Business context and reporting period
The supplied filing is Coach, Inc.’s unaudited Form 10-Q for the quarter ended December 31, 2011 (fiscal Q2 2012), with six-month comparisons to the period ended January 1, 2011. This does not match the request metadata identifying Tapestry, Inc.; verify the issuer and filing before relying on this summary.
Coach sold accessories and gifts through Direct-to-Consumer and Indirect channels. Direct-to-Consumer included company-operated stores and online sales; Indirect included wholesale and licensing. The filing describes global expansion, particularly in North America and Asia, as a key strategy.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2011 | Six months ended Dec. 31, 2011 |
|---|---|---|
| Net sales | $1,448.6 million; up 14.6% | $2,499.0 million; up 14.8% |
| Gross profit / margin | $1,045.2 million / 72.2% | $1,809.9 million / 72.4% |
| Operating income / margin | $500.9 million / 34.6% | $822.9 million / 32.9% |
| Net income | $347.5 million; up 14.5% | $562.5 million; up 14.3% |
| Diluted EPS | $1.18; up 18.1% | $1.90; up 17.2% |
| Operating cash flow | Not reported for the quarter in the supplied statements | $836.1 million, versus $585.2 million |
For the quarter, Direct-to-Consumer sales grew 16.8% to $1,282.6 million, while Indirect sales were essentially flat at $166.0 million. North American comparable sales rose 8.8%; China comparable-store growth was double-digit. For the six-month period, North American comparable sales increased 9.0%.
At December 31, 2011, cash and equivalents were $1,085.6 million, total assets $3,100.9 million, and total liabilities $1,232.2 million. Total debt, including current maturities, was approximately $24.0 million; the company reported no borrowings under its described revolving facilities. Cash exceeded debt by approximately $1.06 billion. Current assets were $1,896.0 million and current liabilities $811.0 million. The company had $184.3 million of letters of credit outstanding from $300.0 million available.
Six-month cash flow included $82.3 million used in investing and $369.5 million used in financing. The company paid $130.6 million in dividends and repurchased $359.0 million of stock. Capital expenditures were $70.2 million.
Material changes and unusual items
- Quarterly sales growth was led by Direct-to-Consumer, while Indirect sales were flat. Operating income grew more slowly than sales, and reported operating margin fell from 35.9% to 34.6%. Gross margin also edged down from 72.4% to 72.2%.
- For the six months, gross margin declined from 73.1% to 72.4% and operating margin from 34.0% to 32.9%. Higher SG&A—including selling, digital/e-commerce investment, international expansion, headcount and systems—outpaced sales growth.
- Reported Q2 results included a $20.3 million contribution to the Coach Foundation and a $12.4 million tax benefit associated principally with Japan tax-law changes and a favorable transfer-pricing agreement. Excluding these items, Q2 operating income was $521.2 million and operating margin 36.0%; adjusted net income and diluted EPS remained $347.5 million and $1.18 because the tax benefit and contribution offset in the reconciliation. These are company-presented non-GAAP measures.
- The effective tax rate was 30.38% for Q2 and 31.38% for the six months, versus 32.93% and 33.25%, respectively, in the prior-year periods. The company attributed the decrease to the Japan tax items and, for the six months, profitability in lower-tax jurisdictions and a lower state tax rate.
- Operating cash flow rose by $250.9 million year over year, with a substantial contribution from accrued liabilities; $138.1 million of the variance related to accrued tax balances and payment timing. Inventory also increased, and receivables absorbed cash.
- Coach acquired its Singapore domestic retail business for $7.6 million in July 2011. It acquired its Taiwan retail business on January 1, 2012; the purchase price remained subject to adjustment and was to be finalized in fiscal Q3.
Outlook, commentary and risks
Management expected approximately $200 million of fiscal 2012 capital expenditures, mainly for new stores and infrastructure, funded primarily from cash and operating cash flow. Store plans included about 15 net new North American retail stores and 25 factory outlets, about 30 new China locations, and approximately 15 net new Japan locations. These are plans stated in the filing, not guaranteed results. Management also noted that consumers, particularly in North America and Japan, remained cautious, while citing China as a major growth opportunity and describing the company as essentially debt-free and well positioned.
Risks highlighted include execution of growth plans, competition, consumer preferences and fashion trends, economic and political conditions, foreign-exchange movements, cost control, and seasonal or quarterly sales fluctuations. The company used derivatives to hedge certain currency exposures and stated that it did not use them for speculation. Routine legal proceedings were not expected by management to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm that Coach, Inc.’s 2011 filing is the intended document for the Tapestry, Inc. request; the issuer names and reporting periods do not align on their face.
- Review the GAAP-to-non-GAAP reconciliation and the treatment of the $20.3 million Foundation contribution and Japan-related tax benefit.
- Assess the sustainability of comparable-store growth, especially China and North America, and the flat quarterly Indirect channel.
- Monitor margin pressure, planned capital spending, inventory and working-capital movements, and the extent to which operating cash flow benefited from tax-payment timing.
- Check progress against planned store openings, the finalized Taiwan acquisition price, and the remaining $602.6 million stock-repurchase authorization.