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| COH > SEC Filings for COH > Form 10-Q on 4-Feb-2009 | All Recent SEC Filings |
4-Feb-2009
Quarterly Report
The following discussion of Coach's financial condition and results of operations should be read together with Coach's condensed consolidated financial statements and notes to those statements, included elsewhere in this document. When used herein, the terms "Coach," "Company," "we," "us" and "our" refer to Coach, Inc., including consolidated subsidiaries. The fiscal year ending June 27, 2009 ("fiscal 2009") will be a 52-week period. The fiscal year ending July 3, 2010 ("fiscal 2010") will be a 53-week period.
EXECUTIVE OVERVIEW
Coach is a leading American marketer of fine accessories and gifts for women and men. Our product offerings include handbags, women's and men's accessories, footwear, outerwear, business cases, sunwear, watches, travel bags, jewelry and fragrance. Coach operates in two segments: Direct-to-Consumer and Indirect. The Direct-to-Consumer segment includes sales to consumers through Company-operated stores in North America, Japan, Hong Kong and Macau, the Internet and the Coach catalog. The Indirect segment includes sales to wholesale customers in over 20 countries, including the United States, and licensing revenue. As Coach's business model is based on multi-channel international distribution, our success does not depend solely on the performance of a single channel or geographic area.
In order to drive growth within our global framework, we continue to focus on two key growth strategies: increased global distribution, with an emphasis on our direct retail distribution in North America, Japan, and China, and improved productivity. To that end, we are focused on four key initiatives:
· Build market share in the North American women's accessories market. As part of our culture of innovation and continuous improvement we are implementing a number of initiatives to accelerate the level of newness, elevate our product offering and enhance the in-store experience. These initiatives will enable us to continue to leverage our leadership position in the market.
· Continue to grow our North American retail store base primarily by opening stores in new markets and adding stores in existing markets. We believe that North America can support about 500 retail stores in total, including up to 30 in Canada. During fiscal 2009, we plan to open 40 retail stores, of which 13 will be in new markets. As a result of the current economic environment, we currently plan to open approximately 20 new retail stores in fiscal 2010, of which 13 will be in new markets. The pace of our new retail store openings will depend upon the economic environment and reflect opportunities in the marketplace.
· Continue to expand market share with the Japanese consumer, driving growth in Japan primarily by opening new retail locations. We believe that Japan can support about 180 locations in total.
· Raise brand awareness in emerging markets to build the foundation for substantial sales in the future. Specifically, China, Korea and other such geographies are increasing in importance as the handbag and accessories category grows in these areas. In September 2008, Coach successfully completed the first phase of our acquisition of our retail businesses in China, transitioning eight stores in Hong Kong and two stores in Macau. We expect to complete the acquisition of our retail business in mainland China in the fourth quarter of fiscal 2009.
We believe the growth strategies outlined above will allow us to deliver long-term returns on our investments and drive increased cash flows from operating activities. However, the current macroeconomic environment has created a very challenging retail market in which it is difficult to achieve productivity gains. The Company believes long-term growth can still be achieved through a combination of expanded distribution, a focus on innovation to support productivity and disciplined expense control. Our multi-channel distribution model is diversified and includes substantial international and factory businesses, which reduces our reliance upon our full-price U.S. business. With an essentially debt-free balance sheet and significant cash position, we believe we are well positioned to manage through this economic downturn.
SECOND QUARTER OF FISCAL 2009
The key metrics of the second quarter of fiscal 2009 were:
· Earnings per diluted share fell 3.0% to $0.67.
· Net sales decreased 1.8% to $960.3 million.
· Direct-to-consumer sales rose 1.9% to $817.6 million.
· Comparable store sales in North America declined 13.2%, primarily due to the challenging retail environment which resulted in decreased traffic in our full-priced stores.
· Coach Japan sales, when translated into U.S. dollars, rose 15.4% to $191.3 million. This increase includes a 16.2% positive impact from currency translation.
· In North America, Coach opened six new retail stores and three new factory stores, bringing the total number of retail and factory stores to 324 and 106, respectively, at the end of the second quarter of fiscal 2009. We also expanded two retail stores and one factory store in North America.
· In Japan, Coach opened two new locations, bringing the total number of Coach Japan-operated locations at the end of the second quarter of fiscal 2009 to 155.
