Coach, Inc. — Form 10-Q Summary
Entity note: The filing is for Coach, Inc., not Tapestry, Inc. It covers the fiscal third quarter and first nine months ended March 27, 2010; fiscal 2010 ends July 3, 2010.
Business context and results
Coach markets accessories and gifts through Direct-to-Consumer channels (company-operated stores, online and catalog) and Indirect channels (wholesale and licensing). Financial statements are unaudited.
| Metric | Quarter ended Mar. 27, 2010 | Year-over-year change | Nine months ended Mar. 27, 2010 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $830.7 million | +12.3% | $2,657.1 million | +8.3% |
| Gross profit / margin | $615.6 million / 74.1% | +17.2%; margin +3.1 points | $1,936.7 million / 72.9% | +9.1%; margin +0.5 points |
| Operating income / margin | $249.1 million / 30.0% | +34.4%; margin +4.9 points | $853.2 million / 32.1% | +11.2%; margin +0.8 points |
| Net income | $157.6 million | +37.2% | $539.4 million | +12.9% |
| Diluted earnings per share | $0.50 | +40.5% | $1.69 | +16.0% |
Quarterly Direct-to-Consumer sales rose 14.5% to $726.2 million; Indirect sales declined 1.3% to $104.5 million. For the nine months, Direct-to-Consumer sales increased 13.2% while Indirect sales fell 16.1%. North American comparable-store sales rose 5.1% in the quarter and 2.5% year to date. China comparable-store sales had double-digit growth, according to management.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $809.4 million, versus $539.0 million a year earlier. Investing used $257.7 million and financing used $653.3 million.
- Cash and cash equivalents were $702.8 million at March 27, 2010, down from $800.4 million at fiscal year-end; short-term investments were $204.9 million. Current assets were $1,510.1 million and current liabilities $551.2 million.
- Total debt was approximately $25.0 million, including $0.7 million current debt. There were no revolving-credit borrowings. The company described its balance sheet as essentially debt-free.
- Operating cash flow benefited from working-capital movements, including a $118.0 million increase in accrued liabilities; management attributed this mainly to higher bonus accruals and the non-recurrence of a prior-year rent-accrual reversal.
Material changes, outlook and risks
- Quarterly gross-margin improvement was attributed mainly to lower manufacturing costs and product mix. SG&A rose 7.9%, slower than sales growth; higher performance-based compensation increased administrative expenses.
- Prior-year comparison included $13.4 million of pre-tax charges for cost-saving initiatives, including about 150 position eliminations, four store closures and closure of a sample-making facility. The charge was $8.3 million after tax; management also presents comparisons excluding it.
- Management cited a challenging but moderating retail environment, with consumers in North America and Japan still cautious. Growth priorities include expanding distribution, improving store productivity and building the China business. Planned fiscal 2010 openings included approximately 20 North American retail stores, 14 China locations and six Japan locations.
- Expected fiscal 2010 capital expenditures were $90–$100 million, primarily for stores and infrastructure. Management said cash on hand and operating cash flow should fund foreseeable working capital, capital expenditures, dividends, scheduled debt service and repurchases; future acquisitions or similar transactions could require additional capital.
- In April 2010, after the quarter, the board authorized an expected annual dividend rate of $0.60 per share starting with the July 2010 payment and a new $1.0 billion repurchase program. The existing program had $9.6 million remaining at quarter-end.
- Key risks include consumer demand and seasonality, fashion-trend execution, competition, cost control, international economic and political conditions, currency movements, and protection of intellectual property. The filing reported no material change to previously disclosed risk factors; routine legal proceedings were not expected to have a material adverse effect.
- Foreign-exchange exposure is managed with derivatives, not for trading. A $231.0 million U.S.-dollar intercompany loan to Coach Japan and its related cross-currency swap were due to mature in July 2010. The company also held a $6.0 million auction-rate security with unsuccessful auctions and underlying maturities scheduled for 2035.
Most important facts to verify
- Confirm the intended issuer: this filing names Coach, Inc.; the request metadata names Tapestry, Inc.
- Check reported results against the filing’s non-GAAP comparisons, particularly the prior-year $13.4 million pre-tax restructuring and cost-saving charge.
- Assess whether operating cash flow’s improvement is sustainable, given the sizable accrued-liability contribution and other working-capital timing effects.
- Verify execution of planned store openings, capital spending and the new dividend and share-repurchase authorizations, which were announced after quarter-end.
- Review foreign-exchange exposure and settlement of the Japan intercompany loan and swap, plus liquidity and valuation risk associated with the auction-rate security.