The following discussion of Coach's financial condition and results of operations should be read together with Coach's condensed consolidated financial statements and notes to those statements, included elsewhere in this document. When used herein, the terms "Coach," "Company," "we," "us" and "our" refer to Coach, Inc., including consolidated subsidiaries. The fiscal year ending July 3, 2010 ("fiscal 2010") will be a 53-week period. The fiscal year ending July 2, 2011 ("fiscal 2011") will be a 52-week period.

EXECUTIVE OVERVIEW

Coach is a leading American marketer of fine accessories and gifts for women and men. Our product offerings include handbags, women's and men's accessories, footwear, jewelry, wearables, business cases, sunwear, travel bags, fragrance and watches. Coach operates in two segments: Direct-to-Consumer and Indirect. The Direct-to-Consumer segment includes sales to consumers through Company-operated stores in North America, Japan, Hong Kong and Macau, and mainland China, the Internet and the Coach catalog. The Indirect segment includes sales to wholesale customers in over 20 countries, including the United States, and royalties earned on licensed product. As Coach's business model is based on multi-channel international distribution, our success does not depend solely on the performance of a single channel or geographic area.

In order to sustain growth within our global framework, we continue to focus on two key growth strategies: increased global distribution, with an emphasis on North America and China, and improved sales productivity. To that end, we are focused on four key initiatives:

· Build market share in the North American women's accessories market. As part of our culture of innovation and continuous improvement, we implemented a number of initiatives to accelerate the level of newness, elevate our product offering and enhance the in-store 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 under-penetrated existing markets. We believe that North America can support about 500 retail stores in total, including up to 30 in Canada. We currently plan to open approximately 20 new retail stores in fiscal 2010, of which 14 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.

· Raise brand awareness in emerging markets, notably in China, where our brand awareness is increasing and the category is developing rapidly. We currently plan to open approximately 15 new locations in China in fiscal 2010.

· 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. We currently plan to open approximately 13 net new locations in Japan in fiscal 2010.

We believe the growth strategies outlined above will allow us to deliver long-term superior returns on our investments and drive increased cash flows from operating activities. However, the current macroeconomic environment 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.

FIRST QUARTER OF FISCAL 2010

The key metrics of the first quarter of fiscal 2010 were:

· Earnings per diluted share was even with prior year at $0.44.

· Net sales increased 1.2% to $761.4 million.

· Direct-to-consumer sales rose 10.4% to $653.9 million.

· Comparable store sales in North America declined 1.1%, 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 11.2% to $152.2 million. This increase includes a 14.1% positive impact from currency translation.

· In North America, Coach opened 10 new retail stores and five new factory stores, bringing the total number of retail and factory stores to 340 and 116, respectively, at the end of the first quarter of fiscal 2010. We also expanded four factory stores in North America.

· Coach Japan opened two new locations, bringing the total number of locations at the end of the first quarter of fiscal 2010 to 157.

· Coach China opened five net new locations, bringing the total number of locations at the end of the first quarter of fiscal 2010 to 33.

RESULTS OF OPERATIONS

FIRST QUARTER FISCAL 2010 COMPARED TO FIRST QUARTER FISCAL 2009

The following table summarizes results of operations for the first quarter of
fiscal 2010 compared to the first quarter of fiscal 2009:

                                                            Quarter Ended
                          September 26, 2009               September 27, 2008                  Variance
                                            (dollars in millions, except per share data)
                                                             (unaudited)

                                         % of                             % of
                        Amount         net sales         Amount         net sales        Amount           %
 Net sales            $    761.4            100.0 %    $    752.5            100.0 %    $     8.9           1.2 %

 Gross profit              550.2             72.3           558.2             74.2           (8.0 )        (1.4 )

 Selling, general
and
  administrative
expenses                   326.9             42.9           324.7             43.1            2.2           0.7

 Operating income          223.2             29.3           233.5             31.0          (10.2 )        (4.4 )

 Interest (expense)
income, net                 (0.6 )           (0.1 )           2.6              0.4           (3.2 )      (122.5 )

 Provision for
income taxes                81.8             10.7            90.3             12.0           (8.5 )        (9.4 )

 Net income                140.8             18.5           145.8             19.4           (5.0 )        (3.4 )


 Net income per
share:
 Basic                $     0.44                       $     0.44                       $    0.00           0.7 %
 Diluted              $     0.44                       $     0.44                       $    0.00           0.3 %

Net Sales

Net sales by business segment in the first quarter of fiscal 2010 compared to
the first quarter of fiscal 2009 were as follows:

