Business context and reporting period
The supplied filing is Coach, Inc.’s unaudited Form 10-Q for the quarter ended September 28, 2013 (first quarter of fiscal 2014; fiscal year ends June 28, 2014). The filing names Coach, Inc., not Tapestry, Inc.; investors should verify the company and filing-period mapping in the request metadata.
Coach describes a strategy to evolve from an accessories business into a global lifestyle brand, expand international and digital distribution, and improve store productivity. Its reportable segments are North America and International.
Financial results and liquidity
| Metric | Quarter ended Sep. 28, 2013 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,150.8 million | $1,161.4 million | (0.9%); +2.4% constant currency |
| Gross profit / margin | $826.6 million / 71.8% | $845.2 million / 72.8% | Margin down 1.0 percentage point |
| Operating income / margin | $321.6 million / 27.9% | $331.7 million / 28.6% | Income down 3.0% |
| Net income | $217.9 million | $221.4 million | Down 1.6% |
| Diluted EPS | $0.77 | $0.77 | Flat |
| Operating cash flow | $164.1 million | $202.2 million | Down $38.1 million |
Cash and cash equivalents were $714.6 million at quarter-end, down from $1,062.8 million at June 29, 2013. Short- and long-term investments totaled $456.8 million. Total debt was approximately $1.0 million ($500,000 current and $485,000 long-term); the company reported no facility borrowings at quarter-end. Current assets were $1,872.1 million versus current liabilities of $707.4 million.
Investing cash use was $231.4 million, including $165.8 million of investment purchases, $45.9 million of property and equipment purchases, and an $18.2 million Hudson Yards joint-venture investment. Financing cash use was $281.5 million, including $95.0 million of dividend payments and $175.0 million of share repurchases. Inventory increased to $637.2 million from $524.7 million, reflecting seasonal pre-holiday stocking, new stores, and the European acquisition.
Material changes and management commentary
- North America sales fell 0.8%; comparable store sales declined 6.8%, primarily due to lower transactions. International sales fell 0.7% in reported dollars but rose 9.3% on a constant-currency basis, with yen exchange effects a key drag.
- Gross margin contracted amid increased promotional activity and channel mix. SG&A declined 1.7% in dollars and to 43.9% of sales from 44.2%; selling costs rose with store openings and transformation spending, while advertising, marketing, and design costs declined year over year.
- Coach acquired the remaining 50% of its European joint venture on July 1, adding 18 retail locations and consolidating the business. Preliminary purchase accounting recorded $21.7 million of goodwill.
- Coach sold the Reed Krakoff business on August 30 for a nominal cash amount and an 8% preferred interest in the buyer. It recorded a $2.7 million loss; related restructuring and transformation liabilities were $7.9 million at quarter-end and expected to be substantially paid in fiscal 2014.
Outlook, risks, and contingencies
- Management estimated fiscal 2014 capital expenditures of approximately $280 million and expected full-year advertising, marketing, and design costs to exceed fiscal 2013 levels. No specific revenue or earnings guidance is provided in the supplied filing text.
- Coach expected to invest approximately $420 million in the Hudson Yards project over three years, including an estimated $120 million for the remainder of fiscal 2014, subject to construction progress. Funding was expected from cash, operating cash flow, credit facilities, and anticipated proceeds from selling its current headquarters in 2015.
- Management cited competition, promotional conditions, macroeconomic uncertainty, consumer preferences and fashion trends, foreign exchange, cost control, and seasonal sales fluctuations as risks. The company said operating cash flow, cash, and credit lines should cover foreseeable needs, but future performance and access to capital remain uncertain.
- After quarter-end, Coach drew on its $700 million revolving facility; $150 million was outstanding as of November 5, 2013. The company reported covenant compliance. Routine legal proceedings were not expected by management to have a material adverse effect; the filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm that this Coach, Inc. 2013 filing is the intended filing for the Tapestry, Inc. request.
- Assess the North American comparable-store sales decline and the extent to which constant-currency international growth translates into reported results.
- Monitor inventory growth, gross-margin pressure from promotions and channel mix, and operating cash flow.
- Verify the timing and financing of Hudson Yards commitments, planned capital expenditures, and the subsequent revolving-credit draw.
- Track integration and purchase accounting for the European business, and cash costs related to the Reed Krakoff divestiture and restructuring.