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| COH > SEC Filings for COH > Form 10-Q on 6-May-2009 | All Recent SEC Filings |
6-May-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 royalties earned on licensed product. As Coach's business model is based on multi-channel international distribution, our success does not depend solely on the performance of a single channel or geographic area.
In order to drive growth within our global framework, we continue to focus on two key growth strategies: increased global distribution, with an emphasis on our direct retail distribution in North America and China and improved productivity. To that end, we are focused on four key initiatives:
· Build market share in the North American women's accessories market. As part of our culture of innovation and continuous improvement we are implementing a number of initiatives to accelerate the level of newness, elevate our product offering and enhance the in-store experience. These initiatives will enable us to continue to leverage our leadership position in the market.
· Continue to grow our North American retail store base primarily by opening stores in new markets and adding stores in existing markets. We believe that North America can support about 500 retail stores in total, including up to 30 in Canada. During fiscal 2009, we plan to open 39 retail stores, of which 13 will be in new markets. We currently plan to open approximately 20 new retail stores in fiscal 2010, of which 13 will be in new markets. The pace of our future retail store openings will depend upon the economic environment and reflect opportunities in the marketplace.
· Continue to expand market share with the Japanese consumer, driving growth in Japan primarily by opening new retail locations. We believe that Japan can support about 180 locations in total.
· Raise brand awareness in emerging markets, notably in China, where our brand is taking hold and the category is developing rapidly. In September 2008, Coach successfully completed the first phase of our acquisition of our retail businesses in China, transitioning eight stores in Hong Kong and two stores in Macau. The acquisition of our retail business in mainland China was completed in April 2009, transitioning 15 stores.
We believe the growth strategies outlined above will allow us to deliver long-term returns on our investments and drive increased cash flows from operating activities. However, the current macroeconomic environment has created a very challenging retail market in which it is difficult to achieve productivity gains. The Company believes long-term growth can still be achieved through a combination of expanded distribution, a focus on innovation to support productivity and disciplined expense control. Our multi-channel distribution model is diversified and includes substantial international and factory businesses, which reduces our reliance upon our full-price U.S. business. With an essentially debt-free balance sheet and significant cash position, we believe we are well positioned to manage through this economic downturn.
THIRD QUARTER OF FISCAL 2009
The key metrics of the third quarter of fiscal 2009 were:
· Earnings per diluted share fell 22.6% to $0.36. Excluding one-time charges of $0.03 per diluted share, earnings per diluted share decreased 17.0% to $0.38 per diluted share.
· Net sales decreased 0.6% to $739.9 million.
· Direct-to-consumer sales rose 8.9% to $634.0 million.
· Comparable store sales in North America declined 4.2%, primarily due to the challenging retail environment which resulted in decreased traffic in our full-priced stores.
· Coach Japan sales, when translated into U.S. dollars, rose 14.2% to $177.0 million. This increase includes a 13.4% positive impact from currency translation.
· In North America, Coach opened two new retail stores, opened three new factory stores and closed two retail stores, bringing the total number of retail and factory stores to 324 and 109, respectively, at the end of the third quarter of fiscal 2009. We also expanded one retail store and one factory store in North America.
· In Japan, Coach opened one new location, bringing the total number of Coach Japan-operated locations at the end of the third quarter of fiscal 2009 to 156.
During the third quarter of fiscal 2009, the Company recorded certain one-time charges related to cost savings initiatives. These initiatives increased total expenses in the third quarter of fiscal 2009 by $13.4 million, or $8.3 million after tax and related to the following: the elimination of approximately 150 positions from the Company's corporate offices in New York, New Jersey and Jacksonville, the planned closure of four underperforming retail stores and the planned closure of Coach Europe Services, the Company's sample-making facility in Italy.