                                                                         Quarter Ended
                                                                          (unaudited)
                                                                                                     Percentage of
                                                       Net Sales                                    Total Net Sales

                                   September 26,       September 27,        Rate of        September 26,       September 27,
                                       2009                2008            Increase            2009                2008
                                         (dollars in millions)

 Direct-to-consumer               $         653.9     $         592.2            10.4 %              85.9 %              78.7 %
 Indirect                                   107.5               160.3           (32.9 )              14.1                21.3
 Total net sales                  $         761.4     $         752.5             1.2               100.0 %             100.0 %

Direct-to-Consumer

Net sales increased 10.4% to $653.9 million during the first quarter of fiscal 2010 from $592.2 million during the same period in fiscal 2009, driven by sales from new and expanded stores, partially offset by a decline in comparable store sales.

In North America, net sales increased 7.9% as sales from new and expanded stores were partially offset by a 1.1% decline in comparable store sales. Since the end of the first quarter of fiscal 2009, Coach opened 22 new retail stores and 13 new factory stores, and expanded four retail stores and 10 factory stores in North America. In Japan, net sales increased 11.2% driven by an approximately $19.3 million or 14.1% positive impact from foreign currency exchange. Since the end of the first quarter of fiscal 2009, Coach opened four new locations and expanded three locations in Japan. Coach China results continued to be strong with double-digit growth in comparable store sales. Since the end of the first quarter of fiscal 2009, Coach opened or acquired 23 net retail stores in Hong Kong, Macau and mainland China.

Indirect

Net sales decreased 32.9% to $107.5 million in the first quarter of fiscal 2010 from $160.3 million during the same period of fiscal 2009. The decrease was driven primarily by a 39.5% decrease in U.S. wholesale as the Company continued to reduce shipments into U.S. department stores in order to manage customer inventory levels due to a weaker sales environment. International shipments also declined 24.3%, however, sales at retail rose slightly and we continue to experience a different behavior between international locations catering to the domestic shopper and to international tourists. Licensing revenue of approximately $3.5 million and $4.3 million in the first quarter of fiscal 2010 and fiscal 2009, respectively, is included in Indirect sales.

Operating Income

Operating income decreased 4.4% to $223.2 million in the first quarter of fiscal 2010 as compared to $233.5 million in the first quarter of fiscal 2009. Operating margin decreased to 29.3% as compared to 31.0% in the same period of the prior year, mainly due to a decline in gross margin partially offset by a decrease in selling, general, and administrative expenses as a percentage of net sales.

Gross profit decreased 1.4% to $550.2 million in the first quarter of fiscal 2010 from $558.2 million during the same period of fiscal 2009. Gross margin was 72.3% in the first quarter of fiscal 2010 as compared to 74.2% during the same period of fiscal 2009. The change in gross margin was driven primarily by planned promotional activities in Coach-operated North American factory stores and channel mix.

Selling, general and administrative expenses increased 0.7% to $326.9 million in the first quarter of fiscal 2010 as compared to $324.7 million in the first quarter of fiscal 2009. As a percentage of net sales, selling, general and administrative expenses decreased to 42.9% during the first quarter of fiscal 2010 as compared to 43.1% during the first quarter of fiscal 2009, as we leveraged our expense base on higher sales.

Selling expenses were $232.9 million, or 30.6% of net sales, in the first quarter of fiscal 2010 compared to $232.3 million, or 30.8% of net sales, in the first quarter of fiscal 2009. The dollar increase in selling expenses was primarily due to an increase in operating expenses for Coach China partially offset by savings in North American stores and Coach Japan expenses. The decrease in Coach Japan operating expenses in constant currency of $9.6 million was partially offset by the impact of foreign currency exchange rates which increased reported expenses by approximately $7.9 million. The decrease in North American store expenses was primarily attributable to operating efficiencies achieved since the end of the first quarter of fiscal 2009.

Advertising, marketing, and design costs were $34.6 million, or 4.5% of net sales, in the first quarter of fiscal 2010, compared to $41.5 million, or 5.5% of net sales, during the same period of fiscal 2009. The decrease was primarily due to controlled sample making expenses partially offset by new design expenditures for the Reed Krakoff brand with expected introductions in fiscal year 2011.

Distribution and consumer service expenses were $11.3 million, or 1.5% of net sales, in the first quarter of fiscal 2010, compared to $12.8 million, or 1.7% of net sales, in the first quarter of fiscal 2009. The decrease in expenses was primarily the result of fiscal 2009 cost savings initiatives and process improvements.

