|
|
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.
EXECUTIVE OVERVIEW
Coach is a leading American marketer of
fine accessories and gifts for women and men. Our product offerings include women’s and men’s bags, accessories, business
cases, footwear, wearables, jewelry, sunwear, travel bags, watches and fragrance. Coach operates in two segments: North America
and International. The North America segment includes sales to North American consumers through Coach-operated stores (including
Internet sales) and sales to North American wholesale customers and distributors. The International segment includes sales to consumers
through Coach-operated stores in Japan and mainland China (including Internet sales), Hong Kong and Macau, Taiwan, Singapore, Korea,
Malaysia and sales to wholesale customers and distributors in over 20 countries. As Coach’s business model is based on multi-channel
global 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
business, 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:
|
|
·
|
Grow our Women’s business in North America by maximizing
productivity in the growing accessories market by increasing our North American distribution.
|
|
|
·
|
Leverage the global opportunity for the Coach brand by
raising brand awareness and building market share in markets where Coach is under-penetrated, most notably in Asia. Outside of
Asia, we are developing the brand opportunity as we expand into Europe, South America and Central America.
|
|
|
·
|
Focus on the Men’s opportunity for the brand, notably
in North America and Asia, while drawing on our long heritage in the category. We are leveraging the Men’s opportunity by
opening new locations in both full-price and factory, and as a productivity driver with a broadened assortment, dual-gender stores
and shop-in-shop store executions.
|
|
|
·
|
Raise brand awareness and maximize e-commerce sales through our digital strategy. Key elements include coach.com, our global
e-commerce sites, third-party flash sites, marketing sites and social networking.
|
We believe the growth strategies described
above will allow us to deliver long-term superior returns on our investments and drive increased cash flows from operating activities.
However, the soft macroeconomic environment, along with intensified competition and a promotional environment has created a challenging
retail market. 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. With a strong balance sheet and significant cash position,
we have a business model that generates significant cash flow and we are in a position to invest in our brand while continuing
to return capital to shareholders through common stock repurchases and dividends.
SUMMARY - SECOND QUARTER OF FISCAL 2013
The key metrics for the second quarter
of fiscal 2013 were:
|
|
·
|
Net sales increased 3.8% to $1.50 billion.
|
|
|
·
|
North America sales rose 0.6% to $1.08 billion.
|
|
|
o
|
Comparable store sales decreased 2.2%.
|
|
|
o
|
Coach opened 15 new factory stores including four Men’s, bringing the total number of retail and factory stores to 356
and 189, respectively, at the end of the second quarter of fiscal 2013.
|
|
|
·
|
International sales rose 11.8% to $411.1 million, as China continued to achieve double digit comparable store sales.
|
|
|
o
|
International benefited from the results of the Company-operated Korea (47 retail and department stores) and Malaysia (ten
retail stores) businesses acquired during the first quarter of fiscal 2013, and the Taiwan (26 retail and department stores) business,
acquired during the third quarter of fiscal 2012.
|
|
|
o
|
Coach opened 13 locations in China and five net locations in Japan. As of the end of the second quarter of fiscal 2013, the
Company operated 186 locations in Japan, 117 in China, 48 in Korea, 27 in Taiwan, 10 in Malaysia, and seven in Singapore.
|
|
|
·
|
Operating income increased 5.1% to $526.6 million.
|
|
|
·
|
Net income increased 1.5% to $352.8 million.
|
|
|
·
|
Earnings per diluted share increased 4.8% to $1.23.
|
RESULTS OF OPERATIONS
SECOND QUARTER FISCAL 2013 COMPARED
TO SECOND QUARTER FISCAL 2012
The following table summarizes results
of operations for the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. Note that these results should
be read in conjunction with the “Non-GAAP Measures” discussion on pages 35-36:
|
|
|
Quarter Ended
|
|
|
|
|
December 29, 2012
|
|
|
December 31, 2011
|
|
|
Variance
|
|
|
|
|
(dollars in millions, except per share data)
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
net sales
|
|
|
Amount
|
|
|
net sales
|
|
|
Amount
|
|
|
%
|
|
|
Net sales
|
|
$
|
1,503.8
|
|
|
|
100.0
|
%
|
|
$
|
1,448.6
|
|
|
|
100.0
|
%
|
|
$
|
55.2
|
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,085.4
|
|
|
|
72.2
|
|
|
|
1,045.2
|
|
|
|
72.2
|
|
|
|
40.2
|
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
558.8
|
|
|
|
37.2
|
|
|
|
544.3
|
|
|
|
37.6
|
|
|
|
14.5
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
526.6
|
|
