Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
FORM 10-K

þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended July 2, 2005
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FORM 10-K

    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended July 1, 2006

or

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-16153

Coach,

COACH, Inc.

(Exact name of registrant as specified in its charter)


Maryland
52-2242751
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification No.)
516 West 34th Street, New York, NY10001
(Address of principal executive offices)
(Zip Code)

516 West 34th Street, New York, NY 10001

(Address of principal executive offices); (Zip Code)

(212) 594-1850

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:


Title of Each Class:Name of Each Exchange on which Registered
Common Stock, par value $.01 per shareNew York Stock Exchange

Securities registered pursuantRegistered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.            Yes           No   

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.       Yes           No   

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.            Yes   þ        No   o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’sregistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.            þ

Yes           No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer               Accelerated Filer               Non-accelerated filer   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).            Yes   o        No   þ

The approximate aggregate market value of the voting and non-votingCoach, Inc. common stock held by non-affiliates as of December 31, 2005 (the last business day of the registrantmost recently completed second fiscal quarter) was approximately $11,881,719,882 as of September 2, 2005.$12.5 billion. For purposes of determining this amount only, the registrant has excluded shares of common stock held by directors and officers. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant.

On September 2, 2005,August 18, 2006, the Registrant had 380,115,103 outstanding365,864,183 shares of common stock outstanding, which is the Registrant’s only class of capital stock.

DOCUMENTS INCORPORATED BY REFERENCE


DocumentsForm 10-K Reference
Proxy Statement for the 2006 Annual Meeting of StockholdersPart III, Items 10 - 14



COACH, INC.

TABLE OF CONTENTS FORM 10-K


  Page
Number
NumberPART I
ITEM 1.
PART I
Item 1.
Business of Coach, Inc. and 1
ITEM 1A.Risk Factors310
Item 2.ITEM 1B.
PropertiesUnresolved Staff Comments1215
ITEM 2.Properties12
ItemITEM 3.Legal Proceedings1513
ItemITEM 4.
Submission of Matters to a Vote of Security Holders1613
PART II
PART II
ItemITEM 5.
Market for Registrant’s Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities1719
ItemITEM 6.
Selected Financial Data2018
ItemITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations2119
ItemITEM 7A.
Quantitative and Qualitative Disclosures about Market Risk3230
ItemITEM 8.
Financial Statements and Supplementary Data3331
ItemITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure3331
ItemITEM 9A.
Controls and Procedures3331
ITEM 9B.Other Information32
PART III
ItemITEM 10.
Directors and Executive Officers of the Registrant3432
ItemITEM 11.
Executive Compensation3432
ItemITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters3432
ItemITEM 13.
Certain Relationships and Related Transactions3432
ItemITEM 14.
Principal Accountant Fees and ServiceServices3334
PART IV
PART IV
ItemITEM 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K34
SIGNATURES3335
EX-4.1: AMENDED AND RESTATED RIGHTS AGREEMENT    SIGNATURES34
EX-10.23: AMENDMENT TO LEW FRANKFORT EMPLOYMENT AGREEMENT
EX-10.24: AMENDMENT TO REED KRAKOFF EMPLOYMENT AGREEMENT
EX-10.25: AMENDMENT TO KEITH MONDA EMPLOYMENT AGREEMENT
EX-21.1: LIST OF SUBSIDIARIES
EX-23.1: CONSENT OF DELOITTE & TOUCHE LLP
EX-31.1: CERTIFICATIONS
EX-32.1: CERTIFICATIONS

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      Founded in 1941, Coach has grown from a family-run workshop in a Manhattan loft to a leading American designer and marketer
Table of high-quality, modern American classic accessories. Coach developed its initial expertise in the small-scale production of classic, high-quality leather goods constructed from “glove-tanned” leather with close attention to detail. Coach sells its products worldwide through its own retail stores, select department stores, its online store and its catalogs. Coach has built upon its brand awareness in the United States by expanding into international markets, particularly in Japan and East Asia, diversifying its product offerings beyond leather handbags, further developing its multi-channel distribution strategy and licensing products with the Coach brand name.
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SPECIAL NOTE ON FORWARD-LOOKING INFORMATION

This document and the documents incorporated by reference in this document contain certain forward-looking statements based on management’s current expectations. These statements can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “intend,” “estimate,” “are‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘estimate,’’ ‘‘are positioned to,” “continue,” “project,” “guidance,” “forecast,” “anticipated,”’’ ‘‘continue,’’ ‘‘project,’’ ‘‘guidance,’’ ‘‘forecast,’’ ‘‘anticipated,’’ or comparable terms.

Coach’s actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in the sections of this Form 10-K filing entitled “Risk Factors”‘‘Risk Factors’’ and “Management’s‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations.”’’ These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of the forward-looking statements contained in this Form 10-K.

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PART I

Item 1.

ITEM 1.    Business of Coach, Inc.

OVERVIEW
Coach, isInc.

OVERVIEW

Coach, Inc. was founded in 1941 and acquired by Sara Lee Corporation (‘‘Sara Lee’’) in 1985. In June 2000, Coach was incorporated in the state of Maryland. In October 2000, Coach was listed on the New York Stock Exchange and sold approximately 68 million shares of common stock, split adjusted, representing 19.5% of the outstanding shares. In April 2001, Sara Lee completed a distribution of its remaining ownership in Coach via an exchange offer, which allowed Sara Lee stockholders to tender Sara Lee common stock for Coach common stock. When used herein, the terms ‘‘Coach,’’ ‘‘Company,’’ ‘‘we,’’ ‘‘us’’ and ‘‘our’’ refer to Coach, Inc., including consolidated subsidiaries.

Coach has grown from a family-run workshop in a Manhattan loft to the leading American designer and marketer of high-quality, modern American classicpremium handbags and accessories. Coach believes that it is one of the most recognized fine accessories brands in the U.S. and in targeted international markets. Coach’s primary product offerings include handbags,We offer luxury lifestyle accessories business cases, outerwear and related accessories and weekend and travel accessories. Together with its licensing partners, Coach also offers watches, footwear, eyewear and office furniture with the Coach brand name. Net sales were $1,710.4 million in the year ended July 2, 2005 (“fiscal 2005”), $1,321.1 million in the year ended July 3, 2004 (“fiscal 2004”) and $953.2 million in the year ended June 28, 2003 (“fiscal 2003”). Operating income was $621.8 million in fiscal 2005, $444.5 million in fiscal 2004 and $243.8 million in fiscal 2003.

      Coach’s products are sold through a number of direct-to-consumer channels, which at the end of fiscal 2005 included:
• 193 North American retail stores;
• 82 North American factory stores;
• the Internet; and
• the Coach catalog.
      Coach’s direct-to-consumer business represented approximately 55% of its total sales in fiscal 2005.
      Coach’s remaining sales were generated from products sold through a number of indirect channels, which at the end of fiscal 2005 included:
• approximately 1,000 department store locations in the U.S.;
• 94 international department store, retail store and travel shopping locations in 19 countries;
• 103 department store shop-in-shops, and retail and factory store locations operated by Coach Japan, Inc.; and
• Business to business.
      Over the last several years, Coach has successfully transformed itself from a manufacturer of traditionally styled classic leather products to a marketer ofloyal and rapidly growing customer base and provide consumers with fresh, relevant and innovative products that are extremely well made, at an attractive price. Coach’s modern, fashionable handbags and accessories usinguse a broaderbroad range of high quality fabrics and materials. Today, Coach’sIn response to our customer's demands for both fashion and function, Coach offers updated styles and multiple product categories which address an increasing portion of its consumer’sour consumer's accessory wardrobe by responding to its customer’s demands for both fashion and function. Along with the rejuvenation of the product line,wardrobe. Coach has created a similarlysophisticated, modern and inviting environment to showcase its product assortment and reinforce a consistent brand position.position wherever the consumer may shop. Finally, Coach has establishedwe utilize a flexible, cost-effective global sourcing model, in which independent manufacturers supply virtually all of itsour products, allowing Coach to bring its broaderbroad range of products to market more rapidly and efficiently.

In order to expand our presence in the Japanese market and to exercise greater control over our brand in that country, Coach has developedJapan, Inc. was formed in June 2001 as a joint venture with Sumitomo Corporation. On July 1, 2005, we purchased Sumitomo’s 50% interest in Coach Japan, Inc., (‘‘Coach Japan’’) resulting in Coach Japan becoming a 100% owned subsidiary of Coach, Inc.

Coach offers a number of key differentiating elements that set it apart from the competitive landscape including:

A Distinctive Brand — – Coach is one of America’s leadingoffers distinctive, easily recognizable, accessible luxury accessories brands, offering an aspirational productproducts that isare relevant, extremely well-made and provides exceptionalprovide excellent value.

A Market Leadership Position with Growing Share — – Coach is one of America’s leading premium handbag and accessories brand and each year, as itsour market share increases, our leadership position strengthens.

Coach’s Loyal and Involved Consumer — – Coach consumers have a specific emotional connection with the brand. Part of the Company’s everyday mission is to cultivate consumer relationships by strengthening this emotional connection.

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Multi-Channel International Distribution — This –This allows Coach to maintain a critical balance as results do not depend solely on the performance of a single channel or geographic area.
The Direct channel provides us with immediate, controlled access to consumers through Coach-owned stores in North America and Japan, the Internet and catalogs. The Indirect channel provides us with access to consumers via U.S. and international wholesale customers.

Coach is Innovative and Consumer-Centric — – Coach listens to its consumer through rigorous consumer research and strong customer orientation. Coach works to anticipate the consumer’s changing needs by keeping the product assortment fresh and relevant.

Coach believes that these differentiating elements have enabled the Company to offer a unique proposition into the marketplace. We hold the number one position within the U.S. premium handbags and accessories market place. In fiscal 2005, net sales increased 29.5%, operating income increased 39.9% and net income increased 48.5% compared to fiscal 2004. In fiscal 2004, net sales increased 38.6%, operating income increased 82.3%the number two position within the Japanese imported luxury handbags and net income increased 78.5% compared to fiscal 2003. Fiscal 2005 was a 52-week year, while fiscal 2004 was 53 weeks.accessories market.


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Growth Strategies

      Based on its established strengths,

In order to continue to expand our market share globally, Coach is pursuing two key growth strategies: first, increased global distribution, with an emphasis on our direct retail distribution in North America and Japan, and second, improving productivity.

Increased Global Distribution – The potential for distribution growth is significant in North America and Japan, as well as in emerging markets. Our primary focus is the following strategies for future growth:

Expand Market Share. Coach is drivingexpansion of Coach’s North American retail store base given the continued double-digit growth of the premium handbag and accessory category in the U.S. Over the next three years, we plan to add about 100 North American retail stores, bringing the store base to over 300 stores. We believe that North America, including Canada, can, over the next several years, support approximately 400 stores. In addition, we will continue to expand select, highly productive retail and factory locations. In Japan, we are continuing to aggressively expand market share bywith the consumer, primarily through distribution, including new stores and expansions, utilizing a similar multi-channel distribution model that we have established in the U.S. Based on our analysis, and the regional market opportunity we have just begun to realize, we estimate that Japan can support at least 180 Coach locations.

In addition to our two core markets, the U.S. and Japan, the Asian region represents an excellent growth opportunity as we partner with local distributors to grow Coach’s presence in this area. Today, there are over 75 locations in Asia excluding Japan, with the largest markets being Korea and Taiwan, where the emerging middle class along with the Japanese tourists, have created very attractive opportunities for us. We are also focused on Hong Kong as the gateway to greater China. We have begun to establish a presence in mainland China through two pilot stores in Beijing and Shanghai, and expect to open at least ten new locations over the next two to three years on the mainland.

Improving Productivity – By leveraging its leadershipour unique position as an accessible luxury lifestyle brand, we are building share in the rapidly growing North American women’s accessories market and gainingin the Japanese accessories market. There are four initiatives we have undertaken to maximize productivity:

Intensify awareness as a greater share of its consumer’s accessories wardrobe. Coach isyear-round gift resource.    We are intensifying awareness as an everyday accessorya year-round gift resource by offering aspirational, stylish, well-made product. As parta variety of this strategy, Coach is emphasizingproducts at a broader range of prices, providing perfect options for all gift-giving holidays. We continue to offer a wide assortment of products at competitive price points, as well as a full range of accessories at sharp price points, including wristlets, agendas, iPod cases, sunglasses, cell phone lanyards, and charms.

Develop under-penetrated categories and emphasize new usage occasions.    We are expanding our core collections and developing under-penetrated categories such as business totes, weekend casual, evening and baby bags. We continue to introduce product for new usage occasions, such as business totes, weekend casual and evening to address voids in our offerings. We strive to understand what our customers want and what they need to suit their lifestyle needs everyday. We work hard to have product that is both fashionable and functional, and by doing this we gain an even greater presence in our customers’ accessory wardrobe and give the Coach shopper additional reasons to visit and re-purchase.

Tiered merchandise strategy.    We introduced this strategy into our stores three years ago, offering items atmore sophisticated product in limited quantities in our flagship and fashion locations, while maintaining our core assortment in the greater number of Coach stores. Today, the balance has shifted as fashion locations represent the majority of our stores. We have elevated our customers’ expectations regarding product and found additional opportunities to graduate stores. We are experiencing significantly higher limited edition penetration, along with driving units per transaction by offering a broader rangeassortment of prices.

Grow North American Retail Store Base.add-on items and potential new categories. We believe that opportunity still remains to graduate stores from core to fashion, and fashion to flagship.

Enhance level of service in stores.    At Coach, believeswe want to be as well-known for excellent service as we are for great product. Great service builds loyalty and loyalty drives sales. While we pride ourselves on today’s service levels, we realize that it has a successful retailprogrammatic approach, reinforced by training and performance standards, will enhance the Coach shopping experience. The store format that reinforces its brand image, generates strong sales per square foot and can be readily adapted to different location requirements. The modernized store environment has an open, loft-like feeling, with crisp white brick walls and a timeless, uncluttered look. Over the next four to five years, Coach plans to open approximately 20 to 25 retail stores per year in North America. In both fiscal 2005 and fiscal 2004, Coach opened 19 new retail stores. It generally takes 60-90 days from the time Coach takes possession of a store to open it. In addition, Coachservice initiative is alsotwo-fold. First, we are expanding select highly productive locations. In fiscal 2005, seven stores were expanded. We expect to expand approximately seven stores in the fiscal year ending July 1, 2006 (“fiscal 2006”). We also expect to drive comparable store sales gains through improved conversion, as a result of Coach service initiatives and continued introduction of relevant new product offerings, generating higher average tickets and increasing units per transaction. In addition, we have evolved our in-store marketing programs to create a more satisfying, service-oriented shopping experience.program, making it easier for our customers


Expand Business with the Japanese Consumer Worldwide. Coach is aggressively raising brand awareness with the Japanese consumer. Japanese women spend four times more per capita globally on luxury accessories than her American counterpart, with approximately halfTable of her worldwide spending on these items occurring outside of Japan.
      In June 2001, we established Coach Japan, Inc., a joint venture with Sumitomo Corporation. We then acquired the existing distributors and expanded the number of locations and retail square footage. We have continued to grow market share and now hold the number two position within the imported luxury accessories market. On July 1, 2005, we completed the purchase of Sumitomo’s 50% interest in Coach Japan, Inc.
      Japanese consumers also seek to purchase luxury accessories when traveling internationally. In order to capitalize on this opportunity, we will continue to open image-enhancing locations wherever the Japanese consumer chooses Contents

to shop. Important U.S. travel destinations include Hawaii, California, New YorkCoach by Special Request, which we introduced two years ago, allows our customers to pre-order product or purchase styles that are not available when they visit a particular store, all on an automated system, and Florida. In these key locations,have them shipped directly to their home. Second, we strive to provideare elevating the Japanese consumer with a superior level of customer service tailored specifically to her needs, such as bilingual staff. In addition, a significant number of the International stores, which are operated byin our distributors, are located in key Japanese travel destinations such as South Korea and Hong Kong.

Improve Operational Efficiencies. Coach has upgraded and reorganized its manufacturing, distribution and information systems over the past several years to allow it to bring new and existing products to market more efficiently. While enhancing its quality control standards, Coach has shifted its manufacturing processes

4

from proprietary domestic factories to independent manufacturers in lower cost markets. As a result, Coach has increased its flexibility, improved its quality and lowered its costs. In fiscal 2005, Coach’s gross margin increased to 76.6% from 74.9% in fiscal 2004. This improvement was driven by a shift in channel mix, as our highest gross margin channels grew faster than the business as a whole; a shift in product mix, reflecting increased penetration of higher margin mixed material product and accessories; and sourcing cost initiatives. Coach expects these factors tostores. We continue to drive gross margin rate improvement.
Coach’s evolve our Coach service programs, focusing on additional opportunities to deliver consistent customer service through new tools and initiatives. This past year, through our smart scheduling initiative, overall labor hours were invested to deliver more consistent customer service. The success of this initiative was demonstrated in our fiscal 2006 results, as we were able to maintain conversion rates in full price stores on higher traffic, and improve conversion in the factory stores.

Products

Handbags. Coach’s original

Coach's primary product offerings include handbags, women’s and men’s accessories, outerwear, business, the design, manufacturetravel, watches, footwear and distribution of fine handbags,eyewear.

Handbags    Handbag sales accounted for approximately 64%67% of net sales in fiscal 2005.2006. Coach makes monthly offerings of its handbag collections, featuring classically inspired designs as well as fashion trend designs. Typically, there are three to four collections per quarter and four to seven styles per collection, depending on the concept and opportunity.

Accessories. Women’scollection.

Accessories    Women's accessories, consisting of wallets,money pieces, wristlets, cosmetic cases, key fobs, belts, electronic accessories and belts,all other small leather accessories represented approximately 20%23% of Coach’sCoach's net sales in fiscal 2005. Coach’s small leather goods2006. Our women’s accessories collections are coordinated with our handbags. Men’sMen's accessories, consisting of belts, wallets and other small leather goods, represented approximately 3%2% of Coach’sCoach's net sales in fiscal 2005.

Business Cases. Business cases2006.

Outerwear, Gloves, Hats and Scarves    This category represented approximately 4%2% of Coach’sCoach's net sales in fiscal 2005. This category includes computer bags and messenger-style bags, as well as men’s and women’s totes.

Outerwear, Gloves, Hats and Scarves. This category represented approximately 3% of Coach’s net sales in fiscal 2005.2006. The assortment is approximately 88% women’sprimarily women's and contains a fashion assortment in all four components of this category.
Weekend

Business    Business cases represented approximately 1% of Coach's net sales in fiscal 2006. The assortment is primarily men’s and includes computer bags, messenger-style bags and totes.

Travel Accessories.    The Coach weekend and travel collections are comprised of cabin bags, duffels, suitcases, garment bagsluggage and a comprehensive collection of travel accessories. Weekend and travel accessoriesThis category represented approximately 1% of Coach’sCoach's net sales in fiscal 2005.

Watches.2006.

Watches    Movado Group, Inc. (“Movado”(‘‘Movado’’) has been Coach’sCoach's watch licensee since 1998 and has developed a distinctive collection of watches inspired primarily by both the women’s and men’s collections. These watches are primarily manufacturedwomen's collections with select men's styles. This category represented approximately 1% of Coach's net sales in Switzerland and are branded with the Coach name and logo.

Footwear.fiscal 2006.

Footwear    Jimlar Corporation (“Jimlar”(‘‘Jimlar’’) has been Coach’sCoach's footwear licensee since 1999. The footwear is developed and manufactured primarily in Italy andFootwear is distributed through more than 450500 locations in the U.S., including leading Coach retail stores and U.S. department stores. Approximately 98% of this business is in women’swomen's footwear, which coordinates with Coach handbags and employs fine materials, including calf and suede.

Eyewear. In the fallCoach’s handbag collections. This category represented approximately 2% of 2003, Coach eyewear was launched withCoach's net sales in fiscal 2006.

Eyewear    Marchon Eyewear (“Marchon”(‘‘Marchon’’) as the licensee.has been Coach’s eyewear licensee since 2003. The eyewear collection is a collaborative effort from Marchon and Coach that combines the Coach aesthetic for fashion accessories with the latest fashion directions in eyewear and sunglasses. Coach sunglasses are sold in Coach retail stores, department stores, select sunglass retailers and optical retailers in major markets. The ophthalmic collection is available through Marchon’s extensive network of optical retailers.

Office/ Home Office. Coach office furniture launched This category represented approximately 1% of Coach's net sales in the Fall of 2001 with Steelcase Inc. (“Steelecase”) as the licensee. Steelcase and Coach offer consumers high-end furniture products to outfit the home office and executive workplace.
fiscal 2006.

Design and Merchandising

      Coach’s

Coach's New York-based design team, led by its Executive Creative Director, is responsible for conceptualizing and directing the design of all Coach products. Designers have access to Coach’sCoach's extensive archives of product designs created over the past 60 years, which are a valuable resource for


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new product concepts. Coach designers are also supported by a strong merchandising team that analyzes sales, market trends and consumer preferences to identify business opportunities that help guide each season’sseason's design process. Merchandisers also analyze products to edit, add and delete styles to achieve profitable sales across all

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channels. Three product category teams, each comprised of design, merchandising/product development and sourcing specialists, help Coach execute design concepts that are consistent with the brand’sbrand's strategic direction.
      Coach’s

Coach's merchandising team works in close collaboration with our licensing partners to ensure that the licensed products, watches, footwear eyewear and office furniture,eyewear, are conceptualized and designed to address the intended market opportunity and convey the distinctive perspective and lifestyle associated with the Coach brand. While Coach’s licensing partners may employ their own designers,

Segments

Coach oversees the developmentoperates in two reportable segments: Direct-to-Consumer and Indirect. The reportable segments represent channels of their collection conceptsdistribution that offer similar products, service and the designmarketing strategies. See Note 11 of licensed products. Licensed products are also subjectNotes to Coach’s quality control standards and the Company exercises final approvalConsolidated Financial Statements for all new products prior to their sale.

Marketing
      Coach’s marketing strategy is to deliver a consistent message every time the consumer comes in contact with the Coach brand, through allsegment financial information.

Direct-to-Consumer Segment

The Direct-to-Consumer segment consists of its communications and visual merchandising. The Coach image is created internally and executed by the creative marketing, visual merchandising and public relations teams.

      In conjunction with promoting a consistent global image, Coach uses its extensive customer database and consumer knowledge to target specific products and communications to specific consumers to efficiently stimulate sales across all distribution channels.
      Coach engages in a wide range of direct marketing activities, including catalogs, brochures and email contacts, targeted to promote sales to consumers in their preferred shopping venue. As part of Coach’s direct marketing strategy, it uses its database consisting of approximately 8.2 million active U.S. households. Catalogs and email contacts are Coach’s principal means of communication and are sent to selected households to stimulate consumer purchases and build brand awareness. The growing number of visitors to the www.coach.com online store provides an opportunity to increase the size of this database. Coach’s online store, like its catalogs and brochures, provides a showcase environment where consumers can browse through a strategic offering of the latest styles and colors in order to increase both online and store sales as well as build brand awareness.
      In the U.S. and Japan, Coach spent $28.1 million, or 2% of net sales in fiscal 2005, for national, regional and local advertising, primarily print and outdoor advertising, in support of its major selling seasons. Coach catalogs and www.coach.com also serve as effective brand communications vehicles, driving store traffic as well as direct-to-consumer sales.
      Coach also has a sophisticated consumer and market research capability, which helps us assess consumer attitudes and trends and gauge the likelihood of a product’s success in the marketplace prior to its introduction.
Channels of Distribution
Direct Channels
      Coach has four different direct channels that provide itus with immediate, controlled access to consumers: retail stores and factory stores in North America and Japan, the Internet and catalogs. The direct-to-consumer channelsThis segment represented approximately 55%76% of Coach’sCoach's total net sales in fiscal year 2005.
2006, with North American stores and Coach Japan contributing approximately 54% and 20% of total net sales, respectively.

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North American Retail Stores. Coach’s retailStores    Our stores establish, reinforceare sophisticated, modern, and capitalize oninviting. They showcase the world of Coach and enhance the shopping experience while reinforcing the image of the Coach brand. Coach operates 193 retail stores in North America that are located in upscale regional shopping centers and metropolitan areas. It operatesOur flagship stores, which offer the broadest assortment of Coach products, are located in high-visibility locations such as New York, Chicago and San Francisco. The following table shows the number of Coach retail stores and their total and average square footage:


              
  Fiscal Year Ended
   
  July 2, July 3, June 28,
  2005 2004 2003
       
Retail stores  193   174   156 
 Net increase vs. prior year  19   18   18 
 Percentage increase vs. prior year  10.9%  11.5%  13.0%
Retail square footage  490,925   431,617   363,310 
 Net increase vs. prior year  59,308   68,307   61,809 
 Percentage increase vs. prior year  13.7%  18.8%  20.5%
Average square footage  2,544   2,481   2,329 
      Depending
 Fiscal Year Ended
 July 1,
2006		July 2,
2005		July 3,
2004
Retail stores218
193
174
Net increase vs. prior year25
19
18
Percentage increase vs. prior year13.0
%
10.9
%
11.5
%
Retail square footage562,553
490,925
431,617
Net increase vs. prior year71,628
59,308
68,307
Percentage increase vs. prior year14.6
%
13.7
%
18.8
%
Average square footage2,581
2,544
2,481

The retail stores carry an assortment of products depending on their size and location, the retail stores present product lines that include handbags, business cases, wallets, footwear, watches, weekend and travel related accessories.location. The modern store design creates a distinctive environment that showcases these various products. Store associates are trained to maintain high standards of visual presentation, merchandising and customer service. The result is a complete statement of the Coach modern American style at the retail level.

North American Factory Stores. Coach’s 82Stores    Coach's factory stores serve as an efficient means to sell manufactured-for-factory-store product, including factory exclusives, as well as discontinued and irregular inventory outside the retail channel. These stores operate under the Coach Factory name and are geographically positioned primarily in established centers that are usually betweengenerally more than 50 to 100 


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miles from major markets. The following table shows the number of Coach factory stores and their total and average square footage:


              
  Fiscal Year Ended
   
  July 2, July 3, June 28,
  2005 2004 2003
       
Factory stores  82   76   76 
 Net increase vs. prior year  6   0   2 
 Percentage increase vs. prior year  7.9%  0%  2.7%
Factory square footage  252,279   231,355   232,898 
 Net increase vs. prior year  20,924   (1,543)  13,391 
 Percentage increase vs. prior year  9.0%  (0.7)%  6.1%
Average square footage  3,077   3,044   3,064 
 Fiscal Year Ended
 July 1,
2006		July 2,
2005		July 3,
2004
Factory stores86
82
76
Net increase vs. prior year4
6
0
Percentage increase vs. prior year4.9
%
7.9
%
0
%
Factory square footage281,787
252,279
231,355
Net increase vs. prior year29,508
20,924
(1,543
)
Percentage increase vs. prior year11.7
%
9.0
%
(0.7
)%
Average square footage3,277
3,077
3,044

Coach’s factory store design, visual presentations and customer service levels support and reinforce the brand’sbrand's image. Through these factory stores, Coach targets value-oriented customers who would not otherwise buy the Coach brand. Prices are generally discounted from 10% to 50% below full retail prices. Through these

Coach Japan, Inc.    Coach Japan operates department store shop-in-shop locations as well as freestanding flagship, retail and factory stores. Flagship stores, which offer the broadest assortment of Coach targets both value-oriented customers who would not otherwise buyproducts, are located in select shopping districts of Japan. The following table shows the number of Coach brandJapan locations and dual channel shoppers.their total and average square footage:


Internet.
 Fiscal Year Ended
 July 1,
2006		July 2,
2005		July 3,
2004
Total locations118
103
100
Net increase vs. prior year15
3
7
Percentage increase vs. prior year14.6
%
3.0
%
7.5
%
Total square footage194,375
161,632
119,291
Net increase vs. prior year32,743
42,341
17,049
Percentage increase vs. prior year20.3
%
35.5
%
16.7
%
Average square footage1,647
1,569
1,193

Internet    Coach views its website as a key communications vehicle for the brand to promote traffic in Coach retail stores and department store locations and build brand awareness. However, ourOur internet business has grown to be significant, generating net sales of $41.7approximately $54 million in fiscal 2005.2006. The growth in the Internet business is driven by the strength of the overall Coach brand as well as advertising and email contacts. In fiscal 2006, there were approximately 40 million unique visitors to the website. In addition, the Company sent approximately 55 million emails to strategically selected customers in fiscal 2006. Like Coach catalogs, and brochures, the online store provides a showcase environment where consumers can browse through a selected offering of the latest styles and colors. Revenue from internet sales is recognized upon shipment of the product.

Catalog.

Catalog    In fiscal 2005,2006, the Company distributed approximately 5.57.6 million catalogs in Coach stores in North America and Japan and mailed Coachapproximately 4.1 million catalogs to about 2.4 million strategically selected U.S. households from its database of customers. While direct mail sales comprise a small portion of Coach’sCoach's net sales, Coach views its catalog as a

7

key communications vehicle for the brand because it promotes store traffic, and facilitates the shopping experience in Coach retail stores and builds brand awareness. As an integral component of our communications strategy, the graphics, models and photography are upscale and modern and present the product in an environment consistent with the Coach brand position. The catalogs highlight selected products and serve as a reference for customers, whether ordering through the catalog, making in-store purchases or purchasing over the Internet.


Indirect Channels
Table of Contents

Indirect Segment

Coach began as a U.S. wholesaler to department stores and this channelsegment remains very important to itsour overall consumer reach. Coach has grown its indirect business by the formation of Coach Japan and workingToday, we work closely with itsour partners, both domestic and international, to ensure a clear and consistent product presentation. The indirect channel represented approximately 45%24% of total net sales in fiscal 2005.

Coach Japan, Inc. Coach is aggressively expanding market share2006, with U.S. Wholesale and raising brand awareness with the Japanese consumer, primarily by opening flagshipInternational Wholesale representing approximately 11% and freestanding stores. As of July 2, 2005, there were 103 Coach-operated locations in Japan, including 76 department store shop-in-shops, seven flagship locations, and nine retail and 11 factory stores. The seven flagship stores, which offer the broadest assortment of Coach products, are located in select shopping districts of Japan. Coach Japan plans to open at least one additional flagship location and more than ten other locations in fiscal 2006. In addition, to strengthen Coach’s presence in premier department stores, Coach Japan is expanding select highly productive shop-in-shops in these department stores. Coach Japan expanded 14 locations during fiscal 2005 and plans to expand an additional eight locations during fiscal 2006. Lastly, Coach Japan is driving sales through improved store productivity by providing distinctive newness to the Japanese marketplace, where innovation is key. This channel represented approximately 22%7% of total net sales, in fiscal 2005. The following table shows the number of Coach Japan locations and their total and average square footage:
              
  Fiscal Year Ended
   
  July 2, July 3, June 28,
  2005 2004 2003
       
Total locations  103   100   93 
 Net increase vs. prior year  3   7   10 
 Percentage increase vs. prior year  3.0%  7.5%  12.0%
Total square footage  161,632   119,291   102,242 
 Net increase vs. prior year  42,341   17,049   25,267 
 Percentage increase vs. prior year  35.5%  16.7%  32.8%
Average square footage  1,569   1,193   1,099 
      In June 2001, Coach and Sumitomo Corporation (“Sumitomo”) commenced a joint venture to form Coach Japan, Inc., in order to operate the Coach business in Japan. During fiscal 2002, Coach Japan acquired the prior distributors of Coach products in Japan in order to expand its presence in the Japanese market and to exercise greater control over its brand in that country. On July 1, 2005, Coach completed the purchase of Sumitomo’s 50% interest in Coach Japan, Inc.
respectively.

U.S. Wholesale. Coach’s products are sold to approximately 1,000 U.S. wholesale locations.Wholesale    This channel represented approximately 11% of total net sales in fiscal 2005. Coach’s net sales to U.S. wholesale customers grew 33.1% in fiscal 2005 from fiscal 2004. This channel offers access to Coach products to consumers who prefer shopping at department stores, or who live in geographic areas that are currently not large enough to support a Coach retail store. Recognizingstore, access to Coach products. While overall U.S. department store sales have been lackluster the last few years, the handbag and accessory category within this channel has remained strong, in large part due to the strength of Coach. Therefore, the department stores continue to devote increased square footage to Coach, providing an additional driver to this channel’s growth.

Coach recognizes the continued importance of U.S. department stores as a distribution channel for premier accessories, Coach continuesaccessories. We continue to fine-tune itsour strategy to increase productivity and drive volume by enhancing presentation, primarily thoughthrough the creation of more shop-in-shops, and the introduction of caseline enhancements with proprietary Coach fixtures.fixtures, while exiting lower performing doors and working with the department stores to re-allocate their Coach spending to higher volume locations. Coach has also improved the wholesale product planning and allocation processes and custom tailors assortments to better match the attributes of our department store consumers in each local market. Coach’sNet sales to U.S. wholesale customers grew 23% in fiscal 2006 from fiscal 2005. Coach's products are sold in approximately 900 U.S. wholesale locations. Our most significant U.S. wholesale

8

customers are Federated Department Stores (including Macy’s and Bloomingdale’s), May Co. (includingMacy's, Bloomingdale's, Lord and Taylor, Marshall Fields and Filene’s), Dillard’s,Dillard's, Nordstrom and Saks, Inc. (including Saks Fifth Avenue and Parisian). Store closures resulting from the recent Federated Department Stores and May Co. merger aredid not expected to have a significant impact on Coach’s U.S. wholesale business.

International Wholesale. Coach’s international business, whichWholesale    This channel represents approximately 6% of total net sales in fiscal 2005, is generated through sales to international wholesale distributors and authorized retailers. Within the international arena, the largest portion of sales is currently the traveling Japanese consumer. However, we continue to drive growth by expanding our distribution to reach local consumers in emerging markets. Coach has developed relationships with a select group of distributors who market Coach products through department stores, freestanding retail locations and specialty retailers in 1918 countries. Coach’sCoach's current network of international distributors serves markets such as Korea, the U.S.United States (primarily Hawaii and Guam), South Korea, Hong Kong, Guam, Taiwan, Singapore, Australia, Japan, Mexico, Saudi Arabia, China,Australia, Mexico, Thailand, Malaysia, the Caribbean, Thailand,China, New Zealand and Malaysia.France. For locations not in freestanding stores, Coach has created shop-in-shops and other image-image enhancing environments to increase brand appeal and stimulate growth. Within the international arena, the primary focus is the traveling Japanese consumer and the local market domestic consumer. Coach targets the Japanese consumer in areas with significant levels of Japanese tourism as per capita spending on luxury accessories by Japanese consumers is substantially greater than that in the U.S. Coach continues to improve productivity in this channel by opening larger image-enhancing locations, expanding existing stores and closing smaller, less productive stores. Coach’sCoach's most significant international wholesale customers are the DFS Group, theLotte Group, Shilla Group, Lotte Group and Tasa Meng Corp.

and Imaginex.

