Filing summary
Entity and period: The supplied filing is Coach, Inc.’s unaudited Form 10-Q for the quarter ended October 1, 2011, not a filing identified as Tapestry, Inc. The comparison period ended October 2, 2010. Unless otherwise indicated, amounts below are in U.S. dollars.
Business context and results
Coach marketed accessories and gifts through Direct-to-Consumer and Indirect channels. Net sales rose 15.2% to $1.050 billion. Direct-to-Consumer sales increased 17.1% to $910.3 million; Indirect sales rose 4.2% to $140.1 million. North American comparable store sales increased 9.2%; China comparable store sales grew at a double-digit rate.
| Metric | Quarter ended Oct. 1, 2011 | Prior-year quarter | Change |
|---|---|---|---|
| Gross profit / margin | $764.7 million / 72.8% | $676.2 million / 74.2% | Profit +13.1%; margin down 1.4 percentage points |
| Operating income / margin | $322.0 million / 30.7% | $285.7 million / 31.3% | Income +12.7%; margin down 0.6 percentage points |
| Net income | $215.0 million | $188.9 million | +13.8% |
| Diluted earnings per share | $0.73 | $0.63 | +15.8% |
| Operating cash flow | $225.0 million | $177.5 million | +$47.5 million |
SG&A increased 13.4% to $442.7 million, but declined as a share of sales to 42.1% from 42.8%. Management attributed spending growth primarily to selling costs and digital, e-commerce, marketing, design and systems investments. The effective tax rate decreased to 32.94% from 33.75%.
Cash, debt and liquidity
At October 1, 2011, cash and cash equivalents were $845.7 million, versus $699.8 million at July 2, 2011. Current assets were $1.689 billion and current liabilities $631.4 million. Total debt, including current maturities, was $24.1 million; the company described its balance sheet as essentially debt-free. No borrowings were outstanding under the disclosed credit facilities. The $100 million Bank of America facility had $92.4 million of available borrowing capacity after letters of credit.
Investing activities used $38.5 million, including $30.9 million of capital expenditures and $7.6 million for the Singapore retail acquisition. Financing activities used $42.5 million, including $65.3 million of dividend payments and $59.0 million of share repurchases, partly offset by proceeds from share-based awards. Inventory was $519.6 million, up from $421.8 million at fiscal year-end as the company stocked for the holiday season.
Changes, outlook and risks
- Sales and earnings increased year over year, but gross and operating margins declined. Management cited higher product costs and operating expenses in its results discussion; the filing does not quantify a single cause for the gross-margin decline.
- Management planned approximately $200 million of fiscal 2012 capital expenditures, primarily for stores and infrastructure, funded mainly by cash on hand and operating cash flow. It expected about 15 net new North American retail stores, 25 factory outlets, 30 China locations and 15 net new Japan locations during fiscal 2012.
- No specific full-year revenue or earnings guidance is provided. Management noted that consumers, particularly in North America and Japan, remained cautious, and that the second fiscal quarter typically benefits from holiday sales.
- Coach acquired its Singapore domestic retail business for $7.6 million; results were included in Direct-to-Consumer from July 3, 2011. In October, it agreed to acquire its Taiwan domestic retail business, with transition expected in early January 2012.
- Foreign-exchange exposure includes U.S.-dollar inventory purchases in Japan and Canada and a Japanese intercompany loan; derivatives were used for hedging, not speculation. The filing expected $3.3 million of net derivative losses in accumulated other comprehensive income to be reclassified into earnings within 12 months. An auction-rate security valued at $6.0 million remained illiquid after unsuccessful auctions.
- Letters of credit totaled $300.0 million available, of which $167.2 million was outstanding, primarily to support inventory purchases. Management said routine pending legal matters were not expected to have a material effect. The filing reported no material change to previously disclosed risk factors.
Investor verification points
- Confirm the intended issuer: this filing names Coach, Inc., not Tapestry, Inc.
- Assess whether sales growth can be sustained while gross and operating margins are below prior-year levels.
- Track holiday-season inventory conversion, working-capital cash use and the subsequent quarter’s seasonal results.
- Monitor store-opening plans, the planned $200 million capital expenditure program, and integration of the Singapore and Taiwan retail operations.
- Review foreign-exchange exposures, derivative fair values and the status of the illiquid auction-rate security.
- Evaluate capital returns and liquidity alongside the remaining $902.6 million share-repurchase authorization and outstanding letters of credit.