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Item 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.
Executive Overview
Coach is a leading American marketer of fine accessories and gifts for menwomen and women.men. Our product offerings include handbags, women’s and men’s accessories, footwear, outerwear,jewelry, wearables, business cases, sunwear, watches, travel bags jewelry and fragrance. Coach operates in two segments: Direct-to-Consumer and Indirect. The Direct-to-Consumer segment includes sales to consumers through Company-operated stores in North America and Japan, the Internet and Coach catalogs.catalog. The Indirect segment includes sales to wholesale customers in the U.S. and Asiainternational locations as well as licensing revenue. 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.
In order to sustain growth within our global framework, we continue to focus on two key growth strategies: increased global distribution, with an emphasis on our direct retail distribution in North America, Japan, and Japan,Greater China, and improved productivity. To that end we are focused on four key initiatives:
Build market share in the rapidly growing North American women’s accessories market by leveragingmarket. As part of our culture of innovation and continuous improvement, we are implementing a number of initiatives to accelerate the level of newness, elevate our product offering and enhance the in-store experience. These initiatives will enable us to continue to leverage our leadership position as a preferred brand for both self purchase and gifts. As part of this initiative, we continue to emphasize new usage occasions, such as weekend casual and evening. We also continue to introduce more sophisticated product to heighten our cachet, especially with our higher-end customers. Lastly, we continue to enhancein the level of customer service in our stores by focusing on additional opportunities to deliver excellent customer service.market.
Rapidly growGrow our North American retail store base by adding stores within existing markets and opening in new markets in the U.S. and by accelerating store openings in Canada.markets. We plan to add about 40 retail stores in North America in each of the next several years and believe that North America can support about 500 retail stores in total, including up to 20 in Canada. In addition, we will continue to expand select, highly productive retail and factory locations.
Expand market share with the Japanese consumer, driving growth in Japan primarily by opening new retail locations and expanding existing ones. We plan to add about 15 – 2010 net new locations in fiscal 20082009 and believe that Japan can support about 180 locations in total. We will also continue to expand key locations.
Raise brand awareness in emerging markets to build the foundation for substantial sales in the future. Specifically, Greater China, Korea and other emerging geographies are increasing in importance as the handbag and accessories category grows in these areas. In fiscal 2008,2009, through distributors, we intend to open approximately 30at least 20 net new wholesale locations through distributors,in emerging markets and five locations in Greater China, Southeast Asia and the Middle East. This includes at least five more locations in major cities in mainland China, bringing the total number of locations in mainland China to at least 16.China.
In addition to theThe growth strategies outlined above wewill allow us to continue to focus on improving our rate of profitability and deliveringdeliver long-term superior returns on investments. By leveraging expenses, our operating margin expansion will continue to outpace our sales growth, which willinvestments and drive increased cash flows from operating activities.
Fiscal 20072008 Highlights
During fiscal 2007,2008, an increase in net sales combined with an improvement in margins, continued to drive net income and earnings per share growth. The highlights of fiscal 20072008 were:
Net income from continuing operations increased 37.2% to $636.5 million.
Earnings per diluted share from continuing operations increased 41.3%28.8% to $1.69$2.17 per diluted share. Excluding one-time items of $0.11 per diluted share, earnings per diluted share increased 21.9% to $2.06 per diluted share.
Net income from continuing operations increased 23.0% to $783.0 million. Excluding one-time items of $41.0 million recorded in the fourth quarter, net income increased 16.6% to $742.0 million.
Net sales increased 28.4%21.8% to $2.6$3.18 billion.
Direct-to-consumer sales rose 30.5%21.0% to $2.1$2.54 billion.
Comparable sales in Coach’s North American stores rose 9.8%.
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Comparable store sales in North America rose 22.3%, with retail stores up 16.4% and factory stores up 30.0%.
Coach Japan sales, when translated into U.S. dollars, rose 15.9%23.4% driven primarily by expanded distribution and mid-single-digit comparable store sales.distribution. These increases in sales reflect a 2.9% decrease9.0% increase due to currency translation.
In North America, Coach opened 4138 net new retail stores and seven netnine new factory stores, bringing the total number of retail and factory stores to 259297 and 93,102, respectively, at the end of fiscal 2007.2008. We also expanded six18 retail stores and seven19 factory stores in North America.
Coach Japan opened 1912 net new locations, bringing the total number of locations at the end of fiscal 20072008 to 137.149. In addition, we expanded nine11 locations.
During the fourth quarter of fiscal 2008, the Company recorded certain one-time items that resulted in a net gain of $41.0 million. These one-time items consisted of an initial $20.0 million contribution to the Coach Foundation, a $12.1 million increase in variable compensation expenses, a $10.7 million increase in interest income, net and a $50.0 decrease to the provision for income taxes.
The increase in interest income, net and decrease in the provision for income taxes were primarily a result of a favorable settlement of a tax return examination. As a result of the higher interest income, net and lower income tax provision, the Company incurred an additional $12.1 million of incentive compensation, as a portion of the Company’s incentive compensation plan is based on net income and earnings per share. Finally, the Company took advantage of the one-time net income favorability to create the Coach Foundation. The Company recorded an initial contribution to the Coach Foundation in the amount of $20.0 million.
Fiscal 2008 Compared to Fiscal 2007
The following table summarizes results of operations for fiscal 2008 compared to fiscal 2007:
 | | | | | | | | | | | | |
| | Fiscal Year Ended |
| | | June 28,
2008 | | June 30,
2007 | | Variance |
| | | (dollars in millions, except per share data) |
| | | Amount | | % of
Net Sales | | Amount | | % of
Net Sales | | Amount | | % |
| Net sales | | $ | 3,180.8 | | | | 100.0 | % | | $ | 2,612.5 | | | | 100.0 | % | | $ | 568.3 | | | | 21.8 | % |
| Gross profit | | | 2,407.1 | | | | 75.7 | | | | 2,023.0 | | | | 77.4 | | | | 384.1 | | | | 19.0 | |
Selling, general and
administrative expenses | | | 1,260.0 | | | | 39.6 | | | | 1,029.6 | | | | 39.4 | | | | 230.4 | | | | 22.4 | |
| Operating income | | | 1,147.1 | | | | 36.1 | | | | 993.4 | | | | 38.0 | | | | 153.7 | | | | 15.5 | |
| Interest income, net | | | 47.8 | | | | 1.5 | | | | 41.3 | | | | 1.6 | | | | 6.5 | | | | 15.9 | |
| Provision for income taxes | | | 411.9 | | | | 13.0 | | | | 398.1 | | | | 15.2 | | | | 13.8 | | | | 3.5 | |
| Income from continuing operations | | | 783.0 | | | | 24.6 | | | | 636.5 | | | | 24.4 | | | | 146.5 | | | | 23.0 | |
| Income from discontinued operations, net of taxes | | | 0.0 | | | | 0.0 | | | | 27.1 | | | | 1.0 | | | | (27.1 | ) | | | (100.0 | ) |
| Net income | | | 783.1 | | | | 24.6 | | | | 663.7 | | | | 25.4 | | | | 119.4 | | | | 18.0 | |
Net income per share:
| | | | | | | | | | | | | | | | | | | | | | | | |
Basic:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 2.20 | | | | | | | $ | 1.72 | | | | | | | $ | 0.48 | | | | 27.8 | % |
| Discontinued operations | | | 0.00 | | | | | | | | 0.07 | | | | | | | | (0.07 | ) | | | (100.0 | ) |
| Net income | | | 2.20 | | | | | | | | 1.80 | | | | | | | | 0.41 | | | | 22.6 | |
Diluted:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 2.17 | | | | | | | $ | 1.69 | | | | | | | $ | 0.49 | | | | 28.8 | % |
| Discontinued operations | | | 0.00 | | | | | | | | 0.07 | | | | | | | | (0.07 | ) | | | (100.0 | ) |
| Net income | | | 2.17 | | | | | | | | 1.76 | | | | | | | | 0.41 | | | | 23.6 | |
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Net Sales
The following table presents net sales by operating segment for fiscal 2008 compared to fiscal 2007:
| | | | | | | | | | |
| | Fiscal Year Ended |
| | | Net Sales | | Rate of
Increase | | Percentage of
Total Net Sales |
| | | June 28,
2008 | | June 30,
2007 | | June 28,
2008 | | June 30,
2007 |
| | | (dollars in millions)
| | (FY08 vs. FY07) | | | | |
| Direct-to-Consumer | | $ | 2,544.1 | | | $ | 2,101.8 | | | | 21.0 | % | | | 80.0 | % | | | 80.5 | % |
| Indirect | | | 636.7 | | | | 510.7 | | | | 24.7 | | | | 20.0 | | | | 19.5 | |
| Total net sales | | $ | 3,180.8 | | | $ | 2,612.5 | | | | 21.8 | % | | | 100.0 | % | | | 100.0 | % |
Direct-to-Consumer — Net sales increased by 21.0%, driven by increased sales from new stores, comparable stores and expanded stores. Comparable store sales measure sales performance at stores that have been open for at least 12 months. Coach excludes new locations from the comparable store base for the first year of operation. Similarly, stores that are expanded by 15.0% 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 mainland China, together with our distributors,North America, net sales increased 22.0% driven by sales from new stores, a 9.8% increase in comparable store sales and an increase in sales from expanded stores. During fiscal 2008, Coach opened eight38 net new retail stores and nine new factory stores, and expanded 18 retail stores and 19 factory stores in North America. In Japan, net sales increased 23.4% driven primarily by sales from new and expanded stores. Coach Japan’s reported net sales were positively impacted by approximately $44 million as a result of foreign currency exchange. During fiscal 2008, Coach opened 12 net new locations and expanded 11 locations in Japan. These sales increases were slightly offset by store closures and a decline in the Internet and direct marketing channels.
Indirect — Net sales increased by 24.7% to $636.7 million in fiscal 2008 from $510.7 million in fiscal 2007, driven primarily by a 16.4% increase in sales in the U.S. wholesale division and a 40.3% increase in sales in the international wholesale division. Licensing revenue of approximately $27 million and $15 million in fiscal 2008 and fiscal 2007, respectively, is included in Indirect sales.
Operating Income
Operating income increased 15.5% to $1.15 billion in fiscal 2008 as compared to $993.4 million in fiscal 2007, driven by increases in net sales and gross profit, partially offset by an increase in selling, general and administrative expenses. Excluding one-time items of $32.1 million, operating income increased 18.7% to $1.18 billion. Operating margin was 36.1% in fiscal 2008 compared to 38.0% in fiscal 2007 as gains from increased net sales were offset by a decrease in gross margin and increase in operating expenses. Excluding one-time items, operating margin was 37.1%.
Gross profit increased 19.0% to $2.41 billion in fiscal 2008 compared to $2.02 billion in fiscal 2007. Gross margin was 75.7% in fiscal 2008 compared to 77.4% in fiscal 2007. The change in gross margin was driven by promotional activities in Coach-operated North American stores, the fluctuation in foreign currency translation rates and 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 year to year.
Selling, general and administrative (“SG&A”) expenses are comprised of four categories: (1) selling; (2) advertising, marketing and design; (3) distribution and consumer service; and (4) 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-operated stores in North America and Japan open during any fiscal period and the related
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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 consumer service expenses include warehousing, order fulfillment, shipping and handling, customer service and bag repair costs. Administrative expenses include compensation costs for the executive, finance, human resources, legal and information systems departments, as well as consulting and software expenses. SG&A expenses increase as the number of Coach-operated stores increase, although an increase in the number of stores generally results in the fixed portion of SG&A expenses being spread over a larger sales base.
During fiscal 2008, SG&A expenses increased 22.4% to $1.26 billion, compared to $1.03 billion in fiscal 2007, driven primarily by increased selling expenses. As a percentage of net sales, SG&A expenses were 39.6% and 39.4% during fiscal 2008 and fiscal 2007, respectively. Excluding one-time costs of $32.1 million, SG&A expenses were $1.23 billion, representing 38.6% of net sales, an improvement of 80 basis points over fiscal 2007, as we continue to leverage our expense base on higher sales.
The following table presents the components of SG&A expenses and the percentage of sales that each component represented for fiscal 2008 compared to fiscal 2007:
| | | | | | | | | | |
| | Fiscal Year Ended |
| | | SG&A Expenses | | Rate of
Increase | | Percentage of
Total Net Sales |
| | | June 28,
2008 | | June 30,
2007 | | June 28,
2008 | | June 30,
2007 |
| | | (dollars in millions)
| | (FY08 vs. FY07) | | | | |
| Selling | | $ | 865.2 | | | $ | 718.0 | | | | 20.5 | % | | | 27.2 | % | | | 27.5 | % |
| Advertising, Marketing and Design | | | 147.7 | | | | 119.8 | | | | 23.3 | | | | 4.6 | | | | 4.6 | |
| Distribution and Consumer Service | | | 47.6 | | | | 53.2 | | | | (10.5 | ) | | | 1.5 | | | | 2.0 | |
| Administrative | | | 199.5 | | | | 138.6 | | | | 43.9 | | | | 6.3 | | | | 5.3 | |
| Total SG&A Expenses | | $ | 1,260.0 | | | $ | 1,029.6 | | | | 22.4 | % | | | 39.6 | % | | | 39.4 | % |
The following table presents administrative expenses and total SG&A expenses and the percentage of sales that each represented for fiscal 2008, excluding one-time items of $32.1 million recorded in fiscal 2008:
| | | | | | | | |
| | Fiscal Year Ended June 28, 2008 |
| | | Administrative Expenses | | Total SG&A Expenses |
| | | $ | | % of Total Net Sales | | $ | | % of Total
Net Sales |
| | | (dollars in millions) |
| As Reported: | | $ | 199.5 | | | | 6.3 | % | | $ | 1,260.0 | | | | 39.6 | % |
| Less: One-time items | | | (32.1 | ) | | | (1.0 | ) | | | (32.1 | ) | | | (1.0 | ) |
| Adjusted: | | $ | 167.4 | | | | 5.3 | % | | $ | 1,227.9 | | | | 38.6 | % |
The increase in selling expenses was primarily due to an increase in operating expenses of North America stores and Coach 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. The impact of foreign currency exchange rates increased reported expenses by approximately $19.2 million. The remaining increase in selling expenses was due to increased variable expenses to support sales growth in other channels.
The increase in advertising, marketing and design costs was primarily due to increased expenses related to direct-mail marketing programs and increased staffing costs.
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Distribution and consumer service expenses decreased primarily due to efficiency gains, partially offset by higher sales volume. Efficiency gains also led to an improvement in distribution and consumer service expenses as a percentage of net sales.
Administrative expenses increased primarily as a result of $32.1 million of one-time charges recorded in the fourth quarter of fiscal 2008. One-time charges consisted of a contribution to the newly created Coach Foundation of $20.0 million and $12.1 million of increased variable compensation expenses, attributable to the increase in net income as a result of a one-time tax benefit discussed below. Excluding these one-time charges, the increase in administrative expenses was driven by an increase in employee staffing costs, including share-based compensation expense and an increase in consulting and depreciation expenses as a result of investments in technology systems.
Interest Income, Net
Interest income, net was $47.8 million in fiscal 2008 as compared to $41.3 million in fiscal 2007. This increase was primarily due to a reduction of $10.7 million of interest expense, related to a one-time tax benefit discussed below. Excluding this benefit, interest income, net decreased primarily as a result of lower returns on our investments as a result of lower interest rates.
Provision for Income Taxes
The effective tax rate was 34.5% in fiscal 2008 compared to 38.5% in fiscal 2007. During the fourth quarter of fiscal 2008, the Company recorded a one-time benefit of $50.0 million, primarily related to a favorable settlement of a tax return examination. Excluding this benefit, the effective tax rate in fiscal 2008 was essentially flat as compared to the fiscal 2007 effective rate.
Income from Continuing Operations
Income from continuing operations increased 23.0% to $783.0 million in fiscal 2008 compared to $636.5 million in fiscal 2007. Excluding one-time items of $41.0 million discussed above, income from continuing operations was $742.0 million, a 16.6% increase over prior year. The increase is primarily attributable to increased net sales as discussed above.
Income from Discontinued Operations
In March 2007, the Company exited its corporate accounts business in order to better control the location and image of the brand where Coach product is sold. Through the corporate accounts business, Coach sold products primarily to distributors for gift-giving and incentive programs. The results of the corporate accounts business, previously included in the Indirect segment, have been segregated from continuing operations and reported as discontinued operations in the Consolidated Statements of Income for all periods presented.
In fiscal 2007, net sales and net income from discontinued operations were $66.5 million and $27.1 million, respectively. In fiscal 2008, net sales and net income from discontinued operations were not significant.
Non-GAAP Measures
The Company’s reported results are presented in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The reported selling, general, and administrative expenses, operating income, interest income, net, provision for income taxes, income from continuing operations, net income and earnings per diluted share from continuing operations reflect certain one-time items recorded in the fourth quarter of fiscal 2008. These metrics are also reported on a non-GAAP basis to exclude the impact of these one-time items. The Company believes these non-GAAP financial measures are useful to investors in evaluating the Company’s ongoing operating and financial results and understanding how such results compare with the Company’s prior guidance. The non-GAAP financial measures should be considered in addition to, and not in lieu of, U.S. GAAP financial measures.