The following table shows the number of international retail stores, international department store locations and other internationalwholesale locations at which Coach products are sold:


             
  Fiscal Year Ended
   
  July 2, July 3, June 28,
  2005 2004 2003
       
International freestanding stores  14   18   18 
International department store locations  58   70   49 
Other international locations  22   27   40 
          
Total international wholesale locations  94   115   107 
          
 Fiscal Year Ended
 July 1,
2006		July 2,
2005		July 3,
2004
International freestanding stores21
14
18
International department store locations63
58
70
Other international locations24
22
27
Total international wholesale locations108
94
115

Business to Business.Business    As part of the indirect channel of distribution, Coach sells products to corporations and distributors for incentive and gift-giving programs.


Licensing.Table of Contents

Licensing    In our licensing relationships, Coach takes an active role in the design process and controls the marketing and distribution of products under the Coach brand. The current licensing relationships as of July 2, 20051, 2006 are as follows:


License
LicensingIntroductionExpiration
CategoryLicensing PartnerIntroduction DateTerritoryLicense
Expiration Date
WatchesMovadoSpring ’98'98U.S. and Japan2008
FootwearJimlarSpring ’99'99U.S.2008
EyewearMarchonFall ’03'03Worldwide2011
Office furnitureSteelcaseFall ’01U.S.2006

Products made under license are, in most cases, sold through all of the channels discussed above and, with Coach’sCoach's approval, these licensees have the right to distribute Coach brand products selectively through several other channels: shoes in department store shoe salons, watches in selected jewelry stores and eyewear in selected optical retailers. These venues provide additional, yet controlled, exposure of the Coach brand. Coach’sCoach's licensing partners pay royalties to Coach on their net sales of Coach branded products. However, such royalties are not material to the Coach business as they currently comprise less than 1% of Coach’s total revenues. The licensing agreements generally give Coach the right to terminate the license if specified sales targets are not achieved.

9Marketing

Manufacturing
      DuringCoach’s marketing strategy is to deliver a consistent message each time the past several years,consumer comes in coordinationcontact with the repositioningCoach brand, through our communications and visual merchandising. The Coach image is created internally and executed by the creative marketing, visual merchandising and public relations teams. Coach also has a sophisticated consumer and market research capability, which helps us assess consumer attitudes and trends and gauge the likelihood of a product’s success in the marketplace prior to its introduction.

In conjunction with promoting a consistent global image, Coach uses its extensive customer database and consumer knowledge to target specific products and communications to specific consumers to efficiently stimulate sales across all distribution channels.

Coach engages in several consumer communication initiatives, including direct marketing activities and national, regional and local advertising. In fiscal 2006, consumer contacts increased 16% to over 100 million. However, the Company continues to leverage marketing expenses. Total expenses related to consumer communications in fiscal 2006 were $36 million, representing less than 2% of net sales.

Coach’s wide range of direct marketing activities includes catalogs, brochures and email contacts, targeted to promote sales to consumers in their preferred shopping venue. In addition to building brand awareness, Coach catalogs and www.coach.com serve as effective brand communications vehicles by providing a showcase environment where consumers can browse through a strategic offering of the latest styles and colors, which drives store traffic.

As part of Coach's direct marketing strategy, it uses its database consisting of approximately 9.7 million active U.S. households. Catalogs and email contacts are Coach's principal means of communication and are sent to selected households to stimulate consumer purchases and build brand awareness. The rapidly growing number of visitors to the www.coach.com online store provides an opportunity to increase the size of this database.

The Company also runs national, regional and local advertising campaigns, primarily print and outdoor advertising, in support of its brand, Coach has refined its production capabilitiesmajor selling seasons.

Manufacturing

All of our products are manufactured by shifting its production from owned domestic facilities to independent manufacturers in lower cost markets. These independent manufacturers can support a broader mix of product types, materials and a seasonal influx of new, more fashion oriented styles. During fiscal year 2005, approximately 65% of Coach’s total net sales were generated from products introduced within the fiscal year. At the same time, by designating a significant number of the new styles as “limited editions” that are planned to be offered for a brief time and then replaced with fresh new products,manufacturers. However, we help manage total inventory and limit our exposure to excess and obsolete inventory.

      Coach developed a flexible manufacturing model that meets shifts in marketplace demand and changes in consumer preferences. It uses two main sources to make Coach products: outsourcing with skilled partners and production by its licensing partners. All product sources must achieve and maintain Coach’s high quality standards, which are an integral part of the Coach identity. One of Coach’s keys to success lies in the rigorous selection of raw materials. Coach has longstanding relationships with purveyors of fine leathers and hardware. As Coach moved its production to external sources, it has maintained control of the supply chain from design through manufacture. We are able to do this by qualifying all raw materials that are used in all of its products, wherever they are made. Compliance is monitored with the quality control standards through on-site quality inspections at all independent manufacturing facilities.
      All of Coach’s fiscal year 2005 product requirements were suppliedmaterial suppliers and by independent manufacturers. Coach buys independently manufactured products from many countries, including China, Hong Kong, Italy, India, Singapore, South Korea, Spain, Turkey, Costa Rica, Hungary, Indonesia, Thailand, Taiwan and Philippines. Coach operatesmaintaining sourcing offices in Hong Kong, China and South Korea that work closely with our sourced vendors.independent manufacturers. Coach also operates a European sourcing and


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product development organization based in Florence, Italy that works closely with the New York design team. This broad-based, multi-country manufacturing strategy is designed to optimize the mix of cost, lead times and construction capabilities. We have increased the presence of our senior management at the manufacturers’ facilities to enhance control over decision making and ensure the speed with which we bring new product to market is maximized.

These independent manufacturers can support a broader mix of product types, materials and a seasonal influx of new, more fashion oriented styles, which allows us to meet shifts in marketplace demand and changes in consumer preferences. During fiscal year 2006, approximately 70% of Coach's total net sales were generated from products introduced within the fiscal year. At the same time, by designating a significant number of the new styles as ‘‘limited editions’’ that are planned to be offered for a brief time and then replaced with fresh new products, we help manage total inventory and limit our exposure to excess and obsolete inventory.

All product sources, including independent manufacturers and licensing partners, must achieve and maintain Coach's high quality standards, which are an integral part of the Coach identity. One of Coach's keys to success lies in the rigorous selection of raw materials. Coach has longstanding relationships with purveyors of fine leathers and hardware. As Coach has moved its production to external sources, it has maintained control of the raw materials that are used in all of its products, wherever they are made. Compliance with quality control standards is monitored through on-site quality inspections at all independent manufacturing facilities.

Coach carefully balances its commitments to a limited number of “better brand”‘‘better brand’’ partners with demonstrated integrity, quality and reliable delivery. Our manufacturers are located in many countries, including China, Hungary, India, Italy, Korea, Philippines, Singapore, Spain, Taiwan, Thailand and Turkey. No one vendor provides more than 16%15% of Coach’s total units. Before partnering with a vendor, Coach evaluates each facility by conducting a quality and business practice standards audit. Periodic evaluations of existing, previously approved facilities are conducted on a random basis. We believe that all of our manufacturing partners are in compliance with Coach’s integrity standards.

Distribution

Coach operates a warehousing, distribution, consumer service and repair facility in Jacksonville, Florida. This computerized,automated, 560,000 square foot facility uses a bar code scanning warehouse management system. Coach’sCoach's distribution center employees use handheld opticalradio frequency scanners to read product bar codes, which allow them to more accurately process and pack orders, track shipments, manage inventory and generally provide better service to our customers. Coach’sCoach's products are primarily shipped via Federal Express and common carrier to Coach retail stores and wholesale customers and via Federal Express and common carrier, and direct to consumers.

consumers via Federal Express.

During 2006, the Jacksonville facility was redesigned, without increasing the building’s square footage, to increase storage and processing capacity. This redesign will enable us to maximize the storage capacity of the building and also increase processing capability and output per associate. We expect that the facility’s increased capacity can support the projected sales growth of the Company during the next few years.

Management Information Systems

The foundation of Coach’sCoach's information systems is its Enterprise Resource Planning system. This fully integrated system supports all aspects of finance and accounting, procurement, inventory control, sales and store replenishment. The system functions as a central repository for all of Coach’sCoach's transactional information, resulting in increased efficiencies, improved inventory control and a better understanding of consumer demand. This system is fully scalable to accommodate rapid growth.

Complementing its Enterprise Resource Planning system are several other system solutions, each of which Coach believes is well suited for its needs. The data warehouse system summarizes the transaction information and provides a single platform for all management reporting. The supply chain management system supports corporate sales and inventory functions, creating a monthly demand plan


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and reconciling production/procurement with financial plans. Product fulfillment is facilitated by Coach’sCoach's highly automated warehouse management system and electronic data interchange system, while the unique requirements of

10

Coach’s Coach's Internet and catalog businesses are supported by Coach’s order management system. Finally, the point-of-sale system supports all in-store transactions, distributes management reporting to each store, and collects sales and payroll information on a daily basis. This daily collection of store sales and inventory information results in early identification of business trends and provides a detailed baseline for store inventory replenishment. Updates and upgrades of these systems are made on a periodic basis in order to ensure that we constantly improve our functionality. All complementary systems are integrated with the central Enterprise Resource Planning system.

Trademarks and Patents

Coach owns all of the material trademark rights used in connection with the production, marketing and distribution of all of its products, both in the U.S. and in other countries in which the products are principally sold. Coach also owns and maintains worldwide registrations for trademarks in all relevant classes of products in each of the countries in which Coach products are sold. Major trademarks includeCoach, Coach and lozenge designandCoach and tag designand it has applications pending for a proprietary“C”‘‘C’’ signature fabric design.design. Coach is not dependent on any one particular trademark or design patent although Coach believes that the Coach name is important for its business. In addition, several of Coach’sCoach's products are covered by design patents or patent applications. Coach aggressively polices its trademarks and trade dress, and pursues infringers both domestically and internationally. It also pursues counterfeiters domestically and internationally through leads generated internally, as well as through its network of investigators, the Coach hotline and business partners around the world.

      Coach’s

Coach's trademarks in the United States will remain in existence for as long as Coach continues to use and renew them on their expiration date. Coach has no material patents.

Employees

As of July 2, 2005,1, 2006, Coach employed approximately 5,7007,500 people, aboutincluding both full and part time employees. Of these employees, approximately 2,300 and 3,500 were full time and part time employees, respectively, in the retail field in North America and Japan. In addition, approximately 50 of which wereCoach’s employees are covered by collective bargaining agreements. Of the total, 3,600 are engaged in retail selling and administration positions, 400 are engaged in sourcing or distribution functions and 1,000 are employed through Coach Japan. The remaining employees are engaged in other aspects of the Coach business. Coach believes that its relations with its employees are good, and it has never encountered a strike or significant work stoppage.

Government Regulation

Most of Coach’sCoach's imported products are subject to existing or potential duties, tariffs or quotas that may limit the quantity of products that Coach may import into the U.S. and other countries or may impact the cost of such products. Coach has not been restricted by quotas in the operation of its business and customs duties have not comprised a material portion of the total cost of its products. In addition, Coach is subject to foreign governmental regulation and trade restrictions, including U.S. retaliation against certain prohibited foreign practices, with respect to its product sourcing and international sales operations.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge on our website, located atwww.coach.com, as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission. These reports are also available on the Securities and Exchange Commission’s website atwww.sec.gov. www.sec.gov. No information contained on any of our websites is intended to be included as part of or incorporated by reference into this Annual Report on Form 10-K.


Table of Contents

ITEM 1A.    Risk Factors

11

RISK FACTORS
You should consider carefully all of the information set forth or incorporated by reference in this document and, in particular, the following risk factors associated with the Business of Coach and forward-looking information in this document. Please also see “Special‘‘Special Note on Forward-Looking Information”Information’’ at the beginning of this report. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently deem immaterial may also have an adverse effect on page 2.
us. If Coachany of the risks below actually occur, our business, results of operations, cash flows or financial condition could suffer.

The growth of our business depends on the successful execution of our growth strategies.

Our growth depends on the continued success of existing products, as well as the successful design and introduction of new products. Our ability to create new products and to sustain existing products is affected by whether we can successfully anticipate and respond to consumer preferences and fashion trends. The failure to develop and launch successful new products could hinder the growth of our business. Also, any delay in the development or launch of a new product could result in our not being the first to market, which could compromise our competitive position.

Significant competition in our industry could adversely affect our business.

We face intense competition in the product lines and markets in which we operate. Our competitors include private label retailers, including some of Coach’s wholesale customers, as well as other well known handbags and accessories companies. There is a risk that our competitors may develop new products that are more popular with our customers. We may be unable to successfully implement itsanticipate the timing and scale of such product introductions by competitors, which could harm our business. Our ability to compete also depends on the strength of our brands, whether we can attract and retain key talent, and our ability to protect our trademarks and design patents. A failure to compete effectively could adversely affect our growth strategies or manage its growing business, its futureand profitability.

We face risks associated with operating resultsin international markets.

We operate on a global basis, with approximately 25% of our net sales coming from operations outside the U.S. However, sales to our international wholesale customers are denominated in U.S. dollars. While geographic diversity helps to reduce the Company’s exposure to risks in any one country, we are subject to risks associated with international operations, including, but not limited to:

• changes in exchange rates for foreign currencies, which may adversely affect the retail prices of our products and result in decreased international consumer demand or increase our supply costs in those markets,
• political or economic instability or changing macroeconomic conditions in our major markets, and
• changes in foreign or domestic legal and regulatory requirements resulting in the imposition of new or more onerous trade restrictions, tariffs, embargoes, exchange or other government controls.

We monitor our foreign currency exposure in Japan to minimize the impact on earnings of foreign currency rate movements through foreign currency hedging of Coach Japan’s U.S. dollar denominated inventory purchases. We cannot ensure, however, that these hedges will succeed in offsetting any negative impact of foreign currency rate movements.

A downturn in the economy could suffer.

      Successful implementationaffect consumer purchases of Coach’s strategiesluxury items and initiatives will require it to manage its growth. To manage growth effectively, Coach will need to continue to increase its outsourced manufacturing while maintaining strict quality control. Coach will also need to continue to improve its operating systems to respond to any increased demand. It could suffer a lossadversely affect our business.

Many factors affect the level of consumer goodwillspending in the premium handbag and aaccessories market, including, among others, general business conditions, interest rates, the availability of consumer credit, taxation and consumer confidence in future economic conditions. Consumer


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purchases of discretionary luxury items, such as Coach products, tend to decline during recessionary periods, when disposable income is lower. A downturn in sales ifthe economies in which Coach sells its products domay adversely affect Coach’s sales.

Our business is subject to the risks inherent in global sourcing activities.

As a company engaged in sourcing on a global scale, we are subject to the risks inherent in such activities, including, but not continue to meet its quality control standardslimited to:

• availability of raw materials,
• compliance with labor laws and other foreign governmental regulations,
• disruptions or delays in shipments,
• loss or impairment of key manufacturing sites,
• product quality issues,
• political unrest,
• as well as natural disasters, acts of war or terrorism and other external factors over which we have no control.

While we have business continuity and contingency plans for our sourcing sites, significant disruption of manufacturing for any of the above reasons could interrupt product supply and, if it is unable to adequately respond to increases in consumer demand for its products.

Coach’s inability to respond to changes in consumer demands and fashion trendsnot remedied in a timely manner, could adversely affect its sales.
      Coach’s success dependshave an adverse impact on its ability to identify, originate and define product and fashion trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. Its products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and areour business.

Our business is subject to rapid change. Coach cannot assure that it will be able to continue to develop appealing styles or meet changing consumer demands in the future.

If Coach misjudges the demand for its products it may incur increased costs due to excess inventories.
inventories if we misjudge the demand for our products.

If Coach misjudges the market for its products it may be faced with significant excess inventories for some products and missed opportunities for other products. In addition, because Coach places orders for products with its manufacturers before it receives wholesale customers’ orders, it could experience higher excess inventories if wholesale customers order fewer products than anticipated.

Competition in the markets in which Coach operates is intense, and our competitors may develop products that are more popular with consumers.
      Coach faces intense competition in the product lines and markets in which it operates. Coach’s products compete with other brands of products within their product category and with private label products sold by retailers, including some of Coach’s wholesale customers. In its wholesale business, Coach competes with numerous manufacturers, importers and distributors of handbags, accessories and other products for the limited space available for the display of these products to the consumer. Moreover, the general availability of contract manufacturing allows new entrants easy access to the markets in which Coach operates, which may increase the number of competitors and adversely affect its competitive position and business. Finally, some of Coach’s competitors have achieved significant recognition for their brand names.
A downturn in the economy may affect consumer purchases of discretionary luxury items, which could adversely affect Coach’s sales.
      Many factors affect the level of consumer spending in the handbag and luxury accessories industry, including, among others, general business conditions, interest rates, the availability of consumer credit, taxation and consumer confidence in future economic conditions. Consumer purchases of discretionary luxury items, such as Coach products, tend to decline during recessionary periods, when disposable income is lower. A downturn in the economies in which Coach sells its products may adversely affect Coach’s sales.

12

Coach’s gross profit may decrease if it becomes unable to obtain its products from, or sell its products in, other countries due to adverse international events that are beyond its control.
      In order to lower its sourcing costs and increase its gross profit, Coach has shifted its production to independent non-U.S. manufacturers in lower-cost markets. Coach’s international manufacturers are subject to many risks, including foreign governmental regulations, political unrest, disruptions or delays in shipments, limits on production capacity, changes in local economic conditions and trade issues. These factors, among others, could influence the ability of these independent manufacturers to make or export Coach products cost-effectively or at all or to procure some of the materials used in these products. The violation of labor or other laws by any of Coach’s independent manufacturers, or the divergence of an independent manufacturer’s labor practices from those generally accepted as ethical by Coach or others in the U.S., could damage Coach’s reputation and force it to locate alternative manufacturing sources. Currency exchange rate fluctuations could increase the cost of raw materials or labor for these independent manufacturers, which they could pass along to Coach, resulting in higher costs and decreased margins for its products. If any of these factors were to render a particular country undesirable or impractical as a source of supply, there could be an adverse effect on Coach’s business, including its gross profit.
      Coach’s failure to continue to increase sales of its products in international markets could adversely affect its gross profit. International sales are subject to many risks, including foreign governmental regulations, foreign consumer preferences, political unrest, disruptions or delays in shipments to other nations, tourism and changes in local economic conditions. These factors, among others, could influence Coach’s ability to sell products successfully in international markets. Coach generally purchases products from international manufacturers in U.S. dollars and sells these products in the U.S. and to its international wholesale customers in U.S. dollars. However, Coach’s international wholesale customers sell Coach products in the relevant local currencies, and currency exchange rate fluctuations could adversely affect the retail prices of the products and result in decreased international consumer demand.
Coach’s business is subject to foreign exchange risk.
      Coach sells products to its international wholesale customers in U.S. dollars. However, those distributors sell Coach product in the relevant local currency. Currency exchange rate fluctuations could adversely affect the retail prices of the products and result in decreased international demand.
      The Company is exposed to market risk from foreign currency exchange rate fluctuations with respect to Coach Japan as a result of its U.S. dollar denominated inventory purchases. In order to manage this risk, Coach Japan enters into forward exchange contracts that allow them to obtain dollars at a rate that is set concurrent with the requisition of inventory. These contracts meet the definition of a derivative under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” As these contracts are entered into before the receipt of inventory, the contract rate may be higher or lower than market rates when the goods are received and the payment is completed. All contracts are fair valued at the end of each reporting period. If the derivative is designated as a cash flow hedge, effective subsequent changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the statement of operations when the hedged items affect earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings immediately. This non-cash charge or credit can result in fluctuations in the reported financial results.
      Coach consolidates the financial results of Coach Japan into its financial statements. The functional currency of Coach Japan is the Japanese yen. Operating results are converted to U.S. dollars based on the average exchange rate during the period and the balance sheet is converted to U.S. dollars based on the exchange rate at the end of the reporting period.
If Coach loses key management or design personnel or is unable to attract and retain the talent required for its business, its operating results could suffer.
      Coach’s performance depends largely on the efforts and abilities of its senior management and design teams. These executives and employees have substantial experience and expertise in Coach’s business and

13

have made significant contributions to its growth and success. Coach is a party to employment agreements with certain executives which provide for compensation and other benefits. The agreements also provide for severance payments under certain circumstances. The unexpected loss of services of one or more of these individuals could have an adverse effect on Coach’s business. As the business grows, Coach will need to attract and retain additional qualified personnel and develop, train and manage an increasing number of management level, sales and other employees. Coach cannot guarantee that it will be able to attract and retain personnel as needed in the future.
Coach’sOur operating results are subject to seasonal and quarterly fluctuations, which could adversely affect the market price of itsCoach common stock.

Because Coach products are frequently given as gifts, Coach has historically realized, and expects to continue to realize, higher sales and operating income in the second quarter of its fiscal year, which includes the holiday months of November and December. In addition, fluctuations in sales and operating income in any fiscal quarter are affected by the timing of seasonal wholesale shipments and other events affecting retail sales. However, over the past several years, we have achieved higher levels of growth in the non holiday quarters, which has reduced these seasonal fluctuations. We expect that these trends will continue and that we will continue to balance our year round business.

Coach’s trademark and other proprietary rights could potentially conflict with the rights of others and it may be inhibited from selling some of its products. If Coach is unable to protect its trademarks and other proprietary rights, others may sell imitation brand products.
      Coach believes that its registered and common law trademarks and design patents are important to its ability to create and sustain demand for Coach products. Coach cannot assure that it will not encounter trademark, patent or trade dress disputes in the future as it expands its product line and the geographic scope of its marketing. Coach also cannot assure that the actions taken by it to establish and protect its trademarks and other proprietary rights will be adequate to prevent imitation of its products or infringement of its trademarks and proprietary rights by others. The laws of some foreign countries may not protect proprietary rights to the same extent as do the laws of the U.S. and it may be more difficult for Coach to successfully challenge the use of its proprietary rights by other parties in these countries.
continue.

Provisions in Coach’s charter and bylaws, Maryland law or its “poison pill”‘‘poison pill’’ may delay or prevent an acquisition of Coach by a third party.

Coach’s charter and bylaws and Maryland law contain provisions that could make it harder for a third party to acquire Coach without the consent of Coach’s Board of Directors. Coach’s charter permits its Board of Directors, without stockholder approval, to amend the charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that Coach has the authority to issue. In addition, Coach’s Board of Directors may classify or reclassify any unissued shares of common stock or preferred stock and may set the preferences, rights and other terms of the classified or reclassified shares. Although Coach’s Board of Directors has no intention to do so at the present time, it could establish a series of preferred stock that could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for Coach’s common stock or otherwise be in the best interest of Coach’s stockholders.

On May 3, 2001 Coach declared a “poison pill”‘‘poison pill’’ dividend distribution of rights to buy additional common stock to the holder of each outstanding share of Coach’s common stock. Subject to limited


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exceptions, these rights may be exercised if a person or group intentionally acquires 10% or more of Coach’s common stock or announces a tender offer for 10% or more of the common stock on terms not approved by the Coach Board of Directors. In this event, each right would entitle the holder of each share of Coach’s common stock to buy one additional common share of Coach stock at an exercise price far below the then-current market price. Subject to certain exceptions, Coach’s Board of Directors will be entitled to redeem the rights at $0.001$0.0001 per right at any time before the close of business on the tenth day following either the public announcement that, or the date on which a majority of Coach’s Board of Directors becomes aware that, a person has acquired 10% or

14

more of the outstanding common stock. As of the end of fiscal 2005,2006, there were no shareholders whose common stock holdings exceeded the 10% threshold established by the rights plan.

Coach’s bylaws can only be amended by Coach’s Board of Directors. Coach’s bylaws also provide that nominations of persons for election to Coach’s Board of Directors and the proposal of business to be considered at a stockholders meeting may be made only in the notice of the meeting, by Coach’s Board of Directors or by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures of Coach’s bylaws. Also, under Maryland law, business combinations, including issuances of equity securities, between Coach and any person who beneficially owns 10% or more of Coach’s common stock or an affiliate of such person are prohibited for a five-year period unless exempted in accordance with the statute. After this period, a combination of this type must be approved by two super-majority stockholder votes, unless some conditions are met or the business combination is exempted by Coach’s Board of Directors. Coach’s Board has exempted any business combination with us or any of our affiliates from the five-year prohibition and the super-majority vote requirements.

      These and other provisions of Maryland law or Coach’s charter and bylaws could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for Coach’s common stock or otherwise be in the best interest of Coach’s stockholders.

ITEM 1B.    Unresolved Staff Comments

None.

ItemITEM 2.Properties

The following table sets forth the location, use and size of Coach’sCoach's distribution, corporate and product development facilities as of July 2, 2005,1, 2006, substantially all of which are leased. The leases expire at various times through 2016,2020, subject to renewal options.


Approximate
LocationUseSquare Footage
Approximate
Square
Footage
Jacksonville, FloridaDistribution and customerconsumer service560,000
New York, New YorkCorporate, sourcing and product development275,000
Carlstadt, New JerseyCorporate and product development225,000
Carlstadt, New JerseyCorporate and product development55,000
Tokyo, JapanCoach Japan, corporate20,000
Shenzhen, People’sPeople's Republic of ChinaQuality control18,000
Florence, ItalySourcing and product development16,000
Kowloon, Hong KongSourcing and quality control5,000
Seoul, South KoreaSourcing3,000

As of July 2, 2005,1, 2006, Coach also occupies 193218 retail and 8286 factory leased stores located in North America. Indirectly, through Coach Japan, Coach operates 103America and 118 department store shop-in-shops, and retail and factory store locations in Japan. Coach considers these properties to be in generally good condition and believes that its facilities are adequate for its operations and provide sufficient capacity to meet its anticipated requirements.


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ItemITEM 3.Legal Proceedings

Coach is involved in various routine legal proceedings as both plaintiff and defendant incident to the ordinary course of its business, including proceedings to protect Coach’s intellectual property rights, litigation instituted by persons alleged to have been injured upon premises within Coach’s control and litigation with present or former employees.

Although Coach’s litigation with present or former employees is routine and incidental to the conduct of Coach’s business, as well as for any business employing significant numbers of U.S.-based employees, such litigation can result in large monetary awards when a civil jury is allowed to determine compensatory and/or punitive damages for actions claiming discrimination on the basis of age, gender, race, religion, disability or other legally protected characteristic or for termination of employment that is wrongful or in violation of implied contracts. As part of its policing program for its intellectual property rights, from time to time, Coach files lawsuits in the U.S. and abroad alleging acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, trademark dilution and/or state or foreign law claims. At any given point in time, Coach may have one or more of such actions

15

pending. These actions often result in seizure of counterfeit merchandise and/or out of court settlements with defendants. From time to time, defendants will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of Coach’s intellectual properties.

Coach believes that the outcome of all pending legal proceedings in the aggregate will not have a material adverse effect on Coach’s business or consolidated financial statements.

Coach has not entered into any transactions that have been identified by the IRS as abusive or that have a significant tax avoidance purpose. Accordingly, we have not been required to pay a penalty to the IRS for failing to make disclosures required with respect to certain transactions that have been identified by the IRS as abusive or that have a significant tax avoidance purpose.

ItemITEM 4.Submission of Matters to a Vote of Security Holders
      None

None.

Executive Officers and Directors

The following table sets forth information regarding each of Coach’sCoach's executive officers and directors serving as of July 2, 2005:1, 2006:


NameAgePosition(s)(1)
Lew Frankfort5960
Chairman, Chief Executive Officer and Director
Keith Monda5960
President, Chief Operating Officer and Director
Reed Krakoff4142
President, Executive Creative Director
Michael Tucci4445
President, North AmericanAmerica Retail Division
Mike Devine4648
Senior Vice President, Chief Financial Officer and Chief Accounting Officer
Carole Sadler46
Senior Vice President, General Counsel and Secretary
Felice Schulaner45
Senior Vice President, Human Resources
Joseph Ellis(3)Ellis(3)6364
Director
Sally Frame Kasaks(2)(3)Susan Kropf6157
Director
Gary Loveman(2)Loveman(2)(3)4546
Director
Ivan Menezes(2)Menezes(2)(3)4647
Director
Irene Miller(2)Miller(2)(3)5354
Director
Michael Murphy(2)Murphy(2)(3)6869
Director
Jide Zeitlin42
Director
(1)Coach’sCoach's executive officers serve indefinite terms and may be appointed and removed by Coach’sCoach's board of directors at any time. Coach’sCoach's directors are elected at the annual stockholders meeting and serve terms of one year.
(2)Member of the audit committee.
(3)Member of the human resources and governance committee.

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Lew Frankforthas been involved with the Coach business for more than 25 years. He has served as Chairman and Chief Executive Officer of Coach since November 1995. He has also served as a member of Coach’s Board of Directors since June 1, 2000, the date of incorporation. Mr. Frankfort served as Senior Vice President of Sara Lee Corporation from January 1994 to October 2000. Mr. Frankfort was appointed President and Chief Executive Officer of the Sara Lee Champion, Intimates & Accessories group in January 1994, and held this position through November 1995. From September 1991 through January 1994, Mr. Frankfort held the positions of Executive Vice President, Sara Lee Personal Products and Chief Executive Officer of Sara Lee Accessories. Mr. Frankfort was appointed President of Coach in July 1985, after Sara Lee acquired Coach, and held this position through September 1991. Mr. Frankfort joined Coach in 1979 as Vice President of New Business Development. Prior to joining Coach, Mr. Frankfort held various New York City government management positions and served as Commissioner, New York City Agency for Child Development. Mr. Frankfort holds a Bachelor of Arts degree from Hunter College and an MBAM.B.A. in Marketing from Columbia University.

16

Keith Mondawas appointed Executive Vice President and Chief Operating Officer of Coach in June 1998 and President of Coach in February 2002. He has served as a member of Coach’s Board of Directors since June 1, 2000, the date of incorporation. Prior to joining Coach, Mr. Monda served as Senior Vice President, Finance & Administration and Chief Financial Officer of Timberland Company from December 1993 until May 1996, and was promoted to, and held the position of, Senior Vice President, Operations from May 1996 until January 1998. From May 1990 to December 1993, Mr. Monda served as Executive Vice President, Finance and Administration of J. Crew, Inc. Mr. Monda holds Bachelor of Science and Master of Arts degrees from Ohio State University.

Reed Krakoffwas appointed President, Executive Creative Director in September 1999 after joining Coach as Senior Vice President and Executive Creative Director in December 1996. Prior to joining Coach, Mr. Krakoff served as Senior Vice President, Marketing, Design & Communications from January 1993 until December 1996, and as Head Designer, Sportswear from April 1992 until January 1993 at Tommy Hilfiger USA, Inc. From July 1988 through April 1992, Mr. Krakoff served as a Senior Designer in Design and Merchandising for Polo/Ralph Lauren. Mr. Krakoff holds an A.A.S. degree in Fashion Design from Parsons School of Design and a Bachelor of Arts degree in Economics and Art History from Tufts University.

Michael Tuccijoined Coach as President, North AmericanAmerica Retail Division, in January 2003. Mr. Tucci joined Coach from Gap, Inc., where he held the position of Executive Vice President, Gap, Inc. Direct from May 2002 until January 2003. He held the position of Executive Vice President of Gap Body from April 2000 until May 2002. From April 1999 to May 2000, Mr. Tucci served as Executive Vice President, Customer Store Experience, Gap Brand. Between May 1996 and April 1999, Mr. Tucci served as Executive Vice President for GAP Kids and Baby Gap. He had joined Gap in December 1994 as Vice President of Merchandising for Old Navy. Prior to joining Gap, he served as President of Aeropostale, a specialty store division of Macy’s,Macy's, which culminated his twelve-year career with the company that included senior buying and merchandising roles. He joined Macy’sMacy's Executive Training Program from Trinity College, where he earned a Bachelor of Arts degree in English.

Mike Devinehas served as Senior Vice President and Chief Financial Officer and Chief Accounting Officer of Coach since December 2001. Prior to Joining Coach, Mr. Devine served as Chief Financial Officer and Vice President-Finance of Mothers Work, Inc. from February 2000 until November 2001. From 1997 to 2000, Mr. Devine was Chief Financial Officer of Strategic Distribution, Inc., a Nasdaq-listed industrial store operator. Previously, Mr. Devine was Chief Financial Officer at Industrial System Associates, Inc. from 1995 to 1997, and for the prior six years he was the Director of Finance and Distribution for McMaster-Carr Supply Co. Mr. Devine holds a Bachelor of Science degree in Finance and Marketing from Boston College and an MBAM.B.A. degree in Finance from the Wharton School of the University of Pennsylvania.

Carole Sadlerhas served as Senior Vice President, General Counsel and Secretary since May 2000. She joined Coach as Vice President, Chief Counsel in March 1997. From April 1991 until February 1997, Ms. Sadler was Vice President and Associate General Counsel of Saks Fifth Avenue.


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From September 1984 until March 1991, Ms. Sadler practiced law as a litigation associate in New York City, most recently at the firm of White & Case, and prior to that at Paskus Gordon & Mandel and Mound Cotton & Wollan. Ms. Sadler holds a Juris Doctor degree from American University, Washington College of Law, and a Bachelor of Arts degree,cum laude, in American Studies from Smith College.

Felice Schulanerjoined Coach as Senior Vice President, Human Resources in January 2000. Prior to joining Coach, Ms. Schulaner served as Senior Vice President, Human Resources of Optimark Technologies from February 1999 through December 1999 and as Senior Vice President, Human Resources of Salant Corporation from July 1997 through February 1999. Ms. Schulaner was Vice President, Worldwide Recruitment & Selection at American Express from July 1996 until June 1997. From 1990 through 1996, she served in various other human resources positions at American Express, including Vice President, Human Resources Reengineering, and, from 1986 until 1990, Ms. Schulaner held human resources positions at Macy’sMacy's Northeast in New York City. Ms. Schulaner holds a Bachelor of Arts degree from New College of the University of South Florida. In December 1998, Salant Corporation commenced bankruptcy proceedings, which concluded in April 1999.