|
|
35.0
|
|
|
|
500.9
|
|
|
|
34.6
|
|
|
|
25.7
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income, net
|
|
|
0.3
|
|
|
|
0.0
|
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)
|
|
|
0.3
|
|
|
|
nm
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(1.5
|
)
|
|
|
(0.1
|
)
|
|
|
(1.8
|
)
|
|
|
(0.1
|
)
|
|
|
0.3
|
|
|
|
nm
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
172.6
|
|
|
|
11.5
|
|
|
|
151.6
|
|
|
|
10.5
|
|
|
|
21.0
|
|
|
|
13.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
352.8
|
|
|
|
23.5
|
|
|
|
347.5
|
|
|
|
24.0
|
|
|
|
5.3
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.25
|
|
|
|
|
|
|
$
|
1.20
|
|
|
|
|
|
|
$
|
0.05
|
|
|
|
4.1
|
%
|
|
Diluted
|
|
|
1.23
|
|
|
|
|
|
|
|
1.18
|
|
|
|
|
|
|
|
0.05
|
|
|
|
4.8
|
|
* - Percentage change is not meaningful
Net Sales
Net sales by business segment in the second
quarter of fiscal 2013, compared to the second quarter of fiscal 2012, were as follows:
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Percentage of
|
|
|
|
|
Net Sales
|
|
|
Total Net Sales
|
|
|
|
|
December 29,
|
|
|
December 31,
|
|
|
Rate of
|
|
|
December 29,
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
(1)
|
|
|
Change
|
|
|
2012
|
|
|
2011
(1)
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,076.1
|
|
|
$
|
1,069.8
|
|
|
|
0.6
|
%
|
|
|
71.6
|
%
|
|
|
73.9
|
%
|
|
International
|
|
|
411.1
|
|
|
|
367.6
|
|
|
|
11.8
|
|
|
|
27.3
|
|
|
|
25.4
|
|
|
Other
(2)
|
|
|
16.6
|
|
|
|
11.2
|
|
|
|
48.2
|
|
|
|
1.1
|
|
|
|
0.7
|
|
|
Total net sales
|
|
$
|
1,503.8
|
|
|
$
|
1,448.6
|
|
|
|
3.8
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
(1)
Prior
year segment data has been restated to reflect the Company’s revised reportable segment structure. See Note “Segment
Information”
for a discussion of the change in reportable segments.
(2)
Net
sales in the other category, which is not a reportable segment, consists of sales generated in ancillary channels including licensing
and disposition.
North America
Net sales increased 0.6% to $1,076.1 million
during the second quarter of fiscal 2013 from $1,069.8 million during the same period in fiscal 2012, primarily driven by significant
traffic improvement in the North American Internet business, as well as new and expanded stores, partially offset by the decrease
in traffic in full price and factory stores and decreased shipments into wholesale stores. Overall, comparable store sales, including
the Internet, decreased by 2.2%. Since the end of the second quarter of fiscal 2012, Coach opened six net retail stores and 32
factory stores, including 14 Men’s, and expanded 11 factory stores in North America.
International
Net sales
increased 11.8% to $411.1 million in the second quarter of fiscal 2013 from $367.6 million during the same period of fiscal 2012,
primarily driven by sales from new and acquisition-related stores and double-digit percentage growth in China comparable store
sales. These increases were partially offset by the 5.5% negative foreign exchange impact of the Yen, which decreased Japan sales
by $11.8 million.
Net sales include the Company-operated Korea and Malaysia businesses, which
were acquired in the first quarter of fiscal 2013, and the Taiwan business, acquired during the third quarter of fiscal 2012. Since
the end of the second quarter of fiscal 2012, International opened 49 net new stores (excluding those acquired as a result of the
acquisitions), with 37 net new stores in mainland China, Hong Kong and Macau, nine net new stores in Japan and three net new stores
in the other regions.
Operating Income
Operating income increased 5.1% to $526.6
million in the second quarter of fiscal 2013 as compared to $500.9 million in the second quarter of fiscal 2012. Operating margin
increased to 35.0% as compared to 34.6% in the same period of the prior year. Excluding items affecting comparability of $20.3
million in the second quarter of fiscal 2012, operating income was $521.2 million, or operating margin was 36.0%, in the second
quarter of fiscal 2012.
Gross profit increased 3.8% to $1.09 billion
in the second quarter of fiscal 2013 from $1.05 billion during the same period of fiscal 2012. Gross margin in the second quarter
of fiscal 2013 was equal to the same period of fiscal 2012 at 72.2%, despite the impact of the higher cost of inventory in connection
with the acquisitions.
Selling, general and administrative expenses
increased 2.7% to $558.8 million in the second quarter of fiscal 2013 as compared to $544.3 million in the second quarter of fiscal
2012. As a percentage of net sales, selling, general and administrative expenses decreased to 37.2% during the second quarter of
fiscal 2013 as compared to 37.6% during the second quarter of fiscal 2012. Excluding items affecting comparability of $20.3 million
in the second quarter of fiscal 2012, selling, general and administrative expenses were $524.0 million, or 36.2% as a percentage
of net sales, in the second quarter of fiscal 2012.
