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COH > SEC Filings for COH > Form 10-Q on 6-Nov-2013All Recent SEC Filings

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Form 10-Q for COACH INC


6-Nov-2013

Quarterly Report


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 New York design house of modern luxury accessories. Our product offerings includes fine accessories and gifts for women and men, including handbags, men's bags, women's and men's small leather goods, footwear, outerwear, watches, weekend and travel accessories, scarves, sunwear, fragrance, jewelry and related accessories. We are in the process of transforming Coach from an international accessories business to a global lifestyle brand, anchored in accessories. We plan to accomplish this strategy by building upon our strong management and design teams and enhancing and building out the Coach experience through expanded and new product categories, notably footwear and outerwear, enhanced retail environments and integrated marketing communications.

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, Singapore, Taiwan, Malaysia, Korea, Europe and sales to wholesale customers and distributors in over 30 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 focus on three key growth strategies: transformation to a lifestyle brand, increased global distribution and improved store sales productivity. To that end we are focused on four key initiatives:

Transform from a leading international accessories Company into a global lifestyle brand, anchored in accessories, presenting a clear and compelling expression of the Coach woman and man across all product categories, store environments and brand imagery.

Focus on the Men's opportunity for the brand, notably in North America and Asia, by drawing on our long heritage in the category. We are capitalizing on this opportunity by opening new standalone and dual gender stores and broadening the men's assortment in existing stores.

Leverage the global opportunity for Coach by raising brand awareness and building market share in markets where Coach is under-penetrated, most notably in Asia and Europe. We are also developing the brand opportunity as we expand into South America and Central America.

Harness the growing power of the digital world, accelerating the development of our digital programs and capabilities in North America and worldwide, reflecting the change in consumer shopping behavior globally. Our intent is to rapidly drive further innovation to engage with customers in this channel. Key elements include coach.com, our invitation-only factory flash sites, our global e-commerce sites, marketing sites and social media.

We believe the growth strategies described above will allow us to deliver long-term superior returns on our investments and increased cash flows from operating activities. However, intensified competition, the promotional environment, along with the current macroeconomic environment, has created a challenging retail market. The Company believes strong long-term growth can be achieved through a combination of brand transformation including expanded product offering, additional distribution, a focus on innovation to support productivity and disciplined expense control. With a strong balance sheet, significant cash position and business model that generates significant cash flow, we are in a position to invest in our brand while continuing to return capital to shareholders.

FIRST QUARTER OF FISCAL 2014 HIGHLIGHTS

The key metrics of the first quarter of fiscal 2014 were:

Net sales decreased 0.9% to $1.15 billion. On a constant currency basis, total net sales grew 2.4%.

North America sales declined 0.8% to $778.3 million.

o Comparable store sales declined 6.8%.

o Coach closed one full price store and opened five new factory stores including one Men's, bringing the total number of retail and factory stores to 350 and 198, respectively, at the end of the first quarter of fiscal 2014.

International sales declined 0.7% to $365.0 million, primarily due to the negative foreign exchange impact of the Yen. On a constant currency basis, International sales rose 9.3% reflecting:

o Growth in Asia and China as comparable store sales continue to rise at a double-digit rate.

o Coach opened 11 net locations in China and Japan. As of the end of the first quarter of fiscal 2014, the Company operated 196 directly-operated locations in Japan, 132 in China, 48 in Korea, 27 in Taiwan, 10 in Malaysia, nine in Singapore and 20 in Europe.

Operating income decreased 3.0% to $321.6 million.

Net income decreased 1.6% to $217.9 million.

Earnings per diluted share remained stable at $0.77.

Cash dividends declared increased 12.5% to $0.3375 per share.

