Business Context and Reporting Period
Company: Coach, Inc. (Ticker: COH)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal Year Ended June 28, 2008 (52 weeks)
Business Overview: Coach is a leading American marketer of fine accessories and gifts, primarily handbags, for women and men. The company operates through two reportable segments: Direct-to-Consumer (company-owned stores, internet, catalog) and Indirect (wholesale). As of June 28, 2008, the company operated 297 retail stores and 102 factory stores in North America, and 149 locations in Japan.
Key Financial Metrics
| Metric | Fiscal 2008 | Fiscal 2007 |
|---|---|---|
| Net Sales | $3,180.8 million | $2,612.5 million |
| Gross Profit | $2,407.1 million | $2,023.0 million |
| Gross Margin | 75.7% | 77.4% |
| Operating Income | $1,147.1 million | $993.4 million |
| Operating Margin | 36.1% | 38.0% |
| Net Income (Continuing Ops) | $783.0 million | $636.5 million |
| Diluted EPS (Continuing Ops) | $2.17 | $1.69 |
| Cash from Operating Activities | $923.4 million | $781.2 million |
| Total Assets | $2,273.8 million | $2,449.5 million |
| Long-Term Debt | $2.6 million | $2.9 million |
| Stockholders' Equity | $1,515.8 million | $1,910.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 21.8% to $3.18 billion, driven by a 21.0% increase in Direct-to-Consumer sales and a 24.7% increase in Indirect sales.
- Comparable Store Sales: North American comparable store sales rose 9.8%. Coach Japan sales increased 23.4% (including a 9.0% currency translation benefit).
- Store Expansion: The company opened 38 net new retail stores and 9 new factory stores in North America, and 12 net new locations in Japan during fiscal 2008.
- Margin Compression: Gross margin decreased 170 basis points to 75.7%, attributed to promotional activities, foreign currency fluctuations, and channel mix shifts. Operating margin decreased 190 basis points to 36.1%.
- One-Time Items: Fiscal 2008 results included a net one-time gain of $41.0 million ($0.11 per diluted share). This consisted of a $50.0 million tax benefit from a favorable settlement, offset by a $20.0 million contribution to the newly created Coach Foundation and $12.1 million in increased variable compensation.
- Discontinued Operations: The company exited its corporate accounts business in fiscal 2007; fiscal 2008 results show no significant income from discontinued operations.
Guidance, Outlook, and Risks
- Strategic Initiatives: Management plans to add approximately 40 retail stores in North America annually and 10 net new locations in Japan in fiscal 2009. The company is also pursuing a phased acquisition of retail businesses in Greater China from the ImagineX group, expected to complete in fiscal 2009.
- Capital Expenditures: Total capital expenditures for fiscal 2008 were $174.7 million. The company expects fiscal 2009 capital expenditures to be approximately $200 million, primarily for store openings and expansions.
- Stock Repurchases: The company repurchased 39.7 million shares in fiscal 2008. As of June 28, 2008, $163.4 million remained available under the current repurchase program.
- Risk Factors: Key risks include intense competition from European luxury brands, exposure to foreign currency exchange rates (specifically the Japanese Yen), global sourcing disruptions, and the impact of economic downturns on discretionary luxury spending.
- Subsequent Event: In July 2008, the company agreed to purchase its corporate headquarters in New York City for $128 million.
Investor Verification Checklist
- One-Time Adjustments: Verify the impact of the $41.0 million one-time net gain on fiscal 2008 earnings and the sustainability of the adjusted operating margin of 37.1%.
- Inventory Levels: Review inventory balances ($345.5 million) and reserves for slow-moving goods, given the company's reliance on seasonal fashion trends.
- Foreign Currency Exposure: Assess the sensitivity of Coach Japan's results to Yen/USD fluctuations and the effectiveness of hedging strategies.
- Greater China Acquisition: Monitor the progress and financial impact of the planned acquisition of retail operations in Greater China from ImagineX.
- Stock Repurchase Activity: Track the utilization of the remaining $163.4 million repurchase authorization and its impact on share count and EPS.