Business Context and Reporting Period
Company: Coach, Inc. (Note: Metadata lists "TAPESTRY, INC." but the filing is for Coach, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 27, 2008 (Second 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 focused on global distribution expansion, particularly in North America, Japan, and China.
Key Financial Metrics
| Metric | Q2 FY2009 (Ended Dec 27, 2008) |
Q2 FY2008 (Ended Dec 29, 2007) |
6 Months FY2009 (Ended Dec 27, 2008) |
6 Months FY2008 (Ended Dec 29, 2007) |
|---|---|---|---|---|
| Net Sales | $960.3 million | $978.0 million | $1,712.8 million | $1,654.7 million |
| Gross Profit | $692.0 million | $737.3 million | $1,250.2 million | $1,255.5 million |
| Gross Margin | 72.1% | 75.4% | 73.0% | 75.9% |
| Operating Income | $348.4 million | $403.1 million | $581.8 million | $641.8 million |
| Operating Margin | 36.3% | 41.2% | 34.0% | 38.8% |
| Net Income | $216.9 million | $252.3 million | $362.7 million | $407.1 million |
| Diluted EPS | $0.67 | $0.69 | $1.10 | $1.09 |
| Cash & Equivalents | $424.2 million | $698.9 million (Prior Year End) | N/A | |
| Operating Cash Flow (6mo) | $332.0 million | $514.9 million | ||
| Total Debt (Long-term + Current) | $27.0 million | $2.9 million (Prior Year End) | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Q2 net sales decreased 1.8% year-over-year. The Direct-to-Consumer segment grew 1.9% (driven by new stores), while the Indirect segment fell 18.7% due to reduced wholesale shipments to manage customer inventory levels.
- Margin Compression: Gross margin declined from 75.4% to 72.1% in Q2. This was driven by promotional activities in factory stores, a "sharper pricing initiative" to address consumer reluctance, and higher average unit costs.
- Expense Growth: Selling, general, and administrative (SG&A) expenses increased 2.8% in Q2, rising as a percentage of sales from 34.2% to 35.8%. Increases were attributed to new store openings, the acquisition of Hong Kong/Macau retail businesses, and foreign currency impacts on Japan operations.
- Comparable Store Sales: North American comparable store sales declined 13.2% in Q2 due to decreased traffic in full-priced stores. Conversely, Japan sales rose 15.4% (including a 16.2% positive currency impact).
- Interest Income: Net interest income dropped significantly from $10.6 million to $0.5 million in Q2 due to lower interest rates and reduced cash balances.
Guidance, Outlook, and Risks
- Outlook: Management expects fiscal 2009 capital expenditures to be approximately $280 million, primarily for new stores and expansions. Fiscal 2010 capital expenditures are expected to decline due to fewer store openings and suspended expansions.
- Store Strategy: Plans to open 40 retail stores in fiscal 2009 (13 in new markets). For fiscal 2010, the plan is reduced to approximately 20 new stores, dependent on the economic environment.
- Acquisitions: Completed the acquisition of retail businesses in Hong Kong and Macau for $14.5 million in September 2008. Expects to complete the acquisition of mainland China retail business in Q4 FY2009.
- Stock Repurchases: Completed a $1.0 billion repurchase program in August 2008. A new $1.0 billion program was approved in August 2008, with $759.6 million remaining available as of Dec 27, 2008.
- Risks:
- Economic Conditions: The current economic crisis is negatively impacting consumer confidence and spending, leading to reduced traffic and sales.
- Currency: Significant exposure to foreign currency fluctuations, particularly the Japanese Yen, which impacts both revenue translation and operating expenses.
- Investments: Held $6.0 million in auction rate securities (ARS) classified as Level 3 assets, which have been marked down due to inactive markets.
Key Facts for Investor Verification
- Inventory Build: Inventories increased to $383.1 million (from $318.5 million at prior year-end), driven by higher average unit costs and timing of shipments.
- Headquarters Purchase: Purchased corporate headquarters in NYC for $126.3 million ($103.3 million cash, $23.0 million mortgage assumed).
- Accounting Change: Changed inventory accounting for Japan operations from LIFO to FIFO, applied retrospectively.
- Derivative Liabilities: Significant fair value liability ($47.8 million) associated with a cross-currency swap to manage Japan intercompany loan exposure.
- Wholesale Channel Weakness: Continued decline in U.S. wholesale sales (down 18.0% in Q2) as the company actively manages distributor inventory levels.