Business context and reporting period
This is Coach, Inc.’s unaudited Form 10-Q for the 13 weeks ended September 27, 2014, the first quarter of fiscal 2015. The filing identifies the registrant as Coach, Inc.; the supplied company label, Tapestry, Inc., does not match the registrant name in this historical filing. Coach sold luxury accessories and lifestyle products through North America and International segments, as well as ancillary channels.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $1,038.8 million | $1,150.8 million | Down 9.7% |
| Gross profit / margin | $715.4 million / 68.9% | $826.6 million / 71.8% | Down 13.4%; margin down 2.9 percentage points |
| Operating income / margin | $179.8 million / 17.3% | $321.6 million / 27.9% | Down 44.1%; margin down 10.6 percentage points |
| Net income | $119.1 million | $217.9 million | Down 45.3% |
| Diluted EPS | $0.43 | $0.77 | Down 43.7% |
| Cash dividends declared per share | $0.3375 | $0.3375 | Unchanged |
Q1 FY2015 results included $37.1 million of pretax transformation charges ($26.7 million after tax, or $0.10 per diluted share). Excluding these charges, management reported operating income of $216.9 million, net income of $145.8 million, and diluted EPS of $0.53. These are company-presented non-GAAP measures; comparable Q1 FY2014 results had no identified comparability items.
Segments and operating drivers
- North America sales fell 18.6% to $633.7 million; comparable store sales declined 24%, primarily reflecting lower traffic. The company said limiting access to its outlet Internet site negatively affected comparable sales by approximately 5%.
- International sales rose 4.4% to $381.0 million, or 5.9% excluding currency effects. Growth in China, Europe, and international wholesale was partly offset by lower Japan sales. International operating income declined 9.3% to $118.0 million.
- North America operating income fell 26.1% to $221.5 million. Consolidated gross margin was pressured by lower North America margin and International currency, product-cost, geographic-mix, and promotional factors.
Cash flow, balance sheet, and liquidity
- Operating cash flow was $138.9 million, versus $164.1 million a year earlier. Investing activities provided $6.0 million, compared with $231.4 million used in the prior-year quarter, largely reflecting investment portfolio maturities and sales. Financing activities used $71.5 million, versus $281.5 million, with no share repurchases in the current quarter versus $175.0 million of repurchases a year earlier.
- Cash and cash equivalents were $660.9 million at quarter-end; short-term investments were $246.6 million. Current assets were $1,938.8 million and current liabilities $817.5 million.
- Current debt was $170.0 million, all reported as revolving-credit borrowing; the filing reports no long-term debt on the balance sheet. The $700 million revolving facility was amended to extend maturity to September 9, 2019. The company reported no known covenant defaults.
- Inventory increased to $597.4 million from $526.2 million at fiscal year-end. The company attributed first-quarter inventory build to seasonal preparation for holiday sales.
- Stockholders’ equity was $2,440.1 million. Other comprehensive loss was $26.9 million, including a $30.2 million foreign-currency translation loss.
Outlook, management commentary, and risks
- Coach said execution of its multi-year transformation plan was on track. The plan targets a shift toward a global lifestyle brand, increased digital and international development, and growth in men’s products. Planned actions include approximately $570 million in store and wholesale capital improvements through fiscal 2017, approximately 70 North American store closures in fiscal 2015, and approximately $50 million of incremental advertising costs beginning in fiscal 2015.
- The company expected total transformation charges of approximately $250 million to $300 million; after charges incurred through Q1, it expected a further $80 million to $130 million, primarily during the remainder of fiscal 2015.
- Fiscal 2015 capital expenditures, excluding Hudson Yards, were forecast at approximately $300 million to $350 million. Coach expected to invest a further approximately $320 million in the Hudson Yards joint venture, substantially by the end of fiscal 2016, including an estimated $140 million during the remainder of fiscal 2015. It also expected approximately $187 million of direct headquarters design and build-out expenditures over the remaining construction period.
- Management anticipated a full-year fiscal 2015 effective tax rate of approximately 32%. The filing gives no full-year sales or EPS guidance.
- Management cited weak and inconsistent retail traffic, promotional competition, uncertainty in global consumer spending, and volatility in China and Southeast Asia. Other disclosed risks include transformation execution, competition, currency movements, consumer preferences, cost control, seasonality, and access to financing.
- Cash and short-term investments were substantially held outside the United States and intended to be permanently reinvested; repatriation could result in additional taxes. The company said it expected cash flows, investments, credit lines, and capital-market access to support its needs, while noting financing availability and future performance risks.
- Routine legal proceedings were disclosed; management did not expect their aggregate outcome to materially affect the company. No material changes to previously disclosed risk factors were reported.
Most important facts to verify
- Confirm the issuer and corporate-history mapping: the filing is for Coach, Inc., not under the name Tapestry, Inc.
- Assess the sharp North America comparable-sales decline and whether the outlet-site policy and lower traffic continued to affect results.
- Track transformation spending, expected remaining charges, store closures, and progress toward the stated growth and profitability objectives.
- Reconcile planned Hudson Yards and other capital commitments with operating cash generation, borrowing, and liquidity; note the company’s foreign-cash and repatriation position.
- Monitor International growth and margins, especially currency exposure and performance in Japan, China, and Europe, as well as the seasonal inventory build.