. Substantially all purchases and sales
involving international parties, excluding Coach Japan and Coach China, are
denominated in U.S. dollars and, therefore, are not subject to foreign currency
exchange risk.
In Japan
and Canada, Coach is exposed to market risk from foreign currency exchange rate
fluctuations resulting from Coach Japan and Coach Canada’s U.S. dollar
denominated inventory purchases. Coach Japan and Coach Canada enter
into certain foreign currency derivative contracts, primarily zero-cost collar
options, to manage these risks. As of October 2, 2010 and July 3,
2010, open foreign currency forward contracts designated as hedges with a
notional amount of $185.6 million and $248.6 million, respectively, were
outstanding.
Coach is
also exposed to market risk from foreign currency exchange rate fluctuations
with respect to Coach Japan as a result of its $139.4 million U.S.
dollar-denominated fixed rate intercompany loan from Coach. To manage
this risk, on July 2, 2010, Coach Japan entered into a cross-currency swap
transaction, the terms of which include an exchange of a Japanese Yen fixed
interest rate for a U.S. dollar fixed interest rate. The loan matures
on June 30, 2011, at which point the swap requires an exchange of Japanese Yen
and U.S. dollar based notional values.
The fair
value of open foreign currency derivatives included in current assets at October
2, 2010 and July 3, 2010 was $0.4 million and $2.1 million,
respectively. The fair value of open foreign currency derivatives
included in current liabilities at October 2, 2010 and September 26, 2009 was
$19.4 million and $7.5 million, respectively. The fair value of these
contracts is sensitive to changes in Japanese Yen and Canadian Dollar exchange
rates.
Coach
believes that exposure to adverse changes in exchange rates associated with
revenues and expenses of foreign operations, which are denominated in Japanese
Yen, Chinese Renminbi, Hong Kong Dollar, Macau Pataca and Canadian Dollars, are
not material to the Company’s consolidated financial
statements.
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. The Company’s investment portfolio consists of U.S.
government and agency securities as well as corporate debt
securities. As the Company does not have the intent to sell and will
not be required to sell these securities until maturity, investments are
classified as held-to-maturity and stated at amortized cost, except for auction
rate securities, which are classified as available-for-sale. At
October 2, 2010 and July 3, 2010, the Company’s investments, classified as
held-to-maturity, consisted of commercial paper and treasury bills valued at
$90.6 million and $99.9 million, on those dates respectively. As the
adjusted book value of the commercial paper and treasury bills equals its fair
value, there were no unrealized gains or losses associated with these
investments. At October 2, 2010 and July 3, 2010, the Company’s
investments, classified as available-for-sale, consisted of a $6.0 million
auction rate security. At October 2, 2010, as the auction rate
security’s adjusted book value equaled its fair value, there were no unrealized
gains or losses associated with this investment.
As of
October 2, 2010, the Company had no outstanding borrowings on its Bank of
America facility, nor its revolving credit facilities maintained by Coach Japan
and Coach Shanghai. The fair value of any future borrowings may be
impacted by fluctuations in interest rates.
As of
October 2, 2010, Coach’s outstanding long-term debt, including the current
portion, was $24.8 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 October 2, 2010.
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, including 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.
As part
of Coach’s 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 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 Coach’s
intellectual properties.
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.
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.
There are
no material changes from the risk factors previously disclosed in our Annual
Report on Form 10-K for the fiscal year ended July 3, 2010.
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
The
Company’s share repurchases during the first quarter of fiscal 2011 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
1 (7/4/2010 - 8/7/2010)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
559,627
|
|
Period
2 (8/8/2010 - 9/4/2010)
|
|
|
2,333
|
|
|
|
37.66
|
|
|
|
2,333
|
|
|
|
471,782
|
|
Period
3 (9/5/2010 - 10/2/2010)
|
|
|
1,252
|
|
|
|
39.65
|
|
|
|
1,252
|
|
|
|
422,128
|
|
Total
|
|
|
3,585
|
|
|
|
|
|
|
|
3,585
|
|
|
|
|
|
(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
|
|
April
20, 2010
|
|
$
1.0 billion
|
|
|
June
2012
|
|
18
|
Letter
re: change in accounting principle
|
|
|
31.1
|
Rule
13(a) – 14(a)/15(d) – 14(a) Certifications
|
|
|
32.1
|
Section
1350 Certifications
|
|
|
101.INS
|
XBRL
Instance Document
|
|
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document
|
|
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase
|
|
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase
|
|
|
101.DEF
|
XBRL
Taxonomy Extension Definition
Linkbase
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
COACH,
INC.
|
|
(Registrant)
|
|
|
|
By:
|
/s/ Michael F. Devine, III
|
|
|
Name:
|
Michael
F. Devine, III
|
|
|
Title:
|
Executive
Vice President,
|
|
|
|
Chief
Financial Officer and
|
|
|
|
Chief
Accounting Officer
|
|
Dated: November
8, 2010
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