Business Context and Reporting Period
Company: Coach, Inc. (Note: The filing metadata lists "TAPESTRY, INC." but the document content identifies the registrant as Coach, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 28, 2009 (Third Quarter of Fiscal 2009)
Business Overview: Coach is a leading marketer of fine accessories and gifts, operating through two segments: Direct-to-Consumer (company-operated stores, internet, catalog) and Indirect (wholesale and licensing). The company is executing growth strategies focused on global distribution, particularly in North America and China, while managing a challenging macroeconomic environment.
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Net Sales | $739.9 million | $744.5 million | $2,452.7 million | $2,399.3 million |
| Gross Profit | $525.1 million | $558.3 million | $1,775.3 million | $1,813.8 million |
| Gross Margin | 71.0% | 75.0% | 72.4% | 75.6% |
| Operating Income | $185.4 million | $256.7 million | $767.2 million | $898.5 million |
| Operating Margin | 25.1% | 34.5% | 31.3% | 37.4% |
| Net Income | $114.9 million | $162.4 million | $477.6 million | $569.5 million |
| Diluted EPS | $0.36 | $0.46 | $1.46 | $1.56 |
| Cash & Equivalents | $551.3 million | $698.9 million (Jun 2008) | N/A | |
| Operating Cash Flow (9mo) | N/A | $539.0 million | $600.3 million | |
| Total Debt | $26.9 million | $2.9 million (Jun 2008) | N/A |
Material Changes vs. Prior Period
- Revenue: Q3 net sales decreased 0.6% year-over-year. Direct-to-Consumer sales rose 8.9% driven by new stores and Japan growth, while Indirect sales fell 34.7% due to reduced U.S. wholesale shipments to manage inventory levels.
- Profitability: Operating income declined 27.8% in Q3. Gross margin compressed to 71.0% from 75.0% due to promotional activities in factory stores, channel mix shifts, and a "sharper pricing initiative" to address consumer reluctance.
- Expenses: Selling, general, and administrative (SG&A) expenses increased 12.6% to $339.7 million. This included $13.4 million in one-time charges related to cost-saving initiatives (elimination of ~150 positions, closure of underperforming stores, and closure of Coach Europe Services).
- Comparable Store Sales: North American comparable store sales declined 4.2% in Q3 due to decreased traffic in full-price stores.
- Japan Performance: Coach Japan sales rose 14.2% (in USD), largely driven by a 13.4% positive impact from currency translation.
Guidance, Outlook, and Risks
- Outlook: Management expects fiscal 2009 capital expenditures to be approximately $265 million, primarily for new stores and expansions in North America, Japan, and China. Fiscal 2010 capital expenditures are expected to decline due to fewer store openings and the suspension of retail expansions.
- Dividend: In April 2009, the Board declared a cash dividend with an expected annual rate of $0.30 per share. The first quarterly payment of $0.075 per share is scheduled for June 29, 2009.
- Stock Repurchases: The company has a $1.0 billion repurchase program approved in August 2008. As of March 28, 2009, $709.6 million remained available. The company repurchased 20.2 million shares in the first nine months of fiscal 2009.
- Risks: The filing highlights significant risks from the current economic crisis, including reduced consumer confidence, spending levels, and credit availability. The company notes that the downturn may continue to adversely affect results for the foreseeable future.
- Unusual Items: Q3 results included $13.4 million in one-time charges ($8.3 million after-tax). Excluding these, operating margin would have been 26.9%.
Investor Verification Checklist
- Inventory Levels: Verify the impact of reduced wholesale shipments on future inventory levels and potential markdowns.
- China Expansion: Confirm the integration and performance of the newly acquired retail businesses in Hong Kong, Macau, and mainland China (acquired April 2009).
- Cost Cutting Effectiveness: Monitor the realization of savings from the $13.4 million one-time restructuring charges and the elimination of 150 positions.
- Currency Exposure: Assess the sustainability of Japan's sales growth given the heavy reliance on favorable currency translation (13.4% impact in Q3).
- Liquidity: Review the $551 million cash position against the $265 million projected capital expenditures and ongoing stock repurchase/dividend obligations.