Selling expenses were $417.1 million, or
27.7% of net sales, in the second quarter of fiscal 2013 compared to $371.0 million, or 25.6% of net sales, in the second quarter
of fiscal 2012. The dollar increase in selling expenses was due to International stores reflecting higher sales, and new store
openings. International selling expenses overall increased as a percentage of sales, due to the acquisitions of the Korea, Malaysia
and Taiwan businesses and infrastructure investments to support Asia. China store expenses as a percentage of sales decreased primarily
due to operating efficiencies and sales leverage.
Advertising, marketing, and design costs
were $65.3 million, or 4.3% of net sales, in the second quarter of fiscal 2013, compared to $69.6 million, or 4.8% of net sales,
during the same period of fiscal 2012. The decrease was primarily due to lower customer communications, which includes our digital
strategy through coach.com, due to the timing of such expenses in the current fiscal period, partially offset by creative marketing
expenses and increased digital media. The Company utilizes and continues to explore implementing new technologies such as our global
web presence, with informational websites in 26 countries, social networking 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 $24.3 million, or 1.6% of net sales, in the second quarter of fiscal 2013, compared to $18.5 million, or 1.3% of net sales,
in the second quarter of fiscal 2012. The increase in distribution and consumer service expenses is primarily the result of the
increase in Internet purchases, resulting in increased packaging and shipping expense per dollar of sales.
Administrative expenses were $52.1 million,
or 3.5% of net sales, in the second quarter of fiscal 2013 compared to $85.2 million, or 5.9% of net sales, during the same period
of fiscal 2012. The decrease is due to the absence of a charitable contribution in the current fiscal period, as well as leveraging
of administrative expenses over the increased sales base. The dollar decrease in fiscal 2013 reflects lower bonus compensation
expenses, partially offset by higher equity compensation and systems investment. Excluding items affecting comparability of $20.3
million in the second quarter of fiscal 2012, administrative expenses were $64.9 million, or 4.5% as a percentage of net sales,
in the second quarter of fiscal 2012.
Provision for Income Taxes
The effective tax rate was 32.9% in the
second quarter of fiscal 2013, as compared to 30.4% effective tax rate in the second quarter of fiscal 2012. During the second
quarter of fiscal 2012, the Company recorded the effect of a revaluation of certain deferred tax asset balances due to a change
in Japan’s corporate tax laws and the favorable completion of a multi-year transfer pricing agreement with Japan, which resulted
in the lower effective tax rate for the second quarter of fiscal 2012. Excluding items affecting comparability, the effective tax
rate was 33.1% for the second quarter of fiscal 2012.
Net Income
Net income was $352.8 million in the second
quarter of fiscal 2013 as compared to $347.5 million in the second quarter of fiscal 2012. This increase was primarily due to the
flow through of higher operating income.
Net Income per Diluted Share
Net income per diluted share grew 4.8%
to $1.23 in the second quarter of fiscal 2013 as compared to $1.18 in the second quarter of fiscal 2012. This growth reflected
leverage due to repurchases of Coach’s common stock, in addition to higher net income.
SUMMARY - SIX MONTHS OF FISCAL 2013
The key metrics for the six months of fiscal
2013 were:
|
|
·
|
Net sales increased 6.6% to $2.67 billion.
|
|
|
·
|
North America sales rose 3.4% to $1.86 billion.
|
|
|
o
|
Comparable store sales increased 0.9%.
|
|
|
o
|
Coach opened 20 new factory stores including seven Men’s, bringing the total number of retail and factory stores to 356
and 189, respectively, at the end of the second quarter of fiscal 2013.
|
|
|
·
|
International sales rose 13.5% to $772.9 million, as China continued to achieve double digit comparable store sales.
|
|
|
o
|
International benefited from the results of the Company-operated Korea (47 retail and department stores) and Malaysia (ten
retail stores) businesses acquired during the first quarter of fiscal 2013, and the Taiwan (26 retail and department stores) business,
acquired during the third quarter of fiscal 2012.
|
|
|
o
|
Coach opened 21 net locations in China and six net locations in Japan. As of the end of the second quarter of fiscal 2013,
the Company operated 186 locations in Japan, 117 in China, 48 in Korea, 27 in Taiwan, 10 in Malaysia, and seven in Singapore.
|
|
|
·
|
Operating income increased 4.3% to $858.3 million.
|
|
|
·
|
Net income increased 2.1% to $574.1 million.
|
|
|
·
|
Earnings per diluted share increased 5.0% to $2.00.
