Business context and reporting period
Issuer discrepancy: The filing identifies the registrant as Coach, Inc.; the request metadata names Tapestry, Inc. Verify that this is the intended filing. Coach sells accessories and gifts through direct-to-consumer and wholesale/licensing channels. This unaudited Form 10-Q covers the quarter ended October 2, 2010, the first quarter of fiscal 2011, compared with the quarter ended September 26, 2009.
Key financial results
Amounts are in U.S. dollars; financial statement figures are rounded to millions unless noted.
| Metric | Q1 FY2011 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $911.7 million | $761.4 million | +19.7% |
| Gross profit / margin | $676.2 million / 74.2% | $550.2 million / 72.3% | Margin +1.9 percentage points |
| Operating income / margin | $285.7 million / 31.3% | $223.2 million / 29.3% | Income +28.0% |
| Net income | $188.9 million | $140.8 million | +34.1% |
| Diluted EPS | $0.63 | $0.44 | +43.0% |
| Cash provided by operating activities | $177.5 million | $240.5 million | Down $63.1 million |
Direct-to-consumer sales rose 18.6% to $775.5 million; indirect sales rose 26.7% to $136.2 million. North American comparable-store sales increased 8.5%. Japan sales increased 13.8% in reported dollars, including a 10.6% favorable currency effect; China comparable-store sales grew at a double-digit rate.
Financial position, liquidity and capital allocation
At October 2, 2010, cash and cash equivalents were $621.4 million and short-term investments were $90.6 million. Total debt was $24.8 million, including $0.8 million current debt; management described the balance sheet as essentially debt-free. The $100 million Bank of America revolving facility had no borrowings and $90 million available after letters of credit. Japanese and Chinese credit facilities also had no outstanding borrowings.
Operating cash flow was lower primarily because inventory used $97.7 million of cash, versus a $6.3 million use in the prior-year quarter, and because accrued-liability cash inflows were smaller. Investing activities used $14.5 million, including $23.1 million of property and equipment purchases. Financing activities used $140.3 million, including $137.5 million of share repurchases and $44.8 million of dividend payments. Cash ended the quarter at $621.4 million, up $24.9 million from the start of the quarter.
Coach repurchased 3.585 million shares at an average $38.35 per share; $422.1 million remained under the $1.0 billion program, which runs through June 2012. Fiscal 2011 capital expenditures were expected to be approximately $150 million, primarily for store openings and infrastructure, funded mainly from cash on hand and operating cash flow.
Changes, outlook, commentary and risks
- Gross margin improved mainly from sourcing-cost improvements and a factory-channel mix favoring higher-margin made-for-factory product. SG&A rose 19.4% in dollars but declined slightly as a share of sales, to 42.8% from 42.9%.
- The effective tax rate declined to 33.75% from 37.43%, which management attributed mainly to higher profitability in lower-tax jurisdictions and a lower state tax rate.
- Management emphasized global distribution growth, particularly in North America and China, improved store productivity, men’s products, and brand awareness in emerging markets. The company opened three new North American retail stores, seven factory stores, and eight China locations during the quarter. It said North America could support about 500 retail stores.
- No full-year revenue or earnings guidance is provided in the supplied filing text. Management said the retail environment remained challenging and consumers, particularly in North America and Japan, cautious; it cited growth opportunities, disciplined expense control, and available cash as supports for its plans. Results are seasonal, with historically higher sales and operating income in the holiday quarter.
- Operating cash flow was pressured by inventory and receivables investment. Risks highlighted include execution of growth plans, competition, international and currency exposure, economic and political conditions, fashion and consumer-preference shifts, cost control, seasonality, and protection of intellectual property.
- Foreign-exchange hedges generated derivative liabilities of $19.4 million at quarter-end; $12.1 million of net derivative losses in accumulated other comprehensive income were expected to be reclassified into earnings within 12 months. A $6.0 million auction-rate security remained illiquid after unsuccessful auctions, with underlying investments scheduled to mature in 2035.
- The company changed the income-statement classification of interest and penalties on uncertain tax positions, applying the change retrospectively. It affected classification between interest income, net, and income-tax provision, but not net income. Management reported no material change to critical accounting policies otherwise.
- Routine legal proceedings were not expected by management to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
Investor verification priorities
- Confirm issuer identity: the filing is for Coach, Inc., notwithstanding the Tapestry, Inc. request metadata.
- Assess whether inventory growth and the resulting lower operating cash flow reflect seasonal holiday preparation or a sustained working-capital trend.
- Verify the assumptions behind planned $150 million fiscal-year capital expenditures, store expansion, and the remaining share-repurchase authorization.
- Monitor foreign-exchange exposure, hedge-related losses and liabilities, and the liquidity and valuation of the auction-rate security.
- Review the filing and subsequent company disclosures for full-year guidance, which is not clearly provided in this filing text.