RESULTS OF OPERATIONS
SECOND QUARTER FISCAL 2009 COMPARED TO SECOND QUARTER FISCAL 2008
The following table summarizes results of operations for the second quarter of
fiscal 2009 compared to the second quarter of fiscal 2008:
Quarter Ended
December 27, 2008 December 29, 2007 Variance
(dollars in millions, except per share data)
(unaudited)
% of % of
Amount net sales Amount net sales Amount %
Net sales $ 960.3 100.0 % $ 978.0 100.0 % $ (17.7 ) (1.8 )%
Gross profit 692.0 72.1 737.3 75.4 (45.3 ) (6.1 )
Selling, general and
administrative
expenses 343.7 35.8 334.2 34.2 9.5 2.8
Operating income 348.4 36.3 403.1 41.2 (54.7 ) (13.6 )
Interest income, net 0.5 0.1 10.6 1.1 (10.1 ) (95.3 )
Provision for income
taxes 132.0 13.7 161.3 16.5 (29.3 ) (18.2 )
Income from
continuing
operations 216.9 22.6 252.3 25.8 (35.4 ) (14.0 )
Income from continuing
operations per share:
Basic $ 0.67 $ 0.70 $ (0.03 ) (3.8 )%
Diluted $ 0.67 $ 0.69 $ (0.02 ) (3.0 )%
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Net Sales
Net sales by business segment in the second quarter of fiscal 2009 compared to
the second quarter of fiscal 2008 were as follows:
Quarter Ended
(unaudited)
Percentage of
Net Sales Total Net Sales
December 27, December 29, Rate of December 27, December 29,
2008 2007 Increase 2008 2007
(dollars in millions)
Direct-to-Consumer $ 817.6 $ 802.5 1.9 % 85.1 % 82.1 %
Indirect 142.7 175.5 (18.7 ) 14.9 17.9
Total net sales $ 960.3 $ 978.0 (1.8 )% 100.0 % 100.0 %
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Direct-to-Consumer
Net sales increased 1.9% to $817.6 million during the second quarter of fiscal 2009 from $802.5 million during the same period in fiscal 2008, driven by sales from new and expanded stores, partially offset by a decline in comparable store sales.
In North America, net sales decreased 1.3% as a result of a 13.2% decline in comparable store sales, which was substantially offset by sales from new and expanded stores. Since the end of the second quarter of fiscal 2008, Coach opened 42 net new retail stores and seven new factory stores, and expanded 13 retail stores and 16 factory stores in North America. In Japan, net sales increased 15.4% as a result of an approximately $26.9 million or 16.2% positive impact from foreign currency exchange. Since the end of the second quarter of fiscal 2008, Coach opened 13 net new locations and expanded seven locations in Japan.
Indirect
Net sales decreased 18.7% to $142.7 million in the second quarter of fiscal 2009 from $175.5 million during the same period of fiscal 2008. The decrease was driven primarily by an 18.0% decrease in U.S. wholesale as the Company reduced shipments into U.S. department stores in order to manage customer inventory levels as the channel continued to experience weakening sales. International shipments also declined 11%; however, international point-of-sale sales rose slightly, driven by an increase in location square footage. Licensing revenue of approximately $4.6 million and $7.5 million in the second quarter of fiscal 2009 and fiscal 2008, respectively, is included in Indirect sales.
Operating Income
Operating income decreased 13.6% to $348.4 million in the second quarter of fiscal 2009 as compared to $403.1 million in the second quarter of fiscal 2008. Operating margin decreased to 36.3% as compared to 41.2% in the same period of the prior year, as gross margin declined while selling, general, and administrative expenses increased.
Gross profit decreased 6.1% to $692.0 million in the second quarter of fiscal 2009 from $737.3 million during the same period of fiscal 2008. Gross margin was 72.1% in the second quarter of fiscal 2009 as compared to 75.4% during the same period of fiscal 2008. The change in gross margin was driven primarily by promotional activities in Coach-operated North American factory stores and channel mix. Gross margin was also negatively impacted by our sharper pricing initiative, in which retail prices on handbags and women's accessories have been reduced in response to consumers' reluctance to spend, and an increase in average unit cost.