FIRST QUARTER FISCAL 2014 COMPARED TO FIRST QUARTER FISCAL 2013



The following table summarizes results of operations for the first quarter of
fiscal 2014 compared to the first quarter of fiscal 2013:



                                                                  Quarter Ended
                                  September 28, 2013              September 29, 2012                Variance
                                                              (dollars in millions)
                                                                   (unaudited)

                                                 % of                            % of
                                Amount         net sales        Amount         net sales       Amount         %
Net sales                     $   1,150.8           100.0 %   $   1,161.4           100.0 %   $  (10.6 )       (0.9 )%

Gross profit                        826.6            71.8           845.2            72.8        (18.6 )       (2.2 )

Selling, general and
administrative expenses             504.9            43.9           513.5            44.2          8.6          1.7

Operating income                    321.6            27.9           331.7            28.6        (10.1 )       (3.0 )

Interest income, net                  1.6             0.1               -               -          1.6            *

Other expense                           -               -            (2.1 )          (0.2 )        2.1            *

Provision for income taxes          105.4             9.2           108.3             9.3          2.9          2.7

Net income                          217.9            18.9           221.4            19.1         (3.5 )       (1.6 )

* - Percentage change is not meaningful

RESULTS OF OPERATIONS



Net Sales



Net sales by business segment in the first quarter of fiscal 2014, compared to
the first quarter of fiscal 2013, were as follows:



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

                                           September 28,       September 29,       Rate of        September 28,       September 29,
                                               2013                2012            Change             2013                2012
                                                 (dollars in millions)

North America                             $         778.3     $         784.2          (0.8 )%              67.6 %              67.5 %
International                                       365.0               367.4          (0.7 )               31.7                31.6
Other *                                               7.5                 9.8         (23.5 )                0.7                 0.9
Total net sales                           $       1,150.8     $       1,161.4          (0.9 )              100.0 %             100.0 %

* 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 decreased 0.8% to $778.3 million during the first quarter of fiscal 2014 from $784.2 million during the same period in fiscal 2013, primarily driven by a 6.8% decrease in comparable store sales partially offset by new store openings. The decline in comparable store sales was primarily driven by lower transactions. Since the end of the first quarter of fiscal 2013, Coach opened six and 24 retail and factory stores, respectively, including eight Men's factory stores, and closed 10 retail stores.

International

Net sales decreased 0.7% to $365.0 million in the first quarter of fiscal 2014 from $367.4 million during the same period of fiscal 2013, primarily driven by the negative foreign exchange impact of the Yen. On a constant currency basis, net sales increased 9.3% reflecting new store openings, strong comparable store performance in Asia and China and the acquisition and related consolidation of the European retail market, partially offset by lower shipments into wholesale accounts due to a shift in holiday timing. Since the end of the first quarter of fiscal 2013, International opened 45 net new stores, with 43 net new stores in mainland China, Hong Kong and Macau and Japan, two net new stores in the other regions. The acquisitions of the European joint venture resulted in a transfer of 18 stores and the transition of two additional stores from wholesale.

Operating Income

Operating income decreased 3.0% to $321.6 million in the first quarter of fiscal 2014 as compared to $331.7 million in the first quarter of fiscal 2013. Operating margin decreased to 27.9% as compared to 28.6% in the same period of the prior year.

Gross profit decreased 2.2% to $826.6 million in the first quarter of fiscal 2014 from $845.2 million during the same period of fiscal 2013. Gross margin in the first quarter of fiscal 2014 decreased to 71.8% as compared to 72.8% in the same period of the prior year reflecting increased promotional activity and channel mix.

Selling, general and administrative expenses decreased 1.7% to $504.9 million in the first quarter of fiscal 2014 as compared to $513.5 million in the first quarter of fiscal 2013. As a percentage of net sales, selling, general and administrative expenses decreased to 43.9% during the first quarter of fiscal 2014 as compared to 44.2% during the first quarter of fiscal 2013.

Selling expenses were $365.1 million, or 31.7% of net sales, in the first quarter of fiscal 2014 compared to $353.1 million, or 30.4% of net sales, in the first quarter of fiscal 2013. The dollar increase in selling expenses reflected new store openings, increased costs related to transformation initiatives across all consumer touch points and the impact of acquiring our 50% interest in our European joint venture. The softening of North America net sales limited opportunities for sales leverage in the first quarter of fiscal 2014. These increases were offset slightly by the impact of foreign currency exchange rates related to Coach Japan.

Advertising, marketing, and design costs were $57.6 million, or 5.0% of net sales, in the first quarter of fiscal 2014, compared to $70.0 million, or 6.0% of net sales, during the same period of fiscal 2013. The decrease was primarily due to overlapping the launch of our Legacy line in the first quarter of fiscal 2013, and a fiscal 2014 reduction in design staff related to the divestiture of the Reed Krakoff business. However, full year 2014 advertising, marketing and design costs are expected to be higher than those costs incurred in fiscal 2013.

