Business context and reporting period
Entity and period discrepancy: The supplied filing is Coach, Inc.’s Form 10-Q for the quarter ended March 30, 2013, not a filing identified as Tapestry, Inc. for “2012 Q3.” It covers the third quarter and first nine months of Coach’s fiscal 2013; the comparable periods ended March 31, 2012. Financial statements are unaudited.
Coach marketed accessories and gifts through North America and International segments, with a multi-channel retail, e-commerce and wholesale business. Management focused on global distribution, store productivity, growing women’s and men’s offerings, and digital commerce.
Financial performance
Amounts below are in millions of dollars, except per-share data and where stated.
| Metric | Quarter ended Mar. 30, 2013 | Year-over-year change | Nine months ended Mar. 30, 2013 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $1,187.6 | +7.1% | $3,852.7 | +6.8% |
| Gross profit / margin | $880.2 / 74.1% | +7.6%; margin +0.3 percentage points | $2,810.7 / 73.0% | +7.0%; margin +0.2 points |
| Operating income / margin | $348.5 / 29.3% | +3.3%; margin down 1.1 points | $1,206.8 / 31.3% | +4.0%; margin down 0.9 points |
| Net income | $238.9 | +6.2% | $813.1 | +3.3% |
| Diluted EPS | $0.84 | +9.5% | $2.84 | +6.3% |
Quarterly segment sales: North America was $792.5 million, up 7.4%; comparable-store sales, including Internet, rose 1%. International was $381.5 million, up 6.4%; China delivered double-digit comparable-store-sales growth. Japan sales were reduced by $28.5 million from yen currency effects. For the nine months, North America sales were $2,652.8 million (+4.6%) and International sales were $1,154.4 million (+11.0%); yen effects reduced Japan sales by $42.1 million.
Margins and expenses: Quarterly gross margin improved on cost savings and mix, substantially offset by higher promotional activity. SG&A rose 10.6% for the quarter to $531.7 million and increased to 44.8% of sales from 43.3%, outpacing revenue growth and weighing on operating margin. For the nine months, SG&A rose 9.3% to $1,604.0 million, or 41.6% of sales versus 40.7%. Management cited international store acquisitions, new-store and infrastructure spending, and higher digital marketing and distribution costs.
Cash flow and liquidity: Nine-month operating cash flow was $1,039.4 million, versus $938.9 million a year earlier. Investing cash outflow was $374.6 million, including $159.9 million of property and equipment purchases and $150.2 million of investment purchases. Financing cash outflow was $697.5 million, including $339.7 million of dividends and $400.0 million of share repurchases. Cash declined $40.9 million to $876.4 million; short- and long-term investments totaled $155.8 million. Cash plus investments was approximately $1.03 billion.
At March 30, 2013, total debt was $22.6 million, including $22.1 million current, and Coach had no borrowings on its amended $700 million revolving facility; commitments could be increased to $1 billion with lender consent. The company reported compliance with facility covenants. Current assets were $1,894.2 million and current liabilities $614.5 million.
Changes, outlook, risks and unusual items
- Growth and capital returns: Sales, income and diluted EPS increased year over year, but operating margins declined as SG&A grew faster than sales. EPS growth also benefited from share repurchases. Nine-month repurchases were $400 million, versus $531 million in the prior-year period; quarterly repurchases were zero. The quarterly dividend declared was $0.30 per share, versus $0.23.
- International expansion: Coach acquired its Korea and Malaysia retail businesses during fiscal 2013; their results are included from the acquisition dates. It also agreed to acquire its partner’s 50% interest in the European retail joint venture, with transfer of control expected in July 2013.
- Guidance and management commentary: The filing provides no specific full-year sales or earnings guidance. Management said cash, operating cash flow and available credit were expected to fund foreseeable working capital, planned capital expenditures, dividends and repurchases. It described the retail environment as challenging due to macroeconomic volatility, competition and promotional activity, while citing expansion, innovation and expense discipline as growth priorities.
- Headquarters project: In April 2013, after quarter-end, Coach entered a joint venture to develop a Manhattan headquarters tower. It expected to invest about $750 million over three years, including an estimated $115–$125 million in fiscal 2013. The project was to be funded with cash, credit-facility borrowings and proceeds from selling existing headquarters buildings. The filing warns of potential cost overruns, delays, operational disruption and development risks.
- Other notable items: The company amended its revolving facility in March 2013, increasing commitments from $400 million to $700 million and extending maturity to March 2018. The prior-year nine-month comparison included a $20.3 million Coach Foundation contribution and favorable Japan tax adjustments; management presents non-GAAP comparisons excluding those items. Routine legal proceedings were not expected by management to have a material adverse effect.
- Principal risks: Consumer preferences and fashion trends, competition and promotional pressure, foreign exchange and international-market exposure, economic and political conditions, cost control, seasonality, and intellectual-property protection. The filing also identifies headquarters construction and relocation risks.
Important facts for investors to verify
- Confirm the intended issuer and reporting period: this source is Coach, Inc., fiscal 2013 Q3, not Tapestry, Inc. or 2012 Q3.
- Assess whether sales growth can be sustained while SG&A growth and promotional activity pressure operating margins.
- Separate organic international growth from acquired-business contributions and assess yen-related effects.
- Review the funding, timing and potential cost exposure of the approximately $750 million headquarters project alongside dividends, buybacks and other capital needs.
- Check subsequent filings for actual results, updated guidance, acquisition integration, and any changes to liquidity, debt or project estimates.