Selling, general and administrative expenses increased 2.8% to $343.7 million in the second quarter of fiscal 2009 as compared to $334.2 million in the second quarter of fiscal 2008. As a percentage of net sales, selling, general and administrative expenses increased to 35.8% during the second quarter of fiscal 2009 as compared to 34.2% during the second quarter of fiscal 2008. The increase as a percentage of sales was primarily driven by the further deleveraging of expenses as cost cutting initiatives did not keep pace with the lower-than-expected net sales, investment spending associated with the acquisition of our retail businesses in Hong Kong and Macau and new business initiatives.
Selling expenses were $265.0 million, or 27.6% of net sales, in the second quarter of fiscal 2009 compared to $234.1 million, or 24.0% of net sales, in the second quarter of fiscal 2008. The dollar increase in selling expenses was primarily due to operating expenses of Coach China and an increase in operating expenses of Coach Japan and North American stores. The second quarter of fiscal 2009 includes operating expenses of the newly formed Coach China, which consisted of investments in stores, marketing, organization and infrastructure. The increase in Coach Japan operating expenses was driven by the impact of foreign currency exchange rates which increased reported expenses by approximately $11.3 million. The increase in North American store expenses was primarily attributable to expenses from new and expanded stores opened since the end of the second quarter of fiscal 2008.
Advertising, marketing, and design costs were $44.0 million, or 4.6% of net sales, in the second quarter of fiscal 2009, compared to $41.0 million, or 4.2% of net sales, during the same period of fiscal 2008. The increase in advertising, marketing and design costs was primarily due to increased staffing costs, design expenditures, and development costs for new business initiatives.
Distribution and consumer service expenses were $14.4 million, or 1.5% of net sales, in the second quarter of fiscal 2009, compared to $12.9 million, or 1.3%, in the second quarter of fiscal 2008. The increase in distribution and consumer service expenses was the result of an increase in fixed occupancy costs related to the expansion of our distribution center that was completed in August 2008.
Administrative expenses were $20.3 million, or 2.1% of net sales, in the second quarter of fiscal 2009 compared to $46.2 million, or 4.7% of net sales, during the same period of fiscal 2008. The decrease in administrative expenses was primarily due to a decrease in performance-based compensation expense and lower rent expense as a result of the purchase of our corporate headquarters building.
Interest Income, Net
Net interest income was $0.5 million in the second quarter of fiscal 2009 as compared to $10.6 million in the second quarter of fiscal 2008. This decrease reflects lower returns on our investments due to lower interest rates and lower average cash balances.
Provision for Income Taxes
The effective tax rate was 37.8% in the second quarter of fiscal 2009 as compared to 39.0% in the second quarter of fiscal 2008. The decrease in the effective tax rate is primarily attributable to an increase in foreign-source income, which is taxed at a lower rate.
Income from Operations
Net income from continuing operations was $216.9 million in the second quarter of fiscal 2009 as compared to $252.3 million in the second quarter of fiscal 2008. This decrease was primarily due to a decline in operating income and interest income, net, partially offset by a lower provision for income taxes.
FIRST SIX MONTHS FISCAL 2009 COMPARED TO FIRST SIX MONTHS FISCAL 2008
The following table summarizes results of operations for the first six months of
fiscal 2009 compared to the first six months of fiscal 2008:
Six Months Ended
December 27, 2008 December 29, 2007 Variance
(dollars in millions, except per share data)
(unaudited)
% of % of
Amount net sales Amount net sales Amount %
Net sales $ 1,712.8 100.0 % $ 1,654.7 100.0 % $ 58.1 3.5 %
Gross profit 1,250.2 73.0 1,255.5 75.9 (5.3 ) (0.4 )
Selling, general and
administrative
expenses 668.4 39.0 613.7 37.1 54.7 8.9
Operating income 581.8 34.0 641.8 38.8 (60.0 ) (9.3 )
Interest income, net 3.2 0.2 25.6 1.5 (22.4 ) (87.5 )
Provision for income
taxes 222.3 13.0 260.3 15.7 (38.0 ) (14.6 )
Income from
continuing
operations 362.7 21.2 407.1 24.6 (44.4 ) (10.9 )
Income from continuing
operations per share:
Basic $ 1.11 $ 1.11 $ (0.00 ) (0.4 )%
Diluted $ 1.10 $ 1.09 $ 0.01 0.6 %
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Net Sales
Net sales by business segment in the first six months of fiscal 2009 compared to
the first six months of fiscal 2008 were as follows:
Six Months Ended
(unaudited)
Percentage of
Net Sales Total Net Sales
December 27, December 29, Rate of December 27, December 29,
2008 2007 Increase 2008 2007
(dollars in millions)
Direct-to-Consumer $ 1,409.8 $ 1,313.3 7.3 % 82.3 % 79.4 %
Indirect 303.0 341.4 (11.2 ) 17.7 20.6
Total net sales $ 1,712.8 $ 1,654.7 3.5 % 100.0 % 100.0 %
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Direct-to-Consumer
Net sales increased 7.3% to $1.4 billion during the first six months of fiscal 2009 from $1.3 billion during the same period in fiscal 2008, driven by sales from new and expanded stores, partially offset by a decline in comparable store sales.