|
FIRST SIX MONTHS FISCAL 2013 COMPARED
TO FIRST SIX MONTHS FISCAL 2012
The following table summarizes results
of operations for the first six months of fiscal 2013 compared to the first six months of fiscal 2012. Note that these results
should be read in conjunction with the “Non-GAAP Measures” discussion on Pages 35-36:
|
|
|
Six Months Ended
|
|
|
|
|
December 29, 2012
|
|
|
December 31, 2011
|
|
|
Variance
|
|
|
|
|
(dollars in millions, except per share data)
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
net sales
|
|
|
Amount
|
|
|
net sales
|
|
|
Amount
|
|
|
%
|
|
|
Net sales
|
|
$
|
2,665.1
|
|
|
|
100.0
|
%
|
|
$
|
2,499.0
|
|
|
|
100.0
|
%
|
|
$
|
166.1
|
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,930.6
|
|
|
|
72.4
|
|
|
|
1,809.9
|
|
|
|
72.4
|
|
|
|
120.7
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
1,072.3
|
|
|
|
40.2
|
|
|
|
987.0
|
|
|
|
39.5
|
|
|
|
85.3
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
858.3
|
|
|
|
32.2
|
|
|
|
822.9
|
|
|
|
32.9
|
|
|
|
35.4
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income, net
|
|
|
0.3
|
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
0.0
|
|
|
|
0.2
|
|
|
|
nm
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(3.6
|
)
|
|
|
(0.1
|
)
|
|
|
(3.2
|
)
|
|
|
(0.1
|
)
|
|
|
(0.4
|
)
|
|
|
nm
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
280.9
|
|
|
|
10.5
|
|
|
|
257.3
|
|
|
|
10.3
|
|
|
|
23.6
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
574.1
|
|
|
|
21.5
|
|
|
|
562.5
|
|
|
|
22.5
|
|
|
|
11.6
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.02
|
|
|
|
|
|
|
$
|
1.94
|
|
|
|
|
|
|
$
|
0.08
|
|
|
|
4.2
|
%
|
|
Diluted
|
|
|
2.00
|
|
|
|
|
|
|
|
1.90
|
|
|
|
|
|
|
|
0.10
|
|
|
|
5.0
|
|
* - Percentage change is not meaningful
Net Sales
Net sales by business segment in the first
six months of fiscal 2013, compared to the first six months of fiscal 2012, were as follows:
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
Percentage of
|
|
|
|
|
Net Sales
|
|
|
Total Net Sales
|
|
|
|
|
December 29,
|
|
|
December 31,
|
|
|
Rate of
|
|
|
December 29,
|
|
|
December 31,
|
|
|
|
|
2012
|
|
|
2011
(1)
|
|
|
Change
|
|
|
2012
|
|
|
2011
(1)
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,860.3
|
|
|
$
|
1,798.4
|
|
|
|
3.4
|
%
|
|
|
69.8
|
%
|
|
|
72.0
|
%
|
|
International
|
|
|
772.9
|
|
|
|
681.2
|
|
|
|
13.5
|
|
|
|
29.0
|
|
|
|
27.3
|
|
|
Other
(2)
|
|
|
31.9
|
|
|
|
19.4
|
|
|
|
64.4
|
|
|
|
1.2
|
|
|
|
0.7
|
|
|
Total net sales
|
|
$
|
2,665.1
|
|
|
$
|
2,499.0
|
|
|
|
6.6
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
(1)
Prior
year segment data has been restated to reflect the Company’s revised reportable segment structure. See Note “Segment
Information” for a discussion of the change in reportable segments.
(2)
Net
sales in the other category, which is not a reportable segment, consists of sales generated in ancillary channels including licensing
and disposition.
North America
Net sales increased 3.4% to $1,860.3 million
during the first six months of fiscal 2013 from $1,798.4 million during the same period in fiscal 2012, primarily driven by sales
from new and expanded stores and a 0.9% increase in comparable store sales and, partially offset by decreased shipments into wholesale
stores. Significant traffic improvement in the North American Internet business drove the comparable store sales increase, while
factory stores benefitted from the return to in-store promotion. Since the end of the first six months of fiscal 2012, Coach opened
six net retail stores and 32 factory stores, including 14 Men’s, and expanded 11 factory stores in North America.
International
Net sales
increased 13.5% to $772.9 million in the first six months of fiscal 2013 from $681.2 million during the same period of fiscal 2012,
primarily driven by sales from new and acquisition-related stores, increased shipments to international wholesale customers, driven
by expanded distribution, and double-digit percentage growth in China comparable store sales. These increases were partially offset
by the 3.3% negative foreign exchange impact of the Yen, which decreased Japan sales by $13.5 million.
The
first six month of fiscal 2013 results include net sales of the Company-operated Korea and Malaysia businesses, which were acquired
in the first quarter of fiscal 2013, and the Taiwan business, acquired during the third quarter of fiscal 2012. Since the end of
the first six months of fiscal 2012, International opened 49 net new stores (excluding those acquired as a result of the acquisitions),
with 37 net new stores in mainland China, Hong Kong and Macau, nine net new stores in Japan and three net new stores in the other
regions.
Operating Income
Operating income increased 4.3% to $858.3
million in the first six months of fiscal 2013 as compared to $822.9 million in the first six months of fiscal 2012. Operating
margin decreased to 32.2% as compared to 32.9% in the same period of the prior year. Excluding items affecting comparability of
$20.3 million in the first six months of fiscal 2012, operating income was $843.1 million, or operating margin was 33.7%, in the
first six months of fiscal 2012.
Gross profit increased 6.7% to $1.93 billion
in the first six months of fiscal 2013 from $1.81 billion during the same period of fiscal 2012. Gross margin in the first six
months of fiscal 2013 was equal to the same period of fiscal 2012 at 72.4%, despite the impact of the higher cost of inventory
in connection with the acquisitions.