RESULTS OF OPERATIONS
THIRD QUARTER FISCAL 2009 COMPARED TO THIRD QUARTER FISCAL 2008
The following table summarizes results of operations for the third quarter of
fiscal 2009 compared to the third quarter of fiscal 2008:
Quarter Ended
March 28, 2009 March 29, 2008 Variance
(dollars in millions, except per share data)
(unaudited)
% of % of
Amount net sales Amount net sales Amount %
Net sales $ 739.9 100.0 % $ 744.5 100.0 % $ (4.6 ) (0.6 )%
Gross profit 525.1 71.0 558.3 75.0 (33.3 ) (6.0 )
Selling, general and administrative
expenses 339.7 45.9 301.6 40.5 38.1 12.6
Operating income 185.4 25.1 256.7 34.5 (71.3 ) (27.8 )
Interest (expense) income, net (0.1 ) (0.0 ) 9.5 1.3 (9.7 ) (101.3 )
Provision for income taxes 70.4 9.5 103.8 13.9 (33.4 ) (32.2 )
Income from continuing operations 114.9 15.5 162.4 21.8 (47.6 ) (29.3 )
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Income from continuing operations per share:
Basic $ 0.36 $ 0.47 $ (0.11 ) (23.1 )%
Diluted $ 0.36 $ 0.46 $ (0.10 ) (22.6 )%
Net Sales
Net sales by business segment in the third quarter of fiscal 2009 compared to
the third quarter of fiscal 2008 were as follows:
Quarter Ended
(unaudited)
Percentage of
Net Sales Total Net Sales
March 28, March 29, Rate of March 28, March 29,
2009 2008 Increase 2009 2008
(dollars in millions)
Direct-to-consumer $ 634.0 $ 582.3 8.9 % 85.7 % 78.2 %
Indirect 105.9 162.2 (34.7 ) 14.3 21.8
Total net sales $ 739.9 $ 744.5 (0.6 ) 100.0 % 100.0 %
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Direct-to-Consumer
Net sales increased 8.9% to $634.0 million during the third quarter of fiscal 2009 from $582.3 million during the same period in fiscal 2008, driven by sales from new and expanded stores, partially offset by a decline in comparable store sales.
In North America, net sales increased 6.8% as sales from new and expanded stores were partially offset by a 4.2% decline in comparable store sales. Since the end of the third quarter of fiscal 2008, Coach opened 37 net new retail stores and eight new factory stores, and expanded 14 retail stores and 16 factory stores in North America. In Japan, net sales increased 14.2% driven primarily by an approximately $20.8 million or 13.4% positive impact from foreign currency exchange. Since the end of the third quarter of fiscal 2008, Coach opened 14 new locations and expanded four locations in Japan.
Indirect
Net sales decreased 34.7% to $105.9 million in the third quarter of fiscal 2009 from $162.2 million during the same period of fiscal 2008. The decrease was driven primarily by a 40.0% decrease in U.S. wholesale as the Company reduced shipments into U.S. department stores in order to manage customer inventory levels due to a weaker sales environment. International shipments also declined 18.5%; however, sales at retail rose slightly, driven by an increase in location square footage. Licensing revenue of approximately $5.9 million and $5.6 million in the third quarter of fiscal 2009 and fiscal 2008, respectively, is included in Indirect sales.
Operating Income
Operating income decreased 27.8% to $185.4 million in the third quarter of fiscal 2009 as compared to $256.7 million in the third quarter of fiscal 2008. Excluding one-time charges of $13.4 million, operating income decreased 22.6% to $198.8 million. Operating margin decreased to 25.1% as compared to 34.5% in the same period of the prior year, as gross margin declined while selling, general, and administrative expenses increased. Excluding one-time charges, operating margin was 26.9%.
Gross profit decreased 6.0% to $525.1 million in the third quarter of fiscal 2009 from $558.3 million during the same period of fiscal 2008. Gross margin was 71.0% in the third quarter of fiscal 2009 as compared to 75.0% during the same period of fiscal 2008. The change in gross margin was driven primarily by promotional activities in Coach-operated North American factory stores and channel mix. Gross margin was also negatively impacted by our sharper pricing initiative, in which retail prices on handbags and women's accessories have been reduced in response to consumers' reluctance to spend, and an increase in average unit cost.