In North America, net sales increased 5.1% as sales from new and expanded stores were partially offset by an 8.2% decline in comparable store sales. Since the end of the first six months of fiscal 2008, Coach opened 42 net new retail stores and seven new factory stores, and expanded 13 retail stores and 16 factory stores in North America. In Japan, net sales increased 18.1% driven primarily by an approximately $38.9 million or 14.0% increase as a result of foreign currency exchange, and by sales from new and expanded stores. Since the end of the first six months of fiscal 2008, Coach opened 13 net new locations and expanded seven locations in Japan.
Indirect
Net sales decreased 11.2% to $303.0 million in the first six months of fiscal 2009 from $341.4 million during the same period of fiscal 2008. The decrease was driven primarily by a 13.9% decrease in U.S. wholesale as the Company reduced shipments into U.S. department stores in order to manage customer inventory levels as the channel continued to experience weakening sales. This decrease was partially offset by a 1.9% increase in Coach international. Licensing revenue of approximately $8.9 million and $11.6 million in the first six months of fiscal 2009 and fiscal 2008, respectively, is included in Indirect sales.
Operating Income
Operating income decreased 9.3% to $581.8 million in the first six months of fiscal 2009 as compared to $641.8 million in the first six months of fiscal 2008. Operating margin decreased to 34.0% as compared to 38.8% in the same period of the prior year, as gross margin declined while selling, general, and administrative expenses increased.
Gross profit was $1.3 billion in the first six months of fiscal 2009 and fiscal 2008. Gross margin was 73.0% in the first six months of fiscal 2009 as compared to 75.9% during the same period of fiscal 2008. The change in gross margin was driven primarily by promotional activities in Coach-operated North American factory stores and channel mix. Gross margin was also negatively impacted by our sharper pricing initiative, in which retail prices on handbags and women's accessories have been reduced in response to consumers' reluctance to spend, and an increase in average unit cost.
Selling, general and administrative expenses increased 8.9% to $668.4 million in the first six months of fiscal 2009 as compared to $613.7 million in the first six months of fiscal 2008. As a percentage of net sales, selling, general and administrative expenses increased to 39.0% during the first six months of fiscal 2009 as compared to 37.1% during the first six months of fiscal 2008. The increase as a percentage of sales was primarily driven by deleveraging of expenses as cost cutting initiatives did not keep pace with the lower-than-expected sales, investment spending associated with the acquisition of our retail businesses in Hong Kong and Macau and new business initiatives.
Selling expenses were $497.4 million, or 29.0% of net sales, in the first six months of fiscal 2009 compared to $426.0 million, or 25.8% of net sales, in the first six months of fiscal 2008. The dollar increase in selling expenses was primarily due to an increase in operating expenses of North American stores, Coach Japan and the newly formed Coach China. The increase in North American store expenses was primarily attributable to expenses from new and expanded stores opened since the end of the first six months of fiscal 2008. The increase in Coach Japan operating expenses was driven by the impact of foreign currency exchange rates which increased reported expenses by approximately $16.6 million. Finally, the first six months of fiscal 2009 includes operating expenses of Coach China, which consisted of investments in stores, marketing, organization and infrastructure.
Advertising, marketing, and design costs were $85.4 million, or 5.0% of net sales, in the first six months of fiscal 2009, compared to $73.1 million, or 4.4% of net sales, during the same period of fiscal 2008. The increase in advertising, marketing and design costs was primarily due to increased staffing costs, design expenditures, and development costs for new business initiatives.