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Fiscal 2007 Compared to Fiscal 2006
The following table summarizes results of operations for fiscal 2007 compared to fiscal 2006:
 | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | | Fiscal Year Ended |
| | | June 30, 2007 | | July 1, 2006 | | Variance | | June 30, 2007 | | July 1, 2006 | | Variance |
| | | (dollars in millions, except per share data) | | (dollars in millions, except per share data) |
| | | Amount | | % of Net
sales | | Amount | | % of Net
sales | | Amount | | % | | Amount | | % of
net sales | | Amount | | % of
net sales | | Amount | | % |
| Net sales | | $ | 2,612.5 | | | | 100.0 | % | | $ | 2,035.1 | | | | 100.0 | % | | $ | 577.4 | | | | 28.4 | % | | $ | 2,612.5 | | | | 100.0 | % | | $ | 2,035.1 | | | | 100.0 | % | | $ | 577.4 | | | | 28.4 | % |
| Gross profit | | | 2,023.0 | | | | 77.4 | | | | 1,581.6 | | | | 77.7 | | | | 441.4 | | | | 27.9 | | | | 2,023.0 | | | | 77.4 | | | | 1,581.6 | | | | 77.7 | | | | 441.4 | | | | 27.9 | |
| Selling, general and administrative expenses | | | 1,029.6 | | | | 39.4 | | | | 866.9 | | | | 42.6 | | | | 162.7 | | | | 18.8 | | | | 1,029.6 | | | | 39.4 | | | | 866.9 | | | | 42.6 | | | | 162.7 | | | | 18.8 | |
| Operating income | | | 993.4 | | | | 38.0 | | | | 714.7 | | | | 35.1 | | | | 278.7 | | | | 39.0 | | | | 993.4 | | | | 38.0 | | | | 714.7 | | | | 35.1 | | | | 278.7 | | | | 39.0 | |
| Interest income, net | | | 41.3 | | | | 1.6 | | | | 32.6 | | | | 1.6 | | | | 8.7 | | | | 26.5 | | | | 41.3 | | | | 1.6 | | | | 32.6 | | | | 1.6 | | | | 8.7 | | | | 26.5 | |
| Provision for income taxes | | | 398.1 | | | | 15.2 | | | | 283.5 | | | | 13.9 | | | | 114.7 | | | | 40.4 | | | | 398.1 | | | | 15.2 | | | | 283.5 | | | | 13.9 | | | | 114.7 | | | | 40.4 | |
| Income from continuing operations | | | 636.5 | | | | 24.4 | | | | 463.8 | | | | 22.8 | | | | 172.7 | | | | 37.2 | | | | 636.5 | | | | 24.4 | | | | 463.8 | | | | 22.8 | | | | 172.7 | | | | 37.2 | |
| Income from discontinued operations, net of taxes | | | 27.1 | | | | 1.0 | | | | 30.4 | | | | 1.5 | | | | (3.3 | ) | | | (10.8 | ) | | | 27.1 | | | | 1.0 | | | | 30.4 | | | | 1.5 | | | | (3.3 | ) | | | (10.8 | ) |
| Net income | | | 663.7 | | | | 25.4 | | | | 494.3 | | | | 24.3 | | | | 169.4 | | | | 34.3 | | | | 663.7 | | | | 25.4 | | | | 494.3 | | | | 24.3 | | | | 169.4 | | | | 34.3 | |
Net income per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 1.72 | | | | | | | $ | 1.22 | | | | | | | $ | 0.50 | | | | 40.9 | % | | $ | 1.72 | | | | | | | $ | 1.22 | | | | | | | $ | 0.50 | | | | 40.9 | % |
| Discontinued operations | | | 0.07 | | | | | | | | 0.08 | | | | | | | | (0.01 | ) | | | (8.4 | ) | | | 0.07 | | | | | | | | 0.08 | | | | | | | | (0.01 | ) | | | (8.4 | ) |
| Net income | | | 1.80 | | | | | | | | 1.30 | | | | | | | | 0.49 | | | | 37.9 | | | | 1.80 | | | | | | | | 1.30 | | | | | | | | 0.49 | | | | 37.9 | |
Diluted:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 1.69 | | | | | | | $ | 1.19 | | | | | | | $ | 0.49 | | | | 41.3 | % | | $ | 1.69 | | | | | | | $ | 1.19 | | | | | | | $ | 0.49 | | | | 41.3 | % |
| Discontinued operations | | | 0.07 | | | | | | | | 0.08 | | | | | | | | (0.01 | ) | | | (8.2 | ) | | | 0.07 | | | | | | | | 0.08 | | | | | | | | (0.01 | ) | | | (8.2 | ) |
| Net income | | | 1.76 | | | | | | | | 1.27 | | | | | | | | 0.49 | | | | 38.2 | | | | 1.76 | | | | | | | | 1.27 | | | | | | | | 0.49 | | | | 38.2 | |
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Net Sales
The following table presents net sales by operating segment for fiscal 2007 compared to fiscal 2006:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | | Fiscal Year Ended |
| | | Net Sales | | | | Percentage of
Total Net Sales | | Net Sales | | Rate of
Increase | | Percentage of
Total Net Sales |
| | | June 30,
2007 | | July 1,
2006 | | Rate of
Increase | | June 30,
2007 | | July 1,
2006 | | June 30,
2007 | | July 1,
2006 | | June 30,
2007 | | July 1,
2006 |
| | | (dollars in millions) | | (dollars in millions)
| | (FY07 vs. FY06) | | | | |
| Direct-to-Consumer | | $ | 2,101.8 | | | $ | 1,610.7 | | | | 30.5 | % | | | 80.5 | % | | | 79.1 | % | | $ | 2,101.8 | | | $ | 1,610.7 | | | | 30.5 | % | | | 80.5 | % | | | 79.1 | % |
| Indirect | | | 510.7 | | | | 424.4 | | | | 20.3 | | | | 19.5 | | | | 20.9 | | | | 510.7 | | | | 424.4 | | | | 20.3 | | | | 19.5 | | | | 20.9 | |
| Total net sales | | $ | 2,612.5 | | | $ | 2,035.1 | | | | 28.4 | % | | | 100.0 | % | | | 100.0 | % | | $ | 2,612.5 | | | $ | 2,035.1 | | | | 28.4 | % | | | 100.0 % | | | | 100.0 % | |
Direct-to-Consumer — Net sales increased by 30.5%, driven by increased sales from comparable stores, new stores and expanded stores. Comparable store sales measure sales performance at stores that have been open for at least 12 months. 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, net sales increased 34.8% driven by a 22.3% increase in comparable store sales growth,and an increase in sales from new and expanded stores. During fiscal 2007, Coach opened 41 new retail stores and sales fromseven net new factory stores, and expanded six retail stores accounted for approximately $233 million, $142 million and $31 million, respectively, of theseven factory stores in North America. In Japan, net sales increase. In Japan,increased 15.9% driven primarily by sales from new stores, comparable store sales growth and sales from expanded stores accounted for approximately $46 million, $20 million and $8 million, respectively, of the net sales increase.stores. Coach Japan’s reported net sales were negatively impacted by approximately $12 million as a result of foreign currency exchange. During fiscal 2007, Coach opened 19 net new locations and expanded nine locations in Japan. Sales
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growth in the Internet business accounted for the remaining sales increase. These sales increases were slightly offset by store closures and a decline in the direct marketing channel.
Indirect — Net sales increased by 20.3%, driven primarily by growtha 30.9% increase in the U.S. wholesale division, which contributed increased sales of approximately $73 million, as compared to the prior year.division. This sales increase was partially offset by an approximately $7 milliona 4.6% decrease in net sales in the international wholesale division, as shipments to our customers were curbed in consideration of slowing Japanese travel trends in our markets and to ensure healthy inventory levels. Licensing revenue of approximately $15 million and $9 million in fiscal 2007 and fiscal 2006, respectively, is included in Indirect sales.
Operating Income
Operating income increased 39.0% to $993.4 million in fiscal 2007 as compared to $714.7 million in fiscal 2006, driven by increases in net sales and gross profit, partially offset by an increase in selling, general and administrative expenses. Operating margin rose to 38.0% in fiscal 2007 from 35.1% in fiscal 2006. This 290 basis point improvement is attributable to increased net sales, as discussed above, and the leveraging of 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 2007 | | | 34.1 | % | | | 42.3 | % | | | 36.2 | % | | | 37.6 | % | | | 38.0 | % |
| Fiscal 2006 | | | 31.3 | % | | | 40.8 | % | | | 32.0 | % | | | 34.3 | % | | | 35.1 | % |
Gross profit increased 27.9% to $2.0$2.02 billion in fiscal 2007 compared to $1.6$1.58 billion in fiscal 2006. Gross margin remained strong at 77.4% in fiscal 2007 compared to 77.7% in fiscal 2006. Gross margin was negatively impacted by channel mix, as Coach Japan grew more slowly than the business as a whole while our factory store channel grew faster, as well as the fluctuation in currency translation rates. However, these negative impacts were partially offset by gains from product mix shifts, reflecting increased penetration of higher margin collections and supply chain initiatives. Coach’s gross profit is dependent upon a variety of
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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 year to year.
Selling, general and administrative (“SG&A”) expenses comprise four categories: (1) selling; (2) advertising, marketing and design; (3) distribution and consumer service; and (4) 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 consumer service expenses include warehousing, order fulfillment, shipping and handling, customer service and bag repair costs. Administrative expenses include compensation costs for the executive, finance, human resources, legal and information systems departments, as well as consulting and software expenses. SG&A expenses increase as Coach and Coach Japan operate more stores, although an increase in the number of stores generally results in the fixed portion of SG&A expenses being spread over a larger sales base.
During fiscal 2007, SG&A expenses increased 18.8% to $1.0$1.03 billion, compared to $866.9 million in fiscal 2006, driven primarily by increased selling expenses. However, as a percentage of net sales, SG&A expenses decreased to 39.4% during fiscal 2007, compared to 42.6% during fiscal 2006, as we continue to leverage our expense base on higher sales.
The following table presents the components of SG&A expenses and the percentage of sales that each component represented for fiscal 2007 compared to fiscal 2006:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended | | Fiscal Year Ended |
| | | SG&A Expenses | | | | Percentage of
Total Net sales | | SG&A Expenses | | Rate of
Increase | | Percentage of
Total Net Sales |
| | | June 30,
2007 | | July 1,
2006 | | Rate of
Increase | | June 30,
2007 | | July 1,
2006 | | June 30,
2007 | | July 1,
2006 | | June 30,
2007 | | July 1,
2006 |
| | | (dollars in millions) | | (FY07 v. FY06) | | | | | | (dollars in millions)
| | (FY07 vs. FY06) | | | | |
| Selling | | $ | 718.0 | | | $ | 576.6 | | | | 24.5 | % | | | 27.5 | % | | | 28.4 | % | | $ | 718.0 | | | $ | 576.6 | | | | 24.5 | % | | | 27.5 | % | | | 28.4 | % |
| Advertising, Marketing and Design | | | 119.8 | | | | 100.6 | | | | 19.1 | | | | 4.6 | | | | 4.9 | | | | 119.8 | | | | 100.6 | | | | 19.1 | | | | 4.6 | | | | 4.9 | |
Distribution and
Consumer Service | | | 53.2 | | | | 42.2 | | | | 26.1 | | | | 2.0 | | | | 2.1 | | | | 53.2 | | | | 42.2 | | | | 26.1 | | | | 2.0 | | | | 2.1 | |
| Administrative | | | 138.6 | | | | 147.5 | | | | (6.0 | ) | | | 5.3 | | | | 7.2 | | | | 138.6 | | | | 147.5 | | | | (6.0 | ) | | | 5.3 | | | | 7.2 | |
| Total SG&A Expenses | | $ | 1,029.6 | | | $ | 866.9 | | | | 18.8 | % | | | 39.4 | % | | | 42.6 | % | | $ | 1,029.6 | | | $ | 866.9 | | | | 18.8 | % | | | 39.4 | % | | | 42.6 | % |
The increase in selling expenses was primarily due to an increase in operating expenses of North America stores and Coach 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. However, the impact of foreign currency exchange rates decreased reported expenses by approximately $6.1 million. The remaining increase in selling expenses was due to increased variable expenses to support sales growth in other channels.
The increase in advertising, marketing and design costs was primarily due to increased staffing costs and design expenditures as well as increased development costs for new product categories.
Distribution and consumer service expenses increased primarily as result of higher sales volumes. However, efficiency gains at the distribution and consumer service facility, partially offset by an increase in our
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direct-to-consumer shipments as a percentage of total shipments, led to a decrease in distribution and consumer service expenses as a percentage of net sales.
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The decrease in administrative expenses was primarily due to a decrease in share-based compensation expense and other employee staffing costs. However, fiscal 2006 expenses were reduced by $2.0 million due to the receipt of business interruption proceeds related to our World Trade Center location. The Company did not receive any business interruption proceeds in fiscal 2007.
Interest Income, Net
Net interest income was $41.3 million in fiscal 2007 compared to $32.6 million in fiscal 2006. This increase was primarily due to higher returns on our investments as a result of higher interest rates and higher average cash and investment balances.
Provision for Income Taxes
The effective tax rate was 38.5% in fiscal 2007 compared to 37.9% in fiscal 2006. This increase is primarily attributable to incremental income being taxed at higher rates.
Income from Continuing Operations
Income from continuing operations was $636.5 million in fiscal 2007 compared to $463.8 million in fiscal 2006. This 37.2% increase is attributable to increased net sales as well as significant operating margin improvement, as discussed above.
Income from Discontinued Operations
Income from discontinued operations was $27.1 million in fiscal 2007 compared to $30.4 million in fiscal 2006. In fiscal 2007, net sales related to the corporate accounts business were $66.5 million compared to $76.4 million in fiscal 2006. The decrease in net sales and income is attributable to the exiting of the corporate accounts business during the third quarter of fiscal 2007.
Fiscal 2006 Compared to Fiscal 2005
The following table summarizes results of operations for fiscal 2006 compared to fiscal 2005:
| | | | | | | | | | | | |
| | Fiscal Year Ended |
| | | July 1, 2006 | | July 2, 2005 | | Variance |
| | | (dollars in millions, except per share data) |
| | | Amount | | % of Net
sales | | Amount | | % of Net
sales | | Amount | | % |
| Net sales | | $ | 2,035.1 | | | | 100.0 | % | | $ | 1,651.7 | | | | 100.0 | % | | $ | 383.4 | | | | 23.2 | % |
| Gross profit | | | 1,581.6 | | | | 77.7 | | | | 1,267.6 | | | | 76.7 | | | | 314.0 | | | | 24.8 | |
Selling, general and
administrative expenses | | | 866.9 | | | | 42.6 | | | | 731.9 | | | | 44.3 | | | | 135.0 | | | | 18.4 | |
| Operating income | | | 714.7 | | | | 35.1 | | | | 535.7 | | | | 32.4 | | | | 179.0 | | | | 33.4 | |
| Interest income, net | | | 32.6 | | | | 1.6 | | | | 15.8 | | | | 1.0 | | | | 16.9 | | | | 107.0 | |
| Provision for income taxes | | | 283.5 | | | | 13.9 | | | | 201.1 | | | | 12.2 | | | | 82.4 | | | | 40.9 | |
| Minority interest | | | — | | | | 0.0 | | | | 13.6 | | | | 0.8 | | | | (13.6 | ) | | | (100.0 | ) |
| Income from continuing operations | | | 463.8 | | | | 22.8 | | | | 336.6 | | | | 20.4 | | | | 127.2 | | | | 37.8 | |
| Income from discontinued operations, net of taxes | | | 30.4 | | | | 1.5 | | | | 22.0 | | | | 1.3 | | | | 8.5 | | | | 38.6 | |
| Net income | | | 494.3 | | | | 24.3 | | | | 358.6 | | | | 21.7 | | | | 135.7 | | | | 37.8 | |
Net income per share:
| | | | | | | | | | | | | | | | | | | | | | | | |
Basic:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 1.22 | | | | | | | $ | 0.89 | | | | | | | $ | 0.33 | | | | 37.4 | % |
Discontinued
operations | | | 0.08 | | | | | | | | 0.06 | | | | | | | | 0.02 | | | | 38.2 | |
| Net income | | | 1.30 | | | | | | | | 0.95 | | | | | | | | 0.35 | | | | 37.5 | |
Diluted:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | $ | 1.19 | | | | | | | $ | 0.86 | | | | | | | $ | 0.33 | | | | 38.4 | % |
Discontinued
operations | | | 0.08 | | | | | | | | 0.06 | | | | | | | | 0.02 | | | | 39.2 | |
| Net income | | | 1.27 | | | | | | | | 0.92 | | | | | | | | 0.35 | | | | 38.4 | |
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Net Sales
The following table presents net sales by operating segment for fiscal 2006 compared to fiscal 2005:
| | | | | | | | | | |
| | Fiscal Year Ended |
| | | Net Sales | | | | Percentage of
Total Net sales |
| | | July 1,
2006 | | July 2,
2005 | | Rate of
Increase | | July 1,
2006 | | July 2,
2005 |
| | | (dollars in millions) | | | | | | |
| Direct-to-Consumer | | $ | 1,610.7 | | | $ | 1,307.4 | | | | 23.2 | % | | | 79.1 | % | | | 79.2 | % |
| Indirect | | | 424.4 | | | | 344.3 | | | | 23.3 | | | | 20.9 | | | | 20.8 | |
| Total net sales | | $ | 2,035.1 | | | $ | 1,651.7 | | | | 23.2 | % | | | 100.0 | % | | | 100.0 | % |
Direct-to-Consumer — Net sales increased 23.2%, driven by increased sales from comparable stores, new stores and expanded stores.
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. Comparable store sales in North America rose 20.7%, with retail stores up 12.3% and factory stores up 31.9%. 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 decline in the direct marketing channel.
Indirect — Net sales increased 23.3%, driven by growth in the U.S. wholesale and international wholesale divisions, which contributed increased sales of approximately $45 million and $36 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.
Operating Income
Operating income increased 33.4% to $714.7 million in fiscal 2006 as compared to $535.7 million in fiscal 2005, driven by increases in net sales and gross profit, partially offset by an increase in SG&A expenses. Operating margin rose to 35.1% in fiscal 2006 from 32.4% in fiscal 2005. This 270 basis point improvement is attributable to increased net sales, as discussed above, and the leveraging of SG&A 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 2006 | | | 31.3 | % | | | 40.8 | % | | | 32.0 | % | | | 34.3 | % | | | 35.1 | % |
| Fiscal 2005 | | | 27.8 | % | | | 38.7 | % | | | 30.9 | % | | | 29.9 | % | | | 32.4 | % |
Gross profit increased 24.8% to $1.6 billion in fiscal 2006 as compared to $1.3 billion in fiscal 2005. Gross margin increased 100 basis points to 77.7% in fiscal 2006 from 76.7% 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.
SG&A expenses increased 18.4% to $866.9 million in fiscal 2006 from $731.9 million in fiscal 2005, driven primarily by increased selling expenses. However, as a percentage of net sales, SG&A expenses decreased to 42.6% as compared to 44.3% during fiscal 2005, as we continue to leverage our expense base on higher sales.
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The following table presents the components of SG&A expenses and the percentage of net sales that each component represented for fiscal 2006 compared to fiscal 2005:
| | | | | | | | | | |
| | Fiscal Year Ended |
| | | SG&A Expenses | | | | Percentage of
Total Net sales |
| | | July 1,
2006 | | July 2,
2005 | | Rate of
Increase | | July 1,
2006 | | July 2,
2005 |
| | | (dollars in millions) | | (FY06 v. FY05) | | | | |
| Selling | | $ | 576.6 | | | $ | 492.7 | | | | 17.0 | % | | | 28.4 | % | | | 29.8 | % |
| Advertising, Marketing and Design | | | 100.6 | | | | 78.8 | | | | 27.7 | | | | 4.9 | | | | 4.8 | |
Distribution and
Consumer Service | | | 42.2 | | | | 36.0 | | | | 17.2 | | | | 2.1 | | | | 2.2 | |
| Administrative | | | 147.5 | | | | 124.4 | | | | 18.6 | | | | 7.2 | | | | 7.5 | |
| Total SG&A Expenses | | $ | 866.9 | | | $ | 731.9 | | | | 18.4 | % | | | 42.6 | % | | | 44.3 | % |
The increase in selling expenses was primarily due to an increase in operating expenses of North America stores and Coach 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. However, 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.
The increase in advertising, marketing and design costs was primarily due to increased staffing costs and increased design expenditures as well as increased development costs for new product categories.
Distribution and consumer service expenses increased primarily as a result of higher sales volumes. However, efficiency gains at the distribution and consumer service facility resulted in an improvement in these expenses as a percentage of net sales.
The increase in administrative expenses was primarily due to increased share-based compensation costs and other employee staffing costs. Fiscal 2006 and fiscal 2005 expenses were reduced by $2.0 million and $2.6 million, respectively, due to the receipt of business interruption proceeds related to our World Trade Center location.
Interest Income, Net
Net interest income was $32.6 million in fiscal 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 37.9% as compared to 36.5% in fiscal 2005. The increase is primarily attributable to the non-recurrence of a one time benefit that the Company recorded in the fourth quarter of fiscal 2005, related to the Company’s buyout of Sumitomo’s 50% interest in Coach Japan.