17

Joseph Elliswas elected to Coach’s Board of Directors in September 2000. Mr. Ellis has served as an Advisory Director of Goldman, Sachs & Co. sincefrom May 1999 until November 2005, and served as a Limited Partner of Goldman, Sachs from 1994 to May 1999 and a General Partner from 1986 to 1994. Mr. Ellis is also a founder, and has served as Chairman since December 2001, of Blue Tulip LLC, a specialty store offering cards, paper products, invitations and gifts. Mr. Ellis served as senior retail-industry analyst from 1970 through 1994. Before joining Goldman, Sachs in 1970, Mr. Ellis was Vice President and Investment Analyst with The Bank of New York. Mr. Ellis also serves as a Director of Waterworks, Inc. and as a trustee of the RARE Center for Tropical Conservation. Mr. Ellis holds a Bachelor of Arts degree from Columbia University.
Sally Frame Kasaks

Susan Kropfwas elected to Coach’sCoach's Board of Directors in November 2001.June 2006. Ms. KasaksKropf has served as a marketing and retail consultant for ISTA Incorporated since January 1997. Prior to this, she served as Chairman and Chief Executive Officer of Ann Taylor Stores, Inc. from February 1992 until August 1996. Ms. Kasaks was thebeen President and Chief ExecutiveOperating Officer of Abercrombie & Fitch, a divisionAvon Products since January 2001, where she has had day-to-day oversight of The Limited, Inc.Avon’s worldwide operations. Before that, she was executive vice president and chief operating officer, Avon North America and Global Business Operations, with responsibility for the company's North American operating business unit as well as global marketing, R&D, supply chain operations and information technology. After 35 years, Ms. Kropf has announced her retirement from Avon, effective later this year. Ms. Kropf also serves on the Boards of MeadWestvaco Corp., from February 1989 through February 1992Sherwin Williams Co., and the Chairman and Chief Executive Officer of The Talbots, Inc., which was a specialty apparel retailing division of General Mills Co., from November 1985 through September 1988.Wallace Foundation. Ms. Kasaks also serves as a Director of Pacific Sunwear of California, Inc., Cortefiel, S.A., The Children’s Place, Inc. and Crane & Co. SheKropf holds a Bachelor of Arts degreeB.A. from AmericanSt. John’s University and an M.B.A in Finance from New York University.

Gary Lovemanwas elected to Coach’s Board of Directors in January 2002. Mr. Loveman has served as Chairman of Harrah’s Entertainment, Inc. since January 2005 and as its Chief Executive Officer and President since January 2003; he had served as President of Harrah’s since April 2001 and as Chief Operating Officer of Harrah’s since May 1998. He was a member of the three-executive Office of the President of Harrah’s from May 1999 to April 2001 and was Executive Vice President from May 1998 to May 1999. From 1989 to 1998, Mr. Loveman was Associate Professor of Business Administration, Harvard University Graduate School of Business Administration, where his responsibilities included teaching MBA and executive education students, research and publishing in the field of service management, and consulting and advising large service companies. Mr. Loveman also serves as a Director of Harrah’s. He holds a Bachelor of Arts degree in Economics from Wesleyan University and a Ph.D. in Economics from the Massachusetts Institute of Technology.

Ivan Menezeswas elected to Coach’s Board of Directors in February 2005. Mr. Menezes has served as President and Chief Executive Officer of Diageo North America, the world’s leading premium drinks company, since January 2004, after having served as its President and Chief OperationOperating Officer from July 2002, and as President of Diageo, Venture Markets since July 2000. Since joining Diageo in 1997 he has held various progressively senior management positions, including the position of President and Chief Operating Officer.positions. Before joining Diageo, he held senior marketing positions with Whirlpool Europe in Milan and was a principal with Booz Allen Hamilton, Inc., both in Chicago and in London. Mr. Menezes holds an MBAM.B.A. from Northwestern University’s Kellogg School of Management.


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Irene Millerwas elected to Coach’sCoach's Board of Directors in May 2001. Ms. Miller is Chief Executive Officer of Akim, Inc., an investment management and consulting firm, and until June 1997 was Vice Chairman and Chief Financial Officer of Barnes & Noble, Inc., the world’sworld's largest bookseller. She joined Barnes & Noble in 1991, became Chief Financial Officer in 1993 and Vice Chairman in 1995. From 1986 to 1990, Ms. Miller was an investment banker at Morgan Stanley & Co. Incorporated. Ms. Miller also serves as a Director of Barnes & Noble, Inc., Inditex, S.A. and The Body Shop International PLC.TD Bank Financial Group. Ms. Miller holds a Bachelor of Science degree from the University of Toronto and a Master of Science degree from Cornell University.

Michael Murphywas elected to Coach’s Board of Directors in September 2000. From 1994 to 1997, Mr. Murphy served as Vice Chairman and Chief Administrative Officer of Sara Lee Corporation. Mr. Murphy also served as a Director of Sara Lee from 1979 through October 1997. Mr. Murphy joined Sara Lee in 1979 as Executive Vice President and Chief Financial and Administrative Officer and, from 1993 until 1994, also served as Vice Chairman. Mr. Murphy is also a Director of Civic Federation, Big Shoulders Fund, Metropolitan Pier and Exposition Authority, Chicago Cultural Center Foundation, GATX Corporation,

18

Payless ShoeSource, Inc. and CNH Global N.V.The Joffrey Ballet. He is also a member of the Board of Trustees of Northern Funds (a family of mutual funds). Mr. Murphy holds a Bachelor of Science degree in Business Administration from Boston College and an MBAM.B.A. degree in finance from the Harvard Business School.

Jide Zeitlin was elected to Coach's Board of Directors in June 2006. Since December 2005, Mr. Zeitlin has served as founder of Independent Mobile Infrastructure (Pvt.) Limited, a privately held company that is focussed on Asian, particularly Indian, telecommunications operating assets. From 1996 until December 2005, Mr. Zeitlin was a partner at Goldman, Sachs & Co.; he most recently held the post of Global Chief Operating Officer of the company's investment banking businesses, after joining the firm in 1983. Mr. Zeitlin is Chairman of the Board of Trustees of Amherst College, serves as a Director of Affiliated Managers Group, Inc. and is a member of several not-for-profit boards including: Common Ground Community, Milton Academy, Montefiore Medical Center, Playwrights Horizons and Teach for America, as well as the Harvard Business School Visiting Committee. Mr. Zeitlin holds an A.B. in Economics and English from Amherst College, and an M.B.A. from Harvard University.


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PART II

ItemITEM 5.Market for Registrant’s Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities

Refer to the information regarding the market for Coach’s Common Stock and the quarterly market price information appearing under the caption “Market‘‘Market and Dividend Information”Information’’ included herein.

19The Company’s share repurchases for the fourth quarter of 2006 were as follows:


PeriodTotal Number
of Shares
Purchased		Average
Price Paid
per Share		Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(1)		Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
or Programs(1)
Period 10 (4/2/06 - 5/6/06)4,145,740
$32.92
4,145,740
$0
Period 11 (5/7/06 - 6/3/06)11,445,168
$30.58
11,445,168
$150 million
Period 12 (6/4/06 - 7/1/06)—
—
—
$150 million
Total15,590,908
$31.20
15,590,908
$150 million
Item
(1)The Coach Board of Directors approved common stock repurchase programs as follows:

Date Share Repurchase Programs were Publicly AnnouncedTotal Dollar Amount
Approved		Expiration Date of Plan
September 17, 2001$80 millionSeptember 2004
January 30, 2003$100 millionJanuary 2006
August 12, 2004$200 millionAugust 2006
May 11, 2005$250 millionMay 2007
May 9, 2006$500 millionJune 2007

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ITEM 6.Selected Financial Data (dollars and shares in thousands, except per share data)

The selected historical financial data presented below as of and for each of the fiscal years in the five-year period ended July 2, 20051, 2006 have been derived from Coach’s audited Consolidated Financial Statements. The financial data should be read in conjunction with Item 7, “Management’s‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations,”’’ the Consolidated Financial Statements and Notes thereto and other financial data included elsewhere herein.

                       
  Fiscal Year Ended(1)
   
  July 2, July 3, June 28, June 29, June 30,
  2005 2004 2003 2002 2001
           
Consolidated Statements of Income:
                    
 Net sales $1,710,423  $1,321,106  $953,226  $719,403  $600,491 
 Cost of sales  399,652   331,024   275,797   236,041   218,507 
                
 Gross profit  1,310,771   990,082   677,429   483,362   381,984 
 Selling, general and administrative expenses  688,961   545,617   433,667   346,354   275,727 
 Reorganization costs(2)  —   —   —   3,373   4,569 
                
 Operating income  621,810   444,465   243,762   133,635   101,688 
 Interest income (expense), net  15,760   3,192   1,059   (299)  (2,258)
                
 Income before provision for income taxes and minority interest  637,570   447,657   244,821   133,336   99,430 
 Provision for income taxes  235,277   167,866   90,585   47,325   35,400 
 Minority interest, net of tax  13,641   18,043   7,608   184   — 
                
 Net income $388,652  $261,748  $146,628  $85,827  $64,030 
                
 Net income per share                    
  Basic $1.03  $0.70  $0.41  $0.24  $0.20 
                
  Diluted $1.00  $0.68  $0.39  $0.24  $0.19 
                
 Shares used in computing net income per share:(3)                    
  Basic  378,670   372,120   359,116   352,192   327,440 
                
  Diluted  390,191   385,558   371,684   363,808   337,248 
                
Consolidated Percentage of Net Sales Data:
                    
 Gross margin  76.6%  74.9%  71.1%  67.2%  63.6%
 Selling, general and administrative expenses  40.3%  41.3%  45.5%  48.1%  45.9%
 Operating income  36.3%  33.6%  25.6%  18.6%  16.9%
 Net income  22.7%  19.8%  15.4%  11.9%  10.7%
Consolidated Balance Sheet Data:
                    
 Working capital $443,580  $535,384  $297,488  $136,902  $53,991 
 Total assets  1,347,132   1,044,425   629,109   448,402   262,506 
 Inventory  184,419   161,913   143,807   136,404   105,162 
 Revolving credit facility  12,292   1,699   26,471   34,169   7,700 
 Long-term debt  3,270   3,420   3,535   3,615   3,690 
 Stockholders’ equity $1,032,776  $782,286  $426,929  $260,356  $148,314 


 Fiscal Year Ended(1)
 July 1,
2006		July 2,
2005		July 3,
2004		June 28,
2003		June 29,
2002
Consolidated Statements of Income(2): 
 
 
 
 
Net sales$2,111,501
$1,710,423
$1,321,106
$953,226
$719,403
Cost of sales472,622
399,652
331,024
275,797
236,041
Gross profit1,638,879
1,310,771
990,082
677,429
483,362
Selling, general and administrative expenses874,275
738,208
584,778
458,980
362,211
Reorganization costs(3)—
—
—
—
3,373
Operating income764,604
572,563
405,304
218,449
117,778
Interest income (expense), net32,623
15,760
3,192
1,059
(299
)
Income before provision for income taxes and minority interest797,227
588,323
408,496
219,508
117,479
Provision for income taxes302,950
216,070
152,504
81,219
41,695
Minority interest, net of tax—
13,641
18,043
7,608
184
Net income$494,277
$358,612
$237,949
$130,681
$75,600
Net income per share 
 
 
 
 
Basic$1.30
$0.95
$0.64
$0.36
$0.21
Diluted$1.27
$0.92
$0.62
$0.35
$0.21
Shares used in computing net income per share:(4) 
 
 
 
 
Basic379,635
378,670
372,120
359,116
352,192
Diluted388,495
390,191
385,558
371,684
363,808
Consolidated Percentage of Net Sales Data: 
 
 
 
 
Gross margin77.6
%
76.6
%
74.9
%
71.1
%
67.2
%
Selling, general and administrative expenses41.4
%
43.2
%
44.3
%
48.2
%
50.3
%
Operating income36.2
%
33.5
%
30.7
%
22.9
%
16.4
%
Net income23.4
%
21.0
%
18.0
%
13.7
%
10.5
%
Consolidated Balance Sheet Data(2): 
 
 
 
 
Working capital$632,658
$443,699
$533,280
$295,333
$135,328
Total assets1,626,520
1,370,157
1,060,279
640,871
456,162
Cash, cash equivalents and investments537,565
505,116
564,443
229,176
93,962
Inventory233,494
184,419
161,913
143,807
136,404
Revolving credit facility—
12,292
1,699
26,471
34,169
Long-term debt3,100
3,270
3,420
3,535
3,615
Stockholders' equity1,188,734
1,055,920
796,036
436,536
266,542
(1)Coach’s fiscal year ends on the Saturday closest to June 30. Fiscal years 2006, 2005, 2003 2002 and 20012002 were 52-week years, while fiscal year 2004 was a 53-week year.
(2)DuringIn accordance with the Company’s adoption of SFAS 123R, ‘‘Share-Based Compensation’’ in fiscal 2001, Coach committed2006, all financial statement amounts for the prior periods presented have been adjusted to and completed a reorganization plan involvingreflect the complete closuregrant-date fair value of its Medley, Florida, manufacturing operation. These actions, intended to reduce costs, resulted in the transfer of production to lower cost third-party manufacturers and the consolidation of all of itsequity awards issued through share-based compensation plans.

20

(3)distribution functions at the Jacksonville, Florida, distribution center. During fiscal 2002, Coach committed to and completed a reorganization plan involving the complete closure of its Lares, Puerto Rico, manufacturing operation. These actions, alsoThis action, intended to reduce costs, resulted in the transfer of production to lower cost third-party manufacturers.
(3) (4)The two-for-one stock splits in April 2005, October 2003 and July 2002 have been retroactively applied to all prior periods.


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ItemITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of Coach’s financial condition and results of operations should be read together with Coach’s financial statements and notes to those statements included elsewhere in this document.

When used herein, the terms ‘‘Coach,’’ ‘‘Company,’’ ‘‘we,’’ ‘‘us’’ and ‘‘our’’ refer to Coach, Inc., including consolidated subsidiaries. Coach’s fiscal year ends on the Saturday closest to June 30. Fiscal 2006 and fiscal 2005 were each 52-week periods whereas fiscal 2004 was a 53-week period.

In accordance with the Company’s adoption of SFAS 123R, ‘‘Share-Based Compensation’’ in fiscal 2006, all financial statement amounts for the prior periods presented have been adjusted to reflect the grant-date fair value of equity awards issued through share-based compensation plans.

Executive Overview

      Founded in 1941,

Coach (the “Company”) is a designerdesigns and marketer ofmarkets high-quality, modern American classic accessories. Coach’sOur primary product offerings include handbags, women’s and men’s accessories, outerwear, business, cases, outerweartravel, watches, footwear and related accessories and weekend and travel accessories.

      Coach generates revenue by selling itseyewear. We sell products directly to consumers through Company-operated stores in North America and Japan, the Internet and catalogs and indirectly through wholesale customers primarily in the U.S. and Asia. As Coach’s business model is based on multi-channel international distribution, our success does not depend solely on the performance of a single channel or geographic area.

Coach Japan,seeks to deliver excellent business results and by licensing its brand namesuperior shareholder returns. In fiscal 2006, an increase in sales, combined with an improvement in margins, continued to select manufacturers. Direct-to-consumer sales consistdrive net income and earnings per share growth. The highlights of sales of Coach products through its 193 Company-operated North Americanfiscal 2006 were:

• Net income rose 37.8% to $494.3 million, or $1.27 per diluted share, compared with $358.6 million or $0.92 per share in the year ago period.
• Net sales totaled $2.1 billion, reflecting a 23.4% increase over prior year sales of $1.7 billion.
• Direct-to-consumer sales, which consist primarily of sales at Coach stores in the U.S. and Japan, rose 23.2% to $1.6 billion during fiscal 2006.
• Comparable store sales in the U.S. rose 20.7%, with retail stores up 12.3% and factory stores up 31.9%.
• Japan sales, when translated into U.S. dollars, rose 12.1% driven by new stores, expansions and mid-single-digit retail comparable store sales. These increases in sales were offset by a 9.5% decrease due to currency translation.

During fiscal 2006, we opened 25 new retail stores its 82 Company-operated North Americanand seven new factory stores its online store and its catalogs. Indirect sales consist of sales of Coach products to approximately 1,000 department store locationsclosed three factory stores in the United States, through 94 international department stores, freestanding retail locations and specialty retailers in 19 countries and through 103 department store shop-in-shops, andU.S., bringing the total number of retail and factory storestores in the U.S. to 218 and 86, respectively, at the end of fiscal 2006. We also expanded seven retail stores in the U.S. In Japan, we opened 18 new locations, closed three locations and expanded nine locations, bringing the total number of locations at the end of fiscal 2006 to 118. Through our international distributors, we opened 14 net new locations and expanded 14 locations in fiscal 2006, bringing the total number of international locations, excluding Coach operated by Coachstores in Japan, Inc. Coach generates additional wholesale sales through business-to-business programs, in which companies purchase Coach products to use108 at the end of fiscal 2006.


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Fiscal 2006 vs. Fiscal 2005

Results of operations for fiscal 2006 compared to fiscal 2005 are as gifts or incentive rewards. Licensing revenues consist of royalties paidfollows:


 Fiscal Year Ended
 July 1, 2006July 2, 2005Variance
 (dollars in millions, except per share data)
 Amount% of net
sales		Amount% of net
sales		Amount%
Total net sales$2,111.5
100.0
%
$1,710.4
100.0
%
$401.1
23.4
%
Gross profit1,638.9
77.6
1,310.8
76.6
328.1
25.0
Selling, general and administrative expenses874.3
41.4
738.2
43.2
136.1
18.4
Operating income764.6
36.2
572.6
33.5
192.0
33.5
Interest income, net32.6
1.5
15.8
0.9
16.9
107.0
Provision for income taxes303.0
14.3
216.1
12.6
86.9
40.2
Minority interest, net of tax—
0.0
13.6
0.8
(13.6
)
(100.0
)
Net income$494.3
23.4
%
$358.6
21.0
%
$135.7
37.8
%
Net income per share: 
 
 
 
 
 
Basic$1.30
 
$0.95
 
$0.36
37.5
%
Diluted$1.27
 
$0.92
 
$0.35
38.4
%

Operating Income

Operating income increased 33.5% to Coach under licensing arrangements with select partners for the sale of Coach branded watches, footwear, eyewear and office furniture. Net sales were $1,710.4 million, $1,321.1 million and $953.2$764.6 million in fiscal 2005, 2004 and 2003, respectively, representing a 29.5% increase in fiscal 20052006 as compared to fiscal 2004$572.6 million in 2005. This increase was driven by increases in net sales and a 38.6%gross profit, offset by an increase in selling, general and administrative expenses.

The following chart illustrates our operating margin performance over the last two years:


 Operating Margin
 First
Quarter		Second
Quarter		Third
Quarter		Fourth
Quarter		Total
Year
Fiscal 200632.3
%
42.1
%
33.2
%
35.0
%
36.2
%
Fiscal 200529.2
%
39.8
%
31.8
%
30.6
%
33.5
%

The increase in operating margin is attributable to higher sales and gross profit as well as the leveraging of selling, general and administrative expenses.

Net Sales

In fiscal 2004 as2006, net sales increased 23.4% to $2.1 billion compared to $1.7 billion, in fiscal 2003. These2005. The net sales increases wereincrease was driven by growth across all distribution channels.

As a result of Coach’s costacquisition of sales consistsSumitomo’s 50% interest in Coach Japan on July 1, 2005, the Company reevaluated the composition of its reportable segments and determined that Coach Japan should be a component of the costs associated withDirect-to-Consumer segment. Previously, Coach Japan was included in the sourcingIndirect segment. All prior period information has been reclassified to include Coach Japan as a component of its products.the Direct-to-Consumer segment.


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Net sales by operating segment in fiscal 2006 as compared to fiscal 2005 are as follows:


 Fiscal Year Ended Percentage of Total Net Sales
 July 1, 2006July 2, 2005Rate of
Increase		July 1, 2006July 2, 2005
 (dollars in millions)   
Direct$1,610.7
$1,307.4
23.2
%
76.3
%
76.4
%
Indirect500.8
403.0
24.3
23.7
23.6
Total net sales$2,111.5
$1,710.4
23.4
%
100.0
%
100.0
%

Direct    Net sales increased 23.2% to $1.6 billion during fiscal 2006 from $1.3 billion during fiscal 2005, driven by increased sales from comparable stores, new stores and expanded stores. Coach excludes new locations from the comparable store base for the first year of operation. Similarly, stores that are expanded by 15% or more are also excluded from the comparable store base until the first anniversary of their reopening. Stores that are closed for renovations are removed from the comparable store base.

In North America, comparable store sales growth, sales from new stores and sales from expanded stores accounted for approximately $167 million, $72 million and $13 million, respectively, of the net sales increase. In Japan, sales from new stores, comparable store sales growth and sales from expanded stores accounted for approximately $41 million, $32 million and $11 million, respectively, of the net sales increase. Coach Japan’s reported net sales were negatively impacted by approximately $35 million as a result of foreign currency exchange. Sales growth in the Internet business accounted for the remaining sales increase. These sales increases were slightly offset by store closures and a slight decline in the direct marketing channel.

Indirect    Net sales increased 24.3% to $500.8 million in fiscal 2006 from $403.0 million during fiscal 2005. This increase was driven by growth in the U.S. wholesale, international wholesale and business-to-business divisions, which contributed increased sales of approximately $45 million, $36 million and $18 million, respectively, as compared to the prior year. Licensing revenue of approximately $9 million and $6 million in fiscal 2006 and fiscal 2005, respectively, is included in indirect sales.

Gross Profit

Gross profit increased 25.0% to $1.6 billion in fiscal 2006 as compared to $1.3 billion in fiscal 2005. Gross margin increased 100 basis points to 77.6% in fiscal 2006 from 76.6% in fiscal 2005, as gains from supply chain initiatives and product mix shifts, reflecting increased penetration of higher margin collections, more than offset the impact of channel mix. Coach’s gross profit is dependent upon a variety of factors, including changes in the relative sales mix among distribution channels, changes in the mix of products sold, foreign currency exchange rates, and fluctuations in material costs. These factors, among others, may cause gross profit to fluctuate from quarteryear to quarter. Gross profit increased to $1,310.8 million in fiscal 2005 from $990.1 million in fiscal 2004year.

Selling, General and $677.4 million in fiscal 2003. Gross margin increased to 76.6% in fiscal 2005 as compared to 74.9% in fiscal 2004 and 71.1% in fiscal 2003, representing an increase of 170 basis points in fiscal 2005 as compared to fiscal 2004 and 380 basis points in fiscal 2004 as compared to fiscal 2003. These increases were primarily driven by the factors discussed above.

Administrative Expenses

Selling, general and administrative expenses comprise four categories: selling; advertising, marketing and design; distribution and customer service; and administration and information services.administrative. Selling expenses include store employee compensation, store occupancy costs, store supply costs, wholesale account administration compensation and all Coach Japan operating expenses. These expenses are affected by the number of Coach and Coach Japan operated stores open during any fiscal period and the related proportion of retail and wholesale sales. Advertising, marketing and design expenses include employee compensation, media space and production, advertising agency fees, new product design costs, public relations, market research expenses and mail order costs. Distribution and customer servicesservice expenses include warehousing, order fulfillment, shipping and handling, customer service and bag repair costs. Administration and information servicesAdministrative expenses include compensation costs for the executive, finance, human resources, legal and information systems departments, as well as consulting and software expenses. Selling, general and administrative expenses increase as Coach and Coach Japan operate more stores, although an


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increase in the number of stores generally results in the fixed portion of selling, general and administrative expenses being spread over a larger sales base.

21

      Operating income was $621.8Selling, general and administrative expenses increased 18.4% to $874.3 million $444.5 million and $243.8in fiscal 2006 from $738.2 million in fiscal 2005, 2004 and 2003, respectively. The 39.9% increase indriven primarily by selling expenses. During fiscal 2005 from fiscal 2004 and 82.3% increase in fiscal 2004 from fiscal 2003 were both driven by the increases in net sales and gross profit discussed previously, partially offset by increases in2006, selling, general and administrative expenses.
      Net incomeexpenses as a percentage of net sales improved to 41.4% as compared to 43.2% during fiscal 2005. This improvement was $388.7due to leveraging our expense base on higher sales.

Selling expenses increased 17.0% to $581.9 million, $261.7or 27.6% of net sales, in fiscal 2006 from $497.3 million, or 29.1% of net sales, in fiscal 2005. The dollar increase in these expenses was primarily due to an increase in operating expenses of North America stores and $146.6Coach Japan. The increase in North America store expenses is attributable to increased variable expenses related to higher sales, new stores opened during the fiscal year and the incremental expense associated with having a full year of expenses related to stores opened in the prior year. The increase in Coach Japan operating expenses was primarily driven by increased variable expenses related to higher sales and new store operating expenses. In addition, the impact of foreign currency exchange rates decreased reported expenses by approximately $16 million. The remaining increase in selling expenses was due to increased variable expenses to support sales growth in other channels.

Advertising, marketing, and design costs increased by 27.7% to $100.6 million, or 4.8% of net sales, in fiscal 2006 from $78.8 million, or 4.6% of net sales, in fiscal 2005. This dollar increase was primarily due to increased staffing costs and increased design expenditures as well as increased development costs for new product categories.

Distribution and customer service expenses increased to $43.0 million in fiscal 2006 from $36.9 million in fiscal 2005. The dollar increase in these expenses was primarily due to higher sales volumes. However, efficiency gains at the distribution and customer service facility resulted in an improvement in the ratio of these expenses to net sales from 2.2% in fiscal 2005 2004to 2.0% in fiscal 2006.

Administrative expenses increased 18.8% to $148.8 million, or 7.0% of net sales, in fiscal 2006 from $125.2 million, or 7.3% of net sales, in fiscal 2005. The dollar increase in these expenses was primarily due to increased share-based compensation costs and 2003, respectively. In allother employee staffing costs. Included as a reduction to administrative expenses are business interruption proceeds of $2.0 million, related to our World Trade Center location.

Interest Income, Net

Net interest income was $32.6 million in fiscal years,2006 as compared to $15.8 million in fiscal 2005. This increase was primarily due to higher returns on investments as a result of higher interest rates.

Provision for Income Taxes

The effective tax rate increased to 38.0% as compared to the increases36.7% rate recorded in net income werefiscal 2005. The increase is primarily attributable to the increasesnon-recurrence of a one time benefit that the Company recorded in operating income, discussed above.

      Coach’sthe fourth quarter of fiscal year ends on2005, related to the Saturday closest to June 30. Fiscal 2005 and fiscal 2003 were each 52-week periods, whereas fiscal 2004Company’s buyout of Sumitomo’s 50% interest in Coach Japan.

Minority Interest

Minority interest expense, net of tax, was a 53-week period. The fifty-third week$0 in fiscal 2004 contributed approximately $19.52006 compared to $13.6 million, or 0.8% of additional net sales.

Acquisition of Coach Japan, Inc.
      On July 1, 2005, Coach completed thesales, in fiscal 2005. The purchase of Sumitomo’s 50% interest in Coach Japan Inc. for $228.4 million, including transaction costs, plus undistributed profits and paid-in capital of $72.9 million. Coach Japan was a joint venture established between Coach and Sumitomo Corporation, to operate and expand the Coach business in Japan. Coach Japan is accounted for as a consolidated subsidiary. Coach recorded the 50% interest in the assets and liabilities of Coach Japan acquired through this acquisition, at their fair values as follows: trade accounts receivable of $15.4 million, inventory of $43.1 million, property and equipment of $21.8 million, customer list of $0.3 million, goodwill of $225.3 million, other assets of $25.0 million, and liabilities of $30.7 million. The results of operations for Coach Japan, Inc. fromon July 1, 2005 are included in our consolidated results of operations for the fiscal year ended July 2, 2005.
      The following unaudited pro forma information assumes the Coach Japan, Inc. acquisition had occurred on July 4, 2004. The pro forma information,eliminated minority interest as presented below, is not indicative of the results that would have been obtained had the transaction occurred July 4,first quarter of fiscal 2006.

Net Income

Net income was $494.3 million in fiscal 2006 as compared to $358.6 million in fiscal 2005. This 37.8% increase is attributable to increased net sales as well as significant margin improvement, as discussed above.


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Fiscal 2005 vs. Fiscal 2004 nor is it indicative of our future results. The final purchase price allocation and the resulting effect on net income may differ significantly from the unaudited pro forma amounts included herein.

         
  Fiscal Year Ended
   
  July 2, July 3,
  2005 2004
     
  (Unaudited) (Unaudited)
Net revenue $1,710.4  $1,321.1 
Net income  402.3   279.8 
Net income per share — Basic  1.06   0.75 
Net income per share — Diluted  1.03   0.73 

22

      The following is a discussion of the resultsResults of operations for fiscal 2005 compared to fiscal 2004 and fiscalare as follows:


 Fiscal Year Ended (1)
 July 2, 2005July 3, 2004Variance
 (dollars in millions, except per share data)
 Amount% of
net sales		Amount% of
net sales		Amount%
Total net sales$1,710.4
100.0
%
$1,321.1
100.0
%
$389.3
29.5
%
Gross profit1,310.8
76.6
990.1
74.9
320.7
32.4
Selling, general and administrative expenses738.2
43.2
584.8
44.3
153.4
26.2
Operating income572.6
33.5
405.3
30.7
167.3
41.3
Interest income, net15.8
0.9
3.2
0.2
12.6
392.5
Provision for income taxes216.1
12.6
152.5
11.5
63.6
41.7
Minority interest, net of tax13.6
0.8
18.0
1.4
(4.4
)
(24.4
)
Net income$358.6
21.0
%
$237.9
18.0
%
$120.7
50.7
%
Net income per share: 
 
 
 
 
 
Basic$0.95
 
$0.64
 
$0.31
48.2
%
Diluted$0.92
 
$0.62
 
$0.30
48.9
%
(1)Fiscal year ended July 3, 2004 was a 53 week year.

Operating Income

Operating income increased 41.3% to $572.6 million in 2005 as compared to $405.3 million in 2004. This increase was driven by increases in net sales and gross profit, offset by an increase in selling, general and administrative expenses.

The following chart illustrates our operating margin performance in fiscal 20032005 and 2004:


 Operating Margin
 First
Quarter		Second
Quarter		Third
Quarter		Fourth
Quarter		Total
Year
Fiscal 200529.2
%
39.8
%
31.8
%
30.6
%
33.5
%
Fiscal 200424.2
%
36.6
%
28.9
%
30.1
%
30.7
%

The increase in operating margin is attributable to higher sales and gross profit as well as a discussionthe leveraging of the changes in financial condition during fiscal 2005.

Results Of Operations
      Consolidated statements of income for fiscal 2005, 2004selling, general and 2003 are as follows:
                          
  Fiscal Year Ended
   
  July 2, 2005 July 3, 2004(1) June 28, 2003
       
  $ % of net sales $ % of net sales $ % of net sales
             
  (dollars and shares in millions, except per share data)
Net sales $1,704.1   99.6% $1,316.3   99.6% $949.4   99.6%
Licensing revenue  6.3   0.4   4.8   0.4   3.8   0.4 
                   
Total net sales  1,710.4   100.0   1,321.1   100.0   953.2   100.0 
Cost of sales  399.6   23.4   331.0   25.1   275.8   28.9 
                   
Gross profit  1,310.8   76.6   990.1   74.9   677.4   71.1 
Selling, general and administrative expenses  689.0   40.3   545.6   41.3   433.7   45.5 
                   
Operating income  621.8   36.3   444.5   33.6   243.7   25.6 
Interest income, net  15.8   0.9   3.2   0.2   1.1   0.1 
                   
Income before provision for income taxes and minority interest  637.6   37.3   447.7   33.9   244.8   25.7 
Provision for income taxes  235.3   13.8   168.0   12.7   90.6   9.5 
Minority interest, net of tax  13.6   0.8   18.0   1.4   7.6   0.8 
                   
Net income $388.7   22.7% $261.7   19.8% $146.6   15.4%
                   
Net income per share:                        
 Basic $1.03      $0.70      $0.41     
 Diluted $1.00      $0.68      $0.39     
Weighted-average number of common shares:                        
 Basic  378.7       372.1       359.1     
 Diluted  390.2       385.6       371.7     
(1) 53-week fiscal year
administrative expenses.

Net Sales

Net sales by businessoperating segment forin fiscal 2005 as compared to fiscal 2004 and fiscal 2003 are as follows:

                                 
  Fiscal Year Ended Percentage of Total Net Sales
     
  July 2, July 3, June 28,   July 2, July 3, June 28,
  2005 2004(1) 2003 Rate of Increase 2005 2004 2003
               
  (dollars in millions) (’05 v. ’04) (’04 v. ’03)      
Direct $935.5  $726.5  $559.5   28.8%  29.8%  54.7%  55.0%  58.7%
Indirect  774.9   594.6   393.7   30.3   51.0   45.3   45.0   41.3 
                         
Total net sales $1,710.4  $1,321.1  $953.2   29.5%  38.6%  100.0%  100.0%  100.0%
                         


 Fiscal Year Ended Percentage of Total
Net Sales
 July 2, 2005July 3, 2004Rate of
Increase		July 2, 2005July 3, 2004
 (dollars in millions)   
Direct$1,307.4
$1,002.7
30.4
%
76.4
%
75.9
%
Indirect403.0
318.4
26.6
23.6
24.1
Total net sales$1,710.4
$1,321.1
29.5
%
100.0
%
100.0
%
(1) 53-week fiscal year

Fiscal 2005 Compared to Fiscal 2004
Net Sales
      Coach excludes new locations from the comparable store base for the first yearTable of operation. Similarly, stores that are expanded by more than 15% are also excluded from the comparable store base until the first anniversary of their reopening. Stores that are closed for renovations are removed from the comparable store

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23

base. In fiscal 2005, 52 weeks of sales were reported and compared to the equivalent 52-week period during fiscal 2004.
Direct.DirectNet sales increased 28.8%30.4% to $935.5 million$1.3 billion during fiscal 2005 from $726.5 million$1.0 billion during fiscal 2004, driven by increased sales from comparable stores, new stores and expanded stores. In North America, comparable store sales new storegrowth, sales and expanded store sales in our North American retail and factory stores divisions. Sales growth in comparable stores was 14.1% for retailfrom new stores and 23.9% for factory stores. Comparable store sales growth for the entire North American store chain was 18.2%, whichfrom expanded stores accounted for $112.0approximately $112 million, $85 million and $11 million, respectively, of the net sales increase. Since the end of fiscal 2004, Coach has opened 19 retail stores and seven factory stores. SalesIn Japan, sales from these new stores, as well as the noncomparable portion ofcomparable store sales growth and sales from expanded stores opened during fiscal 2004, accounted for $84.8approximately $40 million, $30 million and $20 million, respectively, of the net sales increase. Since the end of fiscal 2004, Coach also expanded seven retail stores and two factory stores. Sales from these expanded stores, as well as the noncomparable portion of sales from stores expanded during fiscal 2004, accounted for $11.0 million of theJapan’s reported net sales increase.were positively impacted by approximately $13 million as a result of foreign currency exchange. Sales growth in the Internet business accounted for the remaining sales increase. The netThese sales increase wasincreases were offset by an$15.7 million of sales in the additional week of sales during fiscal 2004 which represented approximately $11.6 million. Also, these increases were slightly offset byas well as store closures and a decline in the direct marketing channel and store closures. Since the end of fiscal 2004, Coach has closed one factory store.
Indirect.channel.