Distribution and consumer service expenses were $27.2 million, or 1.6% of net sales, in the first six months of fiscal 2009, compared to $24.5 million, or 1.5%, in the first six months of fiscal 2008. The increase in distribution and consumer service expenses was the result of an increase in fixed occupancy costs related to the expansion of our distribution center that was completed in August 2008.
Administrative expenses were $58.4 million, or 3.4% of net sales, in the first six months of fiscal 2009 compared to $90.1 million, or 5.4% of net sales, during the same period of fiscal 2008. The decrease in administrative expenses was primarily due to a decrease in performance-based and share-based compensation and lower rent expense as a result of the purchase of our corporate headquarters building.
Interest Income, Net
Net interest income was $3.2 million in the first six months of fiscal 2009 as compared to $25.6 million in the first six months of fiscal 2008. This decrease was primarily due to lower returns on our investments due to lower interest rates and lower average cash balances.
Provision for Income Taxes
The effective tax rate was 38.0% in the first six months of fiscal 2009 as compared to 39.0% in the first six months of fiscal 2008. The decrease in the effective tax rate is primarily attributable to an increase in foreign-source income, which is taxed at a lower rate.
Income from Operations
Net income from continuing operations was $362.7 million in the first six months of fiscal 2009 as compared to $407.1 million in the first six months of fiscal 2008. This decrease was primarily due to a decline in operating income and interest income, net, partially offset by a lower provision for income taxes.
FINANCIAL CONDITION
Cash Flow
Net cash provided by operating activities was $332.0 million in the first six months of fiscal 2009 compared to $514.9 million in the first six months of fiscal 2008. The decrease of $182.9 million was primarily the result of a $55.8 million and $46.9 million greater increase in the current year in inventories and trade accounts receivable, respectively, and a decrease of $44.4 million in net income. The increase in inventory was primarily attributable to a higher average unit cost. The increase in trade accounts receivable was attributable to timing of shipments to wholesale customers and an increase in credit-card receivables due to the timing of retail sales. The remaining change in net cash provided by operating activities was due to changes in other operating assets and liabilities that were attributable to normal operating conditions.
Net cash used in investing activities was $202.7 million in the first six months of fiscal 2009 compared to $521.2 million provided by investing activities in the first six months of fiscal 2008. The $723.9 million change was primarily attributable to a $607.7 million decrease in the net proceeds from maturities of investments, a $103.3 million use of cash related to the purchase of Coach's corporate headquarters building and a $14.5 million use of cash related to the acquisition of our retail businesses in Hong Kong and Macau.
Net cash used in financing activities was $398.7 million in the first six months of fiscal 2009 as compared to $725.6 million in the first six months of fiscal 2008. The decrease of $326.9 million in net cash used was attributable to a $435.4 million decrease in funds expended to repurchase common stock in the first six months of fiscal 2009 as compared to the first six months of fiscal 2008. This decrease was partially offset by a $77.3 million decrease in proceeds from the exercise of share-based compensation, a $19.5 million decrease in the excess tax benefit from share-based compensation and an $11.7 million decrease in net borrowings on revolving credit facilities.
Revolving Credit Facilities
On July 26, 2007, the Company renewed its $100 million revolving credit facility with certain lenders and Bank of America, N.A as the primary lender and administrative agent (the "Bank of America facility"), extending the facility expiration to July 26, 2012. At Coach's request, the Bank of America facility can be expanded to $200 million. The facility can also be extended for two additional one-year periods, at Coach's request.
Coach's Bank of America facility is available for seasonal working capital requirements or general corporate purposes and may be prepaid without penalty or premium. During the first six months of fiscal 2009 and fiscal 2008, there were no borrowings under the Bank of America facility. As of December 27, 2008 and June 28, 2008, there were no outstanding borrowings under the Bank of America facility.
Coach pays a commitment fee of 6 to 12.5 basis points on any unused amounts of the Bank of America facility and interest of LIBOR plus 20 to 55 basis points on any outstanding borrowings. Both the commitment fee and the LIBOR margin are based on the Company's fixed charge coverage ratio. At December 27, 2008, the commitment fee was 6 basis points and the LIBOR margin was 20 basis points.
The Bank of America facility contains various covenants and customary events of default. The Company has been in compliance with all covenants since the inception of the Bank of America facility.
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