Business context and reporting period
Coach, Inc. (the registrant named in this filing) designs and sells accessories and gifts through its Direct-to-Consumer and Indirect segments. This unaudited Form 10-Q covers the second quarter and first six months of fiscal 2010; the quarter ended December 26, 2009. Fiscal 2010 is a 53-week year ending July 3, 2010. Results are seasonal, with the holiday quarter typically stronger.
Key financial metrics
| Metric | Quarter ended Dec. 26, 2009 | Six months ended Dec. 26, 2009 |
|---|---|---|
| Net sales | $1,065.0 million; +10.9% year over year | $1,826.4 million; +6.6% |
| Gross profit / margin | $770.9 million / 72.4%, versus 72.1% | $1,321.1 million / 72.3%, versus 73.0% |
| Operating income / margin | $380.8 million / 35.8%, versus 36.3% | $604.1 million / 33.1%, versus 34.0% |
| Net income | $241.0 million; +11.1% | $381.8 million; +5.3% |
| Diluted EPS | $0.75; +12.4% | $1.19; +8.1% |
| Operating cash flow | Not presented for the quarter alone | $604.2 million, versus $332.0 million |
For the first six months, investing cash outflow was $38.1 million and financing cash outflow was $269.3 million. Cash increased by $302.8 million to $1,103.2 million. At December 26, 2009, total debt was approximately $25.1 million; there were no revolving-facility borrowings. Current assets were $1,716.4 million and current liabilities $578.5 million.
Material changes versus comparable periods
- Quarterly Direct-to-Consumer sales rose 14.2% to $933.9 million, while Indirect sales fell 8.1% to $131.1 million. For the six months, Direct-to-Consumer sales increased 12.6%; Indirect sales declined 21.3%.
- North American comparable-store sales rose 3.2% in the quarter and 1.4% for the six months. Japan sales growth included favorable currency translation; China delivered double-digit comparable-store growth.
- Indirect sales weakened mainly because Coach reduced U.S. wholesale shipments to manage department-store inventory; the travel business was also weak. Six-month U.S. wholesale sales fell 26.1%.
- Quarterly gross margin improved slightly, but six-month gross margin declined 0.7 percentage point. Operating margin declined in both comparisons, as SG&A rose faster than sales in the quarter and administrative costs increased.
- Six-month operating cash flow rose substantially, chiefly reflecting working-capital differences: inventory generated $59.5 million of cash versus using $54.3 million a year earlier, and accrued liabilities generated $129.7 million versus $30.6 million.
Outlook, commentary, risks and unusual items
- Management cited a challenging retail environment and cautious consumers, particularly in North America and Japan, while emphasizing global distribution growth, product innovation, sales productivity and expense discipline. No full-year earnings or revenue guidance is provided in the supplied filing text.
- Fiscal 2010 plans included approximately 20 new North American retail stores, 15 new China locations and seven new Japan locations. Expected full-year capital expenditures were approximately $110 million, primarily for stores and infrastructure.
- Management said cash on hand and operating cash flow should fund foreseeable working capital needs, planned capital expenditures, dividends and repurchases. The company expected an annual dividend rate of $0.30 per share. About $409.6 million remained under the stock repurchase authorization, which expired in June 2010.
- Key risks include consumer demand and seasonality, competition, fashion and preference shifts, cost control, international economic and political conditions, currency movements, and protection of intellectual property. Coach used derivatives to hedge Japan-related currency exposures and stated it did not use them for speculation.
- An auction-rate security valued at $6.0 million remained illiquid after unsuccessful auctions; its underlying investments mature in 2035. Derivative liabilities were $47.4 million at December 26, 2009. The $231.0 million Japan intercompany loan and related cross-currency swap mature in 2010.
- Letters of credit outstanding totaled $124.7 million, primarily supporting inventory purchases. Management considered pending legal proceedings unlikely to have a material adverse effect. No material risk-factor changes were reported.
Important facts for investors to verify
- Whether Direct-to-Consumer growth and comparable-store trends can offset continued weakness in wholesale and travel channels.
- Whether operating margins recover as administrative expenses and promotional activity affect results.
- How much of the strong operating cash flow reflects sustainable earnings versus seasonal working-capital movements.
- Progress on planned store openings and the approximately $110 million capital-expenditure plan.
- Resolution or continued valuation of the auction-rate security, and the 2010 maturity and settlement exposure associated with the Japan loan and cross-currency swap.