Selling, general and administrative expenses
increased 8.6% to $1.07 billion in the first six months of fiscal 2013 as compared to $0.99 billion in the first six months of
fiscal 2012, driven primarily by increased selling expenses in connection with the Korea, Malaysia and Taiwan business acquisitions.
As a percentage of net sales, selling, general and administrative expenses increased to 40.2% during the first six months of fiscal
2013 as compared to 39.5% during the first six months of fiscal 2012, reflecting investment in our growing international businesses.
Excluding items affecting comparability of $20.3 million in the first six months of fiscal 2012, selling, general and administrative
expenses were $966.7 million, or 38.7% as a percentage of net sales, in the second quarter of fiscal 2012.
Selling expenses were $770.2 million, or
28.9% of net sales, in the first six months of fiscal 2013 compared to $674.5 million, or 27.0% of net sales, in the first six
months of fiscal 2012. The dollar increase in selling expenses was due to International stores reflecting higher sales and new
store openings, and higher North American Internet expenses reflecting higher sales. International selling expenses overall increased
as a percentage of sales, due to the acquisitions of the Korea, Malaysia and Taiwan businesses and infrastructure investments to
support Asia. China store expenses as a percentage of sales decreased primarily due to operating efficiencies and sales leverage.
Advertising,
marketing, and design costs were $135.4 million, or 5.1% of net sales, in
the
first six months
of fiscal 2013, compared to $127.4 million, or 5.1% of net sales, during the same period of fiscal
2012. The dollar increase was primarily due to creative and design expenditures and marketing expenses related to consumer communications,
which includes our digital strategy through coach.com, the launch of our Legacy line, marketing sites and social networking. The
Company utilizes and continues to explore implementing new technologies such as our global web presence, with informational websites
in 26 countries, social networking and blogs as cost-effective consumer communication opportunities to increase on-line and store
sales and build brand awareness. Also contributing to the increase were new design expenditures and development costs for new merchandising
initiatives.
Distribution
and consumer service expenses were $43.9 million, or 1.6% of net sales, in
the
first six months
of fiscal 2013, compared to $34.0 million, or 1.4% of net sales, in
the
first six months
of fiscal 2012. The increase in distribution and consumer service expenses is primarily the result
of the change in sales mix of Internet purchases, resulting in increased packaging and shipping expense per dollar of sales.
Administrative
expenses were $122.8 million, or 4.6% of net sales, in
the
first six months
of
fiscal 2013 compared to $151.1 million, or 6.0% of net sales, during the same period of fiscal 2012, The decrease is due to the
absence of a charitable contribution in the current fiscal period, as well as leveraging of administrative expenses over the increased
sales base. The dollar increase in fiscal 2013 reflects lower bonus compensation expenses, partially offset by higher equity compensation
and systems investment. Excluding items affecting comparability of $20.3 million in the first six months of fiscal 2012, administrative
expenses were $130.8 million, or 5.2% as a percentage of net sales, in the first six months of fiscal 2012.
Provision for Income Taxes
The effective
tax rate was 32.9% in the first six months
of fiscal 2013, as compared to the 31.4% effective
tax rate in the
first six months
of fiscal 2012. During
the second quarter of fiscal 2012, the Company recorded the effect of a revaluation of certain deferred tax asset balances due
to a change in Japan’s corporate tax laws and the favorable completion of a multi-year transfer pricing agreement with Japan,
which resulted in the lower effective tax rate for the second quarter of fiscal 2012. Excluding items affecting comparability,
the effective tax rate was 33.0% for the first six months of fiscal 2012, in line with the first six months of fiscal 2013.
Net Income
Net income
increased 2.1% to $574.1 million in the first six months
of fiscal 2013 as compared to $562.5
million in the first six months of fiscal 2012. This increase was primarily due to the flow through of higher operating income.
Net Income per Diluted Share
Net income per diluted share grew 5.0%
to $2.00 in the six months of fiscal 2013 as compared to $1.90 in the six months of fiscal 2012. This growth reflected leverage
due to repurchases of Coach’s common stock, in addition to higher net income.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
The Company’s cash and cash equivalents
decreased $58.6 million during the first six months of fiscal 2013, compared to an increase of $385.8 million in the first six
months of fiscal 2012. The $444.4 million period over period decrease is primarily the result of financing and investing activities.
Net cash provided by operating activities
was $830.0 million in the first six months of fiscal 2013 compared to $836.1 million in the first six months of fiscal 2012. The
decrease of $6.1 million was primarily due to certain working capital changes between the periods, partially offset by $11.7 million
higher net income in the current fiscal period. Accrued liabilities was a source of cash of $151.0 million in the current fiscal
period, compared to $200.2 million, primarily driven by the timing of dividend and tax payments. Changes during the period in other
asset balances resulted in a use of cash of $21.0 million, compared to a source of cash of $10.3 million in the prior fiscal period,
driven primarily by the timing of certain deposits. These changes were partially offset by the changes in inventory balances between
the two periods. In the current period, changes in inventory balances resulted in a cash inflow of $26.3 million, as compared to
a cash outflow of $16.0 million in the prior fiscal period, driven by lower inventory balances at the end of fiscal 2011 as compared
to fiscal 2012.
