Business context and reporting period
This is Coach, Inc.’s unaudited Form 10-Q for the 13-week second quarter and six months ended December 27, 2014, compared with the periods ended December 28, 2013. The filing identifies the registrant as Coach, Inc.; the supplied company metadata says Tapestry, Inc.
Coach sells luxury accessories and lifestyle products through North America and International segments, with sales through company-operated stores, e-commerce, wholesale, and other channels. Fiscal 2015 ends June 27, 2015.
Financial performance and liquidity
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1,219.4 million, down 14.1% (12.2% excluding currency effects) | $2,258.2 million, down 12.1% (10.8% excluding currency effects) |
| Gross profit / margin | $840.0 million / 68.9%, versus $982.7 million / 69.2% | $1,555.4 million / 68.9%, versus $1,809.3 million / 70.4% |
| Operating income / margin | $275.4 million / 22.6%, versus $436.0 million / 30.7% | $455.2 million / 20.2%, versus $757.6 million / 29.5% |
| Net income | $183.5 million, versus $297.4 million | $302.6 million, versus $515.3 million |
| Diluted EPS | $0.66, versus $1.06 | $1.09, versus $1.82 |
For the six months, operating cash flow was $583.6 million, compared with $564.5 million. Purchases of property and equipment were $79.6 million; operating cash flow less those purchases was $504.0 million. Cash and cash equivalents were $836.3 million at December 27, 2014, up from $591.9 million at June 28, 2014. Short-term investments were $228.6 million and long-term investments were $464.6 million.
Current debt was $20.0 million, down from $140.5 million at fiscal year-end; the $700 million revolving facility matures September 9, 2019. Current assets were $1,947.4 million and current liabilities $715.4 million. The company reported total liabilities of $1,099.2 million and stockholders’ equity of $2,518.0 million. It declared dividends of $0.3375 per share in the quarter and $0.6750 per share for the six months.
North America sales fell 20.2% in the quarter and 19.5% for the six months, principally reflecting lower comparable-store sales and traffic. International sales declined 1.0% in the quarter but rose 1.5% for the six months; excluding currency effects, they increased 4.8% and 5.3%, respectively.
Material changes versus the prior comparable periods
- Quarterly net income declined 38.3%; six-month net income declined 41.3%. Diluted EPS fell 37.2% and 39.9%, respectively.
- Quarterly operating income fell 36.8%; six-month operating income fell 39.9%. Margins contracted as sales declined and SG&A represented a larger share of revenue.
- North America comparable-store sales decreased 22% in the quarter and 23% for the six months. Management attributed approximately 600 basis points of comparable-sales impact to limiting access to its outlet Internet site.
- Foreign currency reduced quarterly gross profit by $14.2 million and six-month gross profit by $17.4 million. International growth, particularly in China and Europe, was partly offset by Japan weakness and currency translation.
- Reported results included $23.6 million of quarterly pretax transformation and acquisition-related charges, and $60.7 million for the six months. Excluding these items, diluted EPS was $0.72 for the quarter and $1.25 for the six months; these are company-presented non-GAAP measures.
- Operating cash flow increased modestly, while investing cash use fell sharply versus the prior year, largely reflecting net investment-portfolio proceeds. The company made no share repurchases in the first six months, versus $349.9 million in the prior-year period.
Outlook, management commentary, risks and unusual items
- Management said the transformation plan remained on track and is intended to reposition Coach as a global lifestyle brand, strengthen product and store presentation, reduce promotions, and reinvigorate growth. The plan includes approximately $570 million of store and wholesale-location capital improvements through fiscal 2017, approximately $50 million of incremental advertising, and closure of about 70 underperforming North American stores in fiscal 2015.
- The company expects total pretax transformation-plan charges of approximately $250–$300 million. It recorded $57.2 million in fiscal 2015’s first half and expected another $60–$110 million, primarily during the remainder of fiscal 2015.
- Management anticipated a fiscal 2015 effective tax rate of approximately 32%. Fiscal 2015 capital expenditures, excluding Hudson Yards, were expected to be approximately $300–$350 million.
- Coach agreed on January 5, 2015, after quarter-end, to acquire Stuart Weitzman for approximately $530 million in cash, subject to customary adjustments, plus a potential earnout capped at $44 million. Closing was expected in fiscal 2015’s fourth quarter. The company expected to fund the purchase with cash, its credit facility, and potentially other financing.
- Hudson Yards commitments are substantial: Coach expected to invest approximately $284 million more in the joint venture, including about $91 million during the remainder of fiscal 2015, and expected approximately $187 million of remaining headquarters-related capital expenditures.
- Management cited weak and inconsistent global retail traffic, promotional competition, uncertain consumer spending, and macroeconomic and geopolitical volatility in China and Southeast Asia. Other risks include execution of the transformation plan, foreign currency movements, competition, consumer preferences, cost control, and acquisition integration and performance.
- Routine legal proceedings were not expected by management to have a material adverse effect. The filing also states that foreign cash was intended to be permanently reinvested; repatriation could trigger taxes. Japanese and Shanghai credit facilities may be terminated by their lenders.
Important facts for investors to verify
- Confirm the registrant and period: the filing is by Coach, Inc. and covers fiscal 2015’s second quarter, despite the supplied Tapestry, Inc. metadata and “2014 Q2” label.
- Track North America comparable-store sales, outlet Internet strategy, and whether reduced promotions can improve traffic without harming margins.
- Monitor progress and remaining costs of the transformation plan, including store closures, restructuring, capital investments, and the stated charge estimates.
- Review the Stuart Weitzman transaction’s final purchase price, earnout exposure, financing, closing, integration, and operating performance.
- Assess liquidity needs alongside Hudson Yards commitments, planned capital expenditures, dividends, and any additional borrowing.