Minority Interest
Minority interest expense, net of tax, was $0 in fiscal 2006 compared to $13.6 million, or 0.8% of net sales, in fiscal 2005. The purchase of Sumitomo’s 50% interest in Coach Japan on July 1, 2005 eliminated minority interest as of the first quarter of fiscal 2006.
Income from Continuing Operations
Income from continuing operations was $463.8 million in fiscal 2006 compared to $336.6 million in fiscal 2005. This 37.8% increase is attributable to increased net sales as well as significant operating margin improvement, as discussed above.
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Income from Discontinued Operations
Income from discontinued operations was $30.4 million in fiscal 2006 compared to $22.0 million in fiscal 2005. In fiscal 2006, net sales related to the corporate accounts business were $76.4 million compared to $58.7 million in fiscal 2005. The Company exited the corporate accounts business during the third quarter of fiscal 2007.
Financial Condition
Cash Flow
Net cash provided by operating activities was $779.1$923.4 million in fiscal 20072008 compared to $596.6$781.2 million in fiscal 2006.2007. The $182.5$142.2 million increase was primarily due to increased earnings of $169.4$119.4 million. The changes in operating assets and liabilities were attributable to normal operating fluctuations.
Net cash provided by investing activities was $445.4 million in fiscal 2008 compared to $375.8 million net cash used in investing activities was $375.9 million in fiscal 2007 compared to $181.02007. The $821.2 million in fiscal 2006. The $194.9 million increasechange in net cash used is primarily attributable to a $187.9net cash inflow of $620.2 million increasefrom the net proceeds from sales of investments in fiscal 2008 compared to a $235.2 million net use of cash to purchase investments in the net purchasesprior year. Capital expenditures increased $34.1 million, primarily as a result of investments and a $7.0 million increase in capital expenditures, related primarily toincreased spending for new and renovated retail stores in North America and Japan.America. Coach’s future capital expenditures will depend on the timing and rate of expansion of our businesses, new store openings, store renovations and international expansion opportunities.
Net cash used in financing activities was $1.23 billion in fiscal 2008 compared to $10.4 million net cash provided by financing activities was $10.4 million in fiscal 2007 compared to a $426.8 million use of cash in fiscal 2006.2007. The change of $437.2 million$1.24 billion primarily resulted from a $450.3 million decrease$1.19 billion increase in funds expended to repurchase common stock in fiscal 20072008 compared to fiscal 2006. In addition, there was a $25.6 million increase in proceeds received from2007 and the exercise of stock options and a non-recurrence of $12.3 million in repayments on the Japanese credit facility in the prior year. These increases were partially offset by a $34.2 million decrease in excess tax benefit from share-based compensation and a $16.7 million decreaseuse of cash in fiscal 2007, related to an adjustment to reverse a portion of the excess tax benefit previously recognized from share-based compensation in the fourth quarter of fiscal 2006. In addition, proceeds from share-based awards decreased $28.8 million and the excess tax benefit from share-based compensation decreased $41.8 million.
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Revolving Credit Facilities
As of the end of fiscalOn July 26, 2007, the Company maintained arenewed its $100 million unsecured revolving credit facility with certain lenders and Bank of America, N.A. as the primary lender and administrative agent (the “Bank of America facility”). At Coach’s request, the Bank of America facility was able to be expanded to $125 million. Coach paid 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 June 30, 2007, 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 facility was scheduled to expire on October 16, 2007.
On July 26, 2007 (subsequent to the end of fiscal 2007), the Company renewed the Bank of America facility, extending the facility expiration to July 26, 2012. At Coach’s request, the renewed Bank of America facility can be expanded to $200 million. The facility can also be extended for two additional one-year periods, at Coach’s request. Under the renewed Bank of America facility, Coach will paypays a commitment fee of 6 to 12.5 basis points on any unused amounts and interest of LIBOR plus 20 to 55 basis points on any outstanding borrowings. At June 28, 2008, the commitment fee was 6 basis points and the LIBOR margin was 20 basis points.
The Bank of America facility is available for seasonal working capital requirements or general corporate purposes and may be prepaid without penalty or premium. During fiscal 20072008 and fiscal 20062007 there were no borrowings under the Bank of America facility. Accordingly, as of June 28, 2008 and June 30, 2007, and July 1, 2006, there were no outstanding borrowings under the Bank of America facility.
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 has available credit facilities with several Japanese financial institutions. These facilities allow a maximum borrowing of 7.4 billion yen, or approximately $60$70 million, at June 30, 2007.28, 2008. Interest is based on the Tokyo Interbank rate plus a margin of up to 50 basis points.
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During fiscal 20072008 and fiscal 2006,2007, the peak borrowings under the Japanese credit facilities were $25.5$26.8 million and $21.6$25.5 million, respectively. As of June 28, 2008 and June 30, 2007, and July 1, 2006, there were no outstanding borrowings under the Japanese credit facilities.
Common Stock Repurchase Program
On November 9, 2007, the Company completed its $500 million common stock repurchase program, which was put into place in October 20, 2006,2006. Concurrently, the Coach Board of Directors approved an additionala new common stock repurchase program to acquire up to $500 million$1.0 billion of Coach’s outstanding common stock. This authorization expires instock through June 2008. In connection with Coach’s stock repurchase program, purchases2009. Purchases of Coach stock may beare made from time to time, subject to market conditions and at prevailing market prices, through open market purchases. Repurchased shares of common stock become authorized but unissued shares and may be issued in the future for general corporate and other purposes.uses. The Company may terminate or limit the stock repurchase program at any time.
During fiscal 20072008 and fiscal 2006,2007, the Company repurchased and retired 5.039.7 million and 19.15.0 million shares of common stock, respectively, at an average cost of $29.99$33.68 and $31.50$29.99 per share, respectively. As of June 30, 2007, $50028, 2008, $163.4 million remained available for future repurchasespurchases under the existing program.
Liquidity and Capital Resources
In fiscal 2007,2008, total capital expenditures were $140.9$174.7 million. In North America, Coach opened 4138 net new retail and seven netnine new factory stores and expanded six18 retail stores and seven19 factory stores. These new and expanded stores accounted for approximately $70$104.3 million of the total capital expenditures. In addition, spending on department store renovations and distributor locations accounted for approximately $9$21.8 million of the total capital expenditures. In Japan, we invested approximately $17$9.3 million, primarily for the opening of 1912 net new locations and nine11 store expansions. The remaining capital expenditures related to corporate systems and infrastructure.infrastructure, including $8.5 million related to the expansion of our Jacksonville distribution center. These investments were financed from on hand cash, operating cash flows and by using funds from our Japanese revolving credit facilities.
For the fiscal year ending June 28, 2008,27, 2009, the Company expects total capital expenditures to be approximately $200 million. Capital expenditures will be primarily for new stores and expansions both in the U.S.North America, Japan and in Japan.Greater China. We expect to open approximately 40 new North American retail stores, six new factory stores and 15-20 new locations in Japan, while continuingwill also continue to invest in department store and distributor locations. In addition, we will investlocations and corporate infrastructure. This projection excludes the purchase of the Company’s corporate headquarters in corporate infrastructure and expand our Jacksonville distribution center.New York City. These investments will be financed primarily from on hand cash and operating cash flows.
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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 2007,2008, Coach purchased approximately $663$828 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 continuing 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.
Commitments
At June 30, 2007,28, 2008, the Company had letters of credit available of $205$225.0 million, of which $115.6$111.5 million were outstanding. These letters of credit, which expire at various dates through 2012, primarily collateralize the Company’s obligation to third parties for the purchase of inventory. In addition, $13.2 million relates to a letter of credit for the benefit of the Sara Lee Corporation (“Sara Lee”). Prior to Coach’s spin off from Sara Lee, Sara Lee was a guarantor or a party to many of Coach’s leases. Coach has agreed to make efforts to
28
| (1) | Represents the Company’s legally binding agreements related to capital expenditures. |
| (2) | Represents the Company’s legally binding agreements to purchase finished goods. |
| (3) | Amounts presented exclude interest payment obligations. |
The table above excludes the following: amounts included in current liabilities, other than the current portion of long-term debt, in the Consolidated Balance Sheet at June 30, 200728, 2008 as these items will be paid within one year; long-term liabilities not requiring cash payments, such as deferred lease incentives; and cash contributions for the Company’s pension plans. The Company intends to contribute approximately $0.6$0.9 million to its pension plans during the next year. The above table also excludes reserves recorded in accordance with Statement of Financial Accounting Standard (“SFAS”) Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”, as we are unable to reasonably estimate the timing of future cash flows related to these reserves.
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
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 $3.1$2.9 million and bears interest at 4.5%. Principal and interest payments are made semiannually, with the final payment due in 2014.
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 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 these trends to continue.29
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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 development and selection of the Company’s critical accounting policies and estimates are periodically reviewed with the Audit Committee of the Board of Directors.
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The accounting policies discussed below are considered critical because changes to certain judgments and assumptions inherent in these policies could affect the financial statements. For more information on Coach’s accounting policies, please refer to the Notes to Consolidated Financial Statements.
Income Taxes
The Company’s effective tax rate is based on pre-tax income, statutory tax rates, tax laws and regulations, and tax planning strategies available in the various jurisdictions in which Coach operates. Deferred tax assets are reported at net realizable value, as determined by management. Significant management judgment is required in determining the effective tax rate, in evaluating our tax positions and in determining the net realizable value of deferred tax assets. In accordance with FIN 48, the Company recognizes the impact of tax positions in the financial statements if those positions will more likely than not be sustained on audit, based on the technical merits of the position. Tax authorities periodically audit the Company’s income tax returns. Management believes that our tax filing positions are reasonable and legally supportable. However, in specific cases, various tax authorities may take a contrary position. A change in our tax positions or audit settlements could have a significant impact on our results of operations. For further information about income taxes, see Note 10 to the Consolidated Financial Statements.
Inventories
The Company’s inventories are reported at the lower of cost or market. Inventory costs include material, conversion costs, freight and duties and are determined by the first-in, first-out method, except for inventories of Coach Japan, for which cost is determined by the last-in, first-out method. The Company reserves for slow-moving and aged inventory based on historical experience, current product demand and expected future demand. 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 inventory and additional reserves might be required. At June 30, 2007,28, 2008, a 10% change in the reserve for slow-moving and aged inventory would have resulted in an insignificant change in inventory and cost of goods sold.
Goodwill and Other Intangible Assets
The Company evaluates goodwill and other 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 2008, fiscal 2007 2006 or 2005.fiscal 2006.
Long-Lived Assets
Long-lived assets, such as property and equipment, are evaluated for impairment annually to determine if the carrying value of the assets is recoverable. The evaluation is based on a review of forecasted operating cash flows and the profitability of the related business. An impairment loss is recognized if the forecasted cash flows are less than the carrying amount of the asset. The Company did not record any impairment losses in fiscal 2008, fiscal 2007 2006, or 2005.fiscal 2006. However, as the determination of future cash flows is based on expected future performance, impairment could result in the future if expectations are not met.
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. Revenue associated with gift cards is recognized upon redemption. The
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Company estimates the amount of gift cards that will not be redeemed and records such amounts as revenue over the period of the performance obligation. Allowances for estimated uncollectible accounts, discounts and returns 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 sales from the licensee. At June 30, 2007,28, 2008, a 10% change in the allowances for estimated uncollectible accounts, discounts and returns would have resulted in an insignificant change in accounts receivable and net sales.
Share-Based Compensation
The Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as stock options, based on the grant-date fair value of those awards. The grant-date fair value of stock option awards is determined using the Black-Scholes option pricing model and involves several assumptions, including the expected term of the option and expected 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. Changes in the assumptions used to determine the Black-Scholes value could result in significant changes in the Black-Scholes value. AHowever, a 10% change in the Black-Scholes value would result in an insignificant change in FY07fiscal 2008 share-based compensation expense.
Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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
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instrument that contains an embedded derivative that otherwise would require bifurcation. This statement is effective for all financial instruments acquired or issued after July 1, 2007. The Company does not expect the adoption of SFAS 155 to have a material impact on the Company’s consolidated financial statements.
In June 2006, the FASB ratified the consensus reached on Emerging Issues Task Force (“EITF”) Issue 06-3, “How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation).” 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 was effective for the interim reporting period that began on December 31, 2006. As the Company did not modify its accounting policy of recording sales taxes collected on a net basis, the adoption of EITF 06-3 did not have an 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 SFAS 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 the fiscal year beginning on July 1, 2007. The Company is currently evaluating the impact of FIN 48 on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ThisCertain provisions of this statement isare effective for theCoach’s fiscal year beginningthat will begin on June 29, 2008. The Company does not expect the adoption of SFAS 157 to have a material impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS 158 requires an employer to recognize the funded status of a benefit plan, measured as the difference between plan assets at fair value and the projected benefit obligation, in its statement of financial position. SFAS 158 also requires an employer to measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position. This statement isThe recognition provision and the related disclosures were effective as of the end of the fiscal year ended June 30, 2007, except for the requirement to measure plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position, which2007. The measurement provision is effective for theCoach’s fiscal year ending June 27, 2009. The impact of adopting SFAS 158 is described in Note 12.
In September 2006,Company does not expect the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements.” SAB 108 states that SEC registrants should use both a balance sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement, contains guidance on correcting errors under the dual approach and provides transition guidance for correcting errors existing in prior years. SAB 108 is effective for annual financial statements covering the fiscal year ended June 30, 2007. The adoption of SAB 108 did notthe measurement provision to have ana material impact on the Company’sits consolidated financial statements.
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective for theCoach’s fiscal year beginningthat will begin on June 29, 2008. As the Company did not elect to measure any items at fair value, the adoption of SFAS 159 did not have an impact on the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS 141 (revised 2007), “Business Combinations.” Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS 141(R) will change the accounting treatment for certain specific acquisition-related items, including expensing acquisition-related costs as incurred, valuing noncontrolling interests (minority interests) at fair value at the acquisition date, and expensing restructuring costs associated with an acquired business. SFAS 141(R) also includes expanded disclosure requirements. SFAS 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after June 28, 2009. The Company does not expect the adoption of SFAS 159141(R) to have a material impact on the Company’s consolidated financial statements.
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In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This statement is effective for Coach’s financial statements issued for the interim period that will begin on December 28, 2008. The Company is currently evaluating the impact of SFAS 161 on the Company’s consolidated financial statements.
In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles — FASB Statement No. 162.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company does not expect the adoption of SFAS 162 to have a material impact 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 appropriate, through the use of
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derivative financial instruments with respect to Coach Japan. The use of derivative financial instruments is in accordance with Coach’s risk management policies. Coach does not enter into derivative transactions for speculative or trading purposes.
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.
Foreign Currency 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.
Substantially all of Coach’s fiscal 20072008 non-licensed product needs were purchased from independent manufacturers in countries other than the United States. These countries include China, India, Hungary, Indonesia,Philippines, Mauritius, Italy, Spain, Turkey, Korea, Mauritius, Singapore, Spain,Malaysia, Vietnam, Taiwan and Turkey.Thailand. 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 subject to foreign currency exchange risk.
In Japan, Coach is exposed to market risk from foreign currency exchange rate fluctuations as a result of Coach Japan’s U.S. dollar denominated inventory purchases. Coach Japan enters into certain foreign currency derivative contracts, primarily zero-cost collar options, to manage these risks. The foreign currency contracts entered into by the Company have durations no greater than 12 months. As of June 28, 2008 and June 30, 2007, and July 1, 2006, open foreign currency forward contracts designated as hedges with a notional amount of $111.1$233.9 million and $114.8$111.1 million, respectively, were outstanding.
Coach is also exposed to market risk from foreign currency exchange rate fluctuations with respect to Coach Japan as a result of its $231$231.0 million 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 terms 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.
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The fair values of open foreign currency derivatives included in current assets at June 28, 2008 and June 30, 2007 were $7.9 million and July 1, 2006 were $23.3 million, respectively. The fair value of open foreign currency derivatives included in current liabilities as June 28, 2008 and $2.6June 30, 2007 was $5.5 million and $0, respectively. The fair value of these contracts is sensitive to changes in yen exchange rates.
Coach believes that exposure to adverse changes in exchange rates associated with revenues and expenses of foreign operations, which are denominated in Japanese Yen and Canadian Dollars, are not material to the Company’s consolidated financial statements.
Interest Rate
Coach is exposed to interest rate risk in relation to its investments, revolving credit facilities and long-term debt.
The Company’s investment portfolio is maintained in accordance with the Company’s investment policy, which identifies allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. The primary objective of our investment activities is the preservation of principal while maximizing interest income and minimizing risk. We do not hold any investments for trading purposes. The Company’s investment portfolio consists of U.S. government and agency securities as well as municipal government and corporate debt securities. AsAt June 28, 2008, the Company has both the ability and intent to hold these securities until maturity,Company’s investments, are classified as held-to-maturity and stated at amortized cost, except for auction rate securities, which are classified as available-for-sale. At June 30, 2007, the Company’s short term investmentsavailable-for-sale, consisted of $628.9$8.0 million of auction rate securities. As auction rate securities’ market priceadjusted book value equals its fair value, there are no unrealized gains or losses associated with these investments.
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As of June 30, 2007,28, 2008, the Company did not have any outstanding borrowings on its revolving credit facilities and the Company does not expect to borrow against the facilities in the foreseeable future.facilities. However, the fair value of any outstanding borrowings in the future may be impacted by fluctuations in interest rates.
As of June 30, 2007,28, 2008, Coach’s outstanding long-term debt, including the current portion, was $3.1$2.9 million. A hypothetical 10% 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.
Item 8. Financial Statements and Supplementary Data
See “Index to Financial Statements,” which is located on page 3637 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and ProceduresProcdures
Disclosure Controls and Procedures
Based on the evaluation of the Company’s disclosure controls and procedures, as that term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, each of Lew Frankfort, the Chief Executive Officer of the Company, and Michael F. Devine, III, the Chief Financial Officer of the Company, has concluded that the Company’s disclosure controls and procedures are effective as of June 30, 2007.28, 2008.
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. Management evaluated the effectiveness of the Company’s internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission inInternal Control-Integrated Framework. Management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 200728, 2008 and concluded that it is 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. ThisThe audit report appears on page 38. of this report.
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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.
Item 9B. Other Information
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information set forth in the Proxy Statement for the 20072008 Annual Meeting of Stockholders 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.
Item 11. Executive Compensation
The information set forth in the Proxy Statement for the 20072008 Annual Meeting of Stockholders 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.
Item 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 20072008 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.
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.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information set forth in the Proxy Statement for the 20072008 Annual Meeting of Stockholders 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.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated herein by reference to the section entitled “Matters Relating to Coach’s Independent Auditors” in the Proxy Statement for the 20072008 Annual Meeting of Stockholders. 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.
