TPR

Business Context and Reporting Period

Company: Coach, Inc. (Ticker: COH)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal Year Ended June 28, 2003
Business Overview: Coach is a designer, producer, and marketer of high-quality, modern American classic accessories, primarily handbags and leather goods. The company operates through two main segments: Direct-to-Consumer (retail stores, factory stores, e-commerce, catalogs) and Indirect (wholesale, department stores, and the consolidated joint venture Coach Japan, Inc.).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 32.5% year-over-year, driven by a 25.1% increase in Direct-to-Consumer sales and a 44.6% increase in Indirect sales. The Indirect growth was primarily fueled by the full-year consolidation of Coach Japan and the acquisition of distributor Osawa.
• Margin Expansion: Gross margin improved by 388 basis points to 71.1%, attributed to a favorable shift in product mix (more fabric/mixed-material collections), sourcing cost initiatives, and channel mix optimization.
• Profitability: Operating income surged 82.4% to $243.8 million, and Net Income rose 70.8% to $146.6 million. This was aided by the absence of reorganization costs in 2003 (which totaled $3.4 million in 2002) and improved operating leverage.
• Liquidity: Cash and cash equivalents more than doubled to $229.2 million, supported by strong operating cash flows of $221.6 million.

Guidance, Outlook, and Risks

Management Commentary and Strategy

• Expansion Plans: Coach plans to open at least 20 new U.S. retail stores annually for the next two years and convert approximately 10 international wholesale locations to the new store design by June 2004.
• Japan Focus: Continued investment in Coach Japan, which now operates 95 locations, is a key growth driver. The company aims to further penetrate international markets, particularly targeting Japanese consumers.
• Operational Efficiency: The company continues to shift manufacturing to independent, lower-cost markets to improve flexibility and margins.

Risks and Contingencies

• Seasonality: Approximately 33% of annual sales and 47% of operating income are recognized in the second fiscal quarter (holiday season).
• Foreign Exchange: The company is exposed to currency fluctuations, particularly regarding the Japanese Yen (Coach Japan's functional currency) and the Euro (Italian sourcing office). Coach Japan uses forward contracts to hedge inventory purchase risks.
• Supply Chain: Reliance on independent manufacturers in various countries exposes the company to risks related to labor practices, political unrest, and trade restrictions.
• Consumer Trends: Success depends on accurately anticipating fashion trends; misjudging demand could lead to excess inventory.

Investor Verification Checklist

• Stock Split: Verify the impact of the two-for-one stock split authorized on August 7, 2003, which was not reflected in the fiscal 2003 financial statements but is disclosed as a subsequent event.
• Coach Japan Consolidation: Confirm the full-year impact of Coach Japan (50% owned, consolidated) on revenue and minority interest ($7.6 million in 2003 vs. $0.2 million in 2002).
• Reorganization Costs: Note that 2003 operating income excludes the $3.4 million reorganization costs incurred in 2002 related to the closure of the Lares, Puerto Rico facility.
• Debt Covenants: Review the $100 million revolving credit facility (Fleet facility) which prohibits dividend payments while in place, though no borrowings were outstanding as of June 28, 2003.
• Stock Repurchases: Verify the remaining $120 million authorization under the stock repurchase program as of the fiscal year-end.