Business context and reporting period
Entity discrepancy: The request identifies Tapestry, Inc., but the supplied filing is Coach, Inc.’s Form 10-K, filed August 25, 2010. The summary below covers the filing provided, not a Tapestry filing. It reports fiscal 2010, ended July 3, 2010, a 53-week year; fiscal 2009 had 52 weeks. The filing also includes unaudited fourth-quarter data.
Coach designs and markets accessories, primarily handbags, through Direct-to-Consumer channels (company-operated stores and e-commerce) and Indirect channels (wholesale, distributors, and licensed products). Direct-to-Consumer accounted for 87.5% of fiscal 2010 sales. Coach operated 665 company locations at year-end and emphasized North American and international expansion, particularly China.
Financial performance and position
- Fiscal 2010 sales: $3.61 billion, up 11.7%. Management attributed approximately $70 million of additional sales to the 53rd week; its channel discussion assigns about $62 million to Direct-to-Consumer and $8 million to Indirect.
- Profitability: Gross profit was $2.63 billion; gross margin was 73.0%, versus 71.9%. Operating income was $1.15 billion, up 18.3%, and operating margin was 31.9%, versus 30.1%. Net income was $734.9 million, up 17.9%; diluted EPS was $2.33, up 21.5%.
- Channels: Direct-to-Consumer sales rose 15.7% to $3.16 billion, including 3.5% North American comparable-store growth. Indirect sales fell 10.3% to $451.8 million, mainly reflecting an 18.2% decline in U.S. wholesale shipments as Coach managed department-store inventories.
- Cash flow: Operating cash flow was $990.9 million, compared with $809.2 million. Investing activities used $182.2 million; financing activities used $1.02 billion, principally reflecting $1.15 billion of share repurchases and $94.3 million of dividends.
- Liquidity and debt: Year-end cash and cash equivalents were $596.5 million, with $99.9 million in short-term investments and $6.0 million in long-term investments. Working capital was $773.6 million. Debt, including current maturities, totaled $24.9 million; there were no year-end borrowings under the principal revolving facilities. The $100 million bank revolver had approximately $90 million available after letters of credit.
- Other metrics: Inventory was $363.3 million, up from $326.1 million. Capital expenditures were $81.1 million. Long-term operating lease commitments totaled $922.7 million.
Material changes versus comparable periods
- Fiscal 2010 sales and earnings rebounded from fiscal 2009, when sales grew only 1.6%, operating income declined 15.3%, and net income declined 20.4% from fiscal 2008.
- Fiscal 2010 gross margin improved with lower manufacturing costs and product mix. SG&A was 41.1% of sales versus 41.8%; performance-based compensation and higher administrative costs increased expense, while distribution costs declined.
- Indirect sales continued to weaken, contrasting with growth in company-operated channels. Japan sales rose 7.8%, including a favorable $51.9 million currency translation impact; China retail sales exceeded $100 million.
- Cash and cash equivalents declined to $596.5 million from $800.4 million, while total cash, cash equivalents, and investments were $702.4 million versus $806.4 million. The decline reflected substantial repurchases and dividends, partly offset by operating cash generation.
- Coach repurchased 30.7 million shares in fiscal 2010 at an average $37.48 per share. The Board authorized a new $1.0 billion repurchase program in April 2010, with $559.6 million remaining at year-end. The expected annual dividend rate increased from $0.30 to $0.60 per share, effective with the July 2010 payment.
Fourth-quarter information, outlook, risks, and unusual items
- Fourth quarter: Fiscal 2010 net sales were $950.5 million, gross profit $697.0 million, net income $195.5 million, and diluted EPS $0.64. Fiscal 2009 fourth-quarter figures were $777.7 million, $547.3 million, $145.8 million, and $0.45, respectively. The annual report does not provide a clear fourth-quarter operating-margin figure in the supplied text.
- Outlook: Management planned approximately 10 net new North American retail stores, about 30 new mainland China locations, and approximately seven net new Japan locations in fiscal 2011. It expected fiscal 2011 capital expenditures of about $150 million. Management described the retail environment as challenging, with consumers in North America and Japan still cautious, but expected growth from distribution expansion, product innovation, and expense discipline.
- International expansion: Coach planned to take direct control of retail operations in Singapore and Malaysia, beginning in fiscal 2012 and 2013, respectively, and anticipated European joint-venture retail sales beginning in early fiscal 2011. Management warned that unfamiliar markets, local operating requirements, competition, and differences in consumer behavior could impair sales or margins.
- Risks: Key exposures include consumer spending and economic conditions, fashion and product acceptance, competition, international expansion, foreign exchange, sourcing and supply interruptions, inventory misjudgments, seasonality, and uncertain tax outcomes. Hedging may not fully offset currency movements.
- Unusual items: Fiscal 2009 comparability included $13.4 million of cost-saving charges, a $15 million foundation contribution, and favorable tax-related adjustments. Fiscal 2009 also included a $16.8 million tax benefit and $2.0 million of interest income related primarily to tax settlements. Fiscal 2010 reported results do not include comparable adjustments of similar scale.
- Contingencies and controls: Coach reported routine litigation and intellectual-property enforcement actions and said pending proceedings were not expected to have a material adverse effect. It disclosed $165.7 million of gross unrecognized tax benefits and $35.3 million of accrued tax interest and penalties; timing and outcomes of examinations were uncertain. The independent auditor gave unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is Coach, Inc., not Tapestry, Inc.
- Separate underlying growth from the 53rd-week benefit, acquisitions of China-area retail businesses, and foreign-exchange effects.
- Assess the durability of the gross-margin recovery and the continuing decline in Indirect/U.S. wholesale sales.
- Review cash deployment, including repurchases, the higher dividend, planned capital expenditures, and remaining repurchase authorization.
- Evaluate lease commitments, inventory growth, tax exposures, and execution risks in China, Europe, Singapore, and Malaysia.