PART IV
Item 15. Exhibits and Financial Statement Schedules
| (a) | Financial Statements and Financial Statement Schedules |
See “Index to Financial Statements” which is located on page 3637 of this report.
| (b) | Exhibits. See the exhibit index which is included herein. |
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SIGNATURES
Pursuant to the requirements of 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.
| | |
Date: August 23, 200721, 2008 | | 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 August 23, 2007.21, 2008.
| | |
| Signature | | Title |
/s/ Lew Frankfort
Lew Frankfort | | Chairman, Chief Executive Officer and Director |
/s/ Keith MondaJerry Stritzke
Keith MondaJerry Stritzke | | President, Chief Operating Officer and Director |
/s/ Michael F. Devine, III
Michael F. Devine, III | | Executive Vice President and Chief Financial Officer
(as principal financial officer and principal accounting officer of Coach) |
/s/ Susan Kropf
Susan Kropf | | Director |
/s/ Gary Loveman
Gary Loveman | | Director |
/s/ Ivan Menezes
Ivan Menezes | | Director |
/s/ Keith Monda
Keith Monda | | Director |
/s/ Irene Miller
Irene Miller | | Director |
/s/ Michael Murphy
Michael Murphy | | Director |
/s/ Jide Zeitlin
Jide Zeitlin | | Director |
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UNITED STATES
SECURITES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FINANCIAL STATEMENTS
For the Fiscal Year Ended June 30, 200728, 2008
COACH, INC.
New York, New York 10001
INDEX TO FINANCIAL STATEMENTS
| | |
| | Page |
| Reports of Independent Registered Public Accounting Firm | | | 3738 | |
Consolidated Balance Sheets — At June 28, 2008 and June 30, 2007 and July 1, 2006 | | | 3940 | |
Consolidated Statements of Income — For Fiscal Years Ended June 28, 2008, June 30, 2007 and July 1, 2006 and July 2, 2005 | | | 4041 | |
Consolidated Statements of Stockholders’ Equity — For Fiscal Years Ended June 28, 2008, June 30, 2007
and July 1, 2006 and July 2, 2005 | | | 4142 | |
Consolidated Statements of Cash Flows — For Fiscal Years Ended June 28, 2008, June 30, 2007 and July 1, 2006 and July 2, 2005 | | | 4243 | |
| Notes to Consolidated Financial Statements | | | 4344 | |
| Market and Dividend Information | | | 66 | |
Financial Statement Schedules for the years ended June 28, 2008, June 30, 2007 and July 1, 2006 and July 2, 2005:2006:
| | | | |
| Schedule II — Valuation and Qualifying Accounts | | | 67 | |
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
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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”) as of June 28, 2008 and June 30, 2007, and July 1, 2006, and the related consolidated statements of income, stockholders’stockholders' equity and cash flows for each of the three years in the period ended June 30, 2007.28, 2008. Our audits also included the consolidated financial statement schedule listed in the Index 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 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 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, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at June 28, 2008 and June 30, 2007, and July 1, 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2007,28, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule referred to above, 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 10 to the consolidated financial statements, effective July 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.”
We have also 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 June 30, 2007,28, 2008, 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 August 23, 200721, 2008 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 23, 200721, 2008
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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 management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, thatinternal control over financial reporting of Coach, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of June 30, 2007,28, 2008, based on criteria established in Internal Control — Integrated Framework issued 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.reporting, included in the accompanying Management’s Report on 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’sCompany'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,assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.opinion.
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 June 30, 2007, is fairly stated, in all material respects, based on the criteria established in Internal Control — Integrated Framework issued 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 June 30, 2007,28, 2008, based on the criteria established in Internal Control — Integrated Framework issued 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 June 30, 200728, 2008 of the Company and our report dated August 23, 200721, 2008 expressed an unqualified opinion on those consolidated financial statements and consolidated financial statement schedule.schedule and includes an explanatory paragraph regarding the Company’s adoption of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.”
/s/ Deloitte & Touche LLP
New York, New York
August 23, 200721, 2008
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COACH, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
| | | | | | | | |
| | June 30,
2007 | | July 1,
2006 | | June 28,
2008 | | June 30,
2007 |
ASSETS
| | | | | | | | | | | | | | | | |
Current Assets:
| | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 556,956 | | | $ | 143,388 | | | $ | 698,905 | | | $ | 556,956 | |
| Short-term investments | | | 628,860 | | | | 394,177 | | | | — | | | | 628,860 | |
Trade accounts receivable, less allowances of $6,579 and $6,000,
respectively | | | 107,814 | | | | 84,361 | | |
| Trade accounts receivable, less allowances of $7,717 and $6,579, respectively | | | | 106,738 | | | | 107,814 | |
| Inventories | | | 291,192 | | | | 233,494 | | | | 345,493 | | | | 291,192 | |
| Deferred income taxes | | | 68,305 | | | | 78,019 | | | | 69,557 | | | | 68,305 | |
| Prepaids and other current assets | | | 87,069 | | | | 41,043 | | |
| Prepaid expenses | | | | 65,569 | | | | 16,140 | |
| Other current assets | | | | 99,447 | | | | 70,929 | |
| Total current assets | | | 1,740,196 | | | | 974,482 | | | | 1,385,709 | | | | 1,740,196 | |
| Long-term investments | | | | 8,000 | | | | — | |
| Property and equipment, net | | | 368,461 | | | | 298,531 | | | | 464,226 | | | | 368,461 | |
| Goodwill | | | 213,794 | | | | 227,811 | | |
| Indefinite life intangibles | | | 11,865 | | | | 12,007 | | |
| Goodwill and other intangible assets | | | | 258,906 | | | | 225,659 | |
| Deferred income taxes | | | 86,046 | | | | 84,077 | | | | 81,346 | | | | 86,046 | |
| Other noncurrent assets | | | 29,150 | | | | 29,612 | | |
| Other assets | | | | 75,657 | | | | 29,150 | |
| Total assets | | $ | 2,449,512 | | | $ | 1,626,520 | | | $ | 2,273,844 | | | $ | 2,449,512 | |
LIABILITIES AND STOCKHOLDERS' EQUITY
| | | | | | | | | | | | | | | | |
Current Liabilities:
| | | | | | | | | | | | | | | | |
| Accounts payable | | $ | 109,309 | | | $ | 79,819 | | | $ | 134,726 | | | $ | 109,309 | |
| Accrued liabilities | | | 298,452 | | | | 261,835 | | | | 315,930 | | | | 298,452 | |
| Current portion of long-term debt | | | 235 | | | | 170 | | | | 285 | | | | 235 | |
| Total current liabilities | | | 407,996 | | | | 341,824 | | | | 450,941 | | | | 407,996 | |
| Deferred income taxes | | | 36,448 | | | | 31,655 | | | | 26,417 | | | | 36,448 | |
| Long-term debt | | | 2,865 | | | | 3,100 | | | | 2,580 | | | | 2,865 | |
| Other liabilities | | | 91,849 | | | | 61,207 | | | | 278,086 | | | | 91,849 | |
| Total liabilities | | | 539,158 | | | | 437,786 | | | | 758,024 | | | | 539,158 | |
Commitments and contingencies (Note 8)
| | | | | | | | | |
Stockholders' Equity:
| | | | | | | | | |
Commitments and contingencies (Note 7)
| | | | | | | | | |
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 — 372,521,112 and 369,830,906 shares, respectively | | | 3,725 | | | | 3,698 | | |
| Common stock: (authorized 1,000,000,000 shares; $0.01 par value) issued and outstanding — 336,728,851 and 372,521,112 shares, respectively | | | | 3,367 | | | | 3,725 | |
| Additional paid-in-capital | | | 978,664 | | | | 775,209 | | | | 1,115,041 | | | | 978,664 | |
| Retained earnings | | | 940,757 | | | | 417,087 | | |
| Accumulated other comprehensive loss | | | (12,792 | ) | | | (7,260 | ) | |
| Retained earnings (fiscal 2008 includes impact of FIN 48 adoption of $48,797) | | | | 375,949 | | | | 940,757 | |
| Accumulated other comprehensive income (loss) | | | | 21,463 | | | | (12,792 | ) |
| Total stockholders' equity | | | 1,910,354 | | | | 1,188,734 | | | | 1,515,820 | | | | 1,910,354 | |
| Total liabilities and stockholders' equity | | $ | 2,449,512 | | | $ | 1,626,520 | | | $ | 2,273,844 | | | $ | 2,449,512 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
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COACH, INC.
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
| | | | | | |
| | Fiscal Year Ended |
| | | June 30,
2007 | | July 1,
2006 | | July 2,
2005 |
| Net sales | | $ | 2,612,456 | | | $ | 2,035,085 | | | $ | 1,651,704 | |
| Cost of sales | | | 589,470 | | | | 453,518 | | | | 384,153 | |
| Gross profit | | | 2,022,986 | | | | 1,581,567 | | | | 1,267,551 | |
| Selling, general and administrative expenses | | | 1,029,589 | | | | 866,860 | | | | 731,891 | |
| Operating income | | | 993,397 | | | | 714,707 | | | | 535,660 | |
| Interest income, net | | | 41,273 | | | | 32,623 | | | | 15,760 | |
| Income before provision for income taxes, minority interest and discontinued operations | | | 1,034,670 | | | | 747,330 | | | | 551,420 | |
| Provision for income taxes | | | 398,141 | | | | 283,490 | | | | 201,132 | |
| Minority interest, net of tax | | | — | | | | — | | | | 13,641 | |
| Income from continuing operations | | | 636,529 | | | | 463,840 | | | | 336,647 | |
| Income from discontinued operations, net of income taxes (Note 3) | | | 27,136 | | | | 30,437 | | | | 21,965 | |
| Net income | | $ | 663,665 | | | $ | 494,277 | | | $ | 358,612 | |
Net income per share
| | | | | | | | | | | | |
Basic
| | | | | | | | | | | | |
| Continuing operations | | $ | 1.72 | | | $ | 1.22 | | | $ | 0.89 | |
| Discontinued operations | | | 0.07 | | | | 0.08 | | | | 0.06 | |
| Net income | | $ | 1.80 | | | $ | 1.30 | | | $ | 0.95 | |
Diluted
| | | | | | | | | | | | |
| Continuing operations | | $ | 1.69 | | | $ | 1.19 | | | $ | 0.86 | |
| Discontinued operations | | | 0.07 | | | | 0.08 | | | | 0.06 | |
| Net income | | $ | 1.76 | | | $ | 1.27 | | | $ | 0.92 | |
Shares used in computing net income per share
| | | | | | | | | | | | |
| Basic | | | 369,661 | | | | 379,635 | | | | 378,670 | |
| Diluted | | | 377,356 | | | | 388,495 | | | | 390,191 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
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COACH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(amounts in thousands)
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 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 July 3, 2004 | | $ | 796,036 | | | $ | — | | | $ | 3,792 | | | $ | 420,718 | | | $ | 369,331 | | | $ | 2,195 | | | | | | | | 379,236 | |
| Net income | | | 358,612 | | | | — | | | | — | | | | — | | | | 358,612 | | | | — | | | $ | 358,612 | | | | | |
| Shares issued for stock options and employee benefit plans | | | 42,988 | | | | — | | | | 102 | | | | 42,886 | | | | — | | | | — | | | | | | | | 10,194 | |
| Share-based compensation | | | 55,880 | | | | — | | | | — | | | | 55,880 | | | | — | | | | — | | | | | | | | | |
| Excess tax benefit from share-based compensation | | | 68,667 | | | | — | | | | — | | | | 68,667 | | | | — | | | | — | | | | | | | | | |
| Repurchase of common stock | | | (264,971 | ) | | | — | | | | (110 | ) | | | (21,889 | ) | | | (242,972 | ) | | | — | | | | | | | | (11,000 | ) |
| Changes in derivatives balances, net of tax | | | 1,229 | | | | — | | | | — | | | | — | | | | — | | | | 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, 2005 | | | 1,055,920 | | | | — | | | | 3,784 | | | | 566,262 | | | | 484,971 | | | | 903 | | | | | | | | 378,430 | |
| Net income | | | 494,277 | | | | — | | | | — | | | | — | | | | 494,277 | | | | — | | | $ | 494,277 | | | | | |
| Shares issued for stock options and employee benefit plans | | | 78,444 | | | | — | | | | 105 | | | | 78,339 | | | | — | | | | — | | | | | | | | 10,456 | |
| Share-based compensation | | | 69,190 | | | | — | | | | — | | | | 69,190 | | | | — | | | | — | | | | | | | | | |
| Excess tax benefit from share-based compensation | | | 99,337 | | | | — | | | | — | | | | 99,337 | | | | — | | | | — | | | | | | | | | |
| Repurchase of common stock | | | (600,271 | ) | | | — | | | | (191 | ) | | | (37,919 | ) | | | (562,161 | ) | | | — | | | | | | | | (19,055 | ) |
| Changes in derivatives balances, net of tax | | | (4,488 | ) | | | — | | | | — | | | | — | | | | — | | | | (4,488 | ) | | | (4,488 | ) | | | | |
| Translation adjustments | | | (3,780 | ) | | | — | | | | — | | | | — | | | | — | | | | (3,780 | ) | | | (3,780 | ) | | | | |
| Minimum pension liability | | | 105 | | | | — | | | | — | | | | — | | | | — | | | | 105 | | | | 105 | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 486,114 | | | | | |
| Balances at July 1, 2006 | | | 1,188,734 | | | | — | | | | 3,698 | | | | 775,209 | | | | 417,087 | | | | (7,260 | ) | | | | | | | 369,831 | |
| Net income | | | 663,665 | | | | — | | | | — | | | | — | | | | 663,665 | | | | — | | | $ | 663,665 | | | | | |
| Shares issued for stock options and employee benefit plans | | | 108,318 | | | | — | | | | 77 | | | | 108,241 | | | | — | | | | — | | | | | | | | 7,692 | |
| Share-based compensation | | | 56,726 | | | | — | | | | — | | | | 56,726 | | | | — | | | | — | | | | | | | | | |
| Excess tax benefit from share-based compensation | | | 65,100 | | | | — | | | | — | | | | 65,100 | | | | — | | | | — | | | | | | | | | |
| Adjustment to excess tax benefit from share-based compensation | | | (16,658 | ) | | | — | | | | — | | | | (16,658 | ) | | | — | | | | — | | | | | | | | | |
| Repurchase of common stock | | | (149,999 | ) | | | — | | | | (50 | ) | | | (9,954 | ) | | | (139,995 | ) | | | — | | | | | | | | (5,002 | ) |
| Changes in derivatives balances, net of tax | | | 4,708 | | | | — | | | | — | | | | — | | | | — | | | | 4,708 | | | | 4,708 | | | | | |
| Translation adjustments | | | (9,944 | ) | | | — | | | | — | | | | — | | | | — | | | | (9,944 | ) | | | (9,944 | ) | | | | |
| Minimum pension liability | | | (58 | ) | | | — | | | | — | | | | — | | | | — | | | | (58 | ) | | | (58 | ) | | | | |
| Adjustment to initially apply SFAS 158, net of tax | | | (238 | ) | | | — | | | | — | | | | — | | | | — | | | | (238 | ) | | | | | | | | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 658,371 | | | | | |
| Balances at June 30, 2007 | | $ | 1,910,354 | | | $ | — | | | $ | 3,725 | | | $ | 978,664 | | | $ | 940,757 | | | $ | (12,792 | ) | | | | | | | 372,521 | |
| | | | | | |
| | Fiscal Year Ended |
| | | June 28,
2008 | | June 30,
2007 | | July 1,
2006 |
| Net sales | | $ | 3,180,757 | | | $ | 2,612,456 | | | $ | 2,035,085 | |
| Cost of sales | | | 773,654 | | | | 589,470 | | | | 453,518 | |
| Gross profit | | | 2,407,103 | | | | 2,022,986 | | | | 1,581,567 | |
| Selling, general and administrative expenses | | | 1,259,974 | | | | 1,029,589 | | | | 866,860 | |
| Operating income | | | 1,147,129 | | | | 993,397 | | | | 714,707 | |
| Interest income, net | | | 47,820 | | | | 41,273 | | | | 32,623 | |
| Income before provision for income taxes and discontinued operations | | | 1,194,949 | | | | 1,034,670 | | | | 747,330 | |
| Provision for income taxes | | | 411,910 | | | | 398,141 | | | | 283,490 | |
| Income from continuing operations | | | 783,039 | | | | 636,529 | | | | 463,840 | |
| Income from discontinued operations, net of income taxes (Note 15) | | | 16 | | | | 27,136 | | | | 30,437 | |
| Net income | | $ | 783,055 | | | $ | 663,665 | | | $ | 494,277 | |
Net income per share
| | | | | | | | | | | | |
Basic
| | | | | | | | | | | | |
| Continuing operations | | $ | 2.20 | | | $ | 1.72 | | | $ | 1.22 | |
| Discontinued operations | | | 0.00 | | | | 0.07 | | | | 0.08 | |
| Net income | | $ | 2.20 | | | $ | 1.80 | | | $ | 1.30 | |
Diluted
| | | | | | | | | | | | |
| Continuing operations | | $ | 2.17 | | | $ | 1.69 | | | $ | 1.19 | |
| Discontinued operations | | | 0.00 | | | | 0.07 | | | | 0.08 | |
| Net income | | $ | 2.17 | | | $ | 1.76 | | | $ | 1.27 | |
Shares used in computing net income per share
| | | | | | | | | | | | |
| Basic | | | 355,731 | | | | 369,661 | | | | 379,635 | |
| Diluted | | | 360,332 | | | | 377,356 | | | | 388,495 | |
See accompanying Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(amounts in thousands)
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Shares of
Common
Stock | | Preferred
Stockholders'
Equity | | Common
Stockholders'
Equity | | Additional
Paid-in-
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Income/(Loss) | | Total
Stockholders'
Equity |
| Balances at July 2, 2005 | | | 378,430 | | | $ | — | | | $ | 3,784 | | | $ | 566,262 | | | $ | 484,971 | | | $ | 903 | | | $ | 1,055,920 | |
| Net income | | | | | | | — | | | | — | | | | — | | | | 494,277 | | | | — | | | | 494,277 | |
| Unrealized losses on cash flow hedging derivatives, net of tax | | | | | | | — | | | | — | | | | — | | | | — | | | | (4,488 | ) | | | (4,488 | ) |
| Translation adjustments | | | | | | | — | | | | — | | | | — | | | | — | | | | (3,780 | ) | | | (3,780 | ) |
| Change in pension liability, net of tax | | | | | | | — | | | | — | | | | — | | | | — | | | | 105 | | | | 105 | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 486,114 | |
| Shares issued for stock options and employee benefit plans | | | 10,456 | | | | — | | | | 105 | | | | 78,339 | | | | — | | | | — | | | | 78,444 | |
| Share-based compensation | | | | | | | — | | | | — | | | | 69,190 | | | | — | | | | — | | | | 69,190 | |
| Excess tax benefit from share-based compensation | | | | | | | — | | | | — | | | | 99,337 | | | | — | | | | — | | | | 99,337 | |
| Repurchase and retirement of common stock | | | (19,055 ) | | | | — | | | | (191 | ) | | | (37,919 | ) | | | (562,161 ) | | | | — | | | | (600,271 | ) |
| Balances at July 1, 2006 | | | 369,831 | | | | — | | | | 3,698 | | | | 775,209 | | | | 417,087 | | | | (7,260 | ) | | | 1,188,734 | |
| Net income | | | | | | | — | | | | — | | | | — | | | | 663,665 | | | | — | | | | 663,665 | |
| Unrealized gains on cash flow hedging derivatives, net of tax | | | | | | | — | | | | — | | | | — | | | | — | | | | 4,708 | | | | 4,708 | |
| Translation adjustments | | | | | | | — | | | | — | | | | — | | | | — | | | | (9,944 | ) | | | (9,944 | ) |
| Change in pension liability, net of tax | | | | | | | — | | | | — | | | | — | | | | — | | | | (58 | ) | | | (58 | ) |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 658,371 | |
| Shares issued for stock options and employee benefit plans | | | 7,692 | | | | — | | | | 77 | | | | 108,241 | | | | — | | | | — | | | | 108,318 | |
| Share-based compensation | | | | | | | — | | | | — | | | | 56,726 | | | | — | | | | — | | | | 56,726 | |
| Excess tax benefit from share-based compensation | | | | | | | — | | | | — | | | | 65,100 | | | | — | | | | — | | | | 65,100 | |
| Adjustment to excess tax benefit from share-based compensation | | | | | | | — | | | | — | | | | (16,658 ) | | | | — | | | | — | | | | (16,658 ) | |
| Repurchase and retirement of common stock | | | (5,002 | ) | | | — | | | | (50 | ) | | | (9,954 | ) | | | (139,995 ) | | | | — | | | | (149,999 | ) |
| Adjustment to initially apply SFAS 158, net of tax | | | | | | | — | | | | — | | | | — | | | | — | | | | (238 | ) | | | (238 | ) |
| Balances at June 30, 2007 | | | 372,521 | | | | — | | | | 3,725 | | | | 978,664 | | | | 940,757 | | | | (12,792 ) | | | | 1,910,354 | |
| Net income | | | | | | | — | | | | — | | | | — | | | | 783,055 | | | | — | | | | 783,055 | |
| Unrealized gains on cash flow hedging derivatives, net of tax | | | | | | | — | | | | — | | | | — | | | | — | | | | 5,782 | | | | 5,782 | |
| Translation adjustments | | | | | | | — | | | | — | | | | — | | | | — | | | | 27,963 | | | | 27,963 | |
| Change in pension liability, net of tax | | | | | | | — | | | | — | | | | — | | | | — | | | | 510 | | | | 510 | |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 817,310 | |
| Shares issued for stock options and employee benefit plans | | | 3,896 | | | | — | | | | 39 | | | | 83,281 | | | | — | | | | — | | | | 83,320 | |
| Share-based compensation | | | | | | | — | | | | — | | | | 66,979 | | | | — | | | | — | | | | 66,979 | |
| Adjustment to adopt FIN 48 | | | | | | | — | | | | — | | | | — | | | | (48,797 ) | | | | — | | | | (48,797 ) | |
| Excess tax benefit from share-based compensation | | | | | | | — | | | | — | | | | 23,253 | | | | — | | | | — | | | | 23,253 | |
| Repurchase and retirement of common stock | | | (39,688 ) | | | | — | | | | (397 | ) | | | (37,136 | ) | | | (1,299,066 ) | | | | — | | | | (1,336,599 ) | |
| Balances at June 28, 2008 | | | 336,729 | | | $ | — | | | $ | 3,367 | | | $ | 1,115,041 | | | $ | 375,949 | | | $ | 21,463 | | | $ | 1,515,820 | |
See accompanying Notes to Consolidated Financial Statements.