Indirect    Net sales increased 30.3%26.6% to $774.9$403.0 million in fiscal 2005 from $594.6$318.4 million during fiscal 2004. TheThis increase was primarily driven by growth at Coach Japan, Inc. in which net sales increased $95.7 million over the comparable period of the prior year. Since the end of fiscal 2004, we have opened 12 locations in Japan. Sales from these new stores, as well as the noncomparable portion of sales from other new stores, accounted for $40.3 million of the net sales increase. In addition, comparable store net sales gains accounted for an increase of $30.3 million over the prior year. Since the end of fiscal 2004, we have also expanded 14 locations in Japan. Sales from these expanded stores, as well as the non-comparable portion of sales from other expanded stores, accounted for $20.2 million of the net sales increase. Finally, the impact of foreign currency exchange rates resulted in an increase in reported net sales of $12.9 million. The net sales increase was slightly offset by $4.1 million of sales from Coach Japan during the additional week of fiscal 2004. The net sales increase was further offset by Coach Japan store closures. Since the end of fiscal 2004, Coach Japan has closed eight locations.

      The increase in indirect net sales was also driven by growth in the U.S. wholesale, international wholesale and business-to-business divisions, which contributed increased sales of $47.8approximately $48 million, $19.0$19 million and $9.9$10 million, respectively, as compared to the prior year. The remaining net sales increase is attributable to increases in other indirect channels. The net sales increase was slightly offset by $3.8 million of sales from other indirect channels during the additional week of fiscal 2004.
Gross Profit
Licensing revenue of approximately $6 million and $5 million in fiscal 2005 and fiscal 2004, respectively, is included in indirect sales.

Gross Profit

Gross profit increased 32.4% to $1,310.8 million$1.3 billion in fiscal 2005 from $990.1 million in fiscal 2004. Gross margin increased 170 basis points to 76.6% in fiscal 2005 from 74.9% in fiscal 2004. This improvement was driven by:by a shift in channel mix, as our higher gross margin channels grew faster than the business as a whole, which contributed approximately 80 additional basis points; a shift in product mix, reflecting increased penetration of higher margin mixed material product and accessories, which contributed approximately 60 additional basis points; and the continuing impact of sourcing cost initiatives, which contributed approximately 30 additional basis points.

      The following chart illustrates the gross margin performance we have experienced over the last 12 quarters:
                             
  First Second First Third Fourth Second Total
  Quarter Quarter Half Quarter Quarter Half Year
               
Fiscal 2005  75.0%  75.8%  75.5%  78.1%  77.6%  77.8%  76.6%
Fiscal 2004  72.7%  74.2%  73.6%  75.9%  76.7%  76.3%  74.9%
Fiscal 2003  68.1%  70.3%  69.4%  72.5%  73.2%  72.9%  71.1%
initiatives.

24Selling, General and Administrative Expenses

Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 26.3%26.2% to $689.0$738.2 million in fiscal 2005 from $545.6$584.8 million in fiscal 2004. The dollar increase was caused primarily by increased store operating expenses attributable to new stores opened both domestically and in Japan and increased variable expenses to support increased net sales. As a percentage of net sales, selling, general and administrative expenses during fiscal 2005 were 40.3%43.2% compared to 41.3%44.3% during fiscal 2004. This improvement was due to leveraging our expense base on higher sales.

Selling expenses increased 28.8% to $497.3 million, or 29.1% of net sales, in fiscal 2005 from $386.2 million, or 29.2% of net sales, in fiscal 2004. The dollar increase in these expenses was primarily due to an increase in operating expenses associated with Coach Japan and operating expenses associated with North American stores that were opened during and after the end of fiscal 2004. The increase in Coach Japan expenses was $51.4 million, driven by new store operating expenses, investment in corporate infrastructure, increased variable expenses related to higher sales and increased advertising expense to support the brand in Japan. In addition, the impact of foreign currency exchange rates increased reported expenses by $5.8approximately $6.0 million. Domestically, Coach has opened 19 new retail stores and seven new factory stores sinceIn North America, the end of fiscal 2004. Expensesincrease in operating expenses was primarily driven by expenses from these new stores, as well as the noncomparablenon-comparable portion of expenses from stores opened in fiscal 2004, increased total expenses by $23.1 million.2004. The remaining increase in selling expenses was due to increased variable expenses to support sales growth.

Advertising, marketing, and design costs increased by 24.1% to $78.8 million, or 4.6% of net sales, in fiscal 2005 from $63.5 million, or 4.8% of net sales, in fiscal 2004. This dollar increase was primarily due to increased staffing costs and increased design expenditures.

Distribution and customer service expenses increased to $36.9 million in fiscal 2005 from $32.4 million in fiscal 2004. The dollar increase in these expenses was primarily due to higher sales volumes. However, efficiency gains at the distribution and customer service facility resulted in an improvement in the ratio of these expenses to net sales from 2.5% in fiscal 2004 to 2.2% in fiscal 2005.


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Administrative expenses increased 19.7%21.9% to $76.0$125.2 million, or 4.4%7.3% of net sales, in fiscal 2005 from $63.5$102.7 million, or 4.8%7.8% of net sales, in fiscal 2004. The dollar increase in these expenses was primarily due to increased compensation costs, including share-based compensation, as well as increased professional and consulting fees. Included inas a reduction to administrative expenses are business interruption proceeds of $2.6 million, related to our World Trade Center location.

Interest Income, Net

Interest Income, Net

Net interest income was $15.8 million in fiscal 2005, as compared to $3.2 million in fiscal 2004. This dollar change was due to increased positive cash balances during fiscal 2005 as well as higher returns on investments. During fiscal 2004, Coach began investing in marketable securities with maturities greater than 90 days, which yielded greater ratesinvestments as a result of return.

Provision for Income Taxes
higher interest rates.

Provision for Income Taxes

The effective tax rate decreased to 36.9%36.7% in fiscal 2005 compared with the 37.5%37.3% recorded in fiscal 2004. As a result of the buyout of our joint venture partner in Coach Japan and a continued need to grow the Coach Japan business, we have determined that the earnings of Coach Japan will be permanently reinvested and the tax provision previously recorded relating to the expatriationrepatriation of those earnings was reversed. The reversal was recorded in the fourth quarter of fiscal 2005 and brought the full year to the lower effective appropriate annual rate.

Minority Interest

Minority Interest

Minority interest expense, net of tax, decreased to $13.6 million, or 0.8% of net sales, in fiscal 2005 from $18.0 million, or 1.4% of net sales, in fiscal 2004. The decrease was primarily due to transfer price increases to Coach Japan, Inc., increased marketing expenses and additional infrastructure investments.

25Net Income

Fiscal 2004 Compared to Fiscal 2003
Net Sales
      Coach excludes new locations from the comparable store base for the first year of operation. Similarly, stores that are expanded by more than 15% are also excluded from the comparable store base until the first anniversary of their reopening. Stores that are closed for renovations are removed from the comparable store base. In fiscal 2004, 53 weeks of sales were reported and compared to the equivalent 53-week period.
Direct.Net sales increased 29.8% to $726.5 million during fiscal 2004 from $559.5income was $358.6 million in fiscal 2003, driven by increased comparable store sales, new store sales and expanded store sales in our North American retail and factory stores divisions. This net sales increase was also driven by an additional week of sales, which represented approximately $11.6 million of the total. Sales growth in comparable stores was 21.9% for retail stores and 10.3% for factory stores. Comparable store sales growth for the entire North American store chain was 16.9%, which accounted for $95.7 million of the net sales increase. Since the end of fiscal 2003, Coach has opened 19 retail stores and two factory stores. Sales from these new stores,2005 as well as the noncomparable portion of sales from stores opened during fiscal 2003, accounted for $53.0 million of the net sales increase. Since the end of fiscal 2003, Coach also expanded nine retail stores. Sales from these expanded stores, as well as the noncomparable portion of sales from stores expanded during fiscal 2003, accounted for $15.3 million of the net sales increase. Sales growth in the Internet business accounted for the remaining sales increase. These increases were slightly offset by a decline in the direct marketing channel and store closures. Since the end of fiscal 2003, Coach has closed one retail store and two factory stores.
Indirect. Net sales increased 51.0%compared to $594.6$237.9 million in fiscal 2004 from $393.7 million during fiscal 2003. The increase was primarily driven by growth at our Japanese joint venture, Coach Japan, Inc. in which net sales increased $100.4 million over the comparable period of the prior year, including $4.1 million of sales during the additional week of the fiscal year. Since the end of fiscal 2003, we have opened eight locations in Japan. Sales from these new stores, as well as the noncomparable portion of sales from stores opened during fiscal 2003, accounted for $44.0 million of the net sales increase. Our Japan locations experienced double-digit comparable net sales gains from the prior year, which represented $33.3 million of the net sales increase. Since the end of fiscal 2003, we have also expanded 16 locations in Japan, which accounted for $7.3 million of the net sales increase. Finally, the impact of foreign currency exchange rates resulted in an increase in reported net sales of $21.7 million. These net sales increases were slightly offset by store closures. Since the end of fiscal 2003, Coach Japan has closed one location. The increase in indirect net sales was also driven by growth in the U.S. wholesale, international wholesale and business-to-business divisions, which contributed increased sales of $37.5 million, $33.5 million and $22.0 million, respectively, as compared to the same period in the prior year. The remaining net sales2004. This 50.7% increase is attributable to increases in other indirect channels.
Gross Profit
      Gross profit increased 46.2% to $990.1net sales as well as significant margin improvement, as discussed above.

FINANCIAL CONDITION

Liquidity and Capital Resources

Net cash provided by operating activities was $596.6 million in fiscal 2004 from $677.42006 compared to $475.6 million in fiscal 2003. Gross margin increased 380 basis points to 74.9% in fiscal 2004 from 71.1% in fiscal 2003. This improvement was driven by: a shift in channel mix, as our higher gross margin channels grew faster than the business as a whole, which contributed approximately 140 additional basis points; a shift in product mix, reflecting increased penetration of higher margin mixed material product and accessories, which contributed approximately 120 additional basis points; and the continuing impact of sourcing cost initiatives, which contributed approximately 120 additional basis points.

Selling, General and Administrative Expenses
      Selling, general and administrative expenses increased 25.8% to $545.62005. The $121.0 million in fiscal 2004 from $433.7 million in fiscal 2003. The dollar increase was caused primarily by increased variable expenses related to Coach Japan, increased variable expenses to support increased net sales, and increased store operating expenses attributable to new stores opened both domestically and in Japan, as compared to the prior year. As a percentage of net sales, selling, general and administrative expenses during fiscal 2004 were 41.3% compared to 45.5% during fiscal 2003. This improvement was due to leveraging our expense base on higher sales.

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      Selling expenses increased 31.0% to $386.2 million, or 29.2% of net sales, in fiscal 2004 from $294.9 million, or 30.9% of net sales, in fiscal 2003. The dollar increase in these expenses was primarily due to an increase in operating expenses associated with Coach Japan and operating expenses associated with North American stores that were opened during and after the end of fiscal 2003. The increase in Coach Japan expenses was $42.8 million, driven by new stores operating expenses, increased variable expenses related to higher sales, and the nonrecurrence of a $3.4 million favorable fair value adjustment for open foreign currency forward contracts. In addition, the impact of foreign currency exchange rates increased reported expenses by $10.0 million. Domestically, Coach has opened 19 new retail stores and two new factory stores since the end of fiscal 2003. Expenses from these new stores, as well as the noncomparable portion of expenses from stores opened in fiscal 2003, increased total expenses by $16.2 million. The remaining increase in selling expenses was due to increased variable expenses to support sales growth.
      Advertising, marketing, and design costs increased by 10.8% to $63.5 million, or 4.8% of net sales, in fiscal 2004, from $57.3 million, or 6.0% of net sales, in fiscal 2003. This dollar increase was primarily due to increased staffing costs and increased design expenditures.
      Distribution and customer service expenses increased to $32.4 million in fiscal 2004 from $29.7 million in fiscal 2003.earnings of $135.7 million. The dollar increase in these expenses was primarily due to higher sales volumes. However, efficiency gains at the distribution and customer service facility resulted in an improvement in the ratio of these expenses to net sales from 3.1% in fiscal 2003 to 2.5% in fiscal 2004.
      Administrative expenses increased 22.6% to $63.5 million, or 4.8% of net sales, in fiscal 2004 from $51.8 million, or 5.5% of net sales, in fiscal 2003. The dollar increase in these expenses was primarily due to increased compensation costs as well as increased professional and consulting fees. These increases were offset by an increase in business interruption proceeds of $1.2 million, related to our World Trade Center location.
Interest Income, Net
      Net interest income was $3.2 million in fiscal 2004, as compared to $1.1 million in fiscal 2003. This dollar change was due to increased positive cash balances during fiscal 2004 as well as higher returns on investments. During fiscal 2004, Coach began investing in marketable securities with maturities greater than 90 days, which yielded greater rates of return.
Provision for Income Taxes
      The effective tax rate increased to 37.5% in fiscal 2004 compared with the 37.0% recorded in fiscal 2003.
Minority Interest
      Minority interest expense, net of tax, increased to $18.0 million, or 1.4% of net sales, in fiscal 2004 from $7.6 million, or 0.8% of net sales, in fiscal 2003. This increase was due to increased profits from the operations of Coach Japan and the impact of a stronger yen.
FINANCIAL CONDITION
Liquidity and Capital Resources
      Net cash provided from operating activities was $544.3 million in fiscal 2005 compared to $454.5 million in fiscal 2004. The $89.8 million increase was due primarily to increased earnings of $126.9 million as well as an increase in accrued liabilities of $36.1 million, primarily attributable to a higher provision for income taxes. There was a decrease in the change in accounts receivable of $10.6 million due to improved collection rates. The increase was offset by increased deferred taxes of $67.9 million. Finally, there was a $13.6 million decrease in the tax benefit from the exerciseminority interest expense, as a result of stock optionsCoach’s acquisition on July 1, 2005 of $28.0 million.
Sumitomo’s 50% interest in Coach Japan. The remaining changes in assets and liabilities are attributable to normal operating fluctuations.

Net cash used in investmentinvesting activities was $181.0 million in fiscal 2006 compared to $371.8 million in fiscal 2005 compared to $375.3 million in fiscal 2004.2005. The decrease in net cash used in investmentinvesting activities is primarily attributable to investment maturities during the yearnon-recurrence of $330.7 million.the $228.4 million buyout of Sumitomo’s 50% interest in Coach Japan. This decrease was partially offset by the buyout of our joint venture partner’s

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interesta $39.3 million increase in Coach Japan of $228.4 million, increased investment purchases of $77.8 million and increased capital expenditures, of $20.9 million, whichprimarily related primarily to newinvestments in corporate systems and renovated retail stores in the United States and Japan, as well as technology enhancements.
infrastructure.

Net cash used in financing activities was $280.6$426.8 million in fiscal 20052006 compared to $45.7$211.9 million in fiscal 2004.2005. The $234.9$214.9 million increase in cash used resulted from an additional $210.0is primarily attributable to $335.3 million of additional funds expended to repurchase common stock. In connection withThis cash outflow was offset by the non-recurrence of $72.9 million distributed in the prior year as a result of the buyout of Coach Japan we distributed accumulated earningsas well as an increase of $57.4$39.7 million and repaid our initial investment of $15.5 million to our joint venture partner. The increase in cash used was offset by additional net borrowings on the revolving credit facility of $35.4 million and increased proceeds of $12.7 million received from the exercise of stock options.options and a $30.7 million increase in the excess tax benefit realized related to these exercises. In addition, net borrowings on the Coach Japan revolving credit facility decreased $22.9 million.


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On October 16, 2003, Coach, certain lenders and Bank of America, N.A. (“(‘‘Bank of America”America’’), as primary lender and administrative agent, renewed the $100 million senior unsecured revolving credit facility (the “Bank‘‘Bank of America facility”facility’’), extending the facility expiration to October 16, 2006. On June 23, 2005, this facility was extended for one additional year, to October 16, 2007. At Coach’s request, the Bank of America facility can be expanded to $125 million. On June 23, 2005, this facility was expanded for one additional year, to October 16, 2007. This facility is available for seasonal working capital requirements or general corporate purposes and may be prepaid without penalty or premium.

During fiscal 20052006 and fiscal 20042005 there were no borrowings under the Bank of America facility. AsAccordingly, as of July 1, 2006 and July 2, 2005, there were no outstanding borrowings under the Bank of America facility.

      Under this revolving credit facility,

Coach pays a commitment fee of 10 to 25 basis points based on the Company’s fixed charge coverage ratio, on any unused amounts of the revolving credit facility.Bank of America facility and interest of LIBOR plus 45 to 100 basis points on any outstanding borrowings. The initial commitment fee was 15 basis points. At July 2, 2005,points and the commitment fee was 12.5 basis points. The initial LIBOR margin under the facility was 62.5 basis points. At July 2, 2005,1, 2006, the commitment fee was 10 basis points and the LIBOR margin was 5545 basis points, reflecting an improvement in our fixed-charge coverage ratio.

The Bank of America facility contains various covenants and customary events of default. Coach has been in compliance with all covenants since its inception.

To provide funding for working capital and general corporate purposes, Coach Japan entered into credit facilities with several Japanese financial institutions. These facilities allow a maximum borrowing of 8.67.6 billion yen, or approximately $77$66.0 million, at July 2, 2005.1, 2006. Interest is based on the Tokyo Interbank rate plus a margin of up to 50 basis points.

      During fiscal 2005 and fiscal 2004, the peak borrowings under the Japanese credit facilities were $50.5 million and $36.1 million, respectively. At July 2, 2005 and July 3, 2004, outstanding borrowings under the Japanese facilities were $12.3 million and $1.7 million, respectively.

These Japanese facilities contain various covenants and customary events of default. Coach Japan has been in compliance with all covenants since their inception. These facilities include automatic renewals based on compliance with the covenants. Coach, Inc. is not a guarantor on any of these facilities.

      On August 12, 2004,

During fiscal 2006 and 2005, the Coach Boardpeak borrowings under the Japanese credit facilities were $21.6 million and $50.5 million, respectively. As of Directors approved a $200July 1, 2006 and July 2, 2005, outstanding borrowings under the Japanese credit facilities were $0 and $12.3 million, increase torespectively.

In connection with the Company’s existing common stock repurchase program, and extended the duration of this program through August 2006. As of April 2, 2005, Coach had completed this authorization of the stock repurchase program.

      On May 11, 2005, the Coach Board of Directors approved a common stock repurchase program to acquire up to $250 million of Coach’s outstanding common stock. Purchasespurchases of Coach stock may be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases. Repurchased shares of common stock will become authorized but unissued shares and may be issued in the future for general corporate and other purposes. On May 11, 2005, the Coach Board of Directors approved a common stock repurchase program to acquire up to $250 million of Coach’s outstanding common stock. The Company completed this authorization during 2006. On May 9, 2006, the Coach Board of Directors approved an additional common stock repurchase program to acquire up to $500 million of Coach’s outstanding common stock. This authorization expires in June 2007. The Company may terminate or limit the stock repurchase program at any time.

During fiscal 2006 and 2005, the Company repurchased and fiscal 2004, Coach repurchasedretired 19.1 million and 11.0 million and 3.0 million shares respectively, of common stock at an average cost of $24.09$31.50 and $18.18$24.09 per share, respectively.

As of July 1, 2006, Coach had approximately $150 million remaining in the stock repurchase program.

In fiscal 2005,2006, total capital expenditures were $94.6$133.9 million. In North America, Coach opened 1925 new retail and seven new factory stores in North America, which represented $20.0 million of capital expenditures. We alsoand expanded

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seven retail stores and twofive factory stores. These new and expanded stores which represented $19.9accounted for approximately $56 million of the total capital expenditures. SpendingIn addition, spending on department store renovations and distributor locations was $4.7 million. In addition, $14.0accounted for approximately $6 million was used for information systems and corporate facilities. These investments were financed from internally generated cash flows and on hand cash.of the total capital expenditures. In Japan, we invested $22.9approximately $14 million, primarily for the opening of 1218 new locations and nine store expansionsexpansions. The remaining capital expenditures related to corporate systems and information systems.infrastructure. These investments were financed from on hand cash, operating cash flows and by using funds from our Japanese revolving credit facilitiesfacilities.

For the fiscal year ending June 30, 2007, the Company expects total capital expenditures to be approximately $150 million. Capital expenditures will be primarily for new stores and expansions both


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in the U.S. and in Japan. We expect to open at least 35 new U.S. retail and factory stores and at least 15 net new locations in Japan, while continuing to invest in department store and distributor locations. These investments will be financed primarily from on hand cash and operating cash flow.

flows.

Coach experiences significant seasonal variations in its working capital requirements. During the first fiscal quarter Coach builds inventory for the holiday selling season, opens new retail stores and generates higher levels of trade receivables. In the second fiscal quarter its working capital requirements are reduced substantially as Coach generates consumer sales and collects wholesale accounts receivable. In fiscal 2005,2006, Coach purchased approximately $377$519 million of inventory, which was funded by on hand cash, operating cash flow and by borrowings under the Japanese revolving credit facilities.

Management believes that cash flow from operations and on hand cash will provide adequate funds for the foreseeable working capital needs, planned capital expenditures and the common stock repurchase program. Any future acquisitions, joint ventures or other similar transactions may require additional capital. There can be no assurance that any such capital will be available to Coach on acceptable terms or at all. Coach’s ability to fund its working capital needs, planned capital expenditures and scheduled debt payments, as well as to comply with all of the financial covenants under its debt agreements, depends on its future operating performance and cash flow, which in turn are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond Coach’s control.

      Currently,

Prior to Coach’s spin off from the Sara Lee isCorporation (‘‘Sara Lee’’), Sara Lee was a guarantor or a party to many of Coach’s leases. Coach has agreed to make efforts to remove Sara Lee from all of its existing leases, and Sara Lee is not a guarantor or a party to any new or renewed leases. Coach has obtained a letter of credit for the benefit of Sara Lee in an amount approximately equal to the annual minimum rental payments under leases transferred to Coach by Sara Lee, but for which Sara Lee retains contingent liability. Coach is required to maintain this letter of credit until the annual minimum rental payments under the relevant leases are less than $2.0 million. The initial letter of credit had a face amount of $20.6 million, and we expect this amount to decrease annually as Coach’s guaranteed obligations are reduced. As of July 2, 2005,1, 2006, the letter of credit was $15.4$15.1 million. We expect that we will be required to maintain the letter of credit for at leastapproximately 10 years.

As of July 2, 2005,1, 2006, the scheduled maturities of Coach’s long-term contractual obligations are as follows:


                     
  Payments Due by Period
   
  Less than 1-3 4-5 After 5  
  1 Year Years Years Years Total
           
  (amounts in millions)
Operating leases $62.6  $115.1  $102.4  $175.0  $455.1 
Revolving credit facility  12.3   —   —   —   12.3 
Long-term debt, including the current portion  0.2   0.4   0.6   2.2   3.4 
                
Total $75.1  $115.5  $103.0  $177.2  $470.8 
                
 Payments Due by Period
 TotalLess than
1 Year		1 - 3 Years3 - 5 YearsMore than
5 Years
 (amounts in millions)
Operating leases$587.2
$77.2
$149.7
$137.6
$222.7
Long-term debt, including the current portion3.3
0.2
0.5
0.7
1.9
Total$590.5
$77.4
$150.2
$138.3
$224.6

Coach does not have any off-balance-sheet financing or unconsolidated special purpose entities. Coach’s risk management policies prohibit the use of derivatives for trading purposes. The valuation of financial instruments that are marked to market are based upon independent third-party sources.

Long-Term Debt

Long-Term Debt

Coach is party to an Industrial Revenue Bond related to its Jacksonville, Florida distribution and consumer service facility. This loan has a remaining balance of $3.4$3.3 million and bears interest at 8.77%4.5%. Principal and interest payments are made semiannually, with the final payment due in 2014.

29Seasonality

Seasonality
Because its products are frequently given as gifts, Coach has historically realized, and expects to continue to realize, higher sales and operating income in the second quarter of its fiscal year, which


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includes the holiday months of November and December. In addition, fluctuations in sales and operating income in any fiscal quarter are affected by the timing of seasonal wholesale shipments and other events affecting retail sales. However, over the past several years, we have achieved higher levels of growth in the nonholidaynon-holiday quarters, which has reduced these seasonal fluctuations. We expect that these trends will continue, and we will further balance our year round business.

to continue.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results may vary from estimates in amounts that may be material to the financial statements. The accounting policies discussed below are considered critical because changes to certain judgments and assumptions inherent in these policies could affect the financial statements.

The areas of accounting that involve significant judgments and estimates are inventories, share-based compensation, impairment of long lived assets, goodwill and indefinite life intangible assets and revenue recognition. In certain instances, accounting principles generally accepted in the United States of America allow for the selection of alternative accounting methods. The Company’s significant policiespolicy that involveinvolves the selection of an alternative methods aremethod is accounting for stock options and inventories.

Operating Leases
      The Company leases retail stores and office space under operating leases. The majority of the Company’s lease agreements provide for tenant improvement allowances, rent escalation clauses and/or contingent rent provisions. In fiscal 2005, the Company conformed its For more information on Coach’s accounting for operating leases and leasehold improvements to Statement of Financial Accounting Standards (“SFAS”) No. 13 and its related interpretations as clarified by the Office of the Chief Accountant of the Securities and Exchange Commissionpolicies, please refer to the American Institute of Certified Public Accountants on February 7, 2005.
      Tenant improvement allowances are recorded as a deferred lease credit on the balance sheet and amortized over the lease term, which is consistent with the amortization period for the constructed assets. Historically, the consolidated balance sheets reflected these allowances as a reduction of capital expenditures and the carrying value of fixed assets and the consolidated statements of cash flows reflected tenant improvement allowances as a reduction of capital expenditures within investing activities. Since the impact of this change in accounting was not materialNotes to any previously reported fiscal year, the cumulative effect was recorded in the third quarter of fiscal 2005.
      In addition to the above, the Company recorded a cumulative, noncash charge in the third quarter of fiscal 2005 to reflect the impact of recording rent expense prior to the store opening (during the construction buildout period). Previously, the Company recognized the straight-line rent expense for leases beginning on the earlier of the store opening date or lease commencement date, which generally had the effect of excluding the buildout period of its stores from the calculation of the period over which it expensed rent. The Company now records rent expense when it takes possession of a store to begin its buildout, which generally occurs before the stated commencement of the lease term and is approximately 60 to 90 days prior to the opening of the store. The adjustment resulted in a cumulative, noncash charge to rent expense of approximately $4.8 million during fiscal 2005, of which approximately $4.3 million related to prior periods.
Stock-Based Compensation
      Two alternative methods for accounting for stock options are available: the intrinsic value method and the fair value method. The Company uses the intrinsic value method of accounting for stock options and, accordingly, no compensation expense has been recognized. Under either method, the determination of the

30

pro forma amounts involves several assumptions including option life and future volatility. See Note 1 and Note 8 to the Consolidated Financial Statements for expanded disclosures.
Inventories
Statements.

Inventories

U.S. inventories are valued at the lower of cost (determined by the first-in, first-out method) or market. Inventories in Japan are valued at the lower of cost (determined by the last-in, first-out method) or market. Inventory costs include material, conversion costs, freight and duties. Reserves for slow-moving and aged merchandise are provided based on historical experience and current product demand. We evaluate the adequacy of reserves quarterly. A decrease in product demand due to changing customer tastes, buying patterns or increased competition could impact Coach’s evaluation of its slow-moving and aged merchandise.

      For more information on Coach’s accounting policies, please refer to

Share-Based Compensation

During the Notes to Consolidated Financial Statements. Other critical accounting policies are as follows:

Valuation of Long-Lived Assets
      In accordance with SFAS No. 144, “Accounting for the Impairment or Disposalfirst quarter of Long-Lived Assets,” whichfiscal 2006, the Company adopted effective withStatement of Financial Accounting Standards (‘‘SFAS’’) 123R, ‘‘Share-Based Payment,’’ which requires an entity to measure the beginningcost of fiscal 2002,employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Previously, the Company assessesaccounted for stock-based compensation plans and the employee stock purchase plan in accordance with APB Opinion 25, ‘‘Accounting for Stock Issued to Employees’’ and related Interpretations and provided the required pro forma disclosures of SFAS 123, ‘‘Accounting for Stock-Based Compensation.’’ The Company elected to adopt the modified retrospective application method as provided by SFAS 123R and accordingly, all financial statement amounts for the prior periods presented have been adjusted to reflect the cost of such awards based on the grant-date fair value of the awards.

The determination of the grant-date fair value of the awards involves several assumptions, including expected term of the option and future volatility. The expected term of options represents the period of time that the options granted are expected to be outstanding and is based on historical experience. Expected volatility is based on historical volatility of the Company’s stock as well as the implied volatility from publicly traded options on Coach’s stock.

Valuation of Long-Lived Assets

Long-lived assets other than goodwill and indefinite life intangible assets, which are separately tested for impairment, are evaluated for impairment annually to determine if the carrying value of its long-livedthe assets for possible impairmentis recoverable. The evaluation is based on a review of forecasted operating cash flows and the profitability of the related business. The Company did not record any impairment losses in fiscal 2006, 2005, or 2004.


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Goodwill and Intangible Assets

The Company evaluates goodwill and indefinite life intangible assets annually for impairment. In order to complete our impairment analysis, we must perform a valuation analysis which includes determining the fair value of the Company’s reporting units based on discounted cash flows. This analysis contains uncertainties as it requires management to make assumptions and estimate the profitability of future growth strategies. The Company determined that there was no impairment in fiscal 20042006, 2005 or fiscal 2003.

Revenue Recognition
2004.

Revenue Recognition

Sales are recognized at the point of sale, which occurs when merchandise is sold in an over-the-counter consumer transaction or, for the wholesale, Internet and catalog channels, upon shipment of merchandise, when title passes to the customer. Allowances for estimated uncollectible accounts, discounts, returns and allowances are provided when sales are recorded based upon historical experience and current trends. Royalty revenues are earned through license agreements with manufacturers of other consumer products that incorporate the Coach brand. Revenue earned under these contracts is recognized based upon reported net sales from the licensee.

New Accounting Standards
      In October 2004, the Emerging Issues Task Force (“EITF”) issued its abstract No. 04-1 “Accounting for Pre-existing Relationships between the Parties to a Business Combination.” EITF 04-1 addresses the appropriate accounting treatment for portions of the acquisition costs of an entity that may be deemed to apply to elements of a pre-existing business relationship between the acquiring company and the target company. EITF 04-1 is effective for combinations consummated after October 2004. The adoption of EITF 04-1 had no effect on historical financial statements.

Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (“FASB”(‘‘FASB’’) issued SFAS No. 151, “Inventory‘‘Inventory Costs —– an amendment of ARB. No.ARB 43, Chapter 4.”’’ SFAS 151 is an amendment of Accounting Research Board Opinion No. 43 and sets standards for the treatment of abnormal amounts of idle facility expense, freight, handling costs and spoilage. SFAS 151 is effective for fiscal years beginning after June 15, 2005. We are currently evaluating the impactThe adoption of SFAS 151 did not have a material impact on ourthe Company’s consolidated financial statements.

In December 2004, the FASB issued Staff Position No.(‘‘FSP’’) 109-2, “Accounting‘‘Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“2004.’’ FSP No. 109-2”). FSP No. 109-2 provides guidance under SFAS No. 109, “Accounting‘‘Accounting for Income Taxes,”’’ with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”‘‘Jobs Act’’) on enterprises’ income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of

31

applying SFAS 109. We doAs the Company did not plan to make any dividends under this provision, but we are still evaluating the impact of FSP 109-2 did not have a material impact on ourthe Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchanges‘‘Exchanges of Nonmonetary Assets —– an amendment of APB Opinion No. 29,”’’ which eliminates certain narrow differences between Accounting Principles Board (“APB”)APB 29 and international accounting standards. SFAS 153 is effective for fiscal periods beginning on or after June 15, 2005. The adoption of SFAS 153 isdid not expected to have a material impact on ourthe Company’s consolidated financial statements.

      On

In December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based‘‘Share-Based Payment,”’’ which is a revision of SFAS 123, “Accounting‘‘Accounting for Stock-Based Compensation.”’’ SFAS 123R supersedes Accounting Principles Board Opinion No. 25, “Accounting‘‘Accounting for Stock Issued to Employees.”’’ The pronouncement requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award —– the requisite service period (typically the vesting period). The Company adopted SFAS 123R is effective as of the beginning of the first interim or annual reporting period that begins after June 15,July 3, 2005. We are currently evaluating the effect of SFAS 123R on our financial statements with the intent of implementing this standard in fiscal 2006.

See Footnote 2 for further information.

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”(‘‘SAB’’) No. 107 “Share-Based‘‘Share-Based Payment.”’’ SAB 107 expresses views of the SEC staff regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based paymentspayment arrangements. Subsequently, the SEC decided to delay the required implementation ofThe Company adopted SFAS 123R to fiscal years beginning after June 15,effective July 3, 2005. We are currently evaluating the effectSee Footnote 2 for further information.


Table of SFAS 123R and SAB 107 on our financial statements with the intent of implementing this standard in fiscal 2006.
Contents

In March 2005, the FASB issued Statement of Financial Accounting StandardsSFAS Interpretation No.Number (‘‘FIN’’) 47, (“FIN 47”), “Accounting‘‘Accounting for Conditional Asset Retirement Obligations.”’’ FIN 47 provides clarification regarding the meaning of the term “conditional‘‘conditional asset retirement obligation”obligation’’ as used in FASB 143, “Accounting‘‘Accounting for Asset Retirement Obligations.” We are currently evaluating the impact of FIN 47 on our financial statements.