Net cash used in investing activities was
$268.5 million in the first six months of fiscal 2013 compared to $82.3 million in the first six months of fiscal 2012, with the
increase of $186.2 million driven by purchases of investments, higher planned capital investment and acquisitions. During fiscal
2013, the Company invested $99.4 million in a corporate debt securities portfolio through one of its subsidiaries outside of the
U.S., consisting of high-credit quality U.S. and non-U.S. issued corporate debt securities. Purchases of property and equipment
were $117.1 million in the first six months of fiscal 2013, which was $47.0 million higher than the first six months of fiscal
2012, reflecting planned increased capital investment. Also during fiscal 2013, the Company acquired 100% of its domestic retail
businesses in Korea and Malaysia from the former distributors for an aggregate $45.4 million in cash.
Net cash used in financing activities was
$617.0 million in the first six months of fiscal 2013 as compared to $369.5 million in the first six months of fiscal 2012. The
increase of $247.5 million was primarily attributable to $124.9 million of higher dividend payments due to timing and an increased
dividend rate per share, $41.0 million of higher expenditures for common stock repurchases, as well as $70.3 million of lower net
proceeds from share-based awards, net of taxes paid.
Revolving Credit Facilities
On June 18, 2012, the Company established
a $400 million revolving credit facility with certain lenders and JP Morgan Chase Bank, N.A. as the primary lender and administrative
agent (the “JP Morgan facility”). The JP Morgan facility is available to finance the seasonal working capital requirements
or general corporate purposes of the Company and its subsidiaries, may be prepaid without penalty or premium, and expires in June
2017. At Coach’s request and lenders’ consent, revolving commitments of the JP Morgan facility may be expanded to $650
million. As of December 29, 2012, there were no outstanding borrowings on the JP Morgan facility.
Borrowings under the JP Morgan Facility bear
interest at a rate per annum equal to, at Coach’s option, either (a) an alternate base rate or (b) a rate based on the rates
applicable for deposits in the interbank market for U.S. dollars or the applicable currency in which the loans are made plus an
applicable margin. Additionally, Coach will pay a commitment fee on the average daily unused amount of the JP Morgan Facility,
and certain fees with respect to letters of credit that are issued. At December 29, 2012, the commitment fee was nine basis points.
The JP Morgan facility contains various covenants
and customary events of default. Coach has been in compliance with all covenants of the facility since its inception.
As of December 29, 2012, Coach Japan had
credit facilities with several Japanese financial institutions to provide funding for working capital and general corporate purposes,
allowing a maximum borrowing of 6.0 billion yen, or approximately $70 million, as of December 29, 2012. Interest is based on the
Tokyo Interbank rate plus a margin of 25 to 30 basis points. During the first six months of fiscal 2013, there were no borrowings
under these facilities.
As of December 29, 2012, Coach Shanghai Limited
had a credit facility to provide funding for working capital and general corporate purposes, allowing a maximum borrowing of 63
million Chinese renminbi, or approximately $10 million, as of December 29, 2012. Interest is based on the People's Bank of China
rate. During the first six months of fiscal 2013, there were no borrowings under this facility.
Both the Coach Japan and Coach Shanghai Limited
credit facilities can be terminated at any time by the respective financial institutions, and there is no guarantee that they will
be available to the Company in future periods.
Common Stock Repurchase Program
In October 2012, the Company’s Board
of Directors approved a common stock repurchase program to acquire up to $1.5 billion of Coach’s outstanding common stock
through June 2015. Purchases of Coach common stock are made 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
six months of fiscal 2013 and fiscal 2012, the Company repurchased and retired 7.1 million and 5.9 million shares respectively,
or $
400.0
million and $359.0 million of common stock, respectively, at an average cost of $56.61
and $61.18 per share, respectively. As of December 29, 2012, Coach had $1,361.6
million
remaining in the stock repurchase program.
Capital Expenditures and Working Capital
The Company expects total capital expenditures
for the fiscal year ending June 29, 2013 to be approximately $250 million. Capital expenditures will be primarily for new stores
in North America, Japan, and Asia. We will also continue to invest in corporate infrastructure and department store and distributor
locations. These investments will be financed primarily from cash on hand and operating cash flows.
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 or joint ventures, and 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.
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 six months of fiscal 2013, Coach purchased approximately $720 million of inventory, which was funded by operating cash
flow.
NON-GAAP MEASURES
FISCAL 2012 ITEMS AFFECTING COMPARABILITY OF OUR FINANCIAL
RESULTS
The Company’s reported results are
presented in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The reported SG&A expenses,
operating income and provision for income taxes for the second quarter and six months ended December 31, 2011 reflect certain items
which affect the comparability of our results. These metrics are also reported on a non-GAAP basis for these periods to exclude
the impact of these items.