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COACH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
| | | | | | | | | | | | |
| | Fiscal Year Ended | | Fiscal Year Ended |
| | | June 30,
2007 | | July 1,
2006 | | July 2,
2005 | | June 28,
2008 | | June 30,
2007 | | July 1,
2006 |
CASH FLOWS FROM OPERATING ACTIVITIES
| | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 663,665 | | | $ | 494,277 | | | $ | 358,612 | | | $ | 783,055 | | | $ | 663,665 | | | $ | 494,277 | |
Adjustments to reconcile net income to net cash from
operating activities:
| | | | | | | | | | | | | |
| Depreciation and amortization | | | 80,887 | | | | 65,115 | | | | 50,400 | | | | 100,704 | | | | 80,832 | | | | 64,994 | |
| Provision for bad debt | | | 1,845 | | | | 252 | | | | 41 | | | | 286 | | | | 1,845 | | | | 251 | |
| Minority interest | | | — | | | | — | | | | 13,641 | | |
| Share-based compensation | | | 56,726 | | | | 69,190 | | | | 55,880 | | | | 66,979 | | | | 56,726 | | | | 69,190 | |
| Excess tax benefit from share-based compensation | | | (65,100 | ) | | | (99,337 | ) | | | (68,667 | ) | | | (23,253 | ) | | | (65,100 | ) | | | (99,337 | ) |
| Decrease (increase) in deferred tax assets | | | 7,745 | | | | (56,731 | ) | | | (54,990 | ) | |
| (Decrease) increase in deferred tax liabilities | | | (1,107 | ) | | | 33,788 | | | | (8,428 | ) | |
| Other, net | | | (5,375 | ) | | | (14,723 | ) | | | 3,881 | | |
| Deferred income taxes | | | | (16,907 | ) | | | 7,282 | | | | (23,129 | ) |
| Other noncash credits and (charges), net | | | | 6,845 | | | | (2,024 | ) | | | (16,003 | ) |
Changes in operating assets and liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Increase in trade accounts receivable | | | (25,298 | ) | | | (19,214 | ) | | | (9,716 | ) | |
| Decrease (increase) in trade accounts receivable | | | | 8,213 | | | | (28,066 | ) | | | (20,173 | ) |
| Increase in inventories | | | (57,698 | ) | | | (49,075 | ) | | | (22,506 | ) | | | (32,080 | ) | | | (63,935 | ) | | | (51,693 | ) |
| Increase in other assets | | | (33,463 | ) | | | (6,130 | ) | | | (14,885 | ) | | | (94,535 | ) | | | (50,359 | ) | | | (15,691 | ) |
| Increase in other liabilities | | | 30,382 | | | | 19,307 | | | | 23,820 | | | | 28,529 | | | | 50,888 | | | | 28,605 | |
| Increase in accounts payable | | | 29,490 | | | | 14,834 | | | | 20,214 | | | | 20,423 | | | | 31,230 | | | | 15,658 | |
| Increase in accrued liabilities | | | 96,403 | | | | 145,050 | | | | 128,299 | | | | 75,102 | | | | 98,185 | | | | 149,420 | |
| Net cash provided by operating activities | | | 779,102 | | | | 596,603 | | | | 475,596 | | | | 923,361 | | | | 781,169 | | | | 596,369 | |
CASH FLOWS FROM INVESTING ACTIVITIES
| | | | | | | | | | | | | | | | | | | | | | | | |
| Purchases of property and equipment | | | (140,872 | ) | | | (133,876 | ) | | | (94,592 | ) | | | (174,720 | ) | | | (140,600 | ) | | | (133,421 | ) |
| Acquisition of joint venture | | | — | | | | — | | | | (228,431 | ) | |
| Proceeds from dispositions of property and equipment | | | 156 | | | | 237 | | | | 18 | | | | — | | | | 33 | | | | — | |
| Purchases of investments | | | (920,999 | ) | | | (1,195,934 | ) | | | (379,530 | ) | | | (162,300 | ) | | | (920,999 | ) | | | (1,195,934 | ) |
| Proceeds from maturities of investments | | | 685,789 | | | | 1,148,618 | | | | 330,703 | | |
| Net cash used in investing activities | | | (375,926 | ) | | | (180,955 | ) | | | (371,832 | ) | |
| Proceeds from sales and maturities of investments | | | | 782,460 | | | | 685,789 | | | | 1,148,618 | |
| Net cash provided by (used in) investing activities | | | | 445,440 | | | | (375,777 | ) | | | (180,737 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES
| | | | | | | | | | | | | | | | | | | | | | | | |
| Repurchase of common stock | | | (149,999 | ) | | | (600,271 | ) | | | (264,971 | ) | | | (1,336,599 | ) | | | (149,999 | ) | | | (600,271 | ) |
| Distribution of earnings to joint venture shareholders | | | — | | | | — | | | | (57,403 | ) | |
| Repayment of joint venture partner contribution | | | — | | | | — | | | | (15,524 | ) | |
| Repayment of long-term debt | | | (170 | ) | | | (150 | ) | | | (115 | ) | | | (235 | ) | | | (170 | ) | | | (150 | ) |
| Borrowings on revolving credit facility | | | 57,048 | | | | 58,512 | | | | 359,503 | | |
| Repayments of revolving credit facility | | | (57,048 | ) | | | (70,804 | ) | | | (348,910 | ) | |
| Proceeds from exercise of stock options | | | 112,119 | | | | 86,550 | | | | 46,835 | | |
| Borrowings on revolving credit facility, net | | | | — | | | | — | | | | (11,717 | ) |
| Proceeds from share-based awards | | | | 83,320 | | | | 112,119 | | | | 86,550 | |
| Excess tax benefit from share-based compensation | | | 65,100 | | | | 99,337 | | | | 68,667 | | | | 23,253 | | | | 65,100 | | | | 99,337 | |
Adjustment to excess tax benefit from share-based
compensation | | | (16,658 | ) | | | — | | | | — | | | | — | | | | (16,658 | ) | | | — | |
| Net cash provided by (used in) financing activities | | | 10,392 | | | | (426,826 | ) | | | (211,918 | ) | |
| Net cash (used in) provided by financing activities | | | | (1,230,261 | ) | | | 10,392 | | | | (426,251 | ) |
Effect of exchange rate changes on cash and cash
equivalents | | | | 3,409 | | | | (2,216 | ) | | | (559 | ) |
| Increase (decrease) in cash and cash equivalents | | | 413,568 | | | | (11,178 | ) | | | (108,154 | ) | | | 141,949 | | | | 413,568 | | | | (11,178 | ) |
| Cash and cash equivalents at beginning of year | | | 143,388 | | | | 154,566 | | | | 262,720 | | | | 556,956 | | | | 143,388 | | | | 154,566 | |
| Cash and cash equivalents at end of year | | $ | 556,956 | | | $ | 143,388 | | | $ | 154,566 | | | $ | 698,905 | | | $ | 556,956 | | | $ | 143,388 | |
Supplemental information:
| | | | | | | | | | | | | |
| Cash paid for income taxes | | $ | 370,189 | | | $ | 205,451 | | | $ | 162,702 | | | $ | 463,687 | | | $ | 370,189 | | | $ | 205,451 | |
| Cash paid for interest | | $ | 1,099 | | | $ | 1,155 | | | $ | 238 | | | $ | 1,171 | | | $ | 1,099 | | | $ | 1,155 | |
Noncash investing activity — property and equipment
obligations | | $ | 31,537 | | | $ | 22,349 | | | $ | — | | | $ | 44,260 | | | $ | 31,537 | | | $ | 22,349 | |
42
See accompanying Notes to Consolidated Financial Statements.
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
1. Nature of Operations
Coach, Inc. (the “Company”) designs 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, footwear, outerwear,jewelry, wearables, business cases, sunwear, watches, travel bags jewelry and fragrance. Coach’s products are sold through itsthe Direct-to-Consumer segment, which includes Company-operated stores in North America and Japan, its online storethe Internet and its catalogs, as well asthe Coach catalog, and through itsthe Indirect segment, which includes department store locations in the United States,North America, international department stores, freestanding retail locations and specialty retailers.
2. Significant Accounting Policies
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 June 28, 2008 (“fiscal 2008”), June 30, 2007 (“fiscal 2007”), and July 1, 2006 (“fiscal 2006”) and July 2, 2005 (“fiscal 2005”) were each 52-week periods.
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
The consolidated financial statements include the accounts of the Company and all subsidiaries under the control of the Company, including Coach Japan, Inc.100% owned subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash balances and highly liquid investments with a maturity of three months or less than 90 days at the date of purchase.
Investments
Investments consist of U.S. government and agency debt securities as well as municipal government and corporate debt securities. These securitiesinvestments are classified as held-to-maturity, as the Company has both the abilityavailable-for-sale and the intent to hold these securities until maturity, except for auction rate securities, which are classified as available-for-sale. Investments classified as held-to-maturity are recorded at amortized cost. Premiums are amortized and discounts are accreted over the lives of the related securities as adjustments to interest income. Investments classified as available-for-sale are recorded at fair value, with unrealized gains and losses recorded in other comprehensive income. Dividend and interest income are recognized when earned.
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 believes no significant concentration of credit risk exists with respect to these cash investments and accounts receivable.
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
2. Significant Accounting Policies – (continued)
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”)) or market. Inventories in Japan are valued at the lower of cost (determined by the last-in, first-out method (“LIFO”)) or market. At the end of fiscal 2008 and fiscal 2007, inventories recorded at LIFO were $3,251$27,003 and $23,413 higher, respectively, than if they were valued at FIFO. At the end ofThe fiscal 2006, inventories recorded at LIFO were $911 lower than if they were valued at FIFO.2007 impact has been revised. Inventories valued under LIFO amounted to $49,301$83,157 and $54,651$49,301 in fiscal 20072008 and 2006,fiscal 2007, respectively. Inventory costs include material, conversion costs, freight and duties.
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
The Company’s leases for office space, retail stores and the 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. 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. Rent expense is recorded when the Company 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.
Goodwill and Other Intangible Assets
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. The Company performed an impairment evaluation in fiscal 2008, fiscal 2007 2006 and 2005fiscal 2006 and concluded that there was no impairment of its goodwill or indefinite life intangible assets.
Valuation of Long-Lived Assets
Long-lived assets, such as property and equipment, are evaluated for impairment annually to determine if the carrying value of the assets is recoverable. The evaluation is based on a review of forecasted operating cash flows and the profitability of the related business. An impairment loss is recognized if the forecasted cash flows are less than the carrying amount of the asset. The Company performed an impairment evaluation in fiscal 2008, fiscal 2007 2006 and 2005fiscal 2006 and concluded that there was no impairment of its long-lived assets.
Stock Repurchase and Retirement
The Company accounts for stock repurchases and retirements by allocating the repurchase price to common stock, additional paid-in-capital and retained earnings. The repurchase price allocation is based upon the equity contribution associated with historical issuances, beginning with the earliest issuance.
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
2. Significant Accounting Policies – (continued)
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. Revenue associated with gift cards is recognized upon redemption. The Company estimates the amount of gift cards that will not be redeemed and records such amounts as revenue over the period of the performance obligation. Allowances for estimated uncollectible accounts, discounts and returns are provided when sales are recorded. Royalty revenues are earned through license agreements with
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
2. Significant Accounting Policies – (continued)
manufacturers of other consumer products that incorporate the Coach brand. Revenue earned under these contracts is recognized based upon reported sales from the licensee. Taxes collected from customers and remitted to governmental authorities are recorded on a net basis and therefore are excluded from revenue.
Preopening Costs
Costs associated with the opening of new stores are expensed in the period incurred.
Advertising
Advertising costs include expenses related to direct marketing activities, such as catalogs, as well as media and production costs. In fiscal 2008, fiscal 2007 2006 and 2005,fiscal 2006, advertising expenses totaled $57,380, $47,287 $35,887 and $39,038,$35,887, respectively, and are included in selling, general and administrative expenses. Advertising costs are expensed when the advertising first appears.
Share-Based Compensation
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. The grant-date fair value of the award is recognized as compensation expense over the vesting period.
Shipping and Handling
Shipping and handling costs incurred were $28,433, $28,142 $19,927 and $16,188$19,927 in fiscal years2008, fiscal 2007 2006 and 2005,fiscal 2006, respectively, and are included in selling, general and administrative expenses.
Income Taxes
The Company accounts for income taxes in accordance with SFASStatement of Financial Accounting Standard (“SFAS”) 109, “Accounting for Income Taxes.” Under SFAS 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. Coach does not provideIn evaluating the unrecognized tax benefits associated with the Company’s various tax filing positions, management records these positions using a more-likely-than-not recognition threshold for U.S. income taxes on the unremitted earningstax positions taken or expected to be taken in accordance with Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes — an interpretation of its foreign subsidiaries asFASB Statement No.109”, which the Company intends to permanently reinvest these earnings.
Minority Interest in Subsidiary
Minority interestadopted in the statementsbeginning of income represents Sumitomo Corporation’s share of the earningsfiscal 2008. The Company classifies interest on uncertain tax positions in Coach Japan prior to the July 1, 2005 purchase of Sumitomo’s 50% interest in Coach Japan.expense.
Fair Value of Financial Instruments
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 June 28, 2008 and June 30, 2007, and July 1, 2006, 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 6,5, “Investments,” for the fair values of the Company’s investments as of June 28, 2008 and June 30, 20072007.
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and July 1, 2006.shares in thousands, except per share data)
2. Significant Accounting Policies – (continued)
Coach Japan enters into foreign currency contracts that hedge certain U.S. dollar denominated inventory purchases and its fixed rate intercompany loan. These contracts qualify for hedge accounting and have been designated as cash flow hedges. The fair value of these contracts is recorded in other comprehensive income and recognized in earnings in the period in which the hedged item is also recognized in earnings. The fair value of the foreign currency derivative is based on its market value as determined by an independent party. However, considerablevalue. Considerable judgment is required of management 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.
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
2. Significant Accounting Policies – (continued)
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. The Consolidated Statements of Cash Flows for fiscal 2007 and fiscal 2006 were revised to report the effect of exchange rate changes on cash flows.
Net Income Per Share
Basic net income per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted net income per share is calculated similarly but includes potential dilution from the exercise of stock options and vesting of stock awards.
Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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 July 1, 2007. The Company does not expect the adoption of SFAS 155 to have a material impact on the Company’s consolidated financial statements.
In June 2006, the FASB ratified the consensus reached on Emerging Issues Task Force (“EITF”) Issue 06-3, “How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation).” 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 was effective for the interim reporting period that began on December 31, 2006. As the Company did not modify its accounting policy of recording sales taxes collected on a net basis, the adoption of EITF 06-3 did not have an 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 SFAS 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 the fiscal year beginning on July 1, 2007. The Company is currently evaluating the impact of FIN 48 on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ThisCertain provisions of this statement isare effective for theCoach’s fiscal year beginningthat will begin on July 1, 2007.June 29, 2008. The Company does not expect the adoption of SFAS 157 to have a material impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS 158 requires an employer to recognize the funded status of a benefit plan, measured as the difference between plan assets at fair value and the projected benefit obligation, in its statement of financial position. SFAS 158 also requires an employer to measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position. This statement isThe recognition provision and the related disclosures were effective as of the end of the
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
2. Significant Accounting Policies – (continued)
fiscal year ended June 30, 2007, except for the requirement to measure plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position, which is effective for the fiscal year ending June 27, 2009. The impact of adopting SFAS 158 is described in Note 12.
In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements.” SAB 108 states that SEC registrants should use both a balance sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement, contains guidance on correcting errors under the dual approach and provides transition guidance for correcting errors existing in prior years. SAB 108 is effective for annual financial statements covering the fiscal year ended June 30, 2007. The measurement provision is effective for Coach’s fiscal year ending June 27, 2009. The Company does not expect the adoption of SAB 108 did notthe measurement provision to have ana material impact on the Company’sits consolidated financial statements.
In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is effective for theCoach’s fiscal year beginningthat will begin on June 29, 2008. TheAs the Company doesdid not expectelect to measure any items at fair value, the adoption of SFAS 159 todid not have a materialan impact on the Company’s consolidated financial statements.