      In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections.’’ This statementInterpretation is effective for accounting changes and correctionsno later than the end of errors made in fiscal years beginningending after December 15, 2005. EarlyThe adoption is permitted. The Company will adopt SFAS 154 inof FIN 47 did not have a material impact on the required period.
Company’s consolidated financial statements.

In June 2005, the EITFEmerging Issues Task Force (‘‘EITF’’) reached consensus on EITF 05-6, “Determining‘‘Determining the Amortization Period for Leasehold Improvements.”’’ Under EITF 05-6, leasehold improvements placed in service significantly after and not contemplated at or near the beginning of the lease term, should be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date the leasehold improvements are purchased. EITF 05-6 is effective for periods beginning after June 29, 2005. The adoption of EITF 05-6 did not have a material impact on the Company’s consolidated financial statements.

In November 2005, the FASB issued FSP 115-1 and 124-1, ‘‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.’’ FSP’s 115-1 and 124-1 address the determination as to when an investment is impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP is effective for reporting periods beginning after December 15, 2005. The adoption of FSP’s 115-1 and 124-1 did not expectedhave a material impact on the Company’s consolidated financial statements.

In November 2005, the FASB issued FSP 123R-3, ‘‘Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards.’’ This FSP provides an alternative transition method for calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of Statement 123R. As the Company did not elect to adopt the alternative transition method, this FSP did not impact the Company’s consolidated financial statements.

In February 2006, the FASB issued SFAS 155, ‘‘Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements 133 and 140.’’ SFAS 155 permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This statement is effective for all financial instruments acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006. The Company does not expect the adoption of SFAS 155 to have a material impact on ourthe Company’s consolidated financial statements.

Item 7A.Quantitative and Qualitative Disclosures about Market Risk

In June 2006, the EITF reached consensus on EITF 06-3, ‘‘Disclosure Requirements for Taxes Assessed by a Government Authority on Revenue-Producing Transactions.’’ EITF 06-3 requires disclosure of a company’s accounting policy with respect to presentation of taxes collected on a revenue producing transaction between a seller and a customer. For taxes that are reported on a gross basis (included in revenues and costs), EITF 06-3 also requires disclosure of the amount of taxes included in the financial statements. EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. The Company does not expect the adoption of EITF 06-3 to have a material impact on the Company’s consolidated financial statements.

In June 2006, the FASB issued FIN 48, ‘‘Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109,’’ which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS 109, ‘‘Accounting for Income Taxes.’’ FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 on the Company’s consolidated financial statements.

ITEM 7A. – Quantitative and Qualitative Disclosures about Market Risk

The market risk inherent in our financial instruments represents the potential loss in fair value, earnings or cash flows arising from adverse changes in interest rates or foreign currency exchange rates. Coach manages these exposures through operating and financing activities and, when


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appropriate, through the use of derivative financial instruments with respect to Coach Japan. The following quantitative disclosures are based on quoted market prices obtained through independent pricing sources for the same or similar types of financial instruments, taking into consideration the underlying terms and maturities and theoretical pricing models. These quantitative disclosures do not represent the maximum possible loss or any expected loss that may occur, since actual results may differ from those estimates.

32Foreign Exchange

Foreign Exchange
Foreign currency exposures arise from transactions, including firm commitments and anticipated contracts, denominated in a currency other than the entity’s functional currency, and from foreign-denominated revenues and expenses translated into U.S. dollars.
      Approximately 98%

Substantially all of Coach’s fiscal 20052006 non-licensed product needs were purchased from independent manufacturers in countries other than the United States. These countries include China, Hong Kong,Hungary, India, Italy, India,Korea, Philippines, Singapore, South Korea, Spain, Turkey, Costa Rica, Hungary, Indonesia,Taiwan, Thailand Taiwan and Philippines.Turkey. Additionally, sales are made through international channels to third party distributors. Substantially all purchases and sales involving international parties, excluding Coach Japan, are denominated in U.S. dollars and, therefore, are not hedged by Coach using any derivative instruments.

Coach is exposed to market risk from foreign currency exchange rate fluctuations with respect to Coach Japan as a result of its U.S. dollar denominated inventory purchases. The Company, through Coach Japan, enters into certain foreign currency derivative contracts, primarily foreign exchange forward contracts, to manage these risks. These transactions are in accordance with Coach’s risk management policies. Coach does not enter into derivative transactions for speculative or trading purposes. The Company

Coach is also exposed to market risk from foreign currency exchange rate fluctuations relatedwith respect to the euro-denominated expensesCoach Japan as a result of its Italian sourcing office. During fiscal 2003,$231 million U.S. dollar denominated fixed rate intercompany loan from Coach. To manage this risk, on July 1, 2005, Coach beganJapan entered into a program to enter into certain foreigncross currency derivative contracts, primarily foreignswap transaction, the terms of which include an exchange forward contracts,of a U.S. dollar fixed interest rate for a yen fixed interest rate. The loan matures in order to manage these fluctuations. However, during fiscal 2004, we reassessed this program2010, at which point the swap requires an exchange of yen and determined,U.S. dollar based on current business conditions that we would discontinue hedging against the euro.

principals.

The foreign currency contracts entered into by the Company have durations no greater than 1218 months. The fair values of open foreign currency derivatives included in accrued liabilities at July 2, 2005 and July 3, 2004 were $0 and $0.5 million, respectively. The fair value of open foreign currency derivatives included in current assets at July 1, 2006 and July 2, 2005 were $2.6 million and July 3, 2004 was $1.5 million, and $0, respectively. As of July 1, 2006 and July 2, 2005, open foreign currency forward contracts designated as hedges with a notional amount of $114.8 million and $46.9 million were fair valued resultingvalued. For the year ended July 1, 2006, changes in derivative balances resulted in a reduction of other comprehensive income of $4.5 million, net of taxes. For the year ended July 2, 2005, changes in derivative balances resulted in an increase to equity as a benefit toof other comprehensive income of $1.2 million, net of taxes. As of July 3, 2004, open foreign currency forward contracts designated as hedges, with a notional amount of $63.6 million were fair valued resulting in a reduction to equity as a charge to other comprehensive income of $0.5 million, net of taxes.

Interest Rate

Interest Rate

Coach faces minimal interest rate risk exposure in relation to its outstanding debt of $15.7$3.3 million at July 2, 2005. Of this amount, $12.3 million, under revolving credit facilities, is subject to interest rate fluctuations.1, 2006. A hypothetical 1% change in the interest rate applied to the fair value of debt would not have a material impact on earnings or cash flows of Coach.

ItemITEM 8.Financial StatementStatements and Supplementary Data

See the “Index‘‘Index to Financial Statements”,Statements,’’ which is located on page 3635 of this report.

ItemITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
      None

None.

ItemITEM 9A.Controls and Procedures

Disclosure Controls and Procedures

Based on the evaluation of the Company’s disclosure controls and procedures, each of Lew Frankfort, the Chief Executive Officer of the Company, and Michael F. Devine, III, the Chief


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Financial Officer of the Company, has concluded that the Company’s disclosure controls and procedures are effective as of July 1, 2006.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal controls over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements. AllManagement evaluated the effectiveness of the Company’s internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assuranceover financial reporting using the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control-Integrated Framework. Management, under the supervision and with respect to financial statement preparationthe participation of the Company’s Chief Executive Officer and presentation.

33

      The Company’s managementChief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of July 2, 2005. In making this assessment,1, 2006 and concluded that it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based upon our assessment, we believe that, as of July 2, 2005, the Company’s internal control over financial reporting is effective based on those criteria.
effective.

The Company’s independent auditors have issued an audit report on management’s assessment of the effectiveness of internal control over financial reporting and on the Company’s internal control over financial reporting. This report appears on page 38.

PART III
37.

Changes in Internal Control over Financial Reporting

There were no changes in internal control over financial reporting that occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ItemITEM 9B. Other Information

None.

PART III

ITEM 10.Directors and Executive Officers of the Registrant

The information set forth in the Proxy Statement for the 2005 annual meeting2006 Annual Meeting of stockholdersStockholders is incorporated herein by reference. The Proxy Statement will be filed with the Commission within 120 days after the end of the fiscal year covered by this Form 10-K pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

ItemITEM 11.Executive Compensation

The information set forth in the Proxy Statement for the 2005 annual meeting2006 Annual Meeting of stockholdersStockholders is incorporated herein by reference. The Proxy Statement will be filed with the Commission within 120 days after the end of the fiscal year covered by the Form 10-K pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

ItemITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

(a)    Security ownership of management set forth in the Proxy Statement for the 2006 Annual Meeting of Stockholders is incorporated herein by reference.

(b)    There are no arrangements known to the registrant that may at a subsequent date result in a change in control of the registrant.

ITEM 13.       (a) Security ownership of management set forth in the Proxy Statement for the 2005 annual meeting of stockholders is incorporated herein by reference.
      (b) There are no arrangements known to the registrant that may at a subsequent date result in a change in control of the registrant.
Item 13.Certain Relationships and Related Transactions

The information set forth in the Proxy Statement for the 2005 annual meeting2006 Annual Meeting of stockholdersStockholders is incorporated herein by reference. The Proxy Statement will be filed with the Commission within 120 days after the end of the fiscal year covered by this Form 10-K pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.


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ItemITEM 14.Principal Accountant Fees and Services

The information required by this item is incorporated herein by reference to the section entitled “Matters‘‘Matters Relating to Coach’s Independent Auditors”Auditors’’ in the Proxy Statement for the 2005 annual meeting2006 Annual Meeting of stockholders.

Stockholders.

PART IV

ItemITEM 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)       (a) Financial Statements and Financial Statement Schedule See the “Index to Financial Statements” which is located on page 36Schedules

See ‘‘Index to Financial Statements’’ which is located on page 35 of this report.

(b) Exhibits. See the exhibit index which is included herein.
(c) Reports on Form 8-K. See the exhibit index which is included herein.

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SIGNATURES

34

SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 Coach, Inc.COACH, INC.
Date: August 24, 2006By:/s/ Lew Frankfort
 By: /s/Lew Frankfort
Name:    Lew Frankfort
 Title:       Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated below on September 9, 2005.

August 24, 2006.

SignatureTitle
/s/Lew Frankfort
Lew Frankfort		Chairman, Chief Executive Officer and Director
Lew Frankfort
/s/Keith Monda
Keith Monda		President, Chief Operating Officer and Director
Keith Monda
/s/Michael F. Devine, III
Michael F. Devine, III		Senior Vice President and Chief Financial Officer
(as (as principal financial officer and principal
accounting officer of Coach)
Michael F. Devine, III
/s/Joseph Ellis
Joseph Ellis		Director
Joseph Ellis
/s/Sally Frame Kasaks
Sally Frame Kasaks Susan Kropf		Director
Susan Kropf
/s/Gary Loveman
Gary Loveman		Director
Gary Loveman
/s/Ivan Menezes
Ivan Menezes		Director
Ivan Menezes
/s/Irene Miller
Irene Miller		Director
Irene Miller
/s/Michael Murphy
Michael Murphy		Director
Michael Murphy
/s/ Jide ZeitlinDirector
Jide Zeitlin


35

UNITED STATES

SECURITES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FINANCIAL STATEMENTS


For the Fiscal Year Ended July 2, 2005
1, 2006

COACH, INC.

New York, New York 10001

INDEX TO FINANCIAL STATEMENTS


 Page

Number
Financial Statements 
Reports of Independent Registered Public Accounting Firm
3736
Consolidated Balance Sheets – 
Consolidated Balance Sheets — At July 2, 20051,2006 and July 3, 2004
2,2005		3938
Consolidated Statements of Income — –
For Fiscal Years Ended July1,2006, July2,2005, July 3, 2004 and June 28, 2003July3,20044039
Consolidated Statements of Stockholders’ Equity — –
For Fiscal Years Ended July1,2006, July2,2005, July 3, 2004 and June 28, 2003July3,20044140
Consolidated Statements of Cash Flows — –
For Fiscal Years Ended July1,2006, July2,2005, July 3, 2004 and June 28, 2003July3,20044241
Notes to Consolidated Financial Statements
4342
Market and Dividend Information
67
Financial Statement Schedules for the years ended July 1, 2006, July 2, 2005, and July 3, 2004 and June 28, 2003:2004: 
Schedule II —– Valuation and Qualifying Accounts
68

All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.


36

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Coach, Inc.


New York, New York

We have audited the accompanying consolidated balance sheets of Coach, Inc. and subsidiaries (the “Company”‘‘Company’’) as of July 2, 20051, 2006 and July 3, 2004,2, 2005, and the related consolidated statements of income, stockholders’stockholders' equity and cash flows for each of the three years in the period ended July 2, 2005.1, 2006. Our audits also included the consolidated financial statement schedule listed at Item 15. These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at July 2, 20051, 2006 and July 3, 2004,2, 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 2, 20051, 2006 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, in fiscal 2006 the Company changed its method of accounting for stock-based compensation to conform to Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, and, adjusted all prior periods presented in accordance with the modified retrospective method.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of July 2, 2005,1, 2006, based on the criteria established in Internal Control —– Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 9, 2005August 24, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

New York, New York
August 24, 2006


September 9, 2005

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37

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Coach, Inc.


New York, New York

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Coach, Inc. and subsidiaries (the “Company”‘‘Company’’) maintained effective internal control over financial reporting as of July 2, 2005,1, 2006, based on criteria established inInternal Control —– Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of July 2, 2005,1, 2006, is fairly stated, in all material respects, based on the criteria established inInternal Control —– Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 2, 2005,1, 2006, based on the criteria established inInternal Control —– Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and consolidated financial statement schedule as of and for the year ended July 2, 20051, 2006 of the Company and our report dated September 9, 2005August 24, 2006 expressed an unqualified opinion on those consolidated financial statements and consolidated financial statement schedule.

schedule and included an explanatory paragraph relating to the Company’s change in fiscal 2006 of its method of accounting for stock-based compensation.

/s/ Deloitte & Touche LLP

New York, New York
August 24, 2006


September 9, 2005

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38

COACH, INC.

CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)


          
  July 2, July 3,
  2005 2004
     
  (amounts in thousands,
  except share data)
ASSETS
Cash and cash equivalents $154,566  $262,720 
Short-term investments  228,485   171,723 
Trade accounts receivable, less allowances of $4,124 and $5,456, respectively  65,399   55,724 
Inventories  184,419   161,913 
Deferred income taxes  50,820   34,521 
Prepaid expenses and other current assets  25,671   19,015 
       
Total current assets  709,360   705,616 
 
Property and equipment, net  203,862   164,291 
Long-term investments  122,065   130,000 
Deferred income taxes  31,520   — 
Goodwill  238,711   13,605 
Indefinite life intangibles  9,788   9,788 
Other noncurrent assets  31,826   21,125 
       
Total assets $1,347,132  $1,044,425 
       
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable $64,985  $44,771 
Accrued liabilities  185,502   123,647 
Deferred income taxes  2,851   — 
Revolving credit facility  12,292   1,699 
Current portion of long-term debt  150   115 
       
Total current liabilities  265,780   170,232 
 
Deferred income taxes  4,512   15,791 
Long-term debt  3,270   3,420 
Other liabilities  40,794   32,498 
Minority interest, net of tax  —   40,198 
       
Total liabilities  314,356   262,139 
Commitments and contingencies (Note 6)        
Stockholders’ equity        
 Preferred stock: (authorized 25,000,000 shares; $0.01 par value) none issued  —   — 
 Common stock: (authorized 500,000,000 shares; $0.01 par value) issued and outstanding — 378,429,710 and 379,236,402 shares, respectively  3,784   3,792 
 Capital in excess of par value  465,015   355,130 
 Retained earnings  576,141   430,461 
 Accumulated other comprehensive income  903   2,195 
 Unearned compensation  (13,067)  (9,292)
       
Total stockholders’ equity  1,032,776   782,286 
       
Total liabilities and stockholders’ equity $1,347,132  $1,044,425 
       
ASSETSJuly 1,
2006		July 2,
2005
Cash and cash equivalents$143,388
$154,566
Short-term investments394,177
228,485
Trade accounts receivable, less allowances of $6,000 and $4,124, respectively84,361
65,399
Inventories233,494
184,419
Deferred income taxes78,019
50,820
Prepaid expenses and other current assets41,043
25,671
Total current assets974,482
709,360
Long-term investments—
122,065
Property and equipment, net298,531
203,862
Goodwill227,811
238,711
Indefinite life intangibles12,007
12,088
Deferred income taxes84,077
54,545
Other noncurrent assets29,612
29,526
Total assets$1,626,520
$1,370,157
LIABILITIES AND STOCKHOLDERS' EQUITY 
 
Accounts payable$79,819
$64,985
Accrued liabilities261,835
188,234
Revolving credit facility—
12,292
Current portion of long-term debt170
150
Total current liabilities341,824
265,661
Deferred income taxes31,655
4,512
Long-term debt3,100
3,270
Other liabilities61,207
40,794
Total liabilities437,786
314,237
Commitments and contingencies (Note 6) 
 
Stockholders' equity 
 
Preferred stock: (authorized 25,000,000 shares; $0.01 par value) none issued—
—
Common stock: (authorized 1,000,000,000 shares; $0.01 par value) issued
and outstanding – 369,830,906 and 378,429,710 shares, respectively		3,698
3,784
Additional paid-in-capital775,209
566,262
Retained earnings417,087
484,971
Accumulated other comprehensive (loss) income(7,260
)
903
Total stockholders' equity1,188,734
1,055,920
Total liabilities and stockholders' equity$1,626,520
$1,370,157

See accompanying Notes to Consolidated Financial Statements.Statements


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39

COACH, INC.

CONSOLIDATED STATEMENTS OF INCOME
              
  Fiscal Year Ended
   
  July 2, July 3, June 28,
  2005 2004(1) 2003
       
  (amounts in thousands, except per share data)
Net sales $1,710,423  $1,321,106  $953,226 
Cost of sales  399,652   331,024   275,797 
          
Gross profit  1,310,771   990,082   677,429 
Selling, general and administrative expenses  688,961   545,617   433,667 
          
Operating income  621,810   444,465   243,762 
Interest income, net  15,760   3,192   1,059 
          
Income before provision for income taxes and minority interest  637,570   447,657   244,821 
Provision for income taxes  235,277   167,866   90,585 
Minority interest, net of tax  13,641   18,043   7,608 
          
Net income $388,652  $261,748  $146,628 
          
Net income per share            
 Basic $1.03  $0.70  $0.41 
          
 Diluted $1.00  $0.68  $0.39 
          
Shares used in computing net income per share            
 Basic  378,670   372,120   359,116 
          
 Diluted  390,191   385,558   371,684 
          

(amounts in thousands, except per share data)


 Fiscal Year Ended(1)
 July 1,
2006		July 2,
2005		July 3,
2004
Net sales$2,111,501
$1,710,423
$1,321,106
Cost of sales472,622
399,652
331,024
Gross profit1,638,879
1,310,771
990,082
Selling, general and administrative expenses874,275
738,208
584,778
Operating income764,604
572,563
405,304
Interest income, net32,623
15,760
3,192
Income before provision for income taxes and
minority interest		797,227
588,323
408,496
Provision for income taxes302,950
216,070
152,504
Minority interest, net of tax—
13,641
18,043
Net income$494,277
$358,612
$237,949
Net income per share 
 
 
Basic$1.30
$0.95
$0.64
Diluted$1.27
$0.92
$0.62
Shares used in computing net income per share 
 
 
Basic379,635
378,670
372,120
Diluted388,495
390,191
385,558
(1)Fiscal year ended July 3, 2004 was a 53-week fiscal year

See accompanying Notes to Consolidated Financial Statements.Statements


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40

COACH, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’STOCKHOLDERS' EQUITY
(amounts in thousands)


                                      
            Accumulated      
  Total Preferred Common Capital in   Other     Shares of
  Stockholders’ Stockholders’ Stockholders’ Excess of Retained Comprehensive Unearned Comprehensive Common
  Equity Equity Equity Par Earnings Income (loss) Compensation Income (loss) Stock
                   
  (amounts in thousands)
Balances at June 29, 2002 $260,356  $—  $3,580  $152,718  $105,509  $215  $(1,666)      357,816 
 Net income  146,628   —   —   —   146,628   —   —  $146,628     
 Shares issued for stock options and employee benefit plans  28,395   —   156   28,239   —   —   —       15,800 
 Tax benefit from exercise of stock options  41,503   —   —   41,503   —   —   —         
 Repurchase of common stock  (49,947)  —   (76)  (15,356)  (34,515)  —   —       (7,716)
 Grant of restricted stock awards  —   —   —   5,550   —   —   (5,550)      — 
 Amortization of restricted stock awards  1,568   —   —   —   —   —   1,568       118 
 Unrealized gain on cash flow hedging derivatives, net  168   —   —   —   —   168   —   168     
 Translation adjustments  (348)  —   —   —   —   (348)  —   (348)    
 Minimum pension liability  (1,394)  —   —   —   —   (1,394)  —   (1,394)    
                            
 Comprehensive income                             $145,054     
                            
Balances at June 28, 2003  426,929   —   3,660   212,654   217,622   (1,359)  (5,648)      366,018 
 Net income  261,748   —   —   —   261,748   —   —  $261,748     
 Shares issued for stock options and employee benefit plans  34,141   —   162   33,979   —   —   —       16,240 
 Tax benefit from exercise of stock options  106,458   —   —   106,458   —   —   —         
 Repurchase of common stock  (54,954)  —   (30)  (6,015)  (48,909)  —   —       (3,022)
 Grant of restricted stock awards  —   —   —   8,054   —   —   (8,054)      — 
 Amortization of restricted stock awards  4,410   —   —   —   —   —   4,410       — 
 Unrealized loss on cash flow hedging derivatives, net  (460)  —   —   —   —   (460)  —   (460)    
 Translation adjustments  2,892   —   —   —   —   2,892   —   2,892     
 Minimum pension liability  1,122   —   —   —   —   1,122   —   1,122     
                            
 Comprehensive income                             $265,302     
                            
Balances at July 3, 2004  782,286   —   3,792   355,130   430,461   2,195   (9,292)      379,236 
 Net income  388,652   —   —   —   388,652   —   —  $388,652     
 Shares issued for stock options and employee benefit plans  42,988   —   102   42,886   —   —   —       10,194 
 Tax benefit from exercise of stock options  78,480   —   —   78,480   —   —   —         
 Repurchase of common stock  (264,971)  —   (110)  (21,889)  (242,972)  —   —       (11,000)
 Grant of restricted stock awards  —   —   —   10,408   —   —   (10,408)      — 
 Amortization of restricted stock awards  6,633   —   —   —   —   —   6,633       — 
 Unrealized gain on cash flow hedging derivatives, net  1,229   —   —   —   —   1,229   —   1,229     
 Translation adjustments  (2,331)  —   —   —   —   (2,331)  —   (2,331)    
 Minimum pension liability  (190)  —   —   —   —   (190)  —   (190)    
                            
 Comprehensive income                             $387,360     
                            
Balances at July 2, 2005 $1,032,776  $—  $3,784  $465,015  $576,141  $903  $(13,067)      378,430 
                            
Total
Stockholders'
Equity		Preferred
Stockholders'
Equity		Common
Stockholders'
Equity		Additional
Paid-in-
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (loss)		Comprehensive
Income (loss)		Shares of
Common
Stock
Balances at June 28, 2003$436,536
$   —
$3,660
$253,944
$180,291
$(1,359
)
366,018
Net income237,949
—
—
—
237,949
—
$237,949
Shares issued for stock options and employee benefit plans34,141
—
162
33,979
—
—
16,240
Share-based compensation43,571
—
—
43,571
—
—
Excess tax benefit from exercise of stock options95,239
—
—
95,239
—
—
Repurchase of common stock(54,954
)
—
(30
)
(6,015
)
(48,909
)
—
(3,022
)
Changes in derivatives balances(460
)
—
—
—
—
(460
)
(460
)
Translation adjustments2,892
—
—
—
—
2,892
2,892
Minimum pension liability1,122
—
—
—
—
1,122
1,122
Comprehensive income
$241,503
Balances at July 3, 2004796,036
—
3,792
420,718
369,331
2,195
379,236
Net income358,612
—
—
—
358,612
—
$358,612
Shares issued for stock options and employee benefit plans42,988
—
102
42,886
—
—
10,194
Share-based compensation55,880
—
—
55,880
—
—
Excess tax benefit from exercise of stock options68,667
—
—
68,667
—
—
Repurchase of common stock(264,971
)
—
(110
)
(21,889
)
(242,972
)
—
(11,000
)
Changes in derivatives balances1,229
—
—
—
—
1,229
1,229
Translation adjustments(2,331
)
—
—
—
—
(2,331
)
(2,331
)
Minimum pension liability(190
)
—
—
—
—
(190
)
(190
)
Comprehensive income
$357,320
Balances at July 2, 20051,055,920
—
3,784
566,262
484,971
903
378,430
Net income494,277
—
—
—
494,277
—
$494,277
Shares issued for stock options and employee benefit plans78,444
—
105
78,339
—
—
10,456
Share-based compensation69,190
—
—
69,190
—
—
Excess tax benefit from exercise of stock options99,337
—
—
99,337
—
—
Repurchase of common stock(600,271
)
—
(191
)
(37,919
)
(562,161
)
—
(19,055
)
Changes in derivatives balances(4,488
)
—
—
—
—
(4,488
)
(4,488
)
Translation adjustments(3,780
)
—
—
—
—
(3,780
)
(3,780
)
Minimum pension liability105
—
—
—
—
105
105
Comprehensive income
$486,114
Balances at July 1, 2006$1,188,734
$—
$3,698
$775,209
$417,087
$(7,260
)
369,831

See accompanying Notes to Consolidated Financial Statements.Statements


Table of Contents

41

COACH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
               
  Fiscal Year Ended
   
  July 2, July 3, June 28,
  2005 2004(1) 2003
       
  (amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
            
 Net income $388,652  $261,748  $146,628 
 Adjustments to reconcile net income to net cash from operating activities:            
 Depreciation and amortization  57,033   44,510   31,350 
 Minority interest  13,641   18,043   7,608 
 Tax benefit from exercise of stock options  78,480   106,458   41,503 
 (Increase) decrease in deferred taxes  (56,247)  11,646   8,778 
 Other non cash credits, net  3,881   3,372   (969)
 Changes in assets and liabilities:            
  Increase in trade accounts receivable  (9,675)  (20,254)  (4,545)
  Increase in inventories  (22,506)  (18,106)  (7,403)
  Increase in other assets  (14,885)  (3,861)  (10,880)
  Increase in other liabilities  23,820   7,058   6,242 
  Increase in accounts payable  20,214   18,134   818 
  Increase in accrued liabilities  61,855   25,785   7,239 
          
 Net cash provided by operating activities  544,263   454,533   226,369 
          
CASH FLOWS FROM INVESTING ACTIVITIES
            
 Purchases of property and equipment  (94,592)  (73,659)  (61,857)
 Acquisition of joint venture  (228,431)  —   — 
 Proceeds from dispositions of property and equipment  18   58   27 
 Purchases of investments  (379,530)  (301,723)  — 
 Maturities of investments  330,703   —   — 
          
 Net cash used in investing activities  (371,832)  (375,324)  (61,830)
          
CASH FLOWS FROM FINANCING ACTIVITIES
            
 Repurchase of common stock  (264,971)  (54,954)  (49,947)
 Distribution of earnings to joint venture shareholders  (57,403)  —   — 
 Repayment of joint venture partner contribution  (15,524)  —   — 
 Repayment of long-term debt  (115)  (80)  (75)
 Borrowings on revolving credit facility  359,503   168,865   63,164 
 Repayments of revolving credit facility  (348,910)  (193,637)  (70,862)
 Proceeds from exercise of stock options  46,835   34,141   28,395 
          
 Net cash used in financing activities  (280,585)  (45,665)  (29,325)
          
(Decrease) increase in cash and cash equivalents  (108,154)  33,544   135,214 
Cash and cash equivalents at beginning of period  262,720   229,176   93,962 
          
Cash and cash equivalents at end of period $154,566  $262,720  $229,176 
          
Cash paid for income taxes $162,702  $33,136  $56,083 
          
Cash paid for interest $238  $330  $679 
          

(amounts in thousands)


 Fiscal Year Ended(1)
 July 1,
2006		July 2,
2005		July 3,
2004
CASH FLOWS FROM OPERATING ACTIVITIES 
 
 
Net income$494,277
$358,612
$237,949
Adjustments to reconcile net income to net cash from operating activities: 
 
 
Depreciation and amortization65,115
50,400
40,100
Share-based compensation69,190
55,880
43,571
Minority interest—
13,641
18,043
Excess tax benefit from share-based compensation(99,337
)
(68,667
)
(95,239
)
Increase in deferred tax assets(56,731
)
(54,990
)
(8,237
)
Increase (decrease) in deferred tax liabilities33,788
(8,428
)
15,791
Other noncash credits, net(14,723
)
3,881
3,372
Changes in operating assets and liabilities: 
 
 
Increase in trade accounts receivable(18,962
)
(9,675
)
(20,254
)
Increase in inventories(49,075
)
(22,506
)
(18,106
)
Increase in other assets(6,130
)
(14,885
)
(3,861
)
Increase in other liabilities19,307
23,820
7,058
Increase in accounts payable14,834
20,214
18,134
Increase in accrued liabilities145,050
128,299
120,973
Net cash provided by operating activities596,603
475,596
359,294
CASH FLOWS FROM INVESTING ACTIVITIES 
 
 
Purchases of property and equipment(133,876
)
(94,592
)
(73,659
)
Acquisition of joint venture—
(228,431
)
—
Proceeds from dispositions of property and equipment237
18
58
Purchases of investments(1,195,934
)
(379,530
)
(301,723
)
Proceeds from maturities of investments1,148,618
330,703
—
Net cash used in investing activities(180,955
)
(371,832
)
(375,324
)
CASH FLOWS FROM FINANCING ACTIVITIES 
 
 
Repurchase of common stock(600,271
)
(264,971
)
(54,954
)
Distribution of earnings to joint venture shareholders—
(57,403
)
—
Repayment of joint venture partner contribution—
(15,524
)
—
Repayment of long-term debt(150
)
(115
)
(80
)
Borrowings on revolving credit facility58,512
359,503
168,865
Repayments of revolving credit facility(70,804
)
(348,910
)
(193,637
)
Proceeds from exercise of stock options86,550
46,835
34,141
Excess tax benefit from share-based compensation99,337
68,667
95,239
Net cash (used in) provided by financing activities(426,826
)
(211,918
)
49,574
(Decrease) increase in cash and cash equivalents(11,178
)
(108,154
)
33,544
Cash and cash equivalents at beginning of year154,566
262,720
229,176
Cash and cash equivalents at end of year$143,388
$154,566
$262,720
Cash paid for income taxes$205,451
$162,702
$33,136
Cash paid for interest$1,155
$238
$330
Noncash investing activity$22,349
$—
$—
(1)Fiscal year ended July 3, 2004 was a 53-week fiscal year

See accompanying Notes to Consolidated Financial Statements.Statements


Table of Contents

42

COACH, INC.

Notes to Consolidated Financial Statements


(dollars and shares in thousands, except per share data)

1.Nature of Operations and Significant Accounting Policies

Nature of Operations

Coach, Inc. (the “Company”‘‘Company’’) designs produces and markets high-quality, modern American classic accessories. The Company’s primary product offerings, manufactured by third-party suppliers, include handbags, women’s and men’s accessories, outerwear, business, cases, outerweartravel, watches, footwear and related accessories and weekend and travel accessories,.eyewear. Coach’s products are sold through direct-to-consumer channels, including Company-operated retailstores in North America and factory stores,Japan, its online store and its catalogs, as well as through indirect channels, including department store locations in the United States, international department stores, freestanding retail locations and specialty retailers and retail and factory store locations operated by Coach Japan, Inc.

retailers.

Significant Accounting Policies

Fiscal year

Fiscal year

The Company’s fiscal year ends on the Saturday closest to June 30. Unless otherwise stated, references to years in the financial statements relate to fiscal years. The fiscal years ended July 1, 2006 (‘‘fiscal 2006’’) and July 2, 2005 (“(‘‘fiscal 2005”) and June 28, 2003 (“fiscal 2003”2005’’) were each 52-week periods, whereas the fiscal year ended July 3, 2004 (“(‘‘fiscal 2004”2004’’) was a 53-week period.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Actual results could differ from estimates in amounts that may be material to the financial statements.

Principles of Consolidation

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all subsidiaries under the control of the Company, including Coach Japan, Inc. All significant intercompany transactions and balances are eliminated in consolidation.

Cash and Cash Equivalents

Cash and Cash Equivalents

Cash and cash equivalents consist of cash balances and highly liquid investments with a maturity of less than 90 days.days at the date of purchase.


Investments
Table of Contents

COACH, INC.

Notes to Consolidated Financial Statements – (Continued)
(dollars and shares in thousands, except per share data)

Investments

Investments consist of U.S. government and agency debt securities as well as municipal government and corporate debt securities. These securities are classified as held to maturity, as the Company has both the ability and the intent to hold these securities until maturity. Investments are recorded at amortized cost. Premiums are amortized and discounts are accreted over the lives of the related securities as adjustments to interest income, using the effective interest method.income. Dividend and interest income are recognized when earned.

43Concentration of Credit Risk

COACH, INC.
Notes to Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
Concentration of Credit Risk
Financial instruments that potentially expose Coach to concentration of credit risk consist primarily of cash investments and accounts receivable. The Company places its cash investments with high-credit quality financial institutions and currently invests primarily in U.S. government and agency debt securities, municipal government and corporate debt securities, and bank money market funds placed with major banks and financial institutions. Accounts receivable is generally diversified due to the number of entities comprising Coach’s customer base and their dispersion across many geographical regions. The Company’s allowance for bad debts, returns and allowances was $4,124 at July 2, 2005 and $5,456 at July 3, 2004. The Company believes no significant concentration of credit risk exists with respect to these cash investments and accounts receivable.
Inventories

Inventories

Inventories consist primarily of finished goods. U.S. inventories are valued at the lower of cost (determined by the first-in, first-out method (“FIFO”(‘‘FIFO’’)) or market. Inventories in Japan are valued at the lower of cost (determined by the last-in, first-out method (“LIFO”(‘‘LIFO’’)) or market. At the end of fiscal 20052006 and fiscal 2004,2005, inventories recorded at LIFO were $911 and $17 lower, and $2,409 higher, respectively, than if they were valued at FIFO. Inventories valued under LIFO amounted to $40,861$54,651 and $34,508$40,861 in fiscal 20052006 and 2004,2005, respectively. Inventory costs include material, conversion costs, freight and duties.