Distribution and consumer service expenses were $21.4 million, or 1.9% of net sales, in the first quarter of fiscal 2014, compared to $19.5 million, or 1.7% of net sales, in the first quarter of fiscal 2013. The dollar increase in distribution and consumer service expenses was primarily due to increased North America Internet sales.

Administrative expenses were $60.8 million, or 5.3% of net sales, in the first quarter of fiscal 2014 compared to $70.7 million, or 6.1% of net sales, during the same period of fiscal 2013, reflecting lower ongoing equity compensation expense. The dollar decrease in the first quarter of fiscal 2014 reflects lower equity compensation, primarily related to the departure of key executives, as previously announced. The $60.8 million of administrative expenses includes a one-time expense of $2.8 million, primarily related to the divestiture of the Reed Krakoff business.

Provision for Income Taxes

The effective tax rate was 32.6% in the first quarter of fiscal 2014, which is in line with the 32.8% effective tax rate in the first quarter of fiscal 2013.

Net Income

Net income was $217.9 million in the first quarter of fiscal 2014 as compared to $221.4 million in the first quarter of fiscal 2013. This decrease was primarily due to lower net sales and related gross profit shortfall.

Earnings Per Share

Diluted earnings per share of $0.77 per share in fiscal 2014 was even with prior year as the benefit of share repurchases was offset by the lower net income.

Non-GAAP Measures

The Company's reported results are presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The percentage increase in net sales in the first quarter of fiscal 2014 for total and International net sales has 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 first quarter of fiscal 2013. Excluding currency fluctuation effects is considered a non-GAAP measure.

We believe that presenting total and International net sales variances, 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. 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.

LIQUIDITY AND CAPITAL RESOURCES



Cash Flows



                                                            Quarter Ended
                                                   September 28,       September 29
                                                       2013                2012            Change
                                                        (dollars in thousands)

Net cash provided by operating activities         $       164,100     $      202,174     $  (38,074 )

Net cash used in investing activities                    (231,381 )         (101,734 )     (129,647 )

Net cash used in financing activities                    (281,454 )         (257,685 )      (23,769 )

Effect of exchange rate changes on cash and
cash equivalents                                              567                785           (218 )

Net decrease in cash and cash equivalents         $      (348,168 )   $     (156,460 )   $ (191,708 )

The Company's cash and cash equivalents decreased $348.2 million during the first quarter of fiscal 2014 compared to a decrease of $156.5 million in the first quarter of fiscal 2013. The $191.7 million period over period decrease is driven by the result of investing activities, as well as declines in net cash provided by operations and financing activities.

Net cash provided by operating activities was $164.1 million in the first quarter of fiscal 2014 compared to $202.2 million in the first quarter of fiscal 2013. The decrease of $38.1 million was primarily due to a higher build of inventories reflecting pre-holiday build, the Europe acquisition and new stores. Excluding inventories net operating assets and liabilities increased $7.1 million compared to prior year. This increase was substantially offset by higher depreciation and amortization and deferred taxes netted with the change in ongoing share-based compensation.

Net cash used in investing activities was $231.4 million in the first quarter of fiscal 2014 compared to $101.7 million in the first quarter of fiscal 2013, with the increase of $129.6 reflecting $165.8 million of purchases related to our offshore investment portfolio, partially offset by a $25.2 million reduction in acquisition related expenditures. During the first quarter of fiscal 2014, the Company invested $18.2 million in the Hudson Yards joint venture related to our new corporate headquarters and completed its acquisition of 50% of its European joint venture from Hackett Limited in the quarter, forgiving debt of $18.0 million and providing a net cash payment of $2.0 million. This compares to fiscal 2013 when the Company acquired its domestic retail businesses in Korea and Malaysia from the former distributors for an aggregate $45.4 million in cash. Purchases of property and equipment declined slightly in the quarter to $45.9 million, a reduction of $10.4 million from the prior year. Full year capital expenditures are estimated to be approximately $280 million.

Net cash used in financing activities was $281.5 million in the first quarter of fiscal 2014 as compared to $257.7 million in the first quarter of fiscal 2013. The increase of $23.8 million was primarily attributable to higher taxes to settle net share-based awards and dividend payments.