Selling, general and administrative expenses increased 12.6% to $339.7 million in the third quarter of fiscal 2009 as compared to $301.6 million in the third quarter of fiscal 2008. Excluding one-time charges of $13.4 million, selling, general and administrative expenses were $326.3 million. As a percentage of net sales, selling, general and administrative expenses increased to 45.9% during the third quarter of fiscal 2009 as compared to 40.5% during the third quarter of fiscal 2008. Excluding one-time charges, selling general and administrative expenses as a percentage of net sales increased to 44.1%. The increase as a percentage of net sales was primarily driven by the further deleveraging of expenses due to negative comparable store sales, investment spending associated with the acquisition of our retail businesses in Hong Kong and Macau and new merchandising initiatives.
Selling expenses were $245.2 million, or 33.1% of net sales, in the third quarter of fiscal 2009 compared to $208.6 million, or 28.0% of net sales, in the third quarter of fiscal 2008. Excluding one-time charges of $5.0 million related to the planned closure of four underperforming stores, selling expenses were $240.2 million, representing 32.5% of net sales. The dollar increase in selling expenses was primarily due to an increase in operating expenses of Coach Japan, North American stores and the newly formed Coach China. The increase in Coach Japan operating expenses was driven primarily by the impact of foreign currency exchange rates which increased reported expenses by approximately $8.5 million. The increase in North American store expenses was primarily attributable to expenses from new and expanded stores opened since the end of the third quarter of fiscal 2008. The third quarter of fiscal 2009 includes operating expenses of the newly formed Coach China, which consisted of investments in stores, marketing, organization and infrastructure.
Advertising, marketing, and design costs were $40.5 million, or 5.5% of net sales, in the third quarter of fiscal 2009, compared to $37.2 million, or 5.0% of net sales, during the same period of fiscal 2008. The increase was primarily due to development costs for new merchandising initiatives and design expenditures.
Distribution and consumer service expenses were $13.1 million, or 1.8% of net sales, in the third quarter of fiscal 2009, compared to $11.7 million, or 1.6% of net sales, in the third quarter of fiscal 2008. The increase was primarily the result of an increase in fixed occupancy costs related to the expansion of our distribution center that was completed in August 2008.
Administrative expenses were $40.9 million, or 5.5% of net sales, in the third quarter of fiscal 2009 compared to $44.1 million, or 5.9% of net sales, during the same period of fiscal 2008. Excluding one-time charges of $8.4 million, expenses were $32.5 million, representing 4.4% of net sales. The decrease in administrative expenses was primarily due to a decrease in performance-based compensation expense.
Interest (Expense)/Income, Net
Net interest expense was $0.1 million in the third quarter of fiscal 2009 as compared to income of $9.5 million in the third quarter of fiscal 2008. The change is primarily due to a decrease in interest income, as a result of lower interest rates and lower average cash balances.
Provision for Income Taxes
The effective tax rate was 38.0% in the third quarter of fiscal 2009 as compared to 39.0% in the third quarter of fiscal 2008. The decrease in the effective tax rate is primarily attributable to an increase in foreign-source income, which is taxed at a lower rate.
Income from Continuing Operations
Net income from continuing operations was $114.9 million in the third quarter of fiscal 2009 as compared to $162.4 million in the third quarter of fiscal 2008. Excluding one-time charges of $8.3 million discussed above, income from continuing operations was $123.2 million in the third quarter of fiscal 2009, a 24.2% decrease compared to third quarter of fiscal 2008. This decrease was primarily due to a decline in operating income and interest income, partially offset by a lower provision for income taxes.