Property and Equipment

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. Machinery and equipment are depreciated over lives of five to seven years and furniture and fixtures are depreciated over lives of three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease terms. Maintenance and repair costs are charged to earnings as incurred while expenditures for major renewals and improvements are capitalized. Upon the disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts.

Operating Leases

Operating Leases

The CompanyCompany's leases for office space, retail stores and office space underthe distribution facility are accounted for as operating leases. The majority of the Company’s lease agreements provide for tenant improvement allowances, rent escalation clauses and/or contingent rent provisions. In fiscal 2005, the Company conformed its accounting for operating leases and leasehold improvements to Statement of Financial Accounting Standards (“SFAS”) No. 13 and its related interpretations as clarified by the Office of the Chief Accountant of the Securities and Exchange Commission to the American Institute of Certified Public Accountants on February 7, 2005.

Tenant improvement allowances are recorded as a deferred lease credit on the balance sheet and amortized over the lease term, which is consistent with the amortization period for the constructed assets. Historically,Rent expense is recorded when the consolidated balance sheets reflected these allowances as a reduction of capital expenditures and the carrying value of fixed assets and the consolidated statements of cash flows reflected tenant improvement allowances as a reduction of capital expenditures within investing activities. Since the impact of this change in accounting was not material to any previously reported fiscal year, the cumulative effect was recorded in the third quarter of fiscal 2005.
      In addition to the above, the Company recorded a cumulative, noncash charge in the third quarter of fiscal 2005 to reflect the impact of recording rent expense prior to the store opening (during the construction buildout period). Previously, the Company recognized the straight-line rent expense for leases beginning on

44

COACH, INC.
Notes to Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
the earlier of the store opening date or lease commencement date, which generally had the effect of excluding the buildout period of its stores from the calculation of the period over which it expensed rent. The Company now records rent expense when it takes possession of a store to begin its buildout, which generally occurs before the stated commencement of the lease term and is approximately 60 to 90 days prior to the opening of the store. The adjustment resulted in a cumulative, noncash charge to rent expense of approximately $4,800 during fiscal 2005, of which approximately $4,300 related to prior periods.

Goodwill and Other Intangible Assets

      The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” effective with the beginning of fiscal 2002. In accordance with SFAS No. 142, the Company’s goodwill account is no longer amortized but rather is

Goodwill and indefinite life intangible assets are evaluated for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Based on this annualThe


Table of Contents

COACH, INC.

Notes to Consolidated Financial Statements – (Continued)
(dollars and shares in thousands, except per share data)

Company performed an impairment evaluation the Company hasin fiscal 2006, 2005 and 2004 and concluded that there iswas no impairment of its goodwill or indefinite life intangible assets.

Valuation of Long-Lived Assets

Valuation of Long-Lived Assets

In accordance with SFAS No.Statement of Financial Accounting Standards (‘‘SFAS’’) 144, “Accounting‘‘Accounting for the Impairment or Disposal of Long-Lived Assets,” which the Company adopted effective with the beginning of fiscal 2002,’’ the Company assesses the carrying value of its long-lived assets for possible impairment based on a review of forecasted operating cash flows and the profitability of the related business. The Company did not record any impairment losses in fiscal 2006, 2005 fiscal 2004 or fiscal 2003.

Minority Interest in Subsidiary
      Minority interest in the statements of income represents Sumitomo Corporation’s share of the earnings in Coach Japan. The minority interest in the consolidated balance sheets as of July 3, 2004 reflects the original investment by Sumitomo in that consolidated subsidiary, along with its proportional share of the cumulative income, net of tax. The Company acquired Sumitomo’s share of the equity in Coach Japan, Inc. on July 1, 2005.
Revenue Recognition
2004.

Revenue Recognition

Sales are recognized at the point of sale, which occurs when merchandise is sold in an over-the-counter consumer transaction or, for the wholesale, Internet and catalog channels, upon shipment of merchandise, when title passes to the customer. Allowances for estimated uncollectible accounts, discounts and returns are provided when sales are recorded. Royalty revenues are earned through license agreements with manufacturers of other consumer products that incorporate the Coach brand. Revenue earned under these contracts is recognized based upon reported sales from the licensee.

Advertising

Advertising

Advertising costs which include direct marketing activities, such as catalogs, as well as media and production,production. In fiscal 2006, 2005 and 2004, advertising expenses totaled $28,112, $21,574$35,887, $39,038, and $19,885 in fiscal years 2005, 2004 and 2003,$38,471, respectively, and are included in selling, general and administrative expenses. Advertising costs are expensed when the advertising first appears.

Shipping and Handling

Share-Based Compensation

The Company accounts for share-based compensation in accordance with SFAS 123R, ‘‘Share-Based Payment.’’ Accordingly, the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.

Shipping and Handling

Shipping and handling costs incurred were $19,927, $16,188, $13,080 and $11,290$13,080 in fiscal years 2006, 2005 2004 and 2003,2004, respectively, and are included in selling, general and administrative expenses.

45Income Taxes

COACH, INC.
Notes to Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting‘‘Accounting for Income Taxes.”’’ Under SFAS No. 109, a deferred tax liability or asset is recognized for the estimated future tax consequences of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases. AsCoach does not provide for U.S. income taxes on the unremitted earnings of the fourth quarter of fiscal 2005,its foreign subsidiaries as the Company intends to permanently reinvest the controlled foreign corporation’s undistributed earnings outside the United States. As permittedthese earnings.

Minority Interest in Subsidiary

Minority interest in the Accounting Principles Board (“APB”) Opinion No. 23, “Accounting for Income Taxes — Special Areas,”statements of income represents Sumitomo Corporation’s share of the Company does not provide U.S. income taxes on these earnings.earnings in Coach Japan prior to the July 1, 2005 purchase of Sumitomo’s 50% interest in Coach Japan.


Stock-Based Compensation
      The Company’s stock-based compensation plansTable of Contents

COACH, INC.

Notes to Consolidated Financial Statements – (Continued)
(dollars and the employee stock purchase plan, as more fully describedshares in Note 8, “Stock-Based Compensation,” are accounted for in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Accordingly, no compensation cost is recognized for stock options and replacement stock options issued under stock-based compensation plans or for shares purchased under the employee stock purchase plan. The compensation cost that has been charged against income, reflecting amortization of restricted stock units, was $6,633, $4,410 and $1,568 in fiscal 2005, 2004 and 2003, respectively. The following illustrates the effect on net income and earningsthousands, except per share as if the fair value based methoddata)

Fair Value of accounting, defined in SFAS No. 123, “Accounting for Stock-Based Compensation,” had been applied:

              
  Fiscal Year Ended
   
  July 2, July 3, June 28,
  2005 2004 2003
       
Net income, as reported $388,652  $261,748  $146,628 
Deduct:            
Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects  (30,040)  (23,799)  (15,947)
          
Proforma net income $358,612  $237,949  $130,681 
          
Earnings per share:            
 Basic — as reported $1.03  $0.70  $0.41 
          
 Basic — proforma $0.95  $0.64  $0.36 
          
 Diluted — as reported $1.00  $0.68  $0.39 
          
 Diluted — proforma $0.92  $0.62  $0.35 
          
Fair Value of Financial Instruments
Financial Instruments

The fair value of the revolving credit facility at July 2, 20051, 2006 and July 3, 20042, 2005 approximated its carrying value due to its floating interest rates. The Company has evaluated its Industrial Revenue Bond and believes, based on the interest rate, related term and maturity, that the fair value of such instrument approximates its carrying amount. As of July 2, 20051, 2006 and July 3, 2004,2, 2005, the carrying values of cash and cash equivalents, investments, trade accounts receivable, accounts payable and accrued liabilities approximated their values due to the short-term maturities of these accounts. See Note 7, “Investments,”4, ‘‘Investments,’’ for the fair values of the Company’s investments as of July 2, 2005.

1, 2006.

46

COACH, INC.
Notes to Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
      Coach, through Coach Japan enters into foreign currency forward contracts that hedge certain U.S. dollar denominated inventory risk, thatrisks. These contracts have been designated for hedge accounting. The fair value of these contracts is recognized in other comprehensive income. The fair value of the foreign currency derivative is based on its market value as determined by an independent party. However, considerable judgment is required in developing estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that Coach could settle in a current market exchange. The use of different market assumptions or methodologies could affect the estimated fair value.
Foreign Currency

Foreign Currency

The functional currency of the Company’sCompany's foreign operations is the applicable local currency. Assets and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the weighted-average exchange rates for the period. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. Translation adjustment losses in fiscal 2005 were $2,331 compared to translation adjustment gains in fiscal 2004 of $2,892. Translation adjustment losses in fiscal 2003 were $348.

Net Income Per Share

Net Income Per Share

Basic net income per share wasis calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted net income per share wasis calculated similarly but includes potential dilution from the exercise of stock options and stock awards.

Stock Split
      In May 2002, Coach’s Board of Directors authorized a two-for-one split of the Company’s stock, to be effected in the form of a special dividend of one share of the Company’s common stock for each share outstanding. The additional shares issued as a result of the stock split were distributed on July 3, 2002 to stockholders of record on June 19, 2002.
      In August 2003, Coach’s Board of Directors authorized a two-for-one split of the Company’s common stock, to be effected in the form of a special dividend of one share of the Company’s common stock for each share outstanding. The additional shares issued as a result of the stock split were distributed on October 1, 2003 to stockholders of record on September 17, 2003.
      In January 2005, Coach’s Board of Directors authorized a two-for-one stock split of the Company’s common stock, to be effected in the form of a special dividend of one share of the Company’s common stock for each share outstanding. The additional shares issued as a result of the stock split were distributed on April 4, 2005 to stockholders of record on March 21, 2005.
      The effect of these stock splits on the number of shares and earnings per share was retroactively applied to all periods presented.
Recent Accounting Pronouncements
      In October 2004, the Emerging Issues Task Force (“EITF”) issued its abstract No. 04-1 “Accounting for Preexisting Relationships between the Parties to a Business Combination.” EITF 04-1 addresses the appropriate accounting treatment for portions of the acquisition costs of an entity that may be deemed to apply to elements of a preexisting business relationship between the acquiring company and the target company. EITF 04-1 is effective for combinations consummated after October 2004. The adoption of EITF 04-1 had no effect on historical financial statements.

47Recent Accounting Pronouncements

COACH, INC.
Notes to Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
In November 2004, the Financial Accounting Standards Board (“FASB”(‘‘FASB’’) issued SFAS No. 151, “Inventory‘‘Inventory Costs —– an amendment of ARB No. 43, Chapter 4.”’’ SFAS 151 is an amendment of Accounting Research Board Opinion No. 43 and sets standards for the treatment of abnormal amounts of idle facility expense, freight, handling costs and spoilage. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The Company is currently evaluating the impactadoption of SFAS 151 did not have a material impact on the Company’s consolidated financial statements.

In December 2004, the FASB issued Staff Position No.(‘‘FSP’’) 109-2, “Accounting‘‘Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“2004.’’ FSP No. 109-2”). FSP No. 109-2 provides guidance under SFAS No. 109, “Accounting‘‘Accounting for Income Taxes,”’’ with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”‘‘Jobs Act’’) on enterprises’ income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS 109. TheAs the Company doesdid not plan to make any dividends under this provision, but is still evaluating the impact of FSP 109-2 did not have a material impact on itsthe Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 153, “Exchanges‘‘Exchanges of Nonmonetary Assets —– an amendment of APB Opinion No. 29,”’’ which eliminates certain narrow differences between APB 29 and


Table of Contents

COACH, INC.

Notes to Consolidated Financial Statements – (Continued)
(dollars and shares in thousands, except per share data)

international accounting standards. SFAS 153 is effective for fiscal periods beginning on or after June 15, 2005. The adoption of SFAS 153 isdid not expected to have a material impact on the Company’s consolidated financial statements.

      On

In December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based‘‘Share-Based Payment,”’’ which is a revision of SFAS 123, “Accounting‘‘Accounting for Stock-Based Compensation.”’’ SFAS 123R supersedes APBAccounting Principles Board Opinion 25, “Accounting‘‘Accounting for Stock Issued to Employees.”’’ The pronouncement requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award —– the requisite service period (typically the vesting period). The Company adopted SFAS 123R is effective as of the beginning of the first interim or annual reporting period that begins after June 15,July 3, 2005. The Company is currently evaluating the effect of SFAS 123R on its financial statements with the intent of implementing this standard in fiscal 2006.

See Footnote 2 for further information.

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”(‘‘SAB’’) No. 107 “Share-Based‘‘Share-Based Payment.”’’ SAB 107 expresses views of the SEC staff regarding the interaction between SFAS 123R and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based paymentspayment arrangements. Subsequently, the SEC decided to delay the required implementation ofThe Company adopted SFAS 123R to fiscal years beginning after June 15,effective July 3, 2005. The Company is currently evaluating the effect of SFAS 123R and SAB 107 on its financial statements with the intent of implementing this standard in fiscal 2006.

See Footnote 2 for further information.

In March 2005, the FASB issued Statement of Financial Accounting StandardsSFAS Interpretation Number (‘‘FIN’’) 47, (“FIN 47”), “Accounting‘‘Accounting for Conditional Asset Retirement Obligations.”’’ FIN 47 provides clarification regarding the meaning of the term “conditional‘‘conditional asset retirement obligation”obligation’’ as used in FASB 143, “Accounting‘‘Accounting for Asset Retirement Obligations.” The Company is currently evaluating the impact of FIN 47 on the financial statements.

      In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections.’’ This statementInterpretation is effective for accounting changes and correctionsno later than the end of errors made in fiscal years beginningending after December 15, 2005. EarlyThe adoption is permitted. The Company will adopt SFAS 154 inof FIN 47 did not have a material impact on the required period.
Company’s consolidated financial statements.

48

COACH, INC.
Notes to Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
In June 2005, the EITFEmerging Issues Task Force (‘‘EITF’’) reached consensus on EITF 05-6, “Determining‘‘Determining the Amortization Period for Leasehold Improvements.”’’ Under EITF 05-6, leasehold improvements placed in service significantly after and not contemplated at or near the beginning of the lease term, should be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date the leasehold improvements are purchased. EITF 05-6 is effective for periods beginning after June 29, 2005. The adoption of EITF 05-6 did not have a material impact on the Company’s consolidated financial statements.

In November 2005, the FASB issued FSP 115-1 and 124-1, ‘‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.’’ FSP’s 115-1 and 124-1 address the determination as to when an investment is impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP is effective for reporting periods beginning after December 15, 2005. The adoption of FSP’s 115-1 and 124-1 did not expectedhave a material impact on the Company’s consolidated financial statements.

In November 2005, the FASB issued FSP 123R-3, ‘‘Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards.’’ This FSP provides an alternative transition method for calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of Statement 123R. As the Company did not elect to adopt the alternative transition method, this FSP did not impact the Company’s consolidated financial statements.

In February 2006, the FASB issued SFAS 155, ‘‘Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements 133 and 140.’’ SFAS 155 permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This statement is effective for all financial instruments acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006. The Company does not expect the adoption of SFAS 155 to have a material impact on the Company’s consolidated financial statements.


Reclassifications
Table of Contents

COACH, INC.

Notes to Consolidated Financial Statements – (Continued)
(dollars and shares in thousands, except per share data)

In June 2006, the EITF reached consensus on EITF 06-3, ‘‘Disclosure Requirements for Taxes Assessed by a Government Authority on Revenue-Producing Transactions.’’ EITF 06-3 requires disclosure of a company’s accounting policy with respect to presentation of taxes collected on a revenue producing transaction between a seller and a customer. For taxes that are reported on a gross basis (included in revenues and costs), EITF 06-3 also requires disclosure of the amount of taxes included in the financial statements. EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. The Company does not expect the adoption of EITF 06-3 to have a material impact on the Company’s consolidated financial statements.

In June 2006, the FASB issued FIN 48, ‘‘Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109,’’ which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS 109, ‘‘Accounting for Income Taxes.’’ FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of FIN 48 on the Company’s consolidated financial statements.

Reclassifications

Certain prior year amounts have been reclassified to conform withto the current year presentation.

2.Balance Sheet ComponentsShare-Based Compensation

During the first quarter of fiscal 2006, the Company adopted SFAS 123R, ‘‘Share-Based Payment,’’ which requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Previously, the Company accounted for stock-based compensation plans and the employee stock purchase plan in accordance with APB Opinion 25, ‘‘Accounting for Stock Issued to Employees’’ and related Interpretations and provided the required pro forma disclosures of SFAS 123, ‘‘Accounting for Stock-Based Compensation.’’ The componentsCompany elected to adopt the modified retrospective application method as provided by SFAS 123R and accordingly, all financial statement amounts for the prior periods presented have been adjusted to reflect the cost of certain balance sheet accountssuch awards based on the grant-date fair value of the awards.

The Company maintains several share-based compensation plans which are as follows:more fully described below. The total compensation cost charged against income for these plans was $69,190, $55,880 and $43,571 for fiscal 2006, 2005 and 2004, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $27,191, $21,793 and $17,093 for fiscal 2006, 2005 and 2004, respectively.


          
  July 2, 2005 July 3, 2004
     
Property and Equipment
        
 Machinery and equipment $7,618  $8,346 
 Furniture and fixtures  148,252   140,005 
 Leasehold improvements  243,784   212,000 
 Construction in progress  21,428   11,522 
 Less: accumulated depreciation  (217,220)  (207,582)
       
 Total property and equipment, net $203,862  $164,291 
       
Accrued Liabilities
        
 Income and other taxes $49,180  $16,699 
 Payroll and employee benefits  65,653   54,291 
 Operating expenses  70,669   52,657 
       
 Total accrued liabilities $185,502  $123,647 
       

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49

COACH, INC.

Notes to Consolidated Financial Statements —– (Continued)


(dollars and shares in thousands, except per share data)

The following table details the modified retrospective application impact of SFAS 123R on previously reported amounts:


Fiscal Year Ended July 2, 2005AdjustedAs Previously
Reported
  
 
Selling, general and administrative expenses$738,208
$688,961
Operating income572,563
621,810
Income before provision for income taxes and minority interest588,323
637,570
Provision for income taxes216,070
235,277
Net income358,612
388,652
Earnings per share: 
 
Basic0.95
1.03
Diluted0.92
1.00
Net cash provided by operating activities475,596
544,263
Net cash (used in) financing activities(211,918
)
(280,585
)
Fiscal Year Ended July 3, 2004 
 
Selling, general and administrative expenses$584,778
$545,617
Operating income405,304
444,465
Income before provision for income taxes and minority interest408,496
447,657
Provision for income taxes152,504
167,866
Net income237,949
261,748
Earnings per share: 
 
Basic0.64
0.70
Diluted0.62
0.68
Net cash provided by operating activities359,294
454,533
Net cash provided by (used in) financing activities49,574
(45,665
)
At July 2, 2005 
 
Deferred income taxes$54,545
$31,520
Total assets1,370,157
1,347,132
Accrued liabilities188,234
188,353
Total current liabilities265,661
265,780
Total liabilities314,237
314,356
Additional paid-in capital566,262
465,015
Retained earnings484,971
576,141
Total stockholders' equity1,055,920
1,032,776
Total liabilities and stockholders' equity1,370,157
1,347,132
3.Income Taxes

Coach Stock-Based Plans    Coach maintains the 2000 Stock Incentive Plan, the 2000 Non-Employee Director Stock Plan and the 2004 Stock Incentive Plan to award stock options, shares and other forms of equity compensation to certain members of Coach management and the outside members of its Board of Directors. These plans were approved by Coach’s stockholders. The provisions for income taxes computed by applyingexercise price of each stock option equals the U.S. statutory rate to income before taxes as reconciled tomarket price of Coach’s stock on the actual provisions were:

                          
  Fiscal Year Ended
   
  July 2, 2005 July 3, 2004 June 28, 2003
       
  Amount Percentage Amount Percentage Amount Percentage
             
Income (loss) before provision for income taxes and minority interest:                        
 United States $584,695   91.7% $388,862   86.9% $224,380   91.7%
 Foreign  52,875   8.3   58,795   13.1   20,441   8.3 
                   
Total income before provision for income taxes and minority interest $637,570   100.0% $447,657   100.0% $244,821   100.0%
                   
Tax expense at U.S. statutory rate $223,150   35.0% $156,680   35.0% $85,687   35.0%
State taxes, net of federal benefit  33,279   5.2   16,179   3.6   10,358   4.2 
Reversal of deferred U.S. taxes on foreign earnings  (16,247)  (2.5)  —   —   —   — 
Nontaxable foreign sourced income  (4,458)  (0.7)  (5,182)  (1.2)  (2,069)  (0.8)
Other, net  (447)  (0.1)  189   0.0   (3,391)  (1.3)
                   
Taxes at effective worldwide rates $235,277   36.9% $167,866   37.5% $90,585   37.0%
                   
      Currentdate of grant and deferred tax provisions (benefits) were:generally


                         
  Fiscal Year Ended
   
  July 2, 2005 July 3, 2004 June 28, 2003
       
  Current Deferred Current Deferred Current Deferred
             
Federal $184,318  $(29,744) $128,449  $(7,314) $67,432  $1,728 
Puerto Rico  —   —   —   —   31   (1,182)
Foreign  28,228   1,276   2,302   19,538   402   6,239 
State  60,849   (9,650)  25,468   (577)  13,942   1,993 
                   
Total current and deferred tax provisions (benefits) $273,395  $(38,118) $156,219  $11,647  $81,807  $8,778 
                   

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50

COACH, INC.

Notes to Consolidated Financial Statements —– (Continued)


(dollars and shares in thousands, except per share data)

has a maximum term of 10 years. Options generally vest ratably over three years. Share awards are restricted and subject to forfeiture until the retention period is completed. The retention period is generally three years.

For options granted under Coach’s stock option plans prior to July 1, 2003, an active employee can receive a replacement stock option equal to the number of shares surrendered upon a stock-for-stock exercise. The exercise price of the replacement option equals the market value at the date of exercise of the original option and will remain exercisable for the remaining term of the original option. Replacement stock options generally vest six months from the grant date. Replacement stock options of 5,378, 7,029, and 11,264, were granted in fiscal 2006, 2005 and 2004, respectively.

A summary of option activity under the Coach stock option plans as of July 1, 2006 and changes during the year then ended is as follows:


 Number of
Outstanding
Options		Weighted−
Average
Exercise
Price		Weighted−
Average
Remaining
Contractual
Term		Aggregate
Intrinsic
Value
Outstanding at July 2, 200531,554
$16.17
 
 
Granted13,513
34.17
 
 
Exercised(13,393
)
17.21
 
 
Forfeited or expired(857
)
21.06
 
 
Outstanding at July 1, 200630,817
$23.48
7.00
$278,432
Exercisable at July 1, 200613,507
$21.91
5.45
$142,520

The following aretable summarizes information about stock options under the components of the deferred tax provisions (benefits) occurring as a result of transactions being reported in different years for financial and tax reporting:

              
  Fiscal Year Ended
   
  July 2, July 3, June 28,
  2005 2004 2003
       
Deferred tax provisions (benefits)
            
 Depreciation $(9,546) $(3) $2,269 
 Employee benefits  (2,945)  (3,267)  1,048 
 Advertising accruals  2   (280)  348 
 Nondeductible reserves  (6,681)  (5,228)  (2,025)
 Earnings of foreign subsidiaries  (9,226)  23,920   9,296 
 Other, net  (9,722)  (3,495)  (2,158)
          
 Total deferred tax provisions (benefits) $(38,118) $11,647  $8,778 
          
      The deferred tax assets and liabilitiesCoach option plans at the respective year-ends were as follows:
          
  Fiscal Year Ended
   
  July 2, July 3,
  2005 2004
     
Deferred tax assets
        
 Reserves not deductible until paid $45,978  $31,060 
 Pension and other employee benefits  11,289   7,041 
 Property, plant and equipment  21,456   11,499 
 Other  3,617   5,212 
       
 Total deferred tax assets $82,340  $54,812 
       
Deferred tax liabilities
        
 Earnings of foreign subsidiaries $—  $29,578 
 Equity adjustments  2,644   — 
 Other  4,719   6,504 
       
 Total deferred tax liabilities $7,363  $36,082 
       
 Net deferred tax assets $74,977  $18,730 
       
      The Company has received tax benefit from the exercise of stock options. This benefit is reflected as a credit to stockholders’ equity and not reflected in the provision for income taxes. The amount of this benefit was $78,480, $106,458 and $41,503 in fiscal 2005, 2004 and 2003, respectively.
      On July 1, 2005, the Company acquired the minority interest that it had not previously owned in Coach Japan, Inc., becoming the 100% owner2006:


 Options OutstandingOptions Exercisable
Range of
Exercise
Prices		Number
Outstanding at
July 1, 2006		Weighted−
Average
Remaining
Contractual
Life (Years)		Weighted−
Average
Exercise
Price		Number
Exercisable at
July 1, 2006		Weighted−
Average
Exercise
Price
$2.00 - 5.001,332
4.90
$4.02
1,332
$4.02
$5.01 - - 10.001,934
5.78
6.63
1,934
6.63
$10.01 - - 20.0011,820
7.44
15.64
3,239
15.23
$20.01 - - 30.002,458
5.77
27.19
1,969
27.84
$30.01 - - 37.0013,273
7.23
34.18
5,033
34.49
 30,817
7.00
$23.48
13,507
$21.91

Table of the Japanese operation. The Company currently does not intend to distribute to the U.S. the earnings of the Japanese company, but will reinvest such earnings offshore. As a result, the excess provision for the tax that would have been due upon the distribution of the Japanese company’s earnings accumulated through July 2, 2005 was reversed. The impact of this reversal on the current year provision for income taxes was a reduction of $16,247.
      The American Jobs Creation Act of 2004 was signed into law on October 22, 2004. The Act included a special one-time 85% dividends received deduction (the “Repatriation Provision”) on the repatriation of

Contents

51

COACH, INC.

Notes to Consolidated Financial Statements —– (Continued)


(dollars and shares in thousands, except per share data)

The fair value of each Coach option grant is estimated on the date of grant using the Black-Scholes option pricing model and the following weighted-average assumptions:


certain foreign earnings
 Fiscal Year Ended
 July 1,
2006		July 2,
2005		July 3,
2004
Expected term (years)2.6
1.4
1.6
Expected volatility35.0
%
29.2
%
32.4
%
Risk-free interest rate4.2
%
2.6
%
1.6
%
Dividend yield—
%
—
%
—
%

The expected term of options represents the period of time that the options granted are expected to abe outstanding and is based on historical experience. Expected volatility is based on historical volatility of the Company’s stock as well as the implied volatility from publicly traded options on Coach’s stock. The risk free interest rate is based on the zero-coupon U.S. taxpayer provided that specified conditions and restrictions are satisfied.Treasury issue as of the date of the grant. As Coach does not intend to repatriatepay dividends, the foreign earnings, the Company expects that the Repatriation Provision will have no effect on its financial statements.

      Significant judgmentdividend yield is required in determining the worldwide provision for income taxes, and there are many transactions for which the ultimate tax outcome is uncertain. It is the Company’s policy to establish provisions for taxes that may become payable in future years as a result0%.

The weighted-average grant-date fair value of an examination by tax authorities. The Company establishes the provisions based upon management’s assessment of exposure associated with permanent tax differences and tax credits. The provisions are analyzed periodically and adjustments are made as events occur that warrant adjustments to those provisions.

4.Debt
Revolving Credit Facilities
      On October 16, 2003, Coach, certain lenders and the Bank of America, N.A. (“Bank of America”), as primary lender and administrative agent, renewed the $100,000 senior unsecured revolving credit facility (the “Bank of America facility”), extending the facility expiration to October 16, 2006. At Coach’s request, the Bank of America facility can be expanded to $125,000. On June 23, 2005, this facility was extended for one additional year, to October 16, 2007. This facility is available for seasonal working capital requirements or general corporate purposes and may be prepaid without penalty or premium.
      Duringoptions granted during fiscal 2006, 2005 and 2004 there were no borrowings underwas $8.49, $3.10, and $2.45, respectively. The total intrinsic value of options exercised during fiscal 2006, 2005 and 2004 was $232,507, $201,232, and $263,124, respectively. The total cash received from these option exercises was $86,550, $46,835 and $34,141 in fiscal 2006, 2005 and 2004, respectively, and the Bankactual tax benefit realized for the tax deductions from these option exercises was $88,534, $78,480 and $106,458, respectively.

The grant-date fair value of America facility. each Coach share award is equal to the fair value of Coach stock at the grant date. The following table summarizes information about nonvested shares as of and for the year ended July 1, 2006:


 Number of
Non-vested
Shares		Weighted−
Average
Grant-Date
Fair Value
Nonvested at July 2, 20051,861
$13.16
Granted372
34.17
Vested(845
)
7.65
Forfeited(59
)
23.97
Nonvested at July 1, 20061,329
$22.06

The total fair value of shares vested during fiscal 2006, 2005 and 2004 was $27,593, $5,829 and $526, respectively.

As of July 2,1, 2006, there was $91,565 of total unrecognized compensation cost related to non-vested stock options and stock awards. This cost is expected to be recognized over a weighted-average period of 1.8 years.

Employee Stock Purchase Plan    Under the Employee Stock Purchase Plan, full-time Coach employees are permitted to purchase a limited number of Coach common shares at 85% of market value. Under this plan, Coach sold 162, 159, and 200 shares to employees in fiscal 2006, 2005 there were no outstanding borrowings under the Bankand


Table of America facility.
      Coach pays a commitment fee of 10 to 25 basis points based on any unused amounts of the Bank of America facility. The initial commitment fee was 15 basis points. At July 2, 2005, the commitment fee was 12.5 basis points. The initial LIBOR margin under the Bank of America facility was 62.5 basis points. At July 2, 2005, the LIBOR margin was 55 basis points, reflecting an improvement in our fixed-charge coverage ratio.
      The Bank of America facility prohibits Coach from paying dividends while the credit facility is in place, with certain exceptions. Any future determination to pay cash dividends will be at the discretion of Coach’s Board of Directors and will be dependent upon Coach’s financial condition, operating results, capital requirements and such other factors as the Board of Directors deems relevant.
      The Bank of America facility contains various covenants and customary events of default. The Company has been in compliance with all covenants since its inception.
      To provide funding for working capital and general corporate purposes, Coach Japan entered into credit facilities with several Japanese financial institutions. These facilities allow a maximum borrowing of 8.6 billion yen, or approximately $77,000, at July 2, 2005. Interest is based on the Tokyo Interbank rate plus a margin of up to 50 basis points.
      These facilities contain various covenants and customary events of default. Coach Japan has been in compliance with all covenants since their inception. These facilities include automatic renewals based on compliance with the covenants. Coach, Inc. is not a guarantor on any of these facilities.
      During fiscal 2005 and 2004, the peak borrowings under the Japanese credit facilities were $50,461 and $36,084, respectively. As of July 2, 2005 and July 3, 2004, outstanding borrowings under the Japanese credit facilities were $12,292 and $1,699, respectively.

Contents

52

COACH, INC.

Notes to Consolidated Financial Statements —– (Continued)


(dollars and shares in thousands, except per share data)

2004, respectively. Compensation expense is calculated for the fair value of employees’ purchase rights using the Black-Scholes model and the following weighted-average assumptions:


 Fiscal Year Ended
 July 1,
2006		July 2,
2005		July 3,
2004
Expected lives (years)0.5
0.5
0.5
Expected volatility25.7
%
27.6
%
28.8
%
Risk-free interest rate3.7
%
2.8
%
1.2
%
Dividend yield—
%
—
%
—
%
Long-Term Debt

The weighted-average fair value of the purchase rights granted during fiscal 2006, 2005 and 2004 was $6.64, $6.24, and $4.85, respectively.

Deferred Compensation    Under the Coach, is partyInc. Executive Deferred Compensation Plan, executive officers and certain employees at or above the senior director level may elect to defer all or a portion of their annual bonus or annual base salary into the plan. Under the Coach, Inc. Deferred Compensation Plan for Non-Employee Directors, Coach's outside directors may similarly defer their director's fees. Amounts deferred under these plans may, at the participants' election, be either represented by deferred stock units, which represent the right to receive shares of Coach common stock on the distribution date elected by the participant, or placed in an Industrial Revenue Bond relatedinterest-bearing account to its Jacksonville, Florida facility. This loan bears interestbe paid on such distribution date. The amounts accrued under these plans at 8.77%. PrincipalJuly 1, 2006 and interest payments are made semi annually, with the final payment due in 2014. As of July 2, 2005 were $3,622 and $4,777, respectively, and are included in other noncurrent liabilities in the consolidated balance sheets.

The following table summarizes share and exercise price information about Coach’s equity compensation plans as of July 3, 2004, the remaining balance on the loan was $3,4201, 2006:


Plan CategoryNumber of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
or Rights		Weighted−
Average
Exercise Price of
Outstanding
Options,
Warrants
and Rights		Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans
Equity compensation plans approved by security holders32,146
$22.51
26,684
Equity compensation plans not approved by security holders108
$16.75
3,050
Total32,254
 
29,734

Table of Contents

COACH, INC.

Notes to Consolidated Financial Statements – (Continued)
(dollars and $3,535, respectively. Future principal payments under the Industrial Revenue Bond are as follows:

     
Fiscal Year Amount
   
2006 $150 
2007  170 
2008  235 
2009  285 
2010  335 
Subsequent to 2010  2,245 
    
Total $3,420 
    
shares in thousands, except per share data)

5.3. Leases

Coach leases certain office, distribution and retail facilities. The lease agreements, which expire at various dates through 2019,2020, are subject, in some cases, to renewal options and provide for the payment of taxes, insurance and maintenance. Certain leases contain escalation clauses resulting from the pass-through of increases in operating costs, property taxes and the effect on costs from changes in consumer price indices. Certain rentals are also contingent upon factors such as sales. Rent-free periods and scheduled rent increases are recorded as components of rent expense on a straight-line basis over the related terms of such leases. Contingent rentals are recognized when the achievement of the target (i.e., sales levels), which triggers the related payment, is considered probable. Rent expense for the Company’sCompany's operating leases consisted of the following:


             
  Fiscal Year Ended
   
  July 2, July 3, June 28,
  2005 2004 2003
       
Minimum rentals $73,283  $55,352  $47,098 
Contingent rentals  12,101   7,555   4,885 
          
Total rent expense $85,384  $62,907  $51,983 
          
 Fiscal Year Ended
 July 1,
2006		July 2,
2005		July 3,
2004
Minimum rentals$77,376
$73,283
$55,352
Contingent rentals16,380
12,101
7,555
Total rent expense$93,756
$85,384
$62,907

Future minimum rental payments under noncancelable operating leases are as follows:


     
Fiscal Year Amount
   
2006 $62,597 
2007  57,900 
2008  57,173 
2009  53,846 
2010  48,538 
Subsequent to 2010  175,000 
    
Total minimum future rental payments $455,054 
    

53

COACH, INC.
Notes to Consolidated Financial Statements — (Continued)
Fiscal YearAmount
2007$77,170
200875,889
200973,780
201070,122
201167,431
Subsequent to 2011222,850
Total minimum future rental payments$587,242
(dollars and shares in thousands, except per share data)

Certain operating leases provide for renewal for periods of threefive to fiveten years at their fair rental value at the time of renewal. In the normal course of business, operating leases are generally renewed or replaced by new leases.

