Business Context and Reporting Period
This Form 10-Q covers Coach, Inc. (noting the metadata reference to Tapestry, Inc. is incorrect; the filing is for Coach, Inc.) for the quarterly period ended December 28, 2002 (Second Quarter of Fiscal 2003) and the twenty-six weeks ended December 28, 2002 (First Half of Fiscal 2003). Coach is a premier marketer of high-quality modern American classic accessories, selling through direct-to-consumer channels (retail/factory stores, catalog, internet) and indirect channels (wholesale, licensing).
Key Financial Metrics
| Metric | 13 Weeks Ended Dec 28, 2002 | 26 Weeks Ended Dec 28, 2002 |
|---|---|---|
| Net Sales | $308.5 million | $501.3 million |
| Gross Profit | $216.8 million | $348.1 million |
| Gross Margin | 70.3% | 69.4% |
| Operating Income | $102.6 million | $140.2 million |
| Net Income | $62.4 million | $84.9 million |
| Diluted EPS | $0.68 | $0.92 |
| Cash and Equivalents | $171.1 million | $171.1 million (Balance Sheet) |
| Operating Cash Flow (26 wks) | $126.5 million | |
| Total Debt (Revolving + Long-term) | $46.1 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 30.9% in the quarter and 29.7% in the first half compared to the prior year. Growth was driven by both Direct-to-Consumer (up 19.3% Q/Q) and Indirect segments (up 55.5% Q/Q).
- Profitability: Operating income surged 46.7% in the quarter and 56.8% in the first half. Net income rose 41.4% (quarter) and 49.7% (first half).
- Margins: Gross margin improved by 173 basis points in the quarter (to 70.3%) and 262 basis points in the first half (to 69.4%), primarily due to sourcing cost reductions.
- Segment Drivers: The Indirect segment's growth was heavily influenced by the Japanese joint venture (Coach Japan), which saw double-digit comparable sales gains and the acquisition of J. Osawa distribution rights. Domestic retail comparable store sales grew 18.1% in the quarter.
- Expenses: Selling, general, and administrative (SG&A) expenses increased in absolute dollars due to new store openings and Japan operations but decreased as a percentage of sales (37.0% vs. 38.9% in the quarter) due to operating leverage.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects fiscal 2003 capital expenditures to be approximately $60 million, funding new U.S. retail stores, renovations, and international expansion.
- Stock Repurchase: On January 30, 2003 (subsequent event), the Board approved an additional $100 million repurchase program through January 2006, extending the existing program. Approximately $20 million remained in the original program as of Dec 28, 2002.
- Liquidity: The company maintains a $100 million revolving credit facility (Fleet) with no outstanding borrowings as of Dec 28, 2002. Japanese facilities had $42.5 million outstanding. Management believes cash flow and credit facilities are adequate for foreseeable needs.
- Risks: Key risks include seasonal fluctuations, competition, consumer preference changes, international currency fluctuations (specifically regarding Coach Japan), and the ability to protect trademarks. The effective tax rate increased to 37.0% due to the closure of a Puerto Rico facility.
Investor Verification Checklist
- Japan Performance: Verify the sustainability of the 55.5% growth in the Indirect segment, which is heavily reliant on Coach Japan's expansion and the J. Osawa acquisition.
- Store Economics: Assess the return on investment for the aggressive store expansion (20 new retail and 4 factory stores opened domestically in the first half).
- Margin Sustainability: Confirm if the 173 basis point gross margin improvement is sustainable or if it is a one-time benefit from sourcing cost reductions.
- Debt Utilization: Monitor the utilization of the Japanese credit facilities, which increased from $34.2 million to $42.5 million, versus the unused U.S. facility.
- Tax Rate: Watch for the impact of the Puerto Rico facility closure on future effective tax rates.