FIRST NINE MONTHS FISCAL 2009 COMPARED TO FIRST NINE MONTHS FISCAL 2008
The following table summarizes results of operations for the first nine months
of fiscal 2009 compared to the first nine months of fiscal 2008:
Nine Months Ended
March 28, 2009 March 29, 2008 Variance
(dollars in millions, except per share data)
(unaudited)
% of % of
Amount net sales Amount net sales Amount %
Net sales $ 2,452.7 100.0 % $ 2,399.3 100.0 % $ 53.5 2.2 %
Gross profit 1,775.3 72.4 1,813.8 75.6 (38.5 ) (2.1 )
Selling, general and administrative
expenses 1,008.1 41.1 915.3 38.1 92.8 10.1
Operating income 767.2 31.3 898.5 37.4 (131.3 ) (14.6 )
Interest income, net 3.1 0.1 35.1 1.5 (32.1 ) (91.3 )
Provision for income taxes 292.7 11.9 364.1 15.2 (71.4 ) (19.6 )
Income from continuing operations 477.6 19.5 569.5 23.7 (91.9 ) (16.1 )
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Income from continuing operations per share:
Basic $ 1.47 $ 1.58 $ (0.11 ) (7.1 )%
Diluted $ 1.46 $ 1.56 $ (0.10 ) (6.3 )%
Net Sales
Net sales by business segment in the first nine months of fiscal 2009 compared
to the first nine months of fiscal 2008 were as follows:
Nine Months Ended
(unaudited)
Percentage of
Net Sales Total Net Sales
March 28, March 29, Rate of March 28, March 29,
2009 2008 Increase 2009 2008
(dollars in millions)
Direct-to-consumer $ 2,043.8 $ 1,895.6 7.8 % 83.3 % 79.0 %
Indirect 408.9 503.7 (18.8 ) 16.7 21.0
Total net sales $ 2,452.7 $ 2,399.3 2.2 100.0 % 100.0 %
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Direct-to-Consumer
Net sales increased 7.8% to $2.0 billion during the first nine months of fiscal 2009 from $1.9 billion during the same period in fiscal 2008, driven by sales from new and expanded stores, partially offset by a decline in comparable store sales.
In North America, net sales increased 5.6% as sales from new and expanded stores were partially offset by a 7.1% decline in comparable store sales. Since the end of the first nine months of fiscal 2008, Coach opened 37 net new retail stores and eight new factory stores, and expanded 14 retail stores and 16 factory stores in North America. In Japan, net sales increased 16.7% driven primarily by an approximately $59.6 million or 13.8% increase as a result of foreign currency exchange, and by sales from new and expanded stores. Since the end of the first nine months of fiscal 2008, Coach opened 14 new locations and expanded four locations in Japan.
Indirect
Net sales decreased 18.8% to $408.9 million in the first nine months of fiscal 2009 from $503.7 million during the same period of fiscal 2008. The decrease was driven primarily by a 21.1% decrease in U.S. wholesale as the Company reduced shipments into U.S. department stores in order to manage customer inventory levels due to a weaker sales environment. International shipments also declined 6.0%; however, sales at retail rose slightly, driven by an increase in location square footage. Licensing revenue of approximately $14.8 million and $17.2 million in the first nine months of fiscal 2009 and fiscal 2008, respectively, is included in Indirect sales.
Operating Income
Operating income decreased 14.6% to $767.2 million in the first nine months of fiscal 2009 as compared to $898.5 million in the first nine months of fiscal 2008. Excluding one-time charges of $13.4 million, operating income decreased 13.1% to $780.6 million. Operating margin decreased to 31.3% as compared to 37.4% in the same period of the prior year, as gross margin declined while selling, general, and administrative expenses increased. Excluding one-time charges, operating margin was 31.8%.
Gross profit was $1.8 billion in the first nine months of fiscal 2009 and fiscal 2008. Gross margin was 72.4% in the first nine months of fiscal 2009 as compared to 75.6% during the same period of fiscal 2008. The change in gross margin was driven primarily by promotional activities in Coach-operated North American factory stores and channel mix. Gross margin was also negatively impacted by our sharper pricing initiative, in which retail prices on handbags and women's accessories have been reduced in response to consumers' reluctance to spend, and an increase in average unit cost.
Selling, general and administrative expenses increased 10.1% to $1.0 billion in the first nine months of fiscal 2009 as compared to $915.3 million in the first nine months of fiscal 2008. Excluding one-time charges of $13.4 million, selling, general and administrative expenses were $994.7 million. As a percentage of net sales, selling, general and administrative expenses increased to 41.1% during the first nine months of fiscal 2009 as compared to 38.1% during the first nine months of fiscal 2008. Excluding one-time charges, selling general and administrative expenses as a percentage of net sales increased to 40.6%. The increase as a percentage of net sales was primarily driven by deleveraging of expenses as cost cutting initiatives did not keep pace with lower-than-expected sales, investment spending associated with the acquisition of our retail businesses in Hong Kong and Macau and new merchandising initiatives.