6.Commitments and Contingencies
      At July 2, 2005 and July 3, 2004, the Company had letters of credit outstanding totaling $68,849 and $50,473, respectively. Of these amounts, $15,425 and $16,764, respectively, related to the letter of credit obtained in connection with leases transferred to the Company by the Sara Lee Corporation, for which Sara Lee retains contingent liability. Coach expects that it will be required to maintain the letter of credit for at least 10 years. The remaining letters of credit, which expire at various dates through 2008, primarily collateralize the Company’s obligation to third parties for the purchase of inventory and lease guarantees.
      Coach is a party to employment agreements with certain executives, which provide for compensation and other benefits. The agreements also provide for severance payments under certain circumstances.
      In the ordinary course of business, Coach is a party to several pending legal proceedings and claims. Although the outcome of such items cannot be determined with certainty, Coach’s general counsel and management are of the opinion that the final outcome will not have a material effect on Coach’s cash flow, results of operations or financial position.
7.4. Investments

The Company’s investments consist of U.S. government and agency debt securities as well as municipal government and corporate debt securities. As the Company has both the ability and the intent to hold these securities until maturity, all investments are classified as held to maturity and stated at amortized cost. The following table shows the amortized cost, fair value, and gross unrealized gains and losses of the Company’s investments at July 2, 20051, 2006 and July 3, 2004.2, 2005:


                           
  Fiscal Year Ended
   
    July 2,   July 3,  
  Amortized 2005 Unrealized Amortized 2004 Unrealized
  Cost Fair Value Loss Cost Fair Value Loss
             
Short-term investments:                        
 U.S. government and agency securities $55,000  $54,861  $(139) $50,000  $49,930  $(70)
 Commercial paper  —   —   —   74,260   74,187  $(73)
 Corporate debt securities  173,485   172,467   (1,018)  22,500   22,500  $— 
 Certificates of deposit  —   —   —   24,963   24,860   (103)
                   
  Short-term investments $228,485  $227,328  $(1,157) $171,723  $171,477  $(246)
                   
Long-term investments:                        
 U.S. government and agency securities $49,945  $49,405  $(540) $130,000  $129,975  $(25)
 Corporate debt securities  72,120   71,216   (904)  —   —   — 
                   
  Long-term investments $122,065  $120,621  $(1,444) $130,000  $129,975  $(25)
                   
Table of Contents

COACH, INC.

Notes to Consolidated Financial Statements – (Continued)
(dollars and shares in thousands, except per share data)


 Fiscal Year Ended
 July 1, 2006July 2, 2005
 AmortizedFairUnrealizedAmortizedFairUnrealized
 CostValueLossCostValueLoss
Short-term investments: 
 
 
 
 
 
U.S. government and agency securities$49,986
$49,641
$(345
)
$55,000
$54,861
$(139
)
Corporate debt securities198,191
197,529
(662
)
173,485
172,467
(1,018
)
Municipal securities146,000
146,000
—
—
—
—
Short-term investments$394,177
$393,170
$(1,007
)
$228,485
$227,328
$(1,157
)
Long-term investments: 
 
 
 
 
 
U.S. government and agency securities$—
$—
$—
$49,945
$49,405
$(540
)
Corporate debt securities—
—
—
72,120
71,216
(904
)
Long-term investments$—
$—
$—
$122,065
$120,621
$(1,444
)

Securities with maturity dates within one year are classified as short-term investments. Securities with maturity dates greater than one year are classified as long-term investments. At July 2, 2005, the maturity dates of long-term investments, based on current contractual maturities, extend to February 2007. Actual

54

COACH, INC.
Notes to Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
maturities could differ from contractual maturities, as some borrowers have the right to call certain obligations.
      The difference between amortized cost and

As of July 1, 2006, U.S. corporate debt securities with a fair value is the result of $20,000 and an unrealized gains and losses, caused primarily by interest rate fluctuations. The securities to which the unrealized losses relateloss of $100 have been in a continuousan unrealized loss position for less than twelve months. The Companyremaining corporate debt securities and the U.S. government and agency securities have been in an unrealized loss position for greater than twelve months.

U.S. Government and Agency Securities    The unrealized loss on Coach’s investment in the Federal Home Loan Bank (FHLB) bond was caused by interest rate increases. Coach purchased this investment at a discount relative to its face amount, and the contractual cash flow of this investment is guaranteed by FHLB, which is an agency of the U.S. government. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because Coach has the ability and intent to hold this investment until a recovery of fair value, which may be maturity, Coach does not consider these investmentsthis investment to be other-than-temporarily impaired at July 2, 2005, as1, 2006.

Corporate Debt Securities    The unrealized loss on Coach’s investments in corporate bonds was caused by interest rate increases. It is expected that the Companysecurities would not be settled at a price less than the amortized cost of Coach's investment. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because Coach has both the ability and the intent to hold these investments until a recovery of fair value, which may be maturity, Coach does not consider these investments to be other-than-temporarily impaired at maturity.

July 1, 2006.

8.5. Stock-Based CompensationDebt

Revolving Credit Facilities

On October 16, 2003, Coach, Stock-Based Plans. Coach maintains the 2000 Stock Incentive Plan, the 2000 Non-Employee Director Stock Plancertain lenders and the 2004 Stock Incentive PlanBank of America, N.A. (‘‘Bank of America’’), as primary lender and administrative agent, renewed the $100,000 senior unsecured revolving credit facility (the ‘‘Bank of America facility’’), extending the facility expiration to award stock optionsOctober 16, 2006. On June 23, 2005, this facility was extended for one additional year, to October 16, 2007. At Coach’s request, the Bank of America facility can be expanded to $125,000. This facility is available for seasonal working capital requirements or general corporate purposes and other formsmay be prepaid without penalty or premium.


Table of equity compensation to certain members of Coach management and the outside members of its Board of Directors. The 2000 Stock Incentive Plan and the 2000 Non-Employee Director Stock Plan were approved by Coach’s stockholders during fiscal 2002. The 2004 Stock Incentive Plan was approved by Coach’s stockholders during fiscal 2005. The exercise price of each stock option equals 100% of the market price of Coach’s stock on the date of grant and generally has a maximum term of 10 years. Options generally vest ratably over three years.
      For options granted under Coach’s stock option plans prior to July 1, 2003, an active employee can receive a replacement stock option equal to the number of shares surrendered upon a stock-for-stock exercise. The exercise price of the replacement option is 100% of the market value at the date of exercise of the original option and will remain exercisable for the remaining term of the original option. Replacement stock options generally vest six months from the grant date. Replacement stock options of 7,029, 11,264, and 7,360 were granted in fiscal 2005, 2004 and 2003, respectively.
      A summary of options held by Coach employees under the Coach option plans is as follows:
                  
  Number of Weighted-   Weighted-
  Coach Average   Average
  Outstanding Exercise Exercisable Exercise
  Options Price Shares Price
         
Outstanding at June 29, 2002  40,040  $3.49   6,368  $3.41 
 Granted  19,040   7.67         
 Exercised  (20,352)  3.76         
 Canceled/expired  (3,668)  3.95         
             
Outstanding at June 28, 2003  35,060  $5.56   5,748  $5.43 
 Granted  22,748   16.55         
 Exercised  (24,120)  8.12         
 Canceled/expired  (1,004)  6.87         
             
Outstanding at July 3, 2004  32,684  $11.28   5,278  $6.52 
 Granted  14,927   23.20         
 Exercised  (15,184)  12.74         
 Canceled/expired  (873)  12.84         
             
Outstanding at July 2, 2005  31,554  $16.17   11,178  $16.48 
             

Contents

55

COACH, INC.

Notes to Consolidated Financial Statements —– (Continued)


(dollars and shares in thousands, except per share data)
      The following table summarizes information about stock options

During fiscal 2006 and 2005, there were no borrowings under the Bank of America facility. Accordingly, as of July 1, 2006 and July 2, 2005, there were no outstanding borrowings under the Bank of America facility.

Coach option planspays a commitment fee of 10 to 25 basis points on any unused amounts of the Bank of America facility and interest of LIBOR plus 45 to 100 basis points on any outstanding borrowings. The initial commitment fee was 15 basis points and the initial LIBOR margin was 62.5 basis points. At July 1, 2006, the commitment fee was 10 basis points and the LIBOR margin was 45 basis points, reflecting an improvement in our fixed-charge coverage ratio.

The Bank of America facility contains various covenants and customary events of default. The Company has been in compliance with all covenants since its inception.

To provide funding for working capital and general corporate purposes, Coach Japan entered into credit facilities with several Japanese financial institutions. These facilities allow a maximum borrowing of 7.6 billion yen, or approximately $66,000, at July 2, 2005.

                     
  Options Outstanding Options Exercisable
     
    Weighted-    
    Average Weighted-   Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Prices July 2, 2005 Life (Years) Price July 2, 2005 Price
           
$ 2.00 –  5.00  2,418   5.12  $3.66   2,418  $3.66 
$ 5.01 – 10.00  4,756   6.98   6.38   1,685   6.82 
$10.01 – 20.00  16,108   8.47   15.52   1,727   13.72 
$20.01 – 35.00  8,272   5.63   26.74   5,348   26.21 
                
   31,554   7.24  $16.17   11,178  $16.48 
                
      The fair value of each Coach option grant1, 2006. Interest is estimatedbased on the dateTokyo Interbank rate plus a margin of grant usingup to 50 basis points.

These facilities contain various covenants and customary events of default. Coach Japan has been in compliance with all covenants since their inception. These facilities include automatic renewals based on compliance with the Black-Scholes option pricing modelcovenants. Coach, Inc. is not a guarantor on any of these facilities.

During fiscal 2006 and 2005, the following weighted-average assumptions:

             
  Fiscal Year Ended
   
  July 2, July 3, June 28,
  2005 2004 2003
       
Expected lives (years)  1.4   1.6   1.5 
Risk-free interest rate  2.6%  1.6%  1.7%
Expected volatility  29.2%  32.4%  35.2%
Dividend yield  —%  —%  —%
      The weighted-average fair values of individual options granted during fiscal 2005, 2004peak borrowings under the Japanese credit facilities were $21,568 and 2003 were $3.10, $2.45 and $1.23,$50,461, respectively.
Employee Stock Purchase Plan. Under the Employee Stock Purchase Plan, full-time Coach employees are permitted to purchase a limited number of Coach common shares at 85% of market value. Under this plan, Coach sold 159, 200 and 268 shares to employees in fiscal 2005, 2004 and 2003, respectively. Pro forma compensation expense is calculated for the fair value of employees’ purchase rights using the Black-Scholes model and the following weighted-average assumptions:
             
  Fiscal Year Ended
   
  July 2, July 3, June 28,
  2005 2004 2003
       
Expected lives (years)  0.5   0.5   0.5 
Risk-free interest rate  2.8%  1.2%  1.2%
Expected volatility  27.6%  28.8%  38.3%
Dividend yield  —%  —%  —%
      The weighted-average fair value of the purchase rights granted during fiscal 2005, 2004 and 2003 was $6.24, $4.85 and $2.60, respectively.
Stock Unit Awards. Restricted stock unit awards of Coach common stock have been granted to employees as retention awards. The value of retention awards is determined based upon the fair value of Coach stock at the grant date. Stock awards are restricted and subject to forfeiture until the retention period is completed. The retention period is generally three years. As of July 1, 2006 and July 2, 2005, retention awardsoutstanding borrowings under the Japanese credit facilities were $0 and $12,292, respectively.

Long-Term Debt

Coach is party to an Industrial Revenue Bond related to its Jacksonville, Florida facility. This loan bears interest at 4.5%. Principal and interest payments are made semi-annually, with the final payment due in 2014. As of 1,861 shares were outstanding. This value is initially recordedJuly 1, 2006 and July 2, 2005, the remaining balance on the loan was $3,270 and $3,420, respectively. Future principal payments under the Industrial Revenue Bond are as unearned compensationfollows:


Fiscal YearAmount
2007$170
2008235
2009285
2010335
2011385
Subsequent to 20111,860
Total$3,270
6. Commitments and Contingencies

At July 1, 2006 and is chargedJuly 2, 2005, the Company had letters of credit outstanding totaling $91,855 and $68,849, respectively. Of these amounts, $15,057 and $15,425, respectively, relate to earnings overthe letter of credit obtained in connection with leases transferred to the Company by the Sara Lee Corporation, for which Sara Lee retains contingent liability. Coach expects that it will be required to maintain the letter of credit for approximately 10 years. The remaining letters of credit, which expire at various dates through 2010, primarily collateralize the Company’s obligation to third parties for the purchase of inventory and lease guarantees.


Table of Contents

56

COACH, INC.

Notes to Consolidated Financial Statements —– (Continued)


(dollars and shares in thousands, except per share data)

Coach is a party to employment agreements with certain executives which provide for compensation and other benefits. The agreements also provide for severance payments under certain circumstances. On August 22, 2005, the retention period.Company entered into three-year extensions to the employment agreements of three key executives: Lew Frankfort, Chairman and Chief Executive Officer; Reed Krakoff, President and Executive Creative Director; and Keith Monda, President and Chief Operating Officer. These amendments extend the terms of the executives’ employment agreements from July 2008 through August 2011. On November 8, 2005, Coach entered into five-year employment agreements with two key executives: Michael Tucci, President, North America Retail Division, and Michael F. Devine, III, Senior Vice President and Chief Financial Officer. The amortization expense relatedterms of these employment agreements run through June 30, 2010.

In the ordinary course of business, Coach is a party to these awards was $6,633, $4,410several pending legal proceedings and $1,568 for fiscal 2005, 2004claims. Although the outcome of such items cannot be determined with certainty, Coach's general counsel and 2003, respectively.

Deferred Compensation. Undermanagement are of the opinion that the final outcome will not have a material effect on Coach's cash flow, results of operations or financial position.

7. Derivative Instruments and Hedging Activities

Substantially all purchases and sales involving international parties are denominated in U.S. dollars. However, the Company is exposed to market risk from foreign currency exchange rate fluctuations with respect to Coach Inc. Executive Deferred Compensation Plan, executive officers and certain employees at or above the senior director level may elect to defer all orJapan as a portion of their annual bonus or annual base salary into the plan. Under the Coach, Inc. Deferred Compensation Plan for Non-Employee Directors, Coach’s outside directors may similarly defer their director’s fees. Amounts deferred under these plans may, at the participants’ election, be either represented by deferred stock units, which represent the right to receive sharesresult of Coach common stockJapan’s U.S. dollar-denominated inventory purchases. Coach Japan enters into certain foreign currency derivative contracts, primarily foreign exchange forward contracts, to manage these risks. These transactions are in accordance with the Company’s risk management policies. Coach does not enter into derivative transactions for speculative or trading purposes.

Coach is also exposed to market risk from foreign currency exchange rate fluctuations with respect to Coach Japan as a result of its $231,000 U.S. dollar denominated fixed rate intercompany loan from Coach. To manage this risk, on July 1, 2005, Coach Japan entered into a cross currency swap transaction, the distribution date electedterms of which include an exchange of a U.S. dollar fixed interest rate for a yen fixed interest rate. The loan matures in 2010, at which point the swap requires an exchange of yen and U.S. dollar based principals.

The foreign currency contracts entered into by the participant, or placedCompany have durations no greater than 18 months. The fair values of open foreign currency derivatives included in an interest-bearing account to be paid on such distribution date. The amounts accrued under these planscurrent assets at July 1, 2006 and July 2, 2005 were $2,578 and $1,535, respectively. As of July 1, 2006 and July 3, 20042, 2005, open foreign currency forward contracts designated as hedges with a notional amount of $114,825 and $46,900 were $4,777fair valued. For the year ended July 1, 2006, changes in derivative balances resulted in a reduction of other comprehensive income of $4,488, net of taxes. For the year ended July 2, 2005, changes in derivative balances resulted in an increase of other comprehensive income of $1,229, net of taxes.


Table of Contents

COACH, INC.

Notes to Consolidated Financial Statements – (Continued)
(dollars and $4,263, respectively, and are includedshares in other noncurrent liabilitiesthousands, except per share data)

8. Goodwill and Other Intangible Assets

The changes in the consolidated balance sheets.

      The following table summarizes sharecarrying amount of goodwill for the years ended July 1, 2006 and exercise price information about Coach’s equity compensation plans as of July 2, 2005.
             
      Number of
  Number of Weighted- Securities
  Securities to be Average Exercise Remaining
  Issued Upon Price of Available for
  Exercise of Outstanding Future Issuance
  Outstanding Options, Under Equity
  Options, Warrants Warrants Compensation
Plan Category or Rights and Rights Plans
       
Equity compensation plans approved by security holders  33,415  $15.27   30,384 
Equity compensation plans not approved by security holders  768  $4.52   3,073 
          
Total  34,183       33,457 
          
2005 are as follows:


 Direct-to-
Consumer		IndirectTotal
Balance at July 3, 2004$12,089
$1,516
$13,605
Coach Japan acquisition225,263
—
225,263
Foreign exchange impact(157
)
—
(157
)
Balance at July 2, 2005237,195
1,516
238,711
Coach Japan acquisition adjustment(2,666
)
—
(2,666
)
Foreign exchange impact(8,234
)
—
(8,234
)
Balance at July 1, 2006$226,295
$1,516
$227,811

The total carrying amount of intangible assets not subject to amortization is as follows:


 July 1,
2006		July 2,
2005
Trademarks$9,788
$9,788
Workforce2,219
2,300
Total Indefinite Life Intangible Assets$12,007
$12,088

Table of Contents

COACH, INC.

Notes to Consolidated Financial Statements – (Continued)
(dollars and shares in thousands, except per share data)

9.Income Taxes

The provisions for income taxes computed by applying the U.S. statutory rate to income before taxes as reconciled to the actual provisions were:


 Fiscal Year Ended
 July 1,
2006		July 2,
2005		July 3,
2004
 AmountPercentageAmountPercentageAmountPercentage
Income before provision for income taxes and minority interest: 
 
 
 
 
 
United States$712,981
89.4
%
$535,448
91.0
%
$349,701
85.6
%
Foreign84,246
10.6
52,875
9.0
58,795
14.4
Total income before provision for income taxes and minority interest$797,227
100.0
%
$588,323
100.0
%
$408,496
100.0
%
Tax expense at U.S. statutory rate$279,029
35.0
%
$205,913
35.0
%
$142,974
35.0
%
State taxes, net of federal benefit29,160
3.7
31,309
5.3
14,523
3.6
Reversal of deferred U.S. taxes on foreign earnings—
0.0
(16,247
)
(2.8
)
—
0.0
Foreign income subject to reduced tax rates(11,548
)
(1.4
)
(4,458
)
(0.8
)
(5,182
)
(1.3
)
Other, net6,309
0.8
(447
)
(0.1
)
189
0.0
Taxes at effective worldwide rates$302,950
38.0
%
$216,070
36.7
%
$152,504
37.3
%

Current and deferred tax provisions (benefits) were:


 Fiscal Year Ended
 July 1,
2006		July 2,
2005		July 3,
2004
 CurrentDeferredCurrentDeferredCurrentDeferred
Federal$261,592
$(19,381
)
$184,318
$(46,981
)
$128,449
$(21,020
)
Foreign7,555
8,321
28,228
1,276
2,302
19,538
State50,993
(6,130
)
60,849
(11,620
)
25,468
(2,233
)
Total current and deferred tax provisions (benefits)$320,140
$(17,190
)
$273,395
$(57,325
)
$156,219
$(3,715
)

Table of Contents

COACH, INC.

Notes to Consolidated Financial Statements – (Continued)
(dollars and shares in thousands, except per share data)

The following are the components of the deferred tax provisions (benefits) occurring as a result of transactions being reported in different years for financial and tax reporting:


 Fiscal Year Ended
 July 1,
2006		July 2,
2005		July 3,
2004
Deferred tax provisions (benefits) 
 
 
Depreciation$906
$(9,546
)
$(3
)
Employee benefits811
(2,945
)
(3,267
)
Advertising accruals(508
)
2
(280
)
Nondeductible reserves(11,209
)
(25,888
)
(20,590
)
Earnings of foreign subsidiaries—
(9,226
)
23,920
Other, net(7,190
)
(9,722
)
(3,495
)
Total deferred tax provisions (benefits)$(17,190
)
$(57,325
)
$(3,715
)

The deferred tax assets and liabilities at the respective year-ends were as follows:


 Fiscal Year Ended
 July 1,
2006		July 2,
2005
Deferred tax assets 
 
Reserves not deductible until paid$116,374
$69,003
Pension and other employee benefits10,502
11,289
Property, plant and equipment20,606
21,456
Other14,614
3,617
Total deferred tax assets$162,096
$105,365
Deferred tax liabilities 
 
Equity adjustments$3,107
$2,644
Goodwill17,823
—
Other20,222
4,719
Total deferred tax liabilities$41,152
$7,363
Net deferred tax assets$120,944
$98,002

Significant judgment is required in determining the worldwide provision for income taxes, and there are many transactions for which the ultimate tax outcome is uncertain. It is the Company’s policy to establish provisions for taxes that may become payable in future years as a result of an examination by tax authorities. The Company establishes the provisions based upon management’s assessment of exposure associated with permanent tax differences and tax credits. The provisions are analyzed periodically and adjustments are made as events occur that warrant adjustments to those provisions.

10. Retirement Plans

Coach maintains the Coach, Inc. Savings and Profit Sharing Plan, which is a defined contribution plan. Employees who meet certain eligibility requirements and are not part of a collective bargaining agreement may participate in this program. The annual expense incurred by Coach for this defined contribution plan was $7,714, $8,621, $7,620 and $5,308$7,620 in fiscal 2006, 2005 and 2004, respectively.


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COACH, INC.

Notes to Consolidated Financial Statements – (Continued)
(dollars and 2003, respectively.

shares in thousands, except per share data)

Coach also sponsors a noncontributory defined benefit plan, The Coach, Inc. Supplemental Pension Plan, (the ‘‘U.S. Plan’’) for individuals who are part of collective bargaining arrangements.arrangements in the U.S. The planU.S. Plan provides benefits based on years of service.

Coach Japan sponsors a defined benefit plan for individuals who meet certain eligibility requirements. This plan provides benefits based on employees’ years of service and earnings.

57

COACH, INC.
Notes to Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
The Company uses a March 31 measurement date for its defined benefit retirement plan.plans. Obligation and funded status information for the Company’s defined benefit retirement planplans is as follows:
          
  Fiscal Year Ended
   
  July 2, July 3,
  2005 2004
     
Change in Benefit Obligation
        
 Benefit obligation at beginning of year $5,260  $5,983 
 Service cost  14   13 
 Interest cost  308   381 
 Benefits paid  (178)  (249)
 Actuarial loss  394   797 
 Plan settlements(1)  —   (1,665)
       
Benefit obligation at end of year $5,798  $5,260 
       
Change in Plan Assets
        
 Fair value of plan assets at beginning of year $2,706  $3,863 
 Actual return on plan assets  34   757 
 Employer contributions  1,290   — 
 Benefits paid  (178)  (249)
 Plan settlements(1)  —   (1,665)
       
Fair value of plan assets at end of year $3,852  $2,706 
       


 Fiscal Year Ended
 July 1,
2006		July 2,
2005
Change in Benefit Obligation 
 
Benefit obligation at beginning of year$5,798
$5,260
Service cost357
14
Interest cost333
308
Actuarial (gain) loss(59
)
394
Prior service cost755
—
Foreign exchange impact(25
)
—
Benefits paid(436
)
(178
)
Benefit obligation at end of year$6,723
$5,798
Change in Plan Assets 
 
Fair value of plan assets at beginning of year$3,852
$2,706
Actual return on plan assets241
34
Employer contributions1,223
1,290
Benefits paid(436
)
(178
)
Fair value of plan assets at end of year$4,880
$3,852
Funded status 
 
Funded status at end of year$(1,843
)
$(1,946
)
Unrecognized net actuarial loss2,286
2,117
Net amount recognized$443
$171
Amounts recognized in the 
 
Consolidated Balance Sheets 
 
Accrued benefit liability$(1,507
)
$(1,946
)
Accumulated other comprehensive income1,950
2,117
Net amount recognized$443
$171
(1) Reflects additional lump sum payments made after the measurement date and before fiscal year end.
          
  Fiscal Year Ended
   
  July 2, July 3,
  2005 2004
     
Funded status
        
 Funded status at end of year $(1,946) $(2,554)
 Unrecognized prior service cost  —   — 
 Unrecognized net actuarial loss  2,117   1,766 
       
Net amount recognized $171  $(788)
       
Amounts recognized in the consolidated balance sheets
        
 Other noncurrent assets $—  $— 
 Accrued benefit liability  (1,946)  (2,554)
 Accumulated other comprehensive income  2,117   1,766 
       
Net amount recognized $171  $(788)
       


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58

COACH, INC.


Notes to Consolidated Financial Statements —– (Continued)

(dollars and shares in thousands, except per share data)


      The accumulated benefit obligation for the defined benefit pension plan was $5,798 and $5,260 at July 2, 2005 and July 3, 2004, respectively.
 Fiscal Year Ended
 July 1,
2006		July 2,
2005
Information for pension plans with an accumulated benefit obligation in excess of plan assets 
 
Projected benefit obligation$6,723
$5,798
Accumulated benefit obligation6,497
5,798
Fair value of plan assets4,880
3,852
Additional Information 
 
(Decrease) Increase in minimum liability included in other comprehensive income$(166
)
$350
Weighted-average assumptions used to determine benefit obligations 
 
Discount rate5.42
%
5.75
%
Rate of compensation increase(1)3.00
%
N/A
Weighted-average assumptions used to determine net periodic benefit cost 
 
Discount rate5.25
%
6.00
%
Expected long term return on plan assets6.75
%
6.75
%
Rate of compensation increase(1)3.00
%
N/A
          
  Fiscal Year Ended
   
  July 2, July 3,
  2005 2004
     
Information for pension plans with an accumulated benefit obligation in excess of plan assets
        
 Projected benefit obligation $5,798  $5,260 
 Accumulated benefit obligation  5,798   5,260 
 Fair value of plan assets  3,852   2,706 
Additional Information
        
 Increase in minimum liability included in other comprehensive income $350  $(479)
Weighted-average assumptions used to determine benefit obligations
        
 Discount rate  5.75%  6.00%
 Rate of compensation increase  N/A   N/A 
Weighted-average assumptions used to determine net periodic benefit cost
        
 Discount rate  6.00%  6.50%
 Expected long term return on plan assets  6.75%  7.50%
 Rate of compensation increase  N/A   N/A 
(1)Fiscal 2005 did not include the Coach Japan defined benefit plan. As the U.S. Plan provides benefits based on years of service only, the rate of compensation increase assumption was not applicable in fiscal 2005.

To develop the expected long-term rate of return on plan assets assumption, the Company considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return on plan assets assumption for the portfolio. This resulted in the selection of the 6.75% assumption for the fiscal 2005.year ended July 1, 2006.


              
  Fiscal Year Ended
   
  July 2, July 3, June 28,
  2005 2004 2003
       
Components of net periodic benefit cost
            
 Service cost $14  $13  $15 
 Interest cost  308   381   370 
 Expected return on plan assets  (181)  (281)  (381)
 Amortization of prior service cost  —   —   1 
 Amortization of net actuarial loss  190   246   46 
 Settlement loss  —   559   — 
          
Net periodic benefit cost $331  $918  $51 
          

 Fiscal Year Ended
 July 1,
2006		July 2,
2005		July 3,
2004
Components of net periodic benefit cost 
 
 
Service cost$357
$14
$13
Interest cost333
308
381
Expected return on plan assets(255
)
(181
)
(281
)
Amortization of net actuarial loss313
190
246
Settlement loss—
—
559
Net periodic benefit cost$748
$331
$918

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59

COACH, INC.


Notes to Consolidated Financial Statements —– (Continued)

(dollars and shares in thousands, except per share data)

In the Company’s U.S. Plan, funds are contributed to a trust in accordance with regulatory limits. The Company’s pension plan weighted-average asset allocations of the U.S. Plan, by asset category, as of the measurement dates, are as follows:


          
  Plan Assets
   
  Fiscal 2005 Fiscal 2004
     
Asset Category
        
Domestic equities  62.4%  69.0%
International equities  4.5   4.1 
Fixed income  20.9   25.1 
Cash equivalents  12.2   1.8 
       
 Total  100.0%  100.0%
       
 Plan Assets
 Fiscal 2006Fiscal 2005
Asset Category 
 
Domestic equities61.3
%
62.4
International equities6.8
4.5
Fixed income28.5
20.9
Cash equivalents3.4
12.2
Total100.0
%
100.0

The goals of the investment program are to fully fund the obligation to pay retirement benefits in accordance with the Coach, Inc. Supplemental Pension Plan and to provide returns that,which, along with appropriate funding from Coach, maintain an asset/liability ratio that is in compliance with all applicable laws and regulations and assures timely payment of retirement benefits. The target allocation range of percentages for each major category of plan assets on a weighted-average basis, are as follows:


             
  Low Target High
       
Equity securities  30%  45%  60%
Fixed income  25%  40%  55%
Cash equivalents  5%  15%  25%
 MinimumMaximum
Equity securities30
%
70
%
Fixed income25
%
55
%
Cash equivalents5
%
25
%

The equity securities category includes common stocks, preferred stocks, and commingledco-mingled funds of approved securities. The target allocation of securities is a maximum of 5% of equity assets in any one individual common or preferred stock and a maximum of 15% in any one mutual fund.

      The Company

Coach expects to contribute $442$355 to its defined benefit pension planU.S. Plan during the year ending July 1, 2006.

June 30, 2007. In addition, Coach Japan expects to contribute $111 for benefit payments during the year ending June 30, 2007. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:


     
Fiscal Year Pension Benefits
   
2006  274 
2007  293 
2008  307 
2009  319 
2010  338 
2011 — 2015  1,956 
Fiscal YearPension Benefits
2007$418
2008386
2009660
2010687
2011700
2012 - - 20163,956
10.11. Segment Information

The Company operates its business in two reportable segments: direct-to-consumerDirect-to-Consumer and indirect.Indirect. The Company’sCompany's reportable segments represent channels of distribution that offer similar merchandise, service and marketing strategies. Sales of Coach products through Company-operated retailstores in North America and factory stores,Japan, the Internet and the Coach catalog constitute the direct-to-consumerDirect-to-Consumer segment. The Indirect refers tosegment includes sales of Coach products to other retailers and includes sales through Coach Japan.royalties earned on licensed products. In deciding how to allocate resources and assess performance, Coach’sCoach's executive officers regularly evaluate the sales and operating income of these segments. Operating income is the


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60

COACH, INC.


Notes to Consolidated Financial Statements —– (Continued)

(dollars and shares in thousands, except per share data)
segments. Operating income is the

gross margin of the segment less direct expenses of the segment. Unallocated corporate expenses include production variances, general marketing, administration and information systems, as well as distribution and customerconsumer service expenses.

                 
  Direct-to-   Corporate  
Fiscal 2005 Consumer Indirect Unallocated Total
         
Net sales $935,461  $774,962  $—  $1,710,423 
Operating income (loss)  406,122   385,674   (169,986)  621,810 
Interest income  —   —   16,980   16,980 
Interest expense  —   —   1,220   1,220 
Income (loss) before provision for income taxes and minority interest  406,122   385,674   (154,226)  637,570 
Provision for income taxes  —   —   235,277   235,277 
Minority interest, net of tax  —   —   13,641   13,641 
Depreciation and amortization  29,510   12,126   15,397   57,033 
Total assets  242,604   273,548   830,980   1,347,132 
Additions to long-lived assets  47,906   27,673   19,013   94,592 
                 
  Direct-to-   Corporate  
Fiscal 2004 Consumer Indirect Unallocated Total
         
Net sales $726,457  $594,649  $—  $1,321,106 
Operating income (loss)  293,626   288,648   (137,809)  444,465 
Interest income  —   —   4,000   4,000 
Interest expense  —   —   808   808 
Income (loss) before provision for income taxes and minority interest  293,626   288,648   (134,617)  447,657 
Provision for income taxes  —   —   167,866   167,866 
Minority interest, net of tax  —   —   18,043   18,043 
Depreciation and amortization  26,621   6,940   10,949   44,510 
Total assets  227,657   176,568   640,200   1,044,425 
Additions to long-lived assets  41,554   19,919   12,186   73,659 
                 
  Direct-to-   Corporate  
Fiscal 2003 Consumer Indirect Unallocated Total
         
Net sales $559,553  $393,673  $—  $953,226 
Operating income (loss)  198,247   166,604   (121,089)  243,762 
Interest income  —   —   1,754   1,754 
Interest expense  —   —   695   695 
Income (loss) before provision for income taxes and minority interest  198,247   166,604   (120,030)  244,821 
Provision for income taxes  —   —   90,585   90,585 
Minority interest, net of tax  —   —   7,608   7,608 
Depreciation and amortization  18,603   5,327   7,420   31,350 
Total assets  205,614   137,587   285,908   629,109 
Additions to long-lived assets  37,265   16,602   7,990   61,857 

61As a result of Coach’s acquisition of Sumitomo’s 50% interest in Coach Japan on July 1, 2005, the Company reevaluated the composition of its reportable segments and determined that Coach Japan should be a component of the Direct-to-Consumer segment. Previously, Coach Japan was included in the Indirect segment. All prior period information has been reclassified to include Coach Japan as a component of the Direct-to-Consumer segment.