3. Discontinued Operations
In MarchDecember 2007, the Company exited its corporate accounts businessFASB issued SFAS 141 (revised 2007), “Business Combinations.” Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in order to better controla transaction at the locationacquisition-date fair value with limited exceptions. SFAS 141(R) will change the accounting treatment for certain specific acquisition-related items, including expensing acquisition-related costs as incurred, valuing noncontrolling interests (minority interests) at fair value at the acquisition date, and image of the brand where Coach product is sold. Through the corporate accounts business, Coach sold products primarily to distributors for gift-giving and incentive programs. The results of the corporate accounts business, previously included in the Indirect segment, have been segregated from continuing operations and reported as discontinued operations in the Consolidated Statements of Income for all periods presented. As the Company uses a centralized approach to cash management, interest income was not allocated to the corporate accountsexpensing restructuring costs associated with an acquired business. The following table summarizes results of the corporate accounts business:
| | | | | | |
| | Fiscal Year Ended |
| | | June 30,
2007 | | July 1,
2006 | | July 2,
2005 |
| Net sales | | $ | 66,463 | | | $ | 76,416 | | | $ | 58,719 | |
| Income before provision for income taxes | | | 44,483 | | | | 49,897 | | | | 36,903 | |
| Income from discontinued operations | | | 27,136 | | | | 30,437 | | | | 21,965 | |
The consolidated balance sheet at June 30, 2007SFAS 141(R) also includes approximately $71 of accounts receivable, net and approximately $2,254 of accrued liabilities, related to the corporate accounts business. The net book value of the fixed assets related to the corporate accounts business was $0 prior to the exiting of the business. Accordingly, no gain or loss was recognized upon disposal of the fixed assets. The Consolidated Statement of Cash Flows includes the corporate accounts business for all periods presented.expanded disclosure
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
4.2. Significant Accounting Policies – (continued)
requirements. SFAS 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after June 28, 2009. The Company does not expect the adoption of SFAS 141(R) to have a material impact on the Company’s consolidated financial statements.
In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This statement is effective for Coach’s financial statements issued for the interim period that will begin on December 28, 2008. The Company is currently evaluating the impact of SFAS 161 on the Company’s consolidated financial statements.
In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles — FASB Statement No. 162.” SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company does not expect the adoption of SFAS 162 to have a material impact on the Company’s consolidated financial statements.
3. Share-Based Compensation
The Company maintains several share-based compensation plans which are more fully described below. The following table shows the total compensation cost charged against income for these plans and the related tax benefits recognized in the income statement:
| | | | | | | | | | | | |
| | Fiscal Year Ended | | Fiscal Year Ended |
| | | June 30,
2007 | | July 1,
2006 | | July 2,
2005 | | June 28,
2008 | | June 30,
2007 | | July 1,
2006 |
| Share-based compensation expense | | $ | 56,726 | | | $ | 69,190 | | | $ | 55,880 | | | $ | 66,979 | | | $ | 56,726 | | | $ | 69,190 | |
| Income tax benefit related to share-based compensation expense | | | 22,071 | | | | 27,191 | | | | 21,793 | | | | 24,854 | | | | 22,071 | | | | 27,191 | |
TheIn fiscal 2008, fiscal 2007 and fiscal 2006, the above amounts include $0, $486 $1,290 and $797$1,290 of share-based compensation expense and $0, $187 $503 and $311$503 of related income tax benefit, respectively, related to discontinued operations in fiscal years 2007, 2006 and 2005, respectively.operations.
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 compensationshares to certain members of Coach management and the outside members of its Board of Directors. These plans were approved by Coach’s stockholders. 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. OptionsStock options and share awards that are granted as part of the annual compensation process generally vest ratably over three years. ShareOther stock option and share awards, granted primarily for retention purposes, are restricted and subject to forfeiture until completion of the retentionvesting period, is completed. The retention period is generally threewhich ranges from one to five years.
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
3. Share-Based Compensation – (continued)
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 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 16, 1,462 5,378 and 7,0295,378 were granted in fiscal 2008, fiscal 2007 2006 and 2005,fiscal 2006, respectively.
Stock Options
A summary of option activity under the Coach stock option plans as of June 30, 200728, 2008 and changes during the year then ended is as follows:
| | | | | | | | |
| | Number of
Options
Outstanding | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term
(In Years) | | Aggregate
Intrinsic
Value |
| Outstanding at July 1, 2006 | | | 30,817 | | | $ | 23.48 | | | | | | | | | |
| Granted | | | 7,727 | | | | 33.44 | | | | | | | | | |
| Exercised | | | (8,272 | ) | | | 18.25 | | | | | | | | | |
| Forfeited or expired | | | (896 | ) | | | 30.10 | | | | | | | | | |
| Outstanding at June 30, 2007 | | | 29,376 | | | $ | 27.36 | | | | 6.70 | | | $ | 589,214 | |
| Exercisable at June 30, 2007 | | | 12,309 | | | $ | 24.67 | | | | 5.09 | | | $ | 279,613 | |
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
4. Share-Based Compensation – (continued)
The following table summarizes information about stock options under the Coach option plans at June 30, 2007:
| | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
Range of
Exercise
Prices | | Number
Outstanding at
June 30, 2007 | | Weighted-
Average
Remaining
Contractual
Term (In Years) | | Weighted-
Average
Exercise
Price | | Number
Exercisable at
June 30, 2007 | | Weighted-
Average
Exercise
Price |
| $2.00 – 5.00 | | | 557 | | | | 3.84 | | | $ | 4.09 | | | | 557 | | | $ | 4.09 | |
| $5.01 – 10.00 | | | 891 | | | | 5.15 | | | | 6.39 | | | | 891 | | | | 6.39 | |
| $10.01 – 20.00 | | | 7,679 | | | | 6.55 | | | | 15.78 | | | | 3,806 | | | | 15.78 | |
| $20.01 – 30.00 | | | 7,293 | | | | 8.01 | | | | 29.30 | | | | 1,589 | | | | 27.81 | |
| $30.01 – 40.00 | | | 11,517 | | | | 6.39 | | | | 34.21 | | | | 5,303 | | | | 34.82 | |
| $40.01 – 50.00 | | | 1,349 | | | | 5.16 | | | | 46.26 | | | | 163 | | | | 42.30 | |
| $50.01 – 51.56 | | | 90 | | | | 9.80 | | | | 50.40 | | | | — | | | | — | |
| | | | 29,376 | | | | 6.70 | | | $ | 27.36 | | | | 12,309 | | | $ | 24.67 | |
| | | | | | | | |
| | Number of
Options
Outstanding | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual Term
(In Years) | | Aggregate
Intrinsic
Value |
| Outstanding at June 30, 2007 | | | 29,376 | | | $ | 27.36 | | | | | | | | | |
| Granted | | | 3,732 | | | | 43.00 | | | | | | | | | |
| Exercised | | | (3,428 | ) | | | 24.84 | | | | | | | | | |
| Forfeited or expired | | | (1,025 | ) | | | 34.94 | | | | | | | | | |
| Outstanding at June 28, 2008 | | | 28,655 | | | $ | 29.44 | | | | 6.2 | | | $ | 120,072 | |
| Vested or expected to vest at June 28, 2008 | | | 28,183 | | | $ | 29.33 | | | | 6.0 | | | $ | 120,058 | |
| Exercisable at June 28, 2008 | | | 15,799 | | | $ | 26.46 | | | | 4.9 | | | $ | 97,664 | |
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:
| | | | | | | | | | | | |
| | Fiscal Year Ended | | Fiscal Year Ended |
| | | June 30,
2007 | | July 1,
2006 | | July 2,
2005 | | June 28,
2008 | | June 30,
2007 | | July 1,
2006 |
| Expected term (years) | | | 2.2 | | | | 2.6 | | | | 1.4 | | | | 2.6 | | | | 2.2 | | | | 2.6 | |
| Expected volatility | | | 29.9 | % | | | 35.0 | % | | | 29.2 | % | | | 32.9 | % | | | 29.9 | % | | | 35.0 | % |
| Risk-free interest rate | | | 4.9 | % | | | 4.2 | % | | | 2.6 | % | | | 4.2 | % | | | 4.9 | % | | | 4.2 | % |
| Dividend yield | | | —% | | | | —% | | | | —% | | | | — | % | | | — | % | | | — | % |
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. The risk free interest rate is based on the zero-coupon U.S. Treasury issue as of the date of the grant. As Coach does not pay dividends, the dividend yield is 0%.
The weighted-average grant-date fair value of options granted during fiscal 2008, fiscal 2007 and fiscal 2006 was $10.74, $7.12 and 2005 was $7.12, $8.49, and $3.10, respectively. The total intrinsic value of options exercised during fiscal 2008, fiscal 2007 and fiscal 2006 was $65,922, $191,950 and 2005 was $191,950, $232,507, and $201,232, respectively. The total cash received from these option exercises was $89,356, $112,119 $86,550 and $46,835$86,550 in fiscal 2008, fiscal 2007 2006 and 2005,fiscal 2006, respectively, and the actual tax benefit realized for the tax deductions from these option exercises was $25,610, $69,496 $88,534 and $78,480,$88,534, respectively.
At June 30, 2007, $77,94828, 2008, $66,232 of total unrecognized compensation cost related to non-vested stock option awards is expected to be recognized over a weighted-average period of 1.5 years.1.0 year.
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
4.3. Share-Based Compensation – (continued)
Share Awards
The grant-date fair value of each Coach share award is equal to the fair value of Coach stock at the grant date. The weighted-average grant-date fair value of shares granted during fiscal 2008, fiscal 2007 and fiscal 2006 was $40.47, $35.09 and 2005 was $35.09, $34.17, and $22.96, respectively. The following table summarizes information about nonvestednon-vested shares as of and for the year ended June 30, 2007:28, 2008:
| | | | | | | | |
| | Number of
Non-Vested
Shares | | Weighted-
Average
Grant-Date
Fair Value | | Number of
Non-Vested
Shares | | Weighted-Average
Grant-Date
Fair Value |
| Nonvested at July 1, 2006 | | | 1,329 | | | $ | 22.06 | | |
| Nonvested at June 30, 2007 | | | | 1,326 | | | $ | 26.10 | |
| Granted | | | 332 | | | | 35.09 | | | | 849 | | | | 40.47 | |
| Vested | | | (294 | ) | | | 17.30 | | | | (463 | ) | | | 21.99 | |
| Forfeited | | | (41 | ) | | | 30.62 | | | | (124 | ) | | | 39.24 | |
| Nonvested at June 30, 2007 | | | 1,326 | | | $ | 26.10 | | |
| Nonvested at June 28, 2008 | | | | 1,588 | | | $ | 33.98 | |
The total fair value of shares vested during fiscal 2008, fiscal 2007 and fiscal 2006 was $18,225, $11,558 and 2005 was $11,558, $28,932, and $5,829, respectively. At June 30, 2007, $15,38728, 2008, $28,988 of total unrecognized compensation cost related to nonvestednon-vested share awards is expected to be recognized over a weighted-average period of 1.5 years.1.0 year.
The Company recorded an adjustment in the first quarter of fiscal 2007 to reduce additional paid-in-capital by $16,658, with a corresponding increase to current liabilities, due to an excess tax benefit from share-based compensation overstatement in the fourth quarter of fiscal 2006. This immaterial adjustment is reflected within the cash flows from financing activities of the Consolidated Statement of Cash Flows.
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 155, 159 162 and 159162 shares to employees in fiscal 2008, fiscal 2007 2006 and 2005,fiscal 2006, 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 | | Fiscal Year Ended |
| | | June 30,
2007 | | July 1,
2006 | | July 2,
2005 | | June 28,
2008 | | June 30,
2007 | | July 1,
2006 |
| Expected term (years) | | | 0.5 | | | | 0.5 | | | | 0.5 | | | | 0.5 | | | | 0.5 | | | | 0.5 | |
| Expected volatility | | | 30.1 | % | | | 25.7 | % | | | 27.6 | % | | | 28.4 | % | | | 30.1 | % | | | 25.7 | % |
| Risk-free interest rate | | | 5.1 | % | | | 3.7 | % | | | 2.8 | % | | | 4.1 | % | | | 5.1 | % | | | 3.7 | % |
| Dividend yield | | | —% | | | | —% | | | | —% | | | | — | % | | | — | % | | | — | % |
The weighted-average fair value of the purchase rights granted during fiscal 2008, fiscal 2007 and fiscal 2006 was $10.26, $8.72 and 2005 was $8.72, $6.64, and $6.24, respectively.
Deferred Compensation
Under the Coach, Inc. 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’sCoach's outside directors may similarly defer their director’sdirector's fees. Amounts deferred under these plans may, at the participants’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 interest-bearing account to be paid on such distribution date. The amounts accrued under these plans at June 28, 2008 and June 30, 2007 were $2,288 and $1,922, respectively, and are included within total liabilities in the consolidated balance sheets.
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COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
4. Share-Based Compensation – (continued)
account to be paid on such distribution date. The amounts accrued under these plans at June 30, 2007 and July 1, 2006 were $1,922 and $3,622, respectively, and are included within total liabilities in the consolidated balance sheets.
The following table summarizes share and exercise price information about Coach’s equity compensation plans as of June 30, 2007:
| | | | | | |
| | Number 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 holders | | | 30,702 | | | $ | 26.18 | | | | 25,242 | |
| Equity compensation plans not approved by security holders | | | 46 | | | | 6.84 | | | | 250 | |
| Total | | | 30,748 | | | | | | | | 25,492 | |
5. Leases
Coach leases certain office, distribution and retail facilities. The lease agreements, which expire at various dates through 2020,2028, 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 | | Fiscal Year Ended |
| | | June 30,
2007 | | July 1,
2006 | | July 2,
2005 | | June 28,
2008 | | June 30,
2007 | | July 1,
2006 |
| Minimum rentals | | $ | 83,006 | | | $ | 77,376 | | | $ | 73,283 | | | $ | 92,675 | | | $ | 83,006 | | | $ | 77,376 | |
| Contingent rentals | | | 24,452 | | | | 16,380 | | | | 12,101 | | | | 40,294 | | | | 24,452 | | | | 16,380 | |
| Total rent expense | | $ | 107,458 | | | $ | 93,756 | | | $ | 85,384 | | | $ | 132,969 | | | $ | 107,458 | | | $ | 93,756 | |
Future minimum rental payments under noncancelable operating leases are as follows:
| | | | |
| Fiscal Year | | Amount | | Amount |
| 2008 | | $ | 88,966 | | |
| 2009 | | | 89,344 | | | $ | 112,931 | |
| 2010 | | | 86,515 | | | | 110,642 | |
| 2011 | | | 83,904 | | | | 107,369 | |
| 2012 | | | 78,582 | | | | 102,459 | |
| Subsequent to 2012 | | | 256,538 | | |
| 2013 | | | | 96,071 | |
| Subsequent to 2013 | | | | 371,502 | |
| Total minimum future rental payments | | $ | 683,849 | | | $ | 900,974 | |
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Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
5. Leases – (continued)
Certain operating leases provide for renewal for periods of five to ten 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.
6.5. Investments
The Company’s investments consistCompany invests in auction rate securities (“ARS”), consisting of U.S. government and agency debt securities, as well as municipal government securities and corporate debt securities. As the Company has both the ability and the intent to hold these securities until maturity, investments are classified as held-to-maturity and stated at amortized cost, except for auction rate securities, which are classified as available-for-sale. As of June 30, 2007 and July 1, 2006, available-for-sale securities were $628,860 and $253,650. The remaining investments as of July 1, 2006 were held-to-maturity. The following table shows the amortized cost, fair value and unrealized gains and losses of the Company’s investments:
| | | | | | | | | | | | | |
| | Fiscal Year Ended | | | | |
| | | June 30, 2007 | | July 1, 2006 | | Fiscal Year Ended |
| | | Amortized
Cost | | Fair
Value | | Unrealized
Loss | | Amortized
Cost | | Fair
Value | | Unrealized
Loss | | June 28,
2008 | | June 30,
2007 |
Short-term investments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. government and agency securities | | $ | 25,000 | | | $ | 25,000 | | | $ | — | | | $ | 49,986 | | | $ | 49,641 | | | $ | (345 | ) | | $ | — | | | $ | 25,000 | |
| Corporate debt securities | | | 206,675 | | | | 206,675 | | | | — | | | | 198,191 | | | | 197,529 | | | | (662 | ) | | | — | | | | 206,675 | |
| Municipal securities | | | 397,185 | | | | 397,185 | | | | — | | | | 146,000 | | | | 146,000 | | | | — | | | | — | | | | 397,185 | |
| Short-term investments | | $ | 628,860 | | | $ | 628,860 | | | $ | — | | | $ | 394,177 | | | $ | 393,170 | | | $ | (1,007 | ) | | $ | — | | | $ | 628,860 | |
Long-term investments:
| | | | | | | | | |
| Corporate debt securities | | | $ | 8,000 | | | $ | — | |
| Long-term investments | | | $ | 8,000 | | | $ | — | |
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COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
5. Investments – (continued)
As of June 30, 2007, and July 1, 2006, all held-to-maturity investments had maturities of less than one year. Auction rate securities areARS were included in short-term investments as they arewere intended to meet the short-term working capital needs of the Company and the Company cancould offer to sell the securities or roll them over at each 7, 28 or 35 day auction cycle. During fiscal 2008, the Company sold the majority of its ARS at auction. At the end of fiscal 2008, the Company held one ARS, classified as a long-term investment, as the auction for this security has been unsuccessful. The underlying investments of the ARS are scheduled to mature in 2035.
During fiscal 2008, the Company recorded an impairment charge of $700 as the fair value of the ARS was deemed to be other-than-temporarily impaired. There were no realized gains or losses recorded in fiscal 2007 or fiscal 2006. As of June 28, 2008 and June 30, 2007, there were no unrealized gains or losses on the Company’s investments.
7.6. Debt
Revolving Credit Facilities
As of the end of fiscalOn July 26, 2007, the Company maintained arenewed its $100,000 unsecured revolving credit facility with certain lenders and Bank of America, N.A. as the primary lender and administrative agent (the “Bank of America facility”). At Coach’s request, the Bank of America facility was able to be expanded to $125,000. Coach paid 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 June 30, 2007, 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 facility was scheduled to expire on October 16, 2007.
On July 26, 2007 (subsequent to the end of fiscal 2007), the Company renewed the Bank of America facility, extending the facility expiration to July 26, 2012. At Coach’s request, the renewed Bank of America facility can be expanded to $200,000. The facility can also be extended for two additional one-year periods, at Coach’s request. Under the renewed Bank of America facility, Coach will paypays a commitment fee of 6 to 12.5 basis points on any unused amounts and interest of LIBOR plus 20 to 55 basis points on any outstanding borrowings.
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COACH, INC.
Notes to Consolidated Financial Statements
(dollars At June 28, 2008, the commitment fee was 6 basis points and shares in thousands, except per share data)
7. Debt – (continued)
the LIBOR margin was 20 basis points.The Bank of America facility is available for seasonal working capital requirements or general corporate purposes and may be prepaid without penalty or premium. During fiscal 20072008 and fiscal 20062007 there were no borrowings under the Bank of America facility. Accordingly, as of June 28, 2008 and June 30, 2007, and July 1, 2006, there were no outstanding borrowings under the Bank of America facility.
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 intohas available credit facilities with several Japanese financial institutions. These facilities allow a maximum borrowing of 7.4 billionbil-
lion yen, or approximately $60,000,$70,000, at June 30, 2007.28, 2008. Interest is based on the Tokyo Interbank rate plus a margin of up to 50 basis points.