Selling expenses were $742.5 million, or 30.3% of net sales, in the first nine months of fiscal 2009 compared to $634.6 million, or 26.4% of net sales, in the first nine months of fiscal 2008. Excluding one-time charges of $5.0 million related to the planned closure of four underperforming stores, selling expenses were $737.5 million, representing 30.1% of net sales. The dollar increase in selling expenses was primarily due to an increase in operating expenses of North American stores, Coach Japan and the newly formed Coach China. The increase in North American store expenses was primarily attributable to expenses from new and expanded stores opened since the end of the first nine months of fiscal 2008. The increase in Coach Japan operating expenses was driven primarily by the impact of foreign currency exchange rates which increased reported expenses by approximately $25.1 million. Finally, the first nine months of fiscal 2009 includes operating expenses of Coach China, which consisted of investments in stores, marketing, organization and infrastructure.
Advertising, marketing, and design costs were $126.1 million, or 5.2% of net sales, in the first nine months of fiscal 2009, compared to $110.3 million, or 4.6% of net sales, during the same period of fiscal 2008. The increase was primarily due to design expenditures and development costs for new merchandising initiatives.
Distribution and consumer service expenses were $40.2 million, or 1.6% of net sales, in the first nine months of fiscal 2009, compared to $36.2 million, or 1.5%, in the first nine months of fiscal 2008. The increase was primarily the result of an increase in fixed occupancy costs related to the expansion of our distribution center that was completed in August 2008.
Administrative expenses were $99.3 million, or 4.0% of net sales, in the first nine months of fiscal 2009 compared to $134.2 million, or 5.6% of net sales, during the same period of fiscal 2008. Excluding one-time charges of $8.4 million, expenses were $90.9 million, representing 3.7% of net sales. The decrease in administrative expenses was primarily due to a decrease in performance-based compensation expense and lower rent expense as a result of the purchase of our corporate headquarters building.
Interest Income, Net
Net interest income was $3.1 million in the first nine months of fiscal 2009 as compared to $35.1 million in the first nine months of fiscal 2008. This decrease is attributable to lower returns on our investments due to lower interest rates and lower average cash balances.
Provision for Income Taxes
The effective tax rate was 38.0% in the first nine months of fiscal 2009 as compared to 39.0% in the first nine months of fiscal 2008. The decrease in the effective tax rate is primarily attributable to an increase in foreign-source income, which is taxed at a lower rate.
Income from Continuing Operations
Net income from continuing operations was $477.6 million in the first nine months of fiscal 2009 as compared to $569.5 million in the first nine months of fiscal 2008. Excluding one-time charges of $8.3 million discussed above, income from continuing operations was $485.9 million in the first nine months of fiscal 2009, a 14.7% decrease compared to the first nine months of fiscal 2008. This decrease was primarily due to a decline in operating income and interest income, net, partially offset by a lower provision for income taxes.
Non-GAAP Measures
The Company's reported results are presented in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). The reported selling, general, and administrative expenses, operating income, income from continuing operations and earnings per diluted share from continuing operations reflect certain one-time charges recorded in the third quarter of fiscal 2009. These metrics are also reported on a non-GAAP basis to exclude the impact of these one-time charges. The Company believes these non-GAAP financial measures are useful to investors in evaluating the Company's ongoing operating and financial results and understanding how such results compare with the Company's historical performance. The non-GAAP financial measures should be considered in addition to, and not in lieu of, U.S. GAAP financial measures.
FINANCIAL CONDITION
Cash Flow
Net cash provided by operating activities was $539.0 million in the first nine months of fiscal 2009 compared to $600.3 million in the first nine months of fiscal 2008. The decrease of $61.3 million was primarily the result of a decrease of $92.0 million in net income. This decrease was partially offset by . . .
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