These non-GAAP performance measures were
used by management to conduct and evaluate its business during its regular review of operating results for the periods affected.
Management and the Company’s Board utilized these non-GAAP measures to make decisions about the uses of Company resources,
analyze performance between periods, develop internal projections and measure management performance. The Company’s primary
internal financial reporting excluded these items affecting comparability. In addition, the compensation committee of the Company’s
Board will use these non-GAAP measures when assessing achievement of incentive compensation goals.
We believe these non-GAAP 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. In addition, we believe excluding the items affecting comparability assists
investors in developing expectations of future performance. These items affecting comparability do not represent the Company’s
direct, ongoing business operations. By providing the non-GAAP measures, as a supplement to GAAP information, we believe we are
enhancing investors’ understanding of our business and our results of operations. The non-GAAP financial measures are limited
in their usefulness and should be considered in addition to, and not in lieu of, U.S. GAAP financial measures. Further, these non-GAAP
measures may be unique to the Company, as they may be different from non-GAAP measures used by other companies.
Charitable Contributions and Tax Adjustments
During the second quarter of fiscal 2012,
the Company decreased the provision for income taxes by $12.4 million, primarily as a result of recording the effect of a revaluation
of certain deferred tax asset balances due to a change in Japan’s corporate tax laws and the favorable settlement of a multi-year
transfer pricing agreement with Japan. The Company used the tax favorability to contribute $20.3 million to the Coach Foundation.
The Company believes that both the charitable contribution and tax favorability should be excluded to reflect our ongoing business
operations. This exclusion is consistent with the way management views its results and is the basis on which incentive compensation
was calculated for fiscal 2012.
The following tables provide a reconciliation
of the GAAP to Non-GAAP measures for the periods presented:
|
|
|
|
|
|
Quarter
Ended
|
|
|
|
|
December
29, 2012
|
|
|
December
31, 2011
|
|
|
|
|
GAAP Basis
|
|
|
GAAP Basis
|
|
|
Tax
|
|
|
Charitable
|
|
|
Non-GAAP Basis
|
|
|
|
|
(As
Reported)
|
|
|
(As
Reported)
|
|
|
Adjustment
|
|
|
Contribution
|
|
|
(Excluding
Items)
|
|
|
|
|
|
|
|
(dollars in millions, except
per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general
and administrative expenses
|
|
$
|
558.8
|
|
|
$
|
544.3
|
|
|
$
|
-
|
|
|
$
|
20.3
|
|
|
$
|
524.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
526.6
|
|
|
$
|
500.9
|
|
|
$
|
-
|
|
|
$
|
(20.3
|
)
|
|
$
|
521.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes
|
|
$
|
525.3
|
|
|
$
|
499.1
|
|
|
$
|
-
|
|
|
$
|
(20.3
|
)
|
|
$
|
519.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
172.6
|
|
|
$
|
151.6
|
|
|
$
|
(12.4
|
)
|
|
$
|
(7.9
|
)
|
|
$
|
171.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
352.8
|
|
|
$
|
347.5
|
|
|
$
|
12.4
|
|
|
$
|
(12.4
|
)
|
|
$
|
347.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Net income per share
|
|
$
|
1.23
|
|
|
$
|
1.18
|
|
|
$
|
0.04
|
|
|
$
|
(0.04
|
)
|
|
$
|
1.18
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
|
December
29, 2012
|
|
|
December
31, 2011
|
|
|
|
|
GAAP Basis
|
|
|
GAAP Basis
|
|
|
Tax
|
|
|
Charitable
|
|
|
Non-GAAP Basis
|
|
|
|
|
(As
Reported)
|
|
|
(As
Reported)
|
|
|
Adjustment
|
|
|
Contribution
|
|
|
(Excluding
Items)
|
|
|
|
|
|
|
|
(dollars in millions, except
per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general
and administrative expenses
|
|
$
|
1,072.3
|
|
|
$
|
987.0
|
|
|
$
|
-
|
|
|
$
|
20.3
|
|
|
$
|
966.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
858.3
|
|
|
$
|
822.9
|
|
|
$
|
-
|
|
|
$
|
(20.3
|
)
|
|
$
|
843.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes
|
|
$
|
855.0
|
|
|
$
|
819.7
|
|
|
$
|
-
|
|
|
$
|
(20.3
|
)
|
|
$
|
840.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
280.9
|
|
|
$
|
257.3
|
|
|
$
|
(12.4
|
)
|
|
$
|
(7.9
|
)
|
|
$
|
277.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
574.1
|
|
|
$
|
562.5
|
|
|
$
|
12.4
|
|
|
$
|
(12.4
|
)
|
|
$
|
562.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Net income per share
|
|
$
|
2.00
|
|
|
$
|
1.90
|
|
|
$
|
0.04
|
|
|
$
|
(0.04
|
)
|
|
$
|
1.90
|
|
Currency Fluctuation Effects
The percentage increase in sales and U.S.
dollar increases in operating expenses in the second quarter and first six months of fiscal 2013 for Coach Japan have been presented
both including and excluding currency fluctuation effects from translating these foreign-denominated amounts into U.S. dollars
and comparing these figures to the same periods in the prior fiscal year.