During fiscal 20072008 and fiscal 2006,2007, the peak borrowings under the Japanese credit facilities were $25,518$26,790 and $21,568,$25,518, respectively. As of June 28, 2008 and June 30, 2007, and July 1, 2006,there were no outstanding borrowings under the Japanese credit facilities were $0.facilities.
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COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
6. Debt – (continued)
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 June 28, 2008 and June 30, 2007, and July 1, 2006, the remaining balance on the loan was $3,100$2,865 and $3,270,$3,100, respectively. Future principal payments under the Industrial Revenue Bond are as follows:
| | | | |
| Fiscal Year | | Amount | | Amount |
| 2008 | | $ | 235 | | |
| 2009 | | | 285 | | | $ | 285 | |
| 2010 | | | 335 | | | | 335 | |
| 2011 | | | 385 | | | | 385 | |
| 2012 | | | 420 | | | | 420 | |
| Subsequent to 2012 | | | 1,440 | | |
| 2013 | | | | 455 | |
| Subsequent to 2013 | | | | 985 | |
| Total | | $ | 3,100 | | | $ | 2,865 | |
8.7. Commitments and Contingencies
At June 28, 2008 and June 30, 2007, and July 1, 2006, the Company had letters of credit available of $205,000$225,000 and $155,000,$205,000, of which $115,575$111,528 and $91,855,$115,575, respectively, were outstanding. Of these amounts, $13,236 and $15,057, respectively, relate 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 approximately 10 years. The remaining letters of credit, which expire at various dates through 2012, primarily collateralize the Company’s obligation to third parties for the purchase of inventory.
Coach is a party to employment agreements with certain key executives which provide for compensation and other benefits. The agreements also provide for severance payments under certain circumstances. The Company’s employment agreements with Lew Frankfort, Chairman and Chief Executive Officer, Reed Krakoff, President and Executive Creative Directorthe respective expiration dates are as follows:
| | | | |
| Executive | | Title | | Expiration Date |
| Lew Frankfort | | Chairman and Chief Executive Officer | | August 2011 |
| Reed Krakoff | | President and Executive Creative Director | | June 2014 |
| Keith Monda | | President and Chief Operating Officer | | August 2011 |
| Michael Tucci | | President, North America Retail Division | | June 2013 |
| Michael F. Devine, III | | Executive Vice President and Chief Financial Officer | | June 2010 |
In July 2008, subsequent to the end of fiscal 2008, Keith Monda President and Chief Operating Officer run through August 2011. The Company’s employment agreementsretired, terminating his agreement with Michael Tucci, President, North America Retail Division and Michael F. Devine, III, Executive Vice President and Chief Financial Officer run through June 30, 2010.the Company.
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COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
8. Commitments and Contingencies – (continued)
In addition to the employment agreements described above, other contractual cash obligations as of June 30, 200728, 2008 included $134,690$125,176 related to inventory purchase obligations and $2,482$3,400 related to capital expenditure purchase obligations.
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’sCoach's general counsel and management are of the opinion that the final outcome will not have a material effect on Coach’sCoach's cash flow, results of operations or financial position.
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COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
9.8. Derivative Instruments and Hedging Activities
In the ordinary course of business, Coach uses derivative financial instruments to hedge foreign currency exchange risk. Coach does not enter into derivative transactions for speculative or trading purposes.
Substantially all purchases and sales involving international parties are denominated in U.S. dollars, which limits the Company’s exposure to foreign currency exchange rate fluctuations. However, the Company is exposed to market risk from foreign currency exchange rate fluctuations with respect to Coach Japan as a result of Coach Japan’s U.S. dollar-denominated inventory purchases. Coach Japan enters into certain foreign currency derivative contracts, primarily zero-cost collar options, to manage these risks. These transactions are in accordance with the Company’s risk management policies. As of June 28, 2008 and June 30, 2007, $233,873 and July 1, 2006, $111,057 and $114,825 of foreign currency forward contracts were outstanding. These foreign currency contracts entered into by the Company have durations no greater than 12 months. The effective portion of unrealized gains and losses on cash flow hedges are deferred as a component of accumulated other comprehensive income (loss) and recognized as a component of cost of sales when the related inventory is sold.
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 terms 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 fair values of open foreign currency derivatives included in current assets at June 28, 2008 and June 30, 2007 were $7,906 and July 1, 2006 were $23,329, respectively. The fair value of open foreign currency derivatives included in current liabilities as June 28, 2008 and $2,578,June 30, 2007 was $5,540 and $0, respectively.
Hedging activity affected accumulated other comprehensive income (loss), net of tax, as follows:
| | | | | | | | |
| | Fiscal Year Ended | | Fiscal Year Ended |
| | | June 30,
2007 | | July 1,
2006 | | June 28,
2008 | | June 30,
2007 |
| Balance at beginning of period | | $ | (3,547 | ) | | $ | 941 | | | $ | 1,161 | | | $ | (3,547 | ) |
| Gains, net transferred to earnings | | | (2,724 | ) | | | (3,543 | ) | |
| Net losses/(gains), transferred to earnings | | | | 2,411 | | | | (2,724 | ) |
| Change in fair value, net of tax expense | | | 7,432 | | | | (945 | ) | | | 3,371 | | | | 7,432 | |
| Balance at end of period | | $ | 1,161 | | | $ | (3,547 | ) | | $ | 6,943 | | | $ | 1,161 | |
The Company expects that $4,637$5,572 of net derivative gains included in accumulated other comprehensive income (loss) at June 30, 200728, 2008 will be reclassified into earnings within the next 12 months. This amount will vary due to fluctuations in the yen exchange rate.
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COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
10.9. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the years ended June 28, 2008 and June 30, 2007 and July 1, 2006 are as follows:
| | | | | | | | | | | | |
| | Direct-to-
Consumer | | Indirect | | Total | | Direct-to-
Consumer | | Indirect | | Total |
| Balance at July 2, 2005 | | $ | 237,195 | | | $ | 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 | | | $ | 226,295 | | | $ | 1,516 | | | $ | 227,811 | |
| Foreign exchange impact | | | (14,017 | ) | | | — | | | | (14,017 | ) | | | (14,017 | ) | | | — | | | | (14,017 | ) |
| Balance at June 30, 2007 | | $ | 212,278 | | | $ | 1,516 | | | $ | 213,794 | | | | 212,278 | | | | 1,516 | | | | 213,794 | |
| Foreign exchange impact | | | | 35,324 | | | | — | | | | 35,324 | |
| Balance at June 28, 2008 | | | $ | 247,602 | | | $ | 1,516 | | | $ | 249,118 | |
The total carrying amount ofAt June 28, 2008 and June 30, 2007, intangible assets not subject to amortization is as follows:were $9,788 and $11,865 and consisted primarily of trademarks.
| | | | |
| | June 30, 2007 | | July 1, 2006 |
| Trademarks | | $ | 9,788 | | | $ | 9,788 | |
| Workforce | | | 2,077 | | | | 2,219 | |
| Total Indefinite Life Intangible Assets | | $ | 11,865 | | | $ | 12,007 | |
The $142 decrease54
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COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in the carrying amount of these intangible assets is due to currency translation.thousands, except per share data)
11.10. 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 | | Fiscal Year Ended |
| | | June 30, 2007 | | July 1, 2006 | | July 2, 2005 | | June 28, 2008 | | June 30, 2007 | | July 1, 2006 |
| | | Amount | | Percentage | | Amount | | Percentage | | Amount | | Percentage | | Amount | | Percentage | | Amount | | Percentage | | Amount | | Percentage |
Income before provision for income taxes, minority interest and discontinued operations:
| | | | | | | | | | | | | | | | | | | | | | | | | |
Income before provision for income taxes and discontinued operations:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| United States | | $ | 936,413 | | | | 90.5 | % | | $ | 663,084 | | | | 88.7 | % | | $ | 498,545 | | | | 90.4 | % | | $ | 1,082,584 | | | | 90.6 % | | | $ | 936,413 | | | | 90.5 % | | | $ | 663,084 | | | | 88.7 % | |
| Foreign | | | 98,257 | | | | 9.5 | | | | 84,246 | | | | 11.3 | | | | 52,875 | | | | 9.6 | | | | 112,365 | | | | 9.4 | | | | 98,257 | | | | 9.5 | | | | 84,246 | | | | 11.3 | |
| Total income before provision for income taxes, minority interest and discontinued operations: | | $ | 1,034,670 | | | | 100.0 | % | | $ | 747,330 | | | | 100.0 | % | | $ | 551,420 | | | | 100.0 | % | |
| Total income before provision for income taxes and discontinued operations: | | | $ | 1,194,949 | | | | 100.0 % | | | $ | 1,034,670 | | | | 100.0 | % | | $ | 747,330 | | | | 100.0 % | |
| Tax expense at U.S. statutory rate | | $ | 362,135 | | | | 35.0 | % | | $ | 261,565 | | | | 35.0 | % | | $ | 192,997 | | | | 35.0 | % | | $ | 418,232 | | | | 35.0 % | | | $ | 362,135 | | | | 35.0 % | | | $ | 261,565 | | | | 35.0 % | |
State taxes, net of federal
benefit | | | 38,910 | | | | 3.8 | | | | 27,164 | | | | 3.6 | | | | 29,287 | | | | 5.3 | | | | 43,787 | | | | 3.7 | | | | 38,910 | | | | 3.8 | | | | 27,164 | | | | 3.6 | |
| Reversal of deferred U.S. taxes on foreign earnings | | | — | | | | 0.0 | | | | — | | | | 0.0 | | | | (16,247 | ) | | | (2.9 | ) | |
| Foreign income subject to reduced tax rates | | | (13,892 | ) | | | (1.3 | ) | | | (11,548 | ) | | | (1.5 | ) | | | (4,458 | ) | | | (0.8 | ) | |
| Foreign tax rate differential | | | | (7,750 | ) | | | (0.6 | ) | | | (13,892 | ) | | | (1.3 | ) | | | (11,548 | ) | | | (1.5 | ) |
| Tax benefit, primarily due to settlement of tax return examination | | | | (49,968 | ) | | | (4.2 | ) | | | — | | | | 0.0 | | | | — | | | | 0.0 | |
| Other, net | | | 10,988 | | | | 1.0 | | | | 6,309 | | | | 0.8 | | | | (447 | ) | | | (0.1 | ) | | | 7,609 | | | | 0.6 | | | | 10,988 | | | | 1.0 | | | | 6,309 | | | | 0.8 | |
| Taxes at effective worldwide rates | | $ | 398,141 | | | | 38.5 | % | | $ | 283,490 | | | | 37.9 | % | | $ | 201,132 | | | | 36.5 | % | | $ | 411,910 | | | | 34.5 % | | | $ | 398,141 | | | | 38.5 % | | | $ | 283,490 | | | | 37.9 % | |
Current and deferred tax provisions (benefits) were:
| | | | | | | | | | | | |
| | Fiscal Year Ended |
| | | June 28, 2008 | | June 30, 2007 | | July 1, 2006 |
| | | Current | | Deferred | | Current | | Deferred | | Current | | Deferred |
| Federal | | $ | 334,381 | | | $ | (21,391 | ) | | $ | 323,087 | | | $ | (5,352 | ) | | $ | 245,203 | | | $ | (19,381 | ) |
| Foreign | | | 25,624 | | | | 5,931 | | | | 16,025 | | | | 4,227 | | | | 7,555 | | | | 8,321 | |
| State | | | 68,812 | | | | (1,447 | ) | | | 56,745 | | | | 3,409 | | | | 47,922 | | | | (6,130 | ) |
Total current and deferred tax
provisions (benefits) | | $ | 428,817 | | | $ | (16,907 | ) | | $ | 395,857 | | | $ | 2,284 | | | $ | 300,680 | | | $ | (17,190 | ) |
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Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
11.10. Income Taxes – (continued)
Current and deferred tax provisions (benefits) were:
| | | | | | | | | | | | |
| | Fiscal Year Ended |
| | | June 30, 2007 | | July 1, 2006 | | July 2, 2005 |
| | | Current | | Deferred | | Current | | Deferred | | Current | | Deferred |
| Federal | | $ | 323,087 | | | $ | (5,352 | ) | | $ | 245,203 | | | $ | (19,381 | ) | | $ | 172,491 | | | $ | (46,981 | ) |
| Foreign | | | 16,025 | | | | 4,227 | | | | 7,555 | | | | 8,321 | | | | 28,228 | | | | 1,276 | |
| State | | | 56,745 | | | | 3,409 | | | | 47,922 | | | | (6,130 | ) | | | 57,738 | | | | (11,620 | ) |
| Total current and deferred tax provisions (benefits) | | $ | 395,857 | | | $ | 2,284 | | | $ | 300,680 | | | $ | (17,190 | ) | | $ | 258,457 | | | $ | (57,325 | ) |
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 |
| | | June 30,
2007 | | July 1,
2006 | | July 2,
2005 |
Deferred tax provisions (benefits)
| | | | | | | | | | | | |
| Depreciation | | $ | (5,699 | ) | | $ | 906 | | | $ | (9,546 | ) |
| Employee benefits | | | (209 | ) | | | 811 | | | | (2,945 | ) |
| Advertising accruals | | | (1,012 | ) | | | (508 | ) | | | 2 | |
| Nondeductible reserves | | | 13,065 | | | | (11,209 | ) | | | (25,888 | ) |
| Earnings of foreign subsidiaries | | | — | | | | — | | | | (9,226 | ) |
| Other, net | | | (3,861 | ) | | | (7,190 | ) | | | (9,722 | ) |
| Total deferred tax provisions (benefits) | | $ | 2,284 | | | $ | (17,190 | ) | | $ | (57,325 | ) |
The deferred tax assets and liabilities at the respective year-ends were as follows:
| | | | | | | | |
| | Fiscal Year Ended | | Fiscal 2008 | | Fiscal 2007 |
| | | June 30,
2007 | | July 1,
2006 | |
Deferred tax assets
| | | | | | | | | |
| Reserves not deductible until paid | | $ | 101,658 | | | $ | 116,374 | | | $ | 129,287 | | | $ | 101,658 | |
| Pension and other employee benefits | | | 10,685 | | | | 10,502 | | |
| Property, plant and equipment | | | 25,580 | | | | 20,606 | | |
| Pensions and other employee benefits | | | | 19,069 | | | | 10,685 | |
| Property and equipment | | | | 23,361 | | | | 25,580 | |
| Net operating loss | | | 11,514 | | | | 7,156 | | | | 20,202 | | | | 11,514 | |
| Other | | | 4,914 | | | | 7,458 | | | | 11,537 | | | | 4,914 | |
| Total deferred tax assets | | $ | 154,351 | | | $ | 162,096 | | |
Deferred tax liabilities
| | | | | | | | | |
| Gross deferred tax assets | | | $ | 203,456 | | | $ | 154,351 | |
| Prepaid expenses | | | $ | 16,779 | | | $ | — | |
| Equity adjustments | | $ | 4,703 | | | $ | 3,107 | | | | 8,181 | | | | 4,703 | |
| Goodwill | | | 34,859 | | | | 17,823 | | | | 51,586 | | | | 34,859 | |
| Other | | | 481 | | | | 20,222 | | | | 2,424 | | | | 481 | |
| Total deferred tax liabilities | | $ | 40,043 | | | $ | 41,152 | | |
| Gross deferred tax liabilities | | | $ | 78,970 | | | $ | 40,043 | |
| Net deferred tax assets | | $ | 114,308 | | | $ | 120,944 | | | $ | 124,486 | | | $ | 114,308 | |
Consolidated Balance Sheets Classification
| | | | | | | | | |
| Deferred income taxes – current asset | | | $ | 69,557 | | | $ | 68,305 | |
| Deferred income taxes – noncurrent asset | | | | 81,346 | | | | 86,046 | |
| Accrued liabilities | | | | — | | | | (3,595 | ) |
| Deferred income taxes – noncurrent liability | | | | (26,417 | ) | | | (36,448 | ) |
| Net amount recognized | | | $ | 124,486 | | | $ | 114,308 | |
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and sharesThe Company adopted FIN 48, “Accounting for Uncertainty in thousands, except per share data)
11. Income Taxes – (continued)
— an interpretation of FASB Statement No. 109” on July 1, 2007, the first day of fiscal 2008. 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. As a result, the Company recorded a non-cash cumulative transition charge of $48,797 as a reduction to the opening retained earnings balance.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 permanentuncertain tax differences and tax credits.positions. The provisions are analyzed periodically and adjustments are made as events occur that warrant adjustments to those provisions. All of these determinations are subject to the requirements of FIN 48.
As of July 1, 2007, the gross amount of unrecognized tax benefits was $120,367. The total amount of unrecognized tax benefits that, if recognized, would have affected the effective tax rate was $80,413.
A reconciliation of the beginning and ending gross amount of unrecognized tax benefits is as follows:
| | |
| Balance at July 1, 2007 | | $ | 120,367 | |
| Gross increase due to tax positions related to prior periods | | | 8,606 | |
| Gross decrease due to tax positions related to prior periods | | | (10,122 | ) |
| Gross increase due to tax positions related to current period | | | 72,983 | |
| Gross decrease due to tax positions related to current period | | | (24,369 | ) |
| Decrease due to lapse of statutes of limitations | | | (1,683 | ) |
| Decrease due to settlements with taxing authorities | | | (34,597 | ) |
| Balance at June 28, 2008 | | $ | 131,185 | |
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
10. Income Taxes – (continued)
Of the $131,185 ending gross unrecognized tax benefit balance, $58,405 relates to items which, if recognized, would impact the effective tax rate. As of June 28, 2008, gross interest and penalties payable was $18,640, which is included in other liabilities.
The Company files income tax returns in the U.S. federal jurisdiction as well as various state and foreign jurisdictions. The Company’s foreign tax filings are currently being examined for fiscal years 2004 through 2006. Fiscal years 2007 to present are open to examination in the federal jurisdiction, fiscal 2004 to present in significant state jurisdictions, and from fiscal 2001 to present in foreign jurisdictions.
Based on the number of tax years currently under audit by the relevant tax authorities, the Company anticipates that one or more of these audits may be finalized in the foreseeable future. However, based on the status of these examinations, and the protocol of finalizing audits by the relevant tax authorities, we can not reasonably estimate the impact of any amount of such changes in the next 12 months, if any, to previously recorded uncertain tax positions.
At June 28, 2008, the Company had a net operating loss in foreign tax jurisdictions of $49,649, which will expire beginning in fiscal year 2012 through fiscal year 2015.
The total amount of undistributed earnings of foreign subsidiaries as of June 28, 2008 was $296,038. It is the Company’s intention to permanently reinvest undistributed earnings of its foreign subsidiaries and thereby indefinitely postpone their remittance. Accordingly, no provision has been made for foreign withholding taxes or United States income taxes which may become payable if undistributed earnings of foreign subsidiaries are paid as dividends.
12.11. Retirement Plans
Defined Contribution Plan
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 $11,106, $9,365 $7,714 and $8,621$7,714 in fiscal 2008, fiscal 2007 2006 and 2005,fiscal 2006, respectively.
Defined Benefit Plans
Coach sponsors a noncontributorynon-contributory defined benefit plan, The Coach, Inc. Supplemental Pension Plan, (the “U.S. Plan”) for individuals who are part of collective bargaining arrangements in the U.S. The U.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. The Company uses a March 31 measurement date for its defined benefit retirement plans.
