Business context and reporting period
The supplied filing is Coach, Inc.’s unaudited Form 10-Q for the quarter ended April 2, 2011, and the nine months then ended; it does not identify the registrant as Tapestry, Inc. Coach sold accessories and related products through Direct-to-Consumer and Indirect channels. Fiscal 2011 ends July 2, 2011.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data. Comparisons are with the corresponding prior-year period.
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $950.7; +14.5% | $3,126.8; +17.7% |
| Gross profit / margin | $691.7 / 72.8% (74.1% prior year) | $2,283.0 / 73.0% (72.9% prior year) |
| Operating income / margin | $253.8 / 26.7% (30.0% prior year) | $992.8 / 31.8% (32.1% prior year) |
| Net income | $186.0; +18.0% | $678.3; +25.8% |
| Diluted EPS | $0.62; +22.8% | $2.24; +32.4% |
| Operating cash flow | Not presented as a quarterly figure | $812.6, versus $809.4 |
At April 2, cash and cash equivalents were $812.7 million and short-term investments were $73.4 million. Total debt was $24.2 million; no borrowings were outstanding under the reported revolving facilities. Current assets were $1,562.4 million and current liabilities $550.0 million. Nine-month investing cash outflow was $72.4 million and financing cash outflow $526.7 million. Capital expenditures were $91.0 million.
Changes versus the prior comparable period
- Quarterly sales growth was broad-based: Direct-to-Consumer sales rose 14.5% to $831.6 million and Indirect sales rose 14.0% to $119.1 million. North American comparable-store sales increased 10.3%; China also delivered double-digit comparable-store growth.
- Quarterly operating income grew only 1.9% as SG&A increased 19.5%, faster than sales. GAAP gross and operating margins contracted year over year. Excluding $25.7 million of comparability items, management reported quarterly operating income growth of 12.2% and a 29.4% operating margin.
- Nine-month sales, operating income and net income increased 17.7%, 16.4% and 25.8%, respectively. Share repurchases reduced weighted-average diluted shares, while a lower effective tax rate also supported EPS and net income growth.
- Nine-month operating cash flow was nearly flat despite higher net income; management cited working-capital changes, including inventory use of cash and lower cash proceeds from accrued liabilities.
Outlook, commentary, risks and unusual items
- Management emphasized expansion in North America and China, store productivity, Men’s products, and disciplined expense control. It expected about $150 million of fiscal 2011 capital expenditures, primarily for stores and infrastructure, funded mainly from cash and operating flows. No full-year revenue or earnings guidance is stated in the supplied filing text.
- Management said cash on hand and operating cash flow should cover foreseeable working-capital needs, planned capital spending, dividends and buybacks. It noted possible additional funding needs for future acquisitions or joint ventures and dependence on future operating performance and economic conditions.
- The March 2011 Japan earthquake and tsunami were estimated to reduce quarterly Japan sales by about $20 million and EPS by approximately $0.025; seven stores remained temporarily closed at quarter-end.
- Quarterly results included $25.7 million of items affecting comparability, associated with charitable contributions and tax adjustments. A favorable settlement of a multi-year tax examination reduced the quarter’s tax provision by $15.5 million. The reported effective tax rate was 26.5% for the quarter and 31.5% year to date; management gave an adjusted rate of 33.25% for both periods.
- In April, the board approved an expected annual dividend rate of $0.90 per share beginning with the July 2011 payment. A new $1.5 billion repurchase authorization runs through June 2013; $1.342 billion remained available at quarter-end.
- Risks include consumer demand and economic or political changes, fashion trends, competition, foreign exchange, cost control, seasonality, and protection of intellectual property. The company reported routine legal matters and stated that pending proceedings were not expected to have a material adverse effect. It reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer and corporate lineage: this document is a 2011 Coach, Inc. filing, not a filing under the name Tapestry, Inc.
- Review the reconciliation and nature of the $25.7 million non-GAAP comparability items and the tax-settlement benefit when assessing underlying margins and earnings.
- Track whether Japan sales and store operations recovered from the earthquake-related disruption and whether currency movements materially affect reported results.
- Assess the sustainability of sales growth, margin trends, working-capital needs, capital spending, dividends and the substantial buyback authorization.
- Consider seasonality: the filing says sales and operating income have historically been higher in the holiday-season second quarter; interim results are not necessarily indicative of full-year results.