Filing identity and reporting period
The supplied filing is Coach, Inc.’s unaudited Form 10-Q, not a filing under the name Tapestry, Inc. It reports the quarter and six months ended January 1, 2011 (fiscal 2011); comparative periods ended December 26, 2009. Coach’s fiscal 2011 ends July 2, 2011. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $1,264.5; up 18.7% | $2,176.1; up 19.1% |
| Gross profit / margin | $915.2 / 72.4%; margin unchanged | $1,591.3 / 73.1%, versus 72.3% |
| Operating income / margin | $453.3 / 35.9%, versus 35.8% | $739.0 / 34.0%, versus 33.1% |
| Net income | $303.4; up 25.9% | $492.3; up 29.0% |
| Diluted EPS | $1.00; up 32.8% | $1.62; up 36.6% |
| Operating cash flow | Not presented separately | $585.2, versus $604.2 |
Quarterly sales rose in Direct-to-Consumer (up 17.4% to $1,096.2) and Indirect (up 28.4% to $168.3). North American comparable-store sales increased 12.6% in the quarter and 11.0% for the six months. China delivered double-digit comparable-store growth; Japan sales benefited materially from favorable currency translation. Six-month growth in operating margin reflected improved gross margin, including sourcing efficiencies and product mix.
Cash, debt and capital allocation
At January 1, 2011, cash and cash equivalents were $784.2 and short-term investments were $155.6. Current assets were $1,622.6 and current liabilities $593.3. Long-term debt was $23.6, plus $0.8 current portion. Coach described its balance sheet as essentially debt-free. Japan had $27.1 of short-term facility borrowings at quarter-end, repaid in early January. The Bank of America facility had no borrowings and $90.0 of available capacity, constrained by letters of credit.
Six-month investing cash use was $108.8, including $49.2 of property and equipment purchases and net investment purchases of $55.7. Financing cash use was $291.5, including $525.0 of share repurchases and $89.1 of dividends, partly offset by proceeds from share-based awards. Coach repurchased 10.5 million shares during the six months; $34.6 remained under the existing program at January 1. In January, the Board authorized a new $1.5 billion repurchase program through June 2013. Expected fiscal 2011 capital expenditures were approximately $150.
Outlook, risks and notable items
- Management emphasized expansion in North America and China, store productivity, men’s products and disciplined expense control. It said the macroeconomic environment was improving but consumers, particularly in North America and Japan, remained cautious. The filing provides no specific revenue or earnings guidance.
- Management expected cash on hand and operating cash flow to fund working capital, planned capital spending, dividends and repurchases. Results remain exposed to consumer demand, fashion trends, competition, cost control, seasonality, international conditions and currency movements.
- Foreign-exchange derivatives are used for hedging, not speculation. At quarter-end, derivative liabilities were $23.0; Coach expected $14.1 of net derivative losses in accumulated other comprehensive income to be reclassified into earnings within 12 months. The company also held a $6.0 auction-rate security whose auction had failed; its underlying investments mature in 2035.
- Letters of credit totaled $140.5, 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 changes to previously disclosed risk factors.
- Coach retrospectively changed the income-statement classification of interest and penalties on uncertain tax positions, moving them from interest to income-tax provision. Prior periods were reclassified; net income was unaffected. Effective tax rates were 32.9% for the quarter and 33.3% for the six months, down from 37.0% and 37.2%.
- Operating cash flow declined despite higher net income, largely reflecting working-capital comparisons: accrued-liability cash inflows were lower and inventory was a small use of cash rather than a substantial source in the prior period.
Investor verification priorities
- Confirm the issuer identity: the filing names Coach, Inc.; the supplied company metadata says Tapestry, Inc.
- Review the durability and drivers of sales growth, especially comparable-store trends, China performance, Japan currency effects and wholesale shipments.
- Assess whether margin gains and operating cash generation can continue as advertising, store expansion and other expenses rise.
- Verify repurchase authorization, actual execution and the effect of buybacks on share count, cash and liquidity.
- Monitor foreign-exchange exposures, derivative liabilities and expected earnings reclassifications, as well as the illiquid auction-rate security.