In September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS 158 requires an employer to recognize the funded status of a benefit plan, measured as the difference between plan assets at fair value and the projected benefit obligation, in its statement of financial position. SFAS 158 also requires an employer to measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position. This statement is effective as of the end of the fiscal year ended June 30, 2007, except for the requirement to measure plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position, which is effective for the fiscal year ending June 27, 2009. The following table shows the incremental effect of adopting SFAS 158 on individual line items within the Consolidated Balance Sheet as of June 30, 2007:
| | | | | | |
| | Balance Before
SFAS 158
Adoption | | SFAS 158
Adoption
Adjustment | | Balance After
SFAS 158
Adoption |
Amounts Recognized in the Consolidated
Balance Sheet:
| | | | | | | | | | | | |
| Deferred tax assets | | $ | 85,883 | | | $ | 163 | | | $ | 86,046 | |
| Total assets | | | 2,449,349 | | | | 163 | | | | 2,449,512 | |
| Other liabilities | | | 91,448 | | | | 401 | | | | 91,849 | |
| Total liabilities | | | 538,757 | | | | 401 | | | | 539,158 | |
| Accumulated other comprehensive loss, net of tax | | | (12,554 | ) | | | (238 | ) | | | (12,792 | ) |
| Total stockholders' equity | | | 1,910,592 | | | | (238 | ) | | | 1,910,354 | |
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
12.11. Retirement Plans – (continued)
The following tables provide information about the Company’s pension plans:
| | | | | | | | |
| | Fiscal Year Ended | | Fiscal Year Ended |
| | | June 30,
2007 | | July 1,
2006 | | June 28,
2008 | | June 30,
2007 |
Change in Benefit Obligation
| | | | | | | | | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 6,723 | | | $ | 5,798 | | | $ | 7,818 | | | $ | 6,723 | |
| Service cost | | | 721 | | | | 357 | | | | 777 | | | | 721 | |
| Interest cost | | | 353 | | | | 333 | | | | 384 | | | | 353 | |
| Actuarial loss (gain) | | | 508 | | | | (59 | ) | |
| Prior service cost | | | — | | | | 755 | | |
| Actuarial (gain) loss | | | | (792 | ) | | | 508 | |
| Foreign exchange impact | | | (92 | ) | | | (25 | ) | | | 281 | | | | (92 | ) |
| Benefits paid | | | (395 | ) | | | (436 | ) | | | (398 | ) | | | (395 | ) |
| Benefit obligation at end of year | | $ | 7,818 | | | $ | 6,723 | | | $ | 8,070 | | | $ | 7,818 | |
Change in Plan Assets
| | | | | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 4,880 | | | $ | 3,852 | | | $ | 4,968 | | | $ | 4,880 | |
| Actual return on plan assets | | | 252 | | | | 241 | | | | 166 | | | | 252 | |
| Employer contributions | | | 231 | | | | 1,223 | | | | 931 | | | | 231 | |
| Benefits paid | | | (395 | ) | | | (436 | ) | | | (398 | ) | | | (395 | ) |
| Fair value of plan assets at end of year | | $ | 4,968 | | | $ | 4,880 | | | $ | 5,667 | | | $ | 4,968 | |
Funded status
| | | | | | | | | |
Reconciliation of Funded status
| | | | | | | | | |
| Funded status at end of year | | $ | (2,850 | ) | | $ | (1,843 | ) | | $ | (2,403 | ) | | $ | (2,850 | ) |
| Unrecognized net actuarial loss | | | N/A | | | | 2,286 | | |
| Contributions subsequent to measurement date | | | | 248 | | | | 17 | |
| Net amount recognized | | | N/A | | | $ | 443 | | | $ | (2,155 | ) | | $ | (2,833 | ) |
Amounts recognized in the Consolidated Balance Sheets
| | | | | | | | | | | | | | | | |
| Accrued benefit cost | | | N/A | | | $ | (1,507 | ) | |
| Accumulated other comprehensive income | | | N/A | | | | 1,950 | | |
| Other assets | | | $ | 76 | | | $ | — | |
| Current liabilities | | | | (72 | ) | | | (123 | ) |
| Other liabilities | | | | (2,159 | ) | | | (2,710 | ) |
| Net amount recognized | | | N/A | | | $ | 443 | | | $ | (2,155 | ) | | $ | (2,833 | ) |
| Current liabilities | | $ | (123 | ) | | | N/A | | |
| Noncurrent liabilities | | | (2,727 | ) | | | N/A | | |
| Net amount recognized | | $ | (2,850 | ) | | | N/A | | |
Amounts recognized in Accumulated
| | | | | | | | | |
Other Comprehensive Income (Loss) consist of
| | | | | | | | | |
Amounts recognized in Accumulated Other
Comprehensive Loss consist of
| | | | | | | | | |
| Net actuarial loss | | $ | 2,494 | | | | N/A | | | $ | 1,651 | | | $ | 2,494 | |
| Accumulated benefit obligation | | $ | 7,417 | | | $ | 6,497 | | | $ | 7,345 | | | $ | 7,417 | |
Information for pension plans with an accumulated
benefit obligation in excess of plan assets
| | | | | | | | | | | | | | | | |
| Projected benefit obligation | | $ | 7,818 | | | $ | 6,723 | | | $ | 8,070 | | | $ | 7,818 | |
| Accumulated benefit obligation | | | 7,417 | | | | 6,497 | | | | 7,345 | | | | 7,417 | |
| Fair value of plan assets | | | 4,968 | | | | 4,880 | | | | 5,667 | | | | 4,968 | |
Weighted-average assumptions used to
determine benefit obligations
| | | | | | | | | | | | | | | | |
| Discount rate | | | 5.02 | % | | | 5.42 | % | | | 5.37 % | | | | 5.02 % | |
| Rate of compensation increase | | | 2.60 | % | | | 3.00 | % | | | 3.50 % | | | | 2.60 % | |
58
| (1) | Fiscal 2005 did not include the Coach Japan, Inc. 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 6.50%6.0% assumption for the fiscal year ended June 30, 2007.
During fiscal 2008, approximately $257 of actuarial loss will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost.28, 2008.
In the Company’s U.S. Plan, funds are contributed to a trust in accordance with regulatory limits. The weighted-average asset allocations of the U.S. Plan, by asset category, as of the measurement dates, are as follows:
| | | | | | | | |
| | Plan Assets | | Plan Assets |
| | | Fiscal 2007 | | Fiscal 2006 | | Fiscal 2008 | | Fiscal 2007 |
Asset Category
| | | | | | | | | | | | | | | | |
| Domestic equities | | | 65.3 | % | | | 61.3 | % | | | 18.2 % | | | | 65.3 % | |
| International equities | | | 4.1 | | | | 6.8 | | | | 11.2 | | | | 4.1 | |
| Fixed income | | | 27.3 | | | | 28.5 | | | | 26.5 | | | | 27.3 | |
| Cash equivalents | | | 3.3 | | | | 3.4 | | | | 44.1 | | | | 3.3 | |
| Total | | | 100.0 | % | | | 100.0 | % | | | 100.0 % | | | | 100.0 % | |
59
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
11. Retirement Plans – (continued)
The equity securities category includes common stocksrevision in the target asset allocations also involved a change in investment strategy. The Company chose to utilize institutional pooled accounts (i.e. institutional mutual funds and co-mingled fundsexchange traded funds) rather than the previous strategy of approved securities.separately managed investment accounts. The implementation of the revised policy took place over a period of time that included the calendar quarter end date of March 31, 2008, resulting in a temporary deviation from the target allocationasset allocations described above.
During fiscal 2009, approximately $147 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.actuarial loss will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost.
Coach expects to contribute $448$778 to its U.S. Plan during the year ending June 28, 2008.27, 2009. Coach Japan expects to contribute $123$72 for benefit payments during the year ending June 28, 2008.27, 2009. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
| | | | |
| Fiscal Year | | Pension Benefits | | Pension Benefits |
| 2008 | | $ | 451 | | |
| 2009 | | | 480 | | | $ | 420 | |
| 2010 | | | 548 | | | | 487 | |
| 2011 | | | 656 | | | | 694 | |
| 2012 | | | 694 | | | | 762 | |
| 2013 – 2017 | | | 3,791 | | |
2013
| | | | 797 | |
2014 – 2018
| | | | 4,471 | |
13.12. Segment Information
The Company operates its business in two reportable segments: Direct-to-Consumer and 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 stores in North America and Japan, the Internet and the Coach catalog constitute the Direct-to-Consumer segment. The Indirect segment includes sales of Coach products to other retailers and 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 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 consumer service expenses.
During the third quarter of fiscal 2007, the Company exited its corporate accounts business. The results of the corporate accounts business, previously included in the Indirect segment, have been segregated from continuing operations and reported as discontinued operations in the Consolidated Statements of Income for all periods presented.
| | | | | | | | |
| | Direct-to-
Consumer | | Indirect | | Corporate
Unallocated | | Total |
Fiscal 2008
| | | | | | | | | | | | | | | | |
| Net sales | | $ | 2,544,115 | | | $ | 636,642 | | | $ | — | | | $ | 3,180,757 | |
| Operating income (loss) | | | 1,093,090 | | | | 400,632 | | | | (346,593 | ) | | | 1,147,129 | |
| Income (loss) before provision for income taxes and discontinued operations | | | 1,093,090 | | | | 400,632 | | | | (298,773 | ) | | | 1,194,949 | |
| Depreciation and amortization expense | | | 67,485 | | | | 9,704 | | | | 23,515 | | | | 100,704 | |
| Total assets | | | 1,062,112 | | | | 119,561 | | | | 1,092,171 | | | | 2,273,844 | |
| Additions to long-lived assets | | | 120,288 | | | | 24,252 | | | | 43,123 | | | | 187,663 | |
Fiscal 2007
| | | | | | | | | | | | | | | | |
| Net sales | | $ | 2,101,740 | | | $ | 510,716 | | | $ | — | | | $ | 2,612,456 | |
| Operating income (loss) | | | 953,981 | | | | 316,327 | | | | (276,911 | ) | | | 993,397 | |
| Income (loss) before provision for income taxes and discontinued operations | | | 953,981 | | | | 316,327 | | | | (235,638 | ) | | | 1,034,670 | |
| Depreciation and amortization expense | | | 55,579 | | | | 7,199 | | | | 18,054 | | | | 80,832 | |
| Total assets | | | 913,909 | | | | 114,423 | | | | 1,421,180 | | | | 2,449,512 | |
| Additions to long-lived assets | | | 95,217 | | | | 13,374 | | | | 43,755 | | | | 152,346 | |
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
13.12. Segment Information – (continued)
| | | | | | | | | | | | | | | | |
| | Direct-to-
Consumer | | Indirect | | Corporate
Unallocated | | Total | | Direct-to-
Consumer | | Indirect | | Corporate
Unallocated | | Total |
Fiscal 2007
| | | | | | | | | | | | | | | | | |
Fiscal 2006
| | | | | | | | | | | | | | | | | |
| Net sales | | $ | 2,101,740 | | | $ | 510,716 | | | $ | — | | | $ | 2,612,456 | | | $ | 1,610,691 | | | $ | 424,394 | | | $ | — | | | $ | 2,035,085 | |
| Operating income (loss) | | | 953,981 | | | | 316,327 | | | | (276,911 | ) | | | 993,397 | | | | 717,326 | | | | 261,571 | | | | (264,190 | ) | | | 714,707 | |
| Income (loss) before provision for income taxes, minority interest and discontinued operations | | | 953,981 | | | | 316,327 | | | | (235,638 | ) | | | 1,034,670 | | |
| Income (loss) before provision for income taxes and discontinued operations | | | | 717,326 | | | | 261,571 | | | | (231,567 | ) | | | 747,330 | |
| Depreciation and amortization expense | | | 55,634 | | | | 7,199 | | | | 18,054 | | | | 80,887 | | | | 43,056 | | | | 5,506 | | | | 16,432 | | | | 64,994 | |
| Total assets | | | 913,909 | | | | 114,423 | | | | 1,421,180 | | | | 2,449,512 | | | | 743,034 | | | | 91,247 | | | | 792,239 | | | | 1,626,520 | |
| Additions to long-lived assets | | | 95,217 | | | | 13,374 | | | | 43,755 | | | | 152,346 | | | | 87,576 | | | | 8,747 | | | | 59,902 | | | | 156,225 | |
Fiscal 2006
| | | | | | | | | | | | | | | | | |
| Net sales | | $ | 1,610,691 | | | $ | 424,394 | | | $ | — | | | $ | 2,035,085 | | |
| Operating income (loss) | | | 717,326 | | | | 261,571 | | | | (264,190 | ) | | | 714,707 | | |
| Income (loss) before provision for income taxes, minority interest and discontinued operations | | | 717,326 | | | | 261,571 | | | | (231,567 | ) | | | 747,330 | | |
| Depreciation and amortization expense | | | 43,177 | | | | 5,506 | | | | 16,432 | | | | 65,115 | | |
| Total assets | | | 743,034 | | | | 91,247 | | | | 792,239 | | | | 1,626,520 | | |
| Additions to long-lived assets | | | 87,576 | | | | 8,747 | | | | 59,902 | | | | 156,225 | | |
Fiscal 2005
| | | | | | | | | | | | | | | | | |
| Net sales | | $ | 1,307,425 | | | $ | 344,279 | | | $ | — | | | $ | 1,651,704 | | |
| Operating income (loss) | | | 548,520 | | | | 204,642 | | | | (217,502 | ) | | | 535,660 | | |
| Income (loss) before provision for income taxes, minority interest and discontinued operations | | | 548,520 | | | | 204,642 | | | | (201,742 | ) | | | 551,420 | | |
| Depreciation and amortization expense | | | 37,275 | | | | 4,362 | | | | 8,763 | | | | 50,400 | | |
| Total assets | | | 646,788 | | | | 69,569 | | | | 653,800 | | | | 1,370,157 | | |
| Additions to long-lived assets | | | 70,801 | | | | 4,778 | | | | 19,013 | | | | 94,592 | | |
The following is a summary of the common costs not allocated in the determination of segment performance:
| | | | | | | | | | | | |
| | Fiscal Year Ended | | Fiscal Year Ended |
| | | June 30,
2007 | | July 1,
2006 | | July 2,
2005 | | June 28,
2008 | | June 30,
2007 | | July 1,
2006 |
| Production variances | | $ | 21,203 | | | $ | 14,659 | | | $ | 11,028 | | | $ | 26,659 | | | $ | 21,203 | | | $ | 14,659 | |
| Advertising, marketing and design | | | (108,760 | ) | | | (91,443 | ) | | | (70,234 | ) | | | (128,938 | ) | | | (108,760 | ) | | | (91,443 | ) |
| Administration and information systems | | | (138,552 | ) | | | (147,491 | ) | | | (124,357 | ) | | | (199,525 | ) | | | (138,552 | ) | | | (147,491 | ) |
| Distribution and customer service | | | (50,802 | ) | | | (39,915 | ) | | | (33,939 | ) | | | (44,789 | ) | | | (50,802 | ) | | | (39,915 | ) |
| Total corporate unallocated | | $ | (276,911 | ) | | $ | (264,190 | ) | | $ | (217,502 | ) | | $ | (346,593 | ) | | $ | (276,911 | ) | | $ | (264,190 | ) |
Geographic Area Information
As of June 30, 2007,28, 2008, Coach operated 254289 retail stores and 93102 factory stores in the United States, fiveeight retail stores in Canada and 137149 department store shop-in-shops, retail stores and factory stores in Japan. Coach also operates distribution, product development and quality control locations in the United States, Italy,
Hong Kong, China and South Korea. 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.
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollarsperiod and shares in thousands, except per share data)
13. Segment Information – (continued)
includes property and equipment, net and other assets. | | | | | | | | | | | | | | | | |
| | United States | | Japan | | Other
International(1) | | Total | | United
States | | Japan | | Other
International(1) | | Total |
Fiscal 2008
| | | | | | | | | | | | | | | | | |
| Net sales | | | $ | 2,382,899 | | | $ | 605,523 | | | $ | 192,335 | | | $ | 3,180,757 | |
| Long-lived assets | | | | 452,616 | | | | 76,863 | | | | 10,404 | | | | 539,883 | |
Fiscal 2007
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 1,996,129 | | | $ | 492,748 | | | $ | 123,579 | | | $ | 2,612,456 | | | $ | 1,996,129 | | | $ | 492,748 | | | $ | 123,579 | | | $ | 2,612,456 | |
| Long-lived assets | | | 334,889 | | | | 282,888 | | | | 5,493 | | | | 623,270 | | | | 320,035 | | | | 72,083 | | | | 5,493 | | | | 397,611 | |
Fiscal 2006
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 1,497,869 | | | $ | 420,509 | | | $ | 116,707 | | | $ | 2,035,085 | | | $ | 1,497,869 | | | $ | 420,509 | | | $ | 116,707 | | | $ | 2,035,085 | |
| Long-lived assets | | | 266,190 | | | | 298,087 | | | | 3,684 | | | | 567,961 | | | | 251,350 | | | | 72,973 | | | | 3,820 | | | | 328,143 | |
Fiscal 2005
| | | | | | | | | | | | | | | | | |
| Net sales | | $ | 1,194,451 | | | $ | 372,326 | | | $ | 84,927 | | | $ | 1,651,704 | | |
| Long-lived assets | | | 314,919 | | | | 288,338 | | | | 2,995 | | | | 606,252 | | |
| (1) | Other International sales reflect shipments to third-party distributors, primarily in East Asia, and sales from Coach-operated stores in Canada. |
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COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
14.13. Business Interruption Insurance
In the fiscal year ended June 29, 2002, Coach’s World Trade Center location was completely destroyed as a result of the September 11th terrorist attack. Inventory and fixed asset loss claims were filed with the
Company’s insurers and these losses were fully recovered. Losses covered under the Company’s business interruption insurance program were also filed with the insurers. During the second quarter of fiscal 2006, the Company reached a final settlement with its insurance carriers related to losses covered under the business interruption insurance program. Accordingly, the Company did not receive any proceeds in fiscal 2008 or fiscal 2007 and does not expect to receive any additional business interruption proceeds related to the World Trade Center location in the future. During fiscal 2006, and 2005, Coach received payments of $2,025 and $2,644, respectively, under its business interruption coverage. These amounts are included as a reduction to selling, general and administrative expenses.
15.14. 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 | | Fiscal Year Ended |
| | | June 30, 2007 | | July 1, 2006 | | July 2, 2005 | | June 28,
2008 | | June 30,
2007 | | July 1,
2006 |
| Income from continuing operations | | $ | 636,529 | | | $ | 463,840 | | | $ | 336,647 | | | $ | 783,039 | | | $ | 636,529 | | | $ | 463,840 | |
| Total weighted-average basic shares | | | 369,661 | | | | 379,635 | | | | 378,670 | | | | 355,731 | | | | 369,661 | | | | 379,635 | |
Dilutive securities:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Employee benefit and share award plans | | | 980 | | | | 1,666 | | | | 2,784 | | | | 608 | | | | 980 | | | | 1,666 | |
| Stock option programs | | | 6,715 | | | | 7,194 | | | | 8,737 | | | | 3