Coach, Inc. Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 26, 2009, compared with the quarter ended September 27, 2008. The filing identifies the registrant as Coach, Inc.; it does not identify Tapestry, Inc. as the registrant. Fiscal 2010 is a 53-week year. Financial statements are unaudited.
Key financial results
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Net sales | $761.4 million | $752.5 million | Up 1.2% |
| Gross profit / margin | $550.2 million / 72.3% | $558.2 million / 74.2% | Profit down 1.4%; margin down 1.9 percentage points |
| Operating income / margin | $223.2 million / 29.3% | $233.5 million / 31.0% | Income down 4.4%; margin down 1.7 percentage points |
| Net income | $140.8 million | $145.8 million | Down 3.4% |
| Diluted EPS | $0.44 | $0.44 | Flat |
| Operating cash flow | $240.5 million | $76.5 million | Up $164.0 million |
| Capital expenditures | $20.0 million | $45.6 million | Lower year over year |
Cash and cash equivalents were $994.7 million at September 26, 2009, versus $800.4 million at June 27, 2009. Current assets were $1.61 billion and current liabilities $532.2 million. Total debt, including current maturities, was $25.1 million; there were no revolver borrowings at quarter-end. Management described the balance sheet as essentially debt-free.
Business performance and material changes
- Direct-to-consumer sales rose 10.4% to $653.9 million, while Indirect sales fell 32.9% to $107.5 million. Direct-to-consumer represented 85.9% of sales, compared with 78.7% a year earlier.
- North American comparable-store sales declined 1.1%, which management attributed primarily to lower traffic at full-price stores in a difficult retail market. North American sales increased 7.9% with new and expanded stores.
- Japan sales rose 11.2% to $152.2 million in U.S. dollars, including a 14.1% favorable currency translation effect. China comparable-store sales recorded double-digit growth, according to management.
- Indirect sales weakness reflected a 39.5% decline in U.S. wholesale shipments as Coach reduced shipments to manage department-store inventory; international shipments decreased 24.3%.
- Gross margin pressure reflected planned promotions at North American factory stores and channel mix. SG&A increased 0.7% in dollars but declined to 42.9% of sales from 43.1%. Administrative expense rose, primarily due to performance-based and share-based compensation.
- Net interest shifted from $2.6 million of income to $0.6 million of expense, primarily because of lower interest rates. The effective tax rate declined to 36.75% from 38.25%, primarily due to a reorganization of the company’s Japan business ownership.
Cash, capital, outlook, and risks
- Operating cash flow improved substantially, mainly due to working-capital comparisons: inventory used $6.3 million of cash versus $78.4 million in the prior-year quarter; receivables provided $5.2 million versus a $51.0 million use. Accrued liabilities provided $69.6 million of cash.
- Management expected approximately $110 million in FY2010 capital expenditures, primarily for store openings and expansion, funded mainly by cash on hand and operating cash flow. Planned FY2010 openings included approximately 20 North American retail stores, 15 China locations, and 13 net new Japan locations.
- The company paid its first quarterly dividend of $0.075 per share during the quarter and reported an expected annual dividend rate of $0.30 per share. No shares were repurchased in the quarter; $709.6 million remained available under the repurchase authorization.
- Management said cash and operating cash flow should cover foreseeable working capital, planned capital expenditures, dividends, and scheduled debt payments. It cautioned that the retail environment was challenging and that future performance depends on economic conditions, consumer preferences, competition, execution, cost control, seasonality, and foreign exchange.
- Seasonality is significant: Coach historically expects higher sales and operating income in the second fiscal quarter, which includes November and December.
- At quarter-end, a $6.0 million auction-rate security remained illiquid after unsuccessful auctions; its underlying investments mature in 2035. Derivative liabilities were $54.0 million for foreign-exchange contracts, and the cross-currency swap was valued as a $51.2 million liability. The company said it did not use derivatives for speculation.
- Letters of credit outstanding totaled $107.5 million, primarily supporting inventory purchases. Management said pending legal matters were not expected to materially affect financial position, results, or cash flows; the filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer and filing identity: this document is Coach, Inc.’s 2009 Form 10-Q, not a filing naming Tapestry, Inc.
- Assess whether direct-to-consumer growth can offset continued wholesale weakness and whether North American comparable-store sales recover.
- Track gross-margin trends, factory-store promotions, channel mix, and the impact of foreign currency on Japan results and expenses.
- Review the quality and sustainability of operating cash flow, particularly the effects of seasonal working capital and accrued-liability timing.
- Monitor the auction-rate security’s liquidity and valuation, derivative exposures, and the 2010 maturity of the Japan-related intercompany loan and cross-currency swap.
- Compare planned store openings and approximately $110 million of capital spending with realized demand, cash generation, and the company’s dividend and repurchase plans.