Fiscal 2006Direct-to-
Consumer		IndirectCorporate
Unallocated		Total
Net sales$1,610,691
$500,810
$—
$2,111,501
Operating income (loss)717,326
313,689
(266,411
)
764,604
Income (loss) before provision 
 
 
 
for income taxes and minority interest717,326
313,689
(233,788
)
797,227
Depreciation and amortization expense43,177
5,506
16,432
65,115
Total assets743,034
91,247
792,239
1,626,520
Additions to long-lived assets70,440
6,036
57,400
133,876

Fiscal 2005Direct-to-
Consumer		IndirectCorporate
Unallocated		Total
Net sales$1,307,425
$402,998
$—
$1,710,423
Operating income (loss)548,520
243,276
(219,233
)
572,563
Income (loss) before provision 
 
 
 
for income taxes and minority interest548,520
243,276
(203,473
)
588,323
Depreciation and amortization expense37,275
4,362
8,763
50,400
Total assets646,788
69,569
653,800
1,370,157
Additions to long-lived assets70,801
4,778
19,013
94,592

Fiscal 2004Direct-to-
Consumer		IndirectCorporate
Unallocated		Total
Net sales$1,002,737
$318,369
$—
$1,321,106
Operating income (loss)403,884
178,390
(176,970
)
405,304
Income (loss) before provision 
 
 
 
for income taxes and minority interest403,884
178,390
(173,778
)
408,496
Depreciation and amortization expense30,054
3,509
6,537
40,100
Total assets328,530
64,770
666,979
1,060,279
Additions to long-lived assets57,589
3,884
12,186
73,659

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COACH, INC.


Notes to Consolidated Financial Statements —– (Continued)

(dollars and shares in thousands, except per share data)

The following is a summary of the common costs not allocated in the determination of segment performance.performance:


             
  Fiscal Year Ended
   
  July 2, 2005 July 3, 2004 June 28, 2003
       
Production variances $11,028  $12,581  $6,755 
Advertising, marketing and design  (70,234)  (56,714)  (48,491)
Administration and information systems  (75,970)  (63,521)  (51,843)
Distribution and customer service  (34,810)  (30,155)  (27,510)
          
Total corporate unallocated $(169,986) $(137,809) $(121,089)
          
 Fiscal Year Ended
 July 1,
2006		July 2,
2005		July 3,
2004
Production variances$14,659
$11,028
$12,581
Advertising, marketing and design(91,443
)
(70,234
)
(56,714
)
Administration and information systems(148,846
)
(125,217
)
(102,682
)
Distribution and customer service(40,781
)
(34,810
)
(30,155
)
Total corporate unallocated$(266,411
)
$(219,233
)
$(176,970
)

Geographic Area Information

Geographic revenue information is based on the location of our customer. Geographic long-lived asset information is based on the physical location of the assets at the end of each period. As of July 2, 2005,1, 2006, Coach operated 193218 retail stores and 8286 factory stores in North America. Indirectly, through Coach Japan, Coach operates 103America and 118 department store shop-in-shops, and retail stores and factory store locationsstores in Japan. Coach also operates distribution, product development and quality control locations in the United States, Italy, Hong Kong, China and South Korea.

                  
      Other  
  United States Japan International(1) Total
         
Fiscal 2005
                
 Net sales $1,242,004  $372,326  $96,093  $1,710,423 
 Long-lived assets  314,919   288,338   2,995   606,252 
Fiscal 2004
                
 Net sales $982,668  $278,011  $60,427  $1,321,106 
 Long-lived assets  280,938   55,487   2,384   338,809 
Fiscal 2003
                
 Net sales $735,890  $177,821  $39,515  $953,226 
 Long-lived assets  138,708   31,966   785   171,459 


Fiscal 2006United StatesJapanOther
International(1)		Total
Net sales$1,574,285
$420,509
$116,707
$2,111,501
Long-lived assets266,190
298,087
3,684
567,961
Fiscal 2005United StatesJapanOther
International(1)		Total
Net sales$1,253,170
$372,326
$84,927
$1,710,423
Long-lived assets314,919
288,338
2,995
606,252
Fiscal 2004United StatesJapanOther
International(1)		Total
Net sales$982,668
$278,011
$60,427
$1,321,106
Long-lived assets280,938
55,487
2,384
338,809
(1)Other International sales reflect shipments to third-party distributors primarily in East Asia.
11.12. Derivative Instruments and Hedging ActivitiesBusiness Interruption Insurance
      Substantially all purchases and sales involving international parties are denominated in U.S. dollars,

In the majority of which are not hedged using any derivative instruments. However, the Company is exposed to market risk from foreign currency exchange rate fluctuations with respect to Coach Japanfiscal year ended June 29, 2002, Coach’s World Trade Center location was completely destroyed as a result of its U.S. dollar-denominated inventory purchases. Coach Japan enters into certain foreign currency derivative contracts, primarily foreign exchange forward contracts, to managethe September 11th terrorist attack. Inventory and fixed asset loss claims were filed with the Company’s insurers and these risks. In addition,losses were fully recovered. Losses covered under the Company is exposed to foreign currency exchange rate fluctuations related toCompany’s business interruption insurance program were also filed with the euro-denominated expenses of its Italian sourcing office.insurers. During the third quarter of fiscal 2003, the Company began a program to enter into certain foreign currency derivative contracts, primarily foreign exchange forward contracts, in order to manage these fluctuations. However, during the second quarter of fiscal 2004,2006, the Company reassessed this program and determined, based on currentreached a final settlement with its insurance carriers related to losses covered under the business conditions, thatinterruption insurance program. Accordingly, the Company would discontinue hedging against the euro.

62

COACH, INC.
Notesdoes not expect to Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
      The foreign currency contracts entered into by the Company have durations no greater than 12 months. The fair values of open foreign currency derivatives included in accrued liabilities at July 2, 2005 and July 3, 2004 were $0 and $486, respectively. The fair values of open foreign currency derivatives included in current assets at July 2, 2005 and July 3, 2004 were $1,535 and $0, respectively. As of July 2, 2005, open foreign currency forward contracts designated as hedges with a notional amount of $46,900 were fair valued, resulting in an increasereceive any additional business interruption proceeds related to equity as a benefit to other comprehensive income of $1,229, net of taxes. As of July 3, 2004, open foreign currency forward contracts designated as hedges with a notional amount of $63,600 were fair valued, resulting in a reduction to equity as a charge to other comprehensive income of $460, net of taxes.
12.Goodwill
      Changes in the carrying amounts of net goodwill for the years ended July 2, 2005 and July 3, 2004 are as follows:
             
  Direct-to-    
  Consumer Indirect Total
       
Balance at June 28, 2003 $3,408  $9,601  $13,009 
Foreign exchange impact  —   596   596 
          
Balance at July 3, 2004 $3,408  $10,197  $13,605 
Acquisition of Coach Japan  —   225,263   225,263 
Foreign exchange impact  —   (157)  (157)
          
Balance at July 2, 2005 $3,408  $235,303  $238,711 
          
      On July 1, 2005, Coach completed the purchase of Sumitomo’s 50% interest in Coach Japan. See Note 17, “Acquisition of Coach Japan, Inc.” for more information on the acquisition.
13.Business Interruption Insurance
      As a result of the September 11, 2001 attack, the World Trade Center store was completely destroyed. Losses relating tolocation in the Company’s business interruption coverage were filed with the insurers. Coach has held discussions with its insurance carriers and expects to fully recover these losses.
future.

During fiscal 2006, 2005 2004 and 2003,2004, Coach received payments of $2,025, $2,644, $2,657 and $1,484,$2,657, respectively, under its business interruption coverage. These amounts are included as a reduction to selling, general and administrative expenses.


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63

COACH, INC.


Notes to Consolidated Financial Statements —– (Continued)

(dollars and shares in thousands, except per share data)

14.13. Earnings Per Share

The following is a reconciliation of the weighted-average shares outstanding and calculation of basic and diluted earnings per share:

              
  Fiscal Year Ended
   
  July 2, July 3, June 28,
  2005 2004 2003
       
Net earnings $388,652  $261,748  $146,628 
          
Total basic shares  378,670   372,120   359,116 
Dilutive securities:            
Employee benefit and stock award plans  2,784   2,578   1,840 
Stock option programs  8,737   10,860   10,728 
          
Total diluted shares  390,191   385,558   371,684 
          
Earnings per share:            
 Basic $1.03  $0.70  $0.41 
          
 Diluted $1.00  $0.68  $0.39 
          


 Fiscal Year Ended
 July 1,
2006		July 2,
2005		July 3,
2004
Net income$494,277
$358,612
$237,949
Total weighted-average basic shares379,635
378,670
372,120
Dilutive securities: 
 
 
Employee benefit and stock award plans1,666
2,784
2,578
Stock option programs7,194
8,737
10,860
Total weighted-average diluted shares388,495
390,191
385,558
Earnings per share: 
 
 
Basic$1.30
$0.95
$0.64
Diluted$1.27
$0.92
$0.62

At July 1, 2006, options to purchase 13,202 shares of common stock were outstanding but not included in the computation of diluted earnings per share, as these options’ exercise prices, ranging from $31.28 to $36.86, were greater than the average market price of the common shares.

At July 2, 2005, options to purchase 1,093 shares of common stock were outstanding but not included in the computation of diluted earnings per share, as these options’ exercise prices, ranging from $29.75 to $32.79, were greater than the average market price of the common shares.

At July 3, 2004, options to purchase 4,306 shares of common stock were outstanding but not included in the computation of diluted earnings per share, as these options’ exercise prices, ranging from $21.39 to $22.80, were greater than the average market price of the common shares.

15.14. Stock Repurchase Program
      On September 17, 2001, the Coach Board of Directors authorized the establishment of a common stock repurchase program. Under this program, up to $80,000 may be utilized to repurchase common stock through September 2004. On January 30, 2003, the

The Coach Board of Directors approved an additional common stock repurchase program to acquire up to $100,000programs as follows:


Date Share Repurchase Programs were
Publicly Announced		Total Dollar Amount
Approved		Expiration Date of Plan
September 17, 2001$80 millionSeptember 2004
January 30, 2003$100 millionJanuary 2006
August 12, 2004$200 millionAugust 2006
May 11, 2005$250 millionMay 2007
May 9, 2006$500 millionJune 2007

Purchases of Coach’s outstanding common stock through January 2006 and extended the duration of Coach’s existing repurchase program through January 2006. On May 11, 2005, the Coach Board of Directors approved a common stock repurchase program to acquire up to $250,000 of Coach’s outstanding common stock. Purchases of Coach stock maywill be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases. Repurchased shares of common stock will become authorized but unissued shares and may be issued in the future for general corporate and other uses.purposes. The Company may terminate or limit the stock repurchase program at any time.

During fiscal 2006, 2005 2004 and 2003,2004, the Company repurchased and retired 19,055, 11,000, 3,022 and 7,7163,022 shares of common stock at an average cost of $31.50, $24.09, $18.18 and $6.48$18.18 per share, respectively. As of July 2, 2005,1, 2006, Coach had approximately $250,000$150,000 remaining in the stock repurchase program.


16.Related-Party Transaction
      On July 26, 2001, Coach made a loan to Reed Krakoff, its President, Executive Creative Director, in the principal amountTable of $2,000. The loan bore interest at a rate of 5.12% per annum, compounded annually. The loan amount and applicable accrued interest, less payments received, was recorded as a component of other noncurrent assets in the accompanying balance sheets. Included in the loan agreement was a repayment schedule requiring full repayment on or before July 26, 2006.
      On November 7, 2002, Mr. Krakoff paid Coach the first principal payment of $400 under the loan agreement. On March 11, 2004, Mr. Krakoff made an accelerated payment to retire the full outstanding principal and interest under the loan agreement.

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64

COACH, INC.


Notes to Consolidated Financial Statements —– (Continued)

(dollars and shares in thousands, except per share data)

17.15. Acquisition of Coach Japan, Inc.
      On

During fiscal 2006, the Company completed its purchase price allocation related to the July 1, 2005 Coach completed the purchaseacquisition of Sumitomo’s 50% interest in Coach Japan, Inc. for $228,431, including transaction costs, plus undistributed profits and paid-in capitalAt the time of $72,927. Coach Japan was a joint venture established between Coach and Sumitomo Corporation, to operate and expand the Coach business in Japan. Coach Japan is accounted for as a consolidated subsidiary.acquisition, Coach recorded the 50% interest in the assets and liabilities of Coach Japanthat were acquired through this acquisitionthe transaction at theirfair values. The initial recorded fair values, as follows: trade accounts receivable of $15,369, inventory of $43,089, propertypurchase price allocation adjustments and equipment of $21,848, customer list of $250, goodwill of $225,263, other assets of $24,969 and liabilities of $30,672. The results of operations for Coach Japan, Inc. from July 1, 2005 are included in our consolidated results of operations for the fiscal year ended July 2, 2005.

      The following unaudited pro forma information assumes the Coach Japan, Inc. acquisition had occurred on July 4, 2004. The pro forma information, as presented below, is not indicative of the results that would have been obtained had the transaction occurred July 4, 2004, nor is it indicative of our future results. The final purchase price allocation and the resulting effect on net income may differ significantly from the unaudited pro forma amounts included herein.allocations are as follows:


         
  Fiscal Year Ended
   
  July 2, July 3,
  2005 2004
     
  (Unaudited) (Unaudited)
Net revenue $1,710,423  $1,321,106 
Net income  402,293   279,791 
Net income per share — Basic  1.06   0.75 
Net income per share — Diluted  1.03   0.73 
Assets and liabilities acquiredAs Previously
Reported		AdjustmentsFinal Purchase
Price Allocation
Trade accounts receivable$15,369
$—
$15,369
Inventory43,089
2,666
45,755
Property and equipment21,848
—
21,848
Customer list250
—
250
Workforce2,300
—
2,300
Goodwill225,263
(2,666
)
222,597
Other assets22,669
—
22,669
Other liabilities30,672
—
30,672
18.16. Balance Sheet Components

The components of certain balance sheet accounts are as follows:


July 1, 2006July 2, 2005
Property and Equipment
Land$27,954
$—
Machinery and equipment14,187
7,618
Furniture and fixtures136,730
148,252
Leasehold improvements270,232
243,784
Construction in progress66,240
21,428
Less: accumulated depreciation(216,812
)
(217,220
)
Total property and equipment, net$298,531
$203,862
Accrued Liabilities
Income and other taxes$69,017
$52,031
Payroll and employee benefits78,215
65,653
Capital expenditures21,243
—
Operating expenses93,360
70,550
Total accrued liabilities$261,835
$188,234
17. Shareholder Rights Plan

On May 3, 2001, Coach declared a “poison pill”‘‘poison pill’’ dividend distribution of rights to buy additional common stock, to the holder of each outstanding share of Coach’s common stock.

Subject to limited exceptions, these rights may be exercised if a person or group intentionally acquires 10% or more of the Company’s common stock or announces a tender offer for 10% or more of the common stock on terms not approved by the Coach Board of Directors. In this event, each right would entitle the holder of each share of Coach’s common stock to buy one additional common share of the Company at an exercise price far below the then-current market price. Subject to certain


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COACH, INC.

Notes to Consolidated Financial Statements – (Continued)
(dollars and shares in thousands, except per share data)

exceptions, Coach’s Board of Directors will be entitled to redeem the rights at $0.001$0.0001 per right at any time before the close of business on the tenth day following either the public announcement that, or the date on which a majority of Coach’s Board of Directors becomes aware that, a person has acquired 10% or more of the outstanding common stock. As of the end of fiscal 2005,2006, there were no shareholders whose common stock holdings exceeded the 10% threshold established by the rights plan.

19.Subsequent Event
      On August 22, 2005, Coach, Inc. entered into three-year extensions to the employment agreements of three key executives: Lew Frankfort, Chairman and Chief Executive Officer; Reed Krakoff, President and Executive Creative Director; and Keith Monda, President and Chief Operating Officer. These amendments extend the terms of the executives’ employment agreements from July 2008 through August 2011.

65

COACH, INC.
Notes to Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
20.18. Quarterly Financial Data (Unaudited)
                      
  First Second Third Fourth Total
  Quarter Quarter Quarter Quarter Fiscal Year
           
Fiscal 2005
                    
Net sales $344,065  $531,759  $415,939  $418,660  $1,710,423 
Gross profit  258,174   402,968   324,673   324,956   1,310,771 
Net income  67,725   134,123   89,239   97,565   388,652 
Earnings per common share:                    
 Basic $0.18  $0.35  $0.24  $0.26  $1.03 
 Diluted $0.17  $0.34  $0.23  $0.25  $1.00 
Fiscal 2004
                    
Net sales(1) $258,375  $411,513  $313,073  $338,145  $1,321,106 
Gross profit  187,909   305,143   237,517   259,513   990,082 
Net income  42,329   95,438   58,311   65,670   261,748 
Earnings per common share:                    
 Basic $0.12  $0.26  $0.16  $0.17  $0.70 
 Diluted $0.11  $0.25  $0.15  $0.17  $0.68 
Fiscal 2003
                    
Net sales $192,791  $308,523  $220,396  $231,516  $953,226 
Gross profit  131,224   216,842   159,807   169,556   677,429 
Net income  22,480   62,431   31,853   29,864   146,628 
Earnings per common share:                    
 Basic $0.06  $0.18  $0.09  $0.08  $0.41 
 Diluted $0.06  $0.17  $0.09  $0.08  $0.39 

 First
Quarter		Second
Quarter		Third
Quarter		Fourth
Quarter		Total
Fiscal Year
Fiscal 2006 
 
 
 
 
Net sales$448,951
$650,336
$497,859
$514,355
$2,111,501
Gross profit341,361
504,676
389,769
403,073
1,638,879
Net income93,615
174,174
108,846
117,642
494,277
Earnings per common share: 
 
 
 
 
Basic$0.25
$0.46
$0.28
$0.31
$1.30
Diluted$0.24
$0.45
$0.28
$0.31
$1.27
Fiscal 2005 
 
 
 
 
Net sales$344,065
$531,759
$415,939
$418,660
$1,710,423
Gross profit258,174
402,968
324,673
324,956
1,310,771
Net income60,981
126,903
80,872
89,856
358,612
Earnings per common share: 
 
 
 
 
Basic$0.16
$0.33
$0.21
$0.24
$0.95
Diluted$0.16
$0.32
$0.21
$0.23
$0.92
Fiscal 2004 
 
 
 
 
Net sales(1)$258,375
$411,513
$313,073
$338,145
$1,321,106
Gross profit187,909
305,143
237,517
259,513
990,082
Net income36,605
89,101
51,912
60,331
237,949
Earnings per common share: 
 
 
 
 
Basic$0.10
$0.24
$0.14
$0.16
$0.64
Diluted$0.10
$0.23
$0.13
$0.15
$0.62
(1)Fiscal 2004 fourth quarter and total fiscal year net sales include week 53 sales of $19,500

The sum of the quarterly earnings per common share may not equal the full-year amount, sinceas the computations of the weighted-average number of common-equivalentcommon basic and diluted shares outstanding for each quarter and the full year are madeperformed independently.

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COACH, INC.

Market and Dividend Information

Coach’s common stock is listed on the New York Stock Exchange and is traded under the symbol “COH”.‘‘COH.’’ The following table sets forth, for the fiscal periods indicated, the high and low closing prices per share of Coach’s common stock as reported on the New York Stock Exchange Composite Tape.


             
  Fiscal Year Ended 2005
   
  High   Low
       
Quarter ended            
October 2, 2004 $23.03      $18.06 
January 1, 2005  28.53       19.83 
April 2, 2005  29.75       26.41 
July 2, 2005  33.92       25.22 
Closing price at July 1, 2005     $33.55     
             
  Fiscal Year Ended 2004
   
  High   Low
       
Quarter ended            
September 27, 2003 $14.82      $12.44 
December 27, 2003  19.96       13.54 
March 27, 2004  21.84       17.08 
July 3, 2004  23.10       19.75 
Closing price at July 2, 2004     $23.05     
             
  Fiscal Year Ended 2003
   
  High   Low
       
Quarter ended            
September 28, 2002 $7.34      $4.53 
December 28, 2002  8.62       5.90 
March 29, 2003  9.98       7.29 
June 28, 2003  13.22       9.27 
Closing price at June 27, 2003     $12.49     
 Fiscal Year Ended 2006
 HighLow
Quarter ended 
 
October 1, 2005$36.22
$30.25
December 31, 200536.64
28.94
April 1, 200636.97
31.75
July 1, 200635.35
27.75
Closing price at June 30, 2006$29.90
 Fiscal Year Ended 2005
 HighLow
Quarter ended 
 
October 2, 2004$23.03
$18.06
January 1, 200528.53
19.83
April 2, 200529.75
26.41
July 2, 200533.92
25.22
Closing price at July 1, 2005$33.55
 Fiscal Year Ended 2004
 HighLow
Quarter ended 
 
September 27, 2003$14.82
$12.44
December 27, 200319.96
13.54
March 27, 200421.84
17.08
July 3, 200423.10
19.75
Closing price at July 2, 2004$23.05

Coach has never declared or paid any cash dividends on its common stock. Coach currently intends to retain future earnings, if any, for use in its business and is presently not planning to pay regular cash dividends in its common stock. The Bank of America facility prohibits Coach from paying dividends while the credit facility is in place, with certain exceptions. Any future determination to pay cash dividends will be at the discretion of Coach’s Board of Directors and will be dependent upon Coach’s financial condition, operating results, capital requirements and such other factors as the Board of Directors deems relevant.


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67

COACH, INC.

Schedule II —– Valuation and Qualifying Accounts

For the Fiscal Years Ended July 1, 2006, July 2, 2005 and July 3, 2004 and June 28, 2003
(amounts in thousands)


                  
    Provision    
    Charged    
  Balance at to Costs Write-offs/ Balance
  Beginning and Allowances at End of
  of Year Expenses Taken Year
         
  (amounts in thousands)
Fiscal 2005
                
Allowance for bad debts $1,804  $100  $(239) $1,665 
Allowance for returns  3,652   4,303   (5,496)  2,459 
             
 Total $5,456  $4,403  $(5,735) $4,124 
             
Fiscal 2004
                
Allowance for bad debts $1,312  $610  $(118) $1,804 
Allowance for returns  4,783   3,292   (4,423)  3,652 
             
 Total $6,095  $3,902  $(4,541) $5,456 
             
Fiscal 2003
                
Allowance for bad debts $1,335  $97  $(120) $1,312 
Allowance for returns  2,841   3,561   (1,619)  4,783 
             
 Total $4,176  $3,658  $(1,739) $6,095 
             

 Balance at
Beginning
of Year		Provision
Charged to
Costs and
Expenses		Write-offs/
Allowances
Taken		Balance at
End of
Year
Fiscal 2006 
 
 
 
Allowance for bad debts$1,665
$29
$(50
)
$1,644
Allowance for returns2,459
6,572
(4,675
)
4,356
Total$4,124
$6,601
$(4,725
)
$6,000
Fiscal 2005 
 
 
 
Allowance for bad debts$1,804
$100
$(239
)
$1,665
Allowance for returns3,652
4,303
(5,496
)
2,459
Total$5,456
$4,403
$(5,735
)
$4,124
Fiscal 2004 
 
 
 
Allowance for bad debts$1,312
$610
$(118
)
$1,804
Allowance for returns4,783
3,292
(4,423
)
3,652
Total$6,095
$3,902
$(4,541
)
$5,456

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COACH, INC.

EXHIBITS TO FORM 10-K

For the Fiscal Year Ended July 2, 2005

1, 2006

Commission File No. 1-16153


      (a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
(a)Exhibits (numbered in accordance with Item 601 of Regulation S-K)

Exhibit
No.Description
3.1Amended and Restated Bylaws of Coach, Inc., dated May 3, 2001, which is incorporated herein by reference from Exhibit 3.1 to Coach’s Current Report on Form 8-K filed on May 9, 2001
3.2Articles Supplementary of Coach, Inc., dated May 3, 2001, which is incorporated herein by reference from Exhibit 3.2 to Coach’s Current Report on Form 8-K filed on May 9, 2001
3.3Articles of Amendment of Coach, Inc., dated May 3, 2001, which is incorporated herein by reference from Exhibit 3.3 to Coach’s Current Report on Form 8-K filed on May 9, 2001
3.4Articles of Amendment of Coach, Inc., dated May 3, 2002, which is incorporated by reference from Exhibit 3.4 to Coach’s Annual Report on Form 10-K for the fiscal year ended June 29, 2002
3.5Articles of Amendment of Coach, Inc., dated February 1, 2005, which is incorporated by reference from Exhibit 99.1 to Coach’s Current Report on Form 8-K filed on February 2, 2005
4.1Amended and Restated Rights Agreement, dated as of May 3, 2001, between Coach, Inc. and Mellon Investor Services LLC, which is incorporated by reference from Exhibit 4.1 to Coach’s Annual Report on Form 10-K for the fiscal year ended July 2, 2005
4.2Specimen Certificate for Common Stock of Coach, which is incorporated herein by reference from Exhibit 4.1 to Coach’sCoach's Registration Statement on Form S-1 (Registration No. 333-39502)
10.1Revolving Credit Agreement by and between Coach, certain lenders and Fleet National Bank, which is incorporated by reference from Exhibit 10.1 to Coach’s Annual Report on Form 10-K for the fiscal year ended July 3, 2004
10.2Master Separation Agreement between Coach and Sara Lee, which is incorporated herein by reference from Exhibit 2.1 to Coach’s Registration Statement on Form S-1 (Registration No. 333-39502)
10.3Tax Sharing Agreement between Coach and Sara Lee, which is incorporated herein by reference from Exhibit 2.2 to Coach’s Registration Statement on Form S-1 (Registration No. 333-39502)
10.4General Assignment and Assumption Agreement between Coach and Sara Lee, which is incorporated herein by reference from Exhibit 2.3 to Coach’s Registration Statement on Form S-1 (Registration No. 333-39502)
10.5Employee Matters Agreement between Coach and Sara Lee, which is incorporated by reference herein from Exhibit 2.4 to Coach’s Form 10-Q for the quarterly period ended September 30, 2000, filed with the Commission on November 14, 2000
10.6Real Estate Matters Agreement between Coach and Sara Lee, which is incorporated herein by reference from Exhibit 2.5 to Coach’s Registration Statement on Form S-1 (Registration No. 333-39502)
10.7Master Transitional Services Agreement between Coach and Sara Lee, which is incorporated herein by reference from Exhibit 2.6 to Coach’s Registration Statement on Form S-1 (Registration No. 333-39502)
10.8Indemnification and Insurance Matters Agreement between Coach and Sara Lee, which is incorporated herein by reference from Exhibit 2.7 to Coach’s Registration Statement on Form S-1 (Registration No. 333-39502)
10.9Lease Indemnification and Reimbursement Agreement between Sara Lee and Coach, which is incorporated herein by reference from Exhibit 2.10 to Coach’sCoach's Registration Statement on Form S-1 (Registration No. 333-39502)
10.610.10Coach, Inc. 2000 Stock Incentive Plan, which is incorporated by reference from Exhibit 10.10 to Coach’s Annual Report on Form 10-K for the fiscal year ended June 28, 2003
10.710.11Coach, Inc. Executive Deferred Compensation Plan, which is incorporated by reference from Exhibit 10.11 to Coach’s Annual Report on Form 10-K for the fiscal year ended June 28, 2003

10.8
Exhibit
No.Description
10.12Coach, Inc. Performance-Based Annual Incentive Plan, which is incorporated by reference from Appendix CA to the Registrant’s Definitive Proxy Statement for the 20012005 Annual Meeting of Stockholders, filed on October 4, 2001September 28, 2005
10.910.13Coach, Inc. 2000 Non-Employee Director Stock Plan, which is incorporated by reference from Exhibit 10.13 to Coach’s Annual Report on Form 10-K for the fiscal year ended June 28, 2003

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10.1010.14Coach, Inc. Non-Qualified Deferred Compensation Plan for Outside Directors, which is incorporated by reference from Exhibit 10.14 to Coach’s Annual Report on Form 10-K for the fiscal year ended June 28, 2003
10.1110.15Coach, Inc. 2001 Employee Stock Purchase Plan, which is incorporated by reference from Exhibit 10.15 to Coach’s Annual Report on Form 10-K for the fiscal year ended June 29, 2002
10.1210.16Jacksonville, FL Lease Agreement, which is incorporated herein by reference from Exhibit 10.6 to Coach’sCoach's Registration Statement on Form S-1 (Registration No. 333-39502)
10.1310.17New York, NY Lease Agreement, which is incorporated herein by reference from Exhibit 10.7 to Coach’sCoach's Registration Statement on Form S-1 (Registration No. 333-39502)
10.1410.18Coach, Inc. 2004 Stock Incentive Plan, which is incorporated by reference from Appendix A to the Registrant’s Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders, filed on September 29, 2004
10.1510.19Stock Purchase Agreement, dated April 25, 2005, among Coach, Coach Japan Holdings, Inc., Coach Japan, Inc., Coach Japan Investments, Inc. and Sumitomo Corporation, which is incorporated by reference from Exhibit 10.1 to Coach’s Quarterly Report on Form 10-Q for the Period Ended April 2, 2005
10.20Employment Agreement dated June 1, 2003 between Coach and Lew Frankfort, which is incorporated by reference from Exhibit 10.20 to Coach’s Annual Report on Form 10-K for the fiscal year ended June 28, 2003
10.1610.21Employment Agreement dated June 1, 2003 between Coach and Reed Krakoff, which is incorporated by reference from Exhibit 10.21 to Coach’s Annual Report on Form 10-K for the fiscal year ended June 28, 2003
10.1710.22Employment Agreement dated June 1, 2003 between Coach and Keith Monda, which is incorporated by reference from Exhibit 10.22 to Coach’s Annual Report on Form 10-K for the fiscal year ended June 28, 2003
10.1810.23Amendment to Employment Agreement, dated August 22, 2005, between Coach and Lew Frankfort, which is incorporated by reference from Exhibit 10.23 to Coach’s Annual Report on Form 10-K for the fiscal year ended July 2, 2005
10.1910.24Amendment to Employment Agreement, dated August 22, 2005, between Coach and Reed Krakoff, which is incorporated by reference from Exhibit 10.23 to Coach’s Annual Report on Form 10-K for the fiscal year ended July 2, 2005
10.2010.25Amendment to Employment Agreement, dated August 22, 2005, between Coach and Keith Monda, which is incorporated by reference from Exhibit 10.23 to Coach’s Annual Report on Form 10-K for the fiscal year ended July 2, 2005
10.21Employment Agreement dated November 8, 2005 between Coach and Michael Tucci, which is incorporated by reference from Exhibit 10.1 to Coach’s Quarterly Report on Form 10-Q for the period ended December 31, 2005
10.22Employment Agreement dated November 8, 2005 between Coach and Michael F Devine, III, which is incorporated by reference from Exhibit 10.2 to Coach’s Quarterly Report on Form 10-Q for the period ended December 31, 2005
21.1List of Subsidiaries of Coach
23.1Consent of Deloitte & Touche LLP
31.1Rule 13(a)-14(a)/15(d)-14(a) Certifications
32.1Section 1350 Certifications
(b) Reports on Form 8-K
Current report on Form 8-K, filed with the Commission on July 7, 2005. This report announced the completion of the Company’s purchase of Sumitomo’s 50% ownership interest in Coach Japan, Inc.
Current report on Form 8-K, filed with the Commission on August 16, 2005. This report announced that the Human Resources and Government Committee (‘‘HRGC’’) of the Board of
      (b) Reports on Form 8-K
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Directors had determined the performance goals for the Company’s fiscal year 2006 for purposes of determining bonuses to be paid under the Company’s Performance-Based Annual Incentive Plan. This report also announced the HRGC’s approval of the Company’s annual grants of stock options and restricted stock units to the Company’s management and employees.

Current Reportreport on Form 8-K, filed with the Commission on August 4, 2004.26, 2005. This report announced three-year extensions to the Company’s employment agreements with three key executives: Lew Frankfort, Chairman and Chief Executive Officer; Reed Krakoff, President and Executive Creative Director and Keith Monda, President and Chief Operating Officer. This report also contained the Company’s preliminary earnings resultrevised estimated financial results for the fourthfiscal quarter of, and full year for, fiscal year 2004.

ending October 1, 2005.

Current Reportreport on Form 8-K, filed with the Commission on October 13, 2004.27, 2005. This report contained a descriptionthe Company’s preliminary earnings results for the first quarter of actions taken by the Company to amend and restate the Rights Agreement dated as of May 3, 2001 between Coach and Mellon Investor Services LLC.

fiscal year 2006.

Current Reportreport on Form 8-K, filed with the Commission on October 26, 2004.November 10, 2005. This report containedannounced that the Company’s preliminary earnings result forCompany entered into five-year employment agreements with two key executives: Michael Tucci, President North America Retail Division, and Michael F. Devine, III, Senior Vice President and Chief Financial Officer.

Current report on Form 8-K, filed with the first quarterCommission on December 9, 2005. This report announced that Lew Frankfort, Chairman and Chief Executive Officer, entered into a trading plan with Goldman, Sachs & Co. to comply with Rule 10b5-1 of fiscal year 2005.

the Securities Exchange Act of 1934.

Current Reportreport on Form 8-K, filed with the Commission on January 12, 2005. This report contained the Company’s preliminary sales results for the second quarter and first half of fiscal year 2005.
      Current Report on Form 8-K, filed with the Commission on January 25, 2005.24, 2006. This report contained the Company’s preliminary earnings results for the second quarter and first half of fiscal year 2005.
2006.

Current Reportreport on Form 8-K, filed with the Commission on February 25, 2005.March 15, 2006. This report announced the appointment ofthat Lew Frankfort, Chairman and Chief Executive Officer, entered into a new membertrading plan with Goldman, Sachs & Co. to comply with Rule 10b5-1 of the Company’s boardSecurities Exchange Act of directors.

1934.

Current Reportreport on Form 8-K, filed with the Commission on April 26, 2005.27, 2006. This report contained the Company’s preliminary earnings results for the third quarter and first nine months of fiscal year 2005.

2006.

Current Report on Form 8-K/ A, filed with the Commission on May 17, 2005. This report announced the appointment of Mr. Menezes to the Audit Committee and the Human Resources and Governance Committee of the Board.

      Current Report on Form 8-K, filed with the Commission on July 7, 2005.May 15, 2006. This report announced that Lew Frankfort, Chairman and Chief Executive Officer, cancelled the remainder of his existing trading plan with Goldman, Sachs & Co. pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934.

Current report on Form 8-K, filed with the Commission on June 21, 2006. This report announced the completionappointment of Jide Zeitlin and Susan Kropf to the Company’s purchaseBoard of Sumitomo’s 50% ownership interest in Coach Japan, Inc.Directors.

Current report on Form 8-K, filed with the Commission on August 9, 2006. This report contained the Company’s preliminary earnings results for the fourth quarter and full fiscal year 2006.