We believe that presenting Coach Japan
sales and operating expense increases, including and excluding currency fluctuation effects, will help investors and analysts to
understand the effect on these valuable performance measures 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 June 30, 2012 are those that
depend most heavily on these judgments and estimates. As of December 29, 2012, there have been no material changes to any of the
critical accounting policies contained therein.
Recent Accounting Developments
In September 2011, Accounting Standards
Codification 350-20, “Intangibles — Goodwill and Other — Goodwill,” was amended to allow entities to assess
qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired, and whether it is necessary to
perform the two-step goodwill impairment test required under current accounting standards. This guidance is effective for the Company’s
goodwill impairment testing beginning in fiscal 2013. The Company does not expect its adoption to have a material effect on its
consolidated financial statements.
|
|
ITEM 3.
|
Quantitative and Qualitative Disclosures about Market
Risk
|
Coach operates in foreign countries, which
exposes the Company to market risk associated with foreign exchange rate fluctuations. In addition, the Company’s financial
instruments are subject to market risk arising from interest rate fluctuations. This inherent market risk, which represents potential
loss in fair value, earnings or cash flows, arises from adverse changes in these foreign currency exchange rates or interest rates.
Coach manages these exposures through operating and financing activities and, when appropriate, through the use of derivative financial
instruments. 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
2013 non-licensed product needs are purchased from independent manufacturers in countries other than the United States, including
China, Vietnam, India, Philippines, Thailand, Italy, Taiwan, Mexico, Great Britain and Switzerland. Additionally, sales are made
through international channels to third party distributors. Substantially all purchases and sales involving international parties,
excluding international consumer sales, are denominated in U.S. dollars and, therefore, are not subject to foreign currency exchange
risk.
Coach is exposed to market risk from foreign
currency exchange rate fluctuations resulting from its foreign operating subsidiaries’ 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 December 29, 2012 and June 30, 2012, open foreign currency forward contracts designated as hedges
with a notional amount of $171.4 million and $310.9 million, respectively, were outstanding.
Coach is also exposed to market risk from
foreign currency exchange rate fluctuations with respect to various cross-currency intercompany and related party loans. These
loans are denominated in various foreign currencies, with a total principal amount of $230.9 million and $206.6 million as of December
29, 2012 and June 30, 2012, respectively. To manage the exchange rate risk related to these loans, the Company entered into forward
exchange and cross-currency swap contracts, the terms of which include the exchange of foreign currency fixed interest for U.S.
dollar fixed interest and an exchange of the foreign currency and U.S. dollar based notional values at the maturity dates of the
contracts, the latest of which is May 2014.
The fair value of open foreign currency
derivatives included in current assets at December 29, 2012 and June 30, 2012 was $14.6 million and $1.5 million, respectively.
The fair value of open foreign currency derivatives included in current liabilities at December 29, 2012 and June 30, 2012 was
$3.1 million and $4.1 million, respectively. The fair value of these contracts is sensitive to changes in foreign currency 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, Macanese pataca, Canadian dollar, Singapore dollar, Taiwan dollar, Malaysian ringgit, Korean won and
the euro, are not sufficiently material to warrant a hedging program.
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.
In the second quarter of fiscal 2013, the
Company invested in a portfolio of high-credit quality U.S. and non-U.S. issued corporate debt securities, classified as available-for-sale,
and recorded at fair value. These securities have maturity dates in calendar years 2014 and 2015. Unrealized gains and losses are
recorded within other comprehensive income.
The Company’s non-current investments,
classified as available-for-sale consisted of a $6.0 million auction rate security at both December 29, 2012 and June 30, 2012,
as the auction rate securities’ adjusted book value equaled its fair value, there were no unrealized gains or losses associated
with this investment. Beginning with the second quarter of fiscal 2013, the Company’s non-current investments also consisted
of high-credit quality U.S. and non-U.S. issued corporate debt securities, classified as available-for-sale, with a fair value
of $99.2 million at December 29, 2012.
The Company’s cash and cash equivalents
of $858.7 million and $917.2 million at December 29, 2012 and June 30, 2012, respectively, consist of a cash equivalent portfolio
primarily comprised of corporate debt securities and U.S. government and agency securities. As the Company does not have the intent
to sell and will not be required to sell these securities until maturity, cash equivalents are classified as held-to-maturity and
stated at amortized cost.
As of December 29, 2012, the Company had
no outstanding borrowings on its JP Morgan facility, the Coach Japan credit facility, and the Coach Shanghai Limited credit facility.
The fair value of any future borrowing may be impacted by fluctuations in interest rates.
As of December 29, 2012, Coach’s outstanding
long-term debt, including the current portion, was $22.7 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.