Revolving Credit Facilities

The Company has a $700 million credit facility with certain lenders and JP Morgan Chase Bank, N.A. as the primary lender and administrative agent (the "JP Morgan facility") with an maturity date of March 26, 2018. The JP Morgan facility is available to finance the seasonal working capital requirements and general corporate purposes of the Company and its subsidiaries. At Coach's request and lenders' consent, revolving commitments of the JP Morgan facility may be increased to $1 billion.

Borrowings under the JP Morgan Facility bear interest at a rate per annum equal to, at Coach's option, either (a) 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 or (b) an alternate base rate (which is a rate equal to the greatest of (1) the Prime Rate in effect on such day, (2) the Federal Funds Effective Rate in effect on such day plus of 1% or
(3) the Adjusted LIBO Rate for a one month Interest Period on such day plus 1%). Additionally, Coach pays 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 September 28, 2013, the commitment fee was 7.5 basis points. The JP Morgan facility contains various covenants and customary events of default. Coach is in compliance with all covenants of the JP Morgan facility. During fiscal 2013 and through first quarter of fiscal 2014, there were no borrowings under these facilities. Subsequent to the end of the first quarter of fiscal 2014, Coach drew down the JP Morgan facility. As of November 5, 2013, $150 million was outstanding.

As of September 28, 2013, 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 5.3 billion yen, or approximately $54 million, as of September 28, 2013. Interest is based on the Tokyo Interbank rate plus a margin of 25 to 30 basis points. During fiscal 2013 and through first quarter of fiscal 2014, there were no borrowings under these facilities.

As of September 28, 2013, 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 September 28, 2013. Interest is based on the People's Bank of China rate. During fiscal 2013 and through the first quarter of fiscal 2014, 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 three months of fiscal 2014 and fiscal 2013, the Company repurchased and retired 3.3 million and 3.1 million shares, respectively, or $175.0 million of common stock, respectively, at an average cost of $53.17 and $56.59 per share, respectively. As of September 28, 2013, Coach had $1.19 billion remaining in the stock repurchase program.

Capital Expenditures and Working Capital

As previously disclosed, the Company expects total capital expenditures for the fiscal year ending June 28, 2014 to be approximately $280 million. Capital expenditures will be primarily for new stores in North America and Asia to support our global expansion. We will also continue to invest in corporate infrastructure, primarily technology, and department store and distributor locations. These investments will be financed primarily from on hand cash and operating cash flows.

Because Coach products are frequently given as gifts, 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, its working capital requirements are reduced substantially as Coach generates higher consumer sales, especially during the holiday months of November and December and collects wholesale accounts receivable. 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 last several years, we have achieved higher levels of growth in the non-holiday quarters, which has reduced these seasonal fluctuations. During the first three months of fiscal 2014, Coach purchased approximately $436.7 million of inventory, which was funded by on hand cash and operating cash flows.

In April 2013, the Company entered into a joint venture agreement with the Related Companies, L.P. to develop a new office tower in Manhattan in the Hudson Yards district. The formation of the joint venture serves as a financing vehicle for the project, with the Company owning less than 43%. Upon completion of the office tower in 2015, the Company will retain a condominium interest serving as its new corporate headquarters. During the first three months of fiscal 2014, the Company invested $18.2 million in the joint venture. The Company expects to invest approximately $420 million between the beginning of the second quarter of fiscal 2014 through the next three years. Depending on construction progress, the Company's latest estimate contemplates investing approximately $120 million over the balance of fiscal 2014. The joint venture investments will be financed by the Company with cash on hand, borrowings under its credit facility and approximately $130 million of proceeds from the sale of its current headquarters buildings in 2015.

Management believes that cash flow from operations, on hand cash, cash equivalents and its credit lines will provide adequate funds for the foreseeable working capital needs, planned capital expenditures, dividend payments and the common stock repurchase program. Subsequent to the end of the first quarter of fiscal 2014, Coach drew down the JP Morgan facility. As of November 5, 2013, $150 million was outstanding.

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.

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 29, 2013 are those that depend most heavily on these judgments and estimates. As of September 28, 2013, there have been no material changes to any of the critical accounting policies contained therein.

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