Administrative expenses were $48.1 million, or 6.3% of net sales, in the first quarter of fiscal 2010 compared to $38.1 million, or 5.1% of net sales, during the same period of fiscal 2009. The increase in administrative expenses was primarily due to an increase in performance-based compensation and share-based compensation expense.

Interest (Expense)/Income, Net

Net interest expense was $0.6 million in the first quarter of fiscal 2010 as compared to net interest income of $2.6 million in the first quarter of fiscal 2009. The change is primarily due to a decrease in interest income, as a result of lower interest rates.

Provision for Income Taxes

The effective tax rate was 36.75% in the first quarter of fiscal 2010 as compared to 38.25% in the first quarter of fiscal 2009. The decrease in the effective tax rate is primarily attributable to the reorganization of the ownership of the Company's business in Japan.

Net Income

Net income from continuing operations was $140.8 million in the first quarter of fiscal 2010 as compared to $145.8 million in the first quarter of fiscal 2009. This decrease was primarily due to a decline in operating income and interest income, partially offset by a lower provision for income taxes.

FINANCIAL CONDITION

Cash Flow

Net cash provided by operating activities was $240.5 million in the first quarter of fiscal 2010 compared to $76.5 million in the first quarter of fiscal 2009. The increase of $164.0 million was primarily the result of working capital changes between the two periods. The most significant of these working capital changes occurred in inventory, for which there was a cash use of $6.3 million in the current period compared to $78.4 million in the prior fiscal year period, due to more tightly managed inventory levels; trade accounts receivable, which provided cash of $5.2 million in the current period compared to a $51.0 million cash use in the prior fiscal year period, primarily due to timing of shipments and collections; and accrued liabilities, which provided cash of $69.6 million in the current period and $37.7 million in the prior fiscal year period, primarily due to lower bonus payouts in the current period.

Net cash used in investing activities was $20.0 million in the first quarter of fiscal 2010 compared to $66.9 million used by investing activities in the first quarter of fiscal 2009. The $46.8 million decrease was attributable to lower purchases of property and equipment in the current period and the fiscal 2009 distributor acquisition and purchase of Coach's corporate headquarters building.

Net cash used in financing activities was $32.4 million in the first quarter of fiscal 2010 as compared to $299.1 million in the first quarter of fiscal 2009. The decrease of $266.6 million in net cash used was attributable to $300.4 million in funds expended in the first three months of fiscal 2009 for repurchases of common stock with no repurchases occurring in the current period. This decrease was partially offset by the payment of the Company's first quarterly dividend of $23.8 million and repayment of credit facilities of $7.5 million.

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 quarter of fiscal 2010 and fiscal 2009, there were no borrowings under the Bank of America facility. As of September 26, 2009 and June 27, 2009, 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 September 26, 2009, the commitment fee was 8 basis points and the LIBOR margin was 35 basis points.

The Bank of America facility contains various covenants and customary events of default. Coach has been in compliance with all covenants since the facility's inception.

To provide funding for working capital and general corporate purposes, Coach Japan has available credit facilities with several Japanese financial institutions. These facilities allow a maximum borrowing of 4.1 billion yen or approximately $45.6 million at September 26, 2009. Interest is based on the Tokyo Interbank Rate plus a margin of 30 basis points. During the first quarter of fiscal 2010 and fiscal 2009, the peak borrowings under these facilities were $0 and $2.9 million, respectively. As of September 26, 2009 and June 27, 2009, there were no outstanding borrowings under these facilities.

To provide funding for working capital and general corporate purposes, Coach Shanghai Limited maintains a credit facility that allows a maximum borrowing of $10 million at September 26, 2009. Coach Shanghai pays a commitment fee of 10 basis points on the daily unused amount if the daily unused amount exceeds 60% of the total facility. Interest is based on the People's Bank of China rate plus 2%, per annum. During the first quarter of fiscal 2010, the Company had no new borrowings under this credit facility. At September 26, 2009 and June 27, 2009, the Company had $0 and $7.5 million outstanding borrowings under this facility.

Common Stock Repurchase Program

On August 25, 2008, the Coach Board of Directors approved a new common stock repurchase program to acquire up to $1.0 billion of Coach's outstanding common stock through June 2010. Purchases of Coach stock are made from time to time, subject to market conditions and at prevailing market prices, through open market purchases. Repurchased shares become authorized but unissued shares and may be issued in the future for general corporate and other uses. The Company may terminate or limit the stock repurchase program at any time.

During the first quarter of fiscal 2010 the Company made no repurchases. During the first quarter of fiscal 2009, the Company repurchased and retired 10.5 million shares of common stock at an average cost of $28.53 per share.

As of September 26, 2009, $709.6 million remained available for future repurchases under the existing program. During fiscal 2009 and fiscal 2008, the Company repurchased and retired 20.2 million and 39.7 million shares of common stock, respectively, at an average cost of $22.51 and $33.68 per share, respectively.

Liquidity and Capital Resources

The Company expects total capital expenditures for the fiscal year ending July 3, 2010 to be approximately $110 million. Capital expenditures will be primarily for new stores in North America, Japan, Hong Kong, Macau and mainland China. We will also continue to invest in corporate infrastructure and department store and distributor locations. These investments will be financed primarily from on hand cash and operating cash flows.

Coach experiences significant seasonal variations in its working capital requirements. During the first fiscal quarter Coach builds inventory for the holiday selling season, opens new retail stores and generates higher levels of trade receivables. In the second fiscal quarter, working capital requirements are reduced substantially as Coach generates greater consumer sales and collects wholesale accounts receivable. During the first quarter of fiscal 2010, Coach purchased approximately $223 million of inventory, which was funded by operating cash flow.

In April 2009, Coach's Board of Directors voted to declare a cash dividend, at an expected annual rate of $0.30 per share. The first quarterly payment, of $0.075 per share, was paid on June 29, 2009 to stockholders of record as of June 8, 2009. The second quarterly payment, of $0.075 per share, was paid on September 28, 2009 to stockholders of record as of September 8, 2009.

Management believes that cash flow from continuing operations and on hand cash will provide adequate funds for the foreseeable working capital needs, planned capital expenditures, dividend payments and the common stock repurchase program. Any future acquisitions, joint ventures or other similar transactions may require additional capital. There can be no assurance that any such capital will be available to Coach on acceptable terms or at all. Coach's ability to fund its working capital needs, planned capital expenditures, dividend payments and scheduled debt payments, as well as to comply with all of the financial covenants under its debt agreements, depends on its future operating performance and cash flow, which in turn are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond Coach's control.

Reference should be made to our most recent Annual Report on Form 10-K for additional information regarding liquidity and capital resources.

Seasonality

Because Coach products are frequently given as gifts, Coach has historically realized, and expects to continue to realize, higher sales and operating income in the second quarter of its fiscal year, which includes the holiday months of November and December. In addition, fluctuations in sales and operating income in any fiscal quarter are affected by the timing of seasonal wholesale shipments and other events affecting retail sales. Over the past several years, we have achieved higher levels of growth in the non-holiday quarters, which has reduced these seasonal fluctuations.

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 27, 2009 are those that depend most heavily on these judgments and estimates. As of September 26, 2009, there have been no material changes to any of the critical accounting policies contained therein.

Recent Accounting Developments

ASC 820-10, "Fair Value Measurements and Disclosures," defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The Company adopted the provisions of the standard related to financial assets and liabilities in the first quarter of fiscal 2009. During the first quarter of fiscal 2010, the Company adopted the provisions of the standard related to non-financial assets and liabilities measured at fair value on a non-recurring basis with no material impact on our consolidated financial statements. In addition, the standard provides guidance on employer's disclosures about plan assets of a defined benefit pension or other postretirement plan. This provision is effective for fiscal years ending after December 15, 2009. The Company does not expect the application of this provision to have a material impact on the Company's consolidated financial statements. For further information about the fair value measurements of our financial assets and liabilities see note on Fair Value Measurements.

ASC 805-10, "Business Combinations," requires an acquiring entity to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. ASC 805-10 changed the accounting treatment for certain specific acquisition-related items, including expensing acquisition-related costs as incurred, valuing noncontrolling interests (minority interests) at fair value at the acquisition date, and expensing restructuring costs associated with an acquired business. ASC 805-10 also includes expanded disclosure requirements. ASC 805-10 is applied prospectively to business combinations for which the acquisition date is on or after June 28, 2009. The Company has not had a business combination since June 28, 2009.

ASC 105, "Generally Accepted Accounting Principles," states that the FASB Accounting Standards Codification is the source of authoritative U.S. GAAP recognized by the FASB. The GAAP hierarchy was modified to include only two levels of GAAP: authoritative and nonauthoritative. This standard was effective for Coach's financial statements beginning with the interim period ending September 26, 2009. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.