Business context and reporting period
This filing is Coach, Inc.’s unaudited Form 10-Q for the 13 weeks ended March 29, 2014, and the first nine months of fiscal 2014 (fiscal year ending June 28, 2014). The request identifies Tapestry, Inc. and 2013 Q3, but the filing itself is for Coach, Inc. and fiscal 2014 Q3; verify the intended company and period.
Coach describes a transformation from an accessories company toward a global lifestyle brand. Its reportable segments are North America and International. The company acquired the remaining 50% of its European retail joint venture on July 1, 2013 and included Europe in International.
Key financial metrics
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Net sales | $1,099.6m | $1,187.6m | $3,670.0m | $3,852.7m |
| Gross profit / margin | $781.3m / 71.1% | $880.2m / 74.1% | $2,590.6m / 70.6% | $2,810.7m / 73.0% |
| Operating income / margin | $262.7m / 23.9% | $348.5m / 29.3% | $1,020.3m / 27.8% | $1,206.8m / 31.3% |
| Net income | $190.7m | $238.9m | $706.1m | $813.1m |
| Diluted EPS | $0.68 | $0.84 | $2.51 | $2.84 |
| Operating cash flow | Not separately provided | Not separately provided | $669.3m | $1,039.4m |
At March 29, 2014, cash and cash equivalents were $463.5m, short- and long-term investments totaled $790.7m, and debt was $210.5m, all under the revolving facility and classified as current. Cash plus investments less debt was approximately $1.04bn. Current assets were $1,790.1m versus current liabilities of $787.9m. Nine-month capital expenditures were $157.6m; operating cash flow less capital expenditures was approximately $511.7m. Dividends declared were $0.3375 per share for the quarter and $1.0125 for the nine-month period.
Material changes versus prior comparable periods
- Q3 sales fell 7.4% (5.4% excluding currency); nine-month sales fell 4.7% (2.0% excluding currency). North America sales declined 18.2% in Q3 and 9.2% year to date, while International sales rose 14.4% and 5.1%, respectively.
- North America comparable-store sales fell 21.4% in Q3 and 13.8% for the nine-month period. Management cited reduced store traffic, promotional conditions, weather and Easter timing; Q3 Internet comparable sales were also affected by limiting third-party events and access to the e-factory flash site.
- Gross margin declined 300 basis points in Q3 and 240 basis points year to date. Management attributed pressure principally to promotions, especially in North America factory stores, as well as currency translation and product/category mix.
- Despite lower SG&A dollars, SG&A rose as a share of sales to 47.2% in Q3 from 44.8%, and to 42.8% for nine months from 41.6%. Operating income declined 24.6% in Q3 and 15.5% year to date; diluted EPS declined 19.0% and 11.6%, respectively.
- Nine-month operating cash flow fell $370.1m year over year, reflecting lower net income and working-capital movements, including inventory, accounts payable and accrued liabilities. Inventory was $583.7m, 13% above the prior-year quarter-end level, which management linked partly to sales below expectations and distribution for new stores and the Europe acquisition.
Outlook, commentary, risks and unusual items
- The filing does not provide a clear sales or earnings forecast. Management said the transformation is intended to support long-term growth, while acknowledging intense North American competition, promotional activity and lower in-store traffic. Results are seasonal and may be affected by weather and other retail conditions.
- Fiscal 2014 capital expenditures were expected to be $250m–$260m. The company expected fiscal 2014 share repurchases of $524.9m; $836.7m remained under the $1.5bn authorization at March 29, 2014.
- Coach expected to invest approximately $370m in the Hudson Yards joint venture from Q4 FY2014 through FY2016, including about $30m in the remainder of FY2014, and to incur approximately $190m of additional construction-period capital expenditures. Funding was expected from cash, credit-facility borrowings and approximately $130m of proceeds from a planned 2016 headquarters sale. Management anticipated that debt could be higher at FY2014 year-end.
- The company reported $210m outstanding on its $700m revolving facility and said it was in compliance with its covenants. Management believed available liquidity was sufficient, but noted that substantial cash and short-term investments were held outside the U.S. and intended to be permanently reinvested.
- Unusual items included a $2.7m loss on the Reed Krakoff business sale in Q1 and a lower Q3 effective tax rate of 26.9%, primarily due to discrete tax benefits, notably statute closures. The filing says pending legal proceedings are not expected to have a material adverse effect; it reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the intended issuer and reporting period given the mismatch between the request metadata and the Coach, Inc. filing.
- Track North American traffic, comparable-store sales, promotional intensity and inventory levels, alongside the growth and margins of International operations.
- Assess whether the transformation and international store expansion can offset North American weakness without further margin deterioration.
- Review cash generation, working-capital trends, planned repurchases and the debt implications of Hudson Yards investment and other capital spending.
- Check the effect of foreign-exchange movements and discrete tax items on reported growth, margins and earnings comparability.