Business Context and Reporting Period
Company: Coach, Inc. (Note: Metadata listed "Tapestry, Inc." but the filing is for Coach, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007 (Third Quarter of Fiscal 2007)
Business Overview: Coach is a leading marketer of fine accessories and gifts, operating through Direct-to-Consumer (company-operated stores, internet, catalog) and Indirect (wholesale, licensing) segments. The company exited its corporate accounts business in March 2007, reporting those results as discontinued operations.
Key Financial Metrics
| Metric (in millions) | Q3 FY2007 | Q3 FY2006 | 9 Months FY2007 | 9 Months FY2006 |
|---|---|---|---|---|
| Net Sales | $625.3 | $479.7 | $1,960.3 | $1,533.5 |
| Gross Profit | $486.4 | $376.2 | $1,513.7 | $1,188.0 |
| Gross Margin % | 77.8% | 78.4% | 77.2% | 77.5% |
| Operating Income | $226.6 | $153.7 | $748.0 | $542.5 |
| Operating Margin % | 36.2% | 32.0% | 38.2% | 35.4% |
| Net Income (Continuing Ops) | $147.4 | $101.7 | $477.1 | $351.0 |
| Net Income (Total) | $150.0 | $108.8 | $503.1 | $376.6 |
| Diluted EPS (Total) | $0.40 | $0.28 | $1.34 | $0.96 |
| Cash & Equivalents | $222.3 | $143.4 | $222.3 | $184.4 |
| Short-term Investments | $713.9 | $394.2 | $713.9 | $394.2 |
| Total Debt (Current + Long-term) | $3.1 | $3.3 | $3.1 | $3.3 |
| Operating Cash Flow (9 Mo) | $522.3 | $401.4 | $522.3 | $401.4 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 30.3% in Q3 and 27.8% for the nine months ended March 31, 2007, compared to the prior year. Direct-to-Consumer sales grew 28.7% (Q3) and 30.9% (9 months), driven by comparable store sales growth, new store openings, and expanded locations in North America and Japan.
- Profitability Expansion: Operating income rose 47.5% in Q3 and 37.9% for the nine-month period. Operating margins improved by 420 basis points in Q3 (36.2% vs. 32.0%) and 280 basis points for the nine months (38.2% vs. 35.4%) due to sales leverage and expense management.
- Discontinued Operations: The company exited its corporate accounts business in March 2007. Income from discontinued operations decreased significantly in Q3 ($2.6M vs. $7.2M) due to the exit, though nine-month income remained relatively flat ($25.9M vs. $25.6M).
- Expense Management: Selling, general, and administrative (SG&A) expenses increased in absolute dollars but decreased as a percentage of net sales (41.5% in Q3 vs. 46.4% prior year) due to leveraging fixed costs against higher revenue.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects fiscal 2007 capital expenditures to be approximately $160 million, primarily for new stores and expansions in North America and Japan, as well as corporate systems.
- Store Expansion: Plans include opening 40 new retail stores and seven net new factory stores in North America, and 19 net new locations in Japan for the full fiscal year.
- Stock Repurchases: As of March 31, 2007, $500 million remained available under the existing stock repurchase program. The company repurchased 5.0 million shares in the first nine months of FY2007.
- Liquidity: The company maintains a strong liquidity position with $222.3 million in cash and $713.9 million in short-term investments. It has a revolving credit facility with Bank of America and Japanese credit facilities, with no outstanding borrowings on the Bank of America facility as of March 31, 2007.
- Risks: Key risks include foreign currency fluctuations (specifically regarding Coach Japan), changes in consumer preferences, competition, and the ability to control costs. The company uses derivative instruments to hedge foreign currency risks related to Coach Japan.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the long-term strategic impact of exiting the corporate accounts business on future revenue streams and margin profiles.
- Comparable Store Sales: Confirm the sustainability of the 20.0% comparable store sales growth in the U.S. and the drivers behind the 13.3% growth in Japan (translated).
- Inventory Levels: Monitor inventory levels ($249.8M) relative to sales growth to ensure no overstocking risks, especially given the seasonal nature of the business.
- Foreign Exchange Exposure: Assess the sensitivity of future earnings to yen/dollar fluctuations, given the significant portion of sales and assets in Japan.
- Capital Allocation: Track the execution of the $160M capital expenditure plan and the utilization of the $500M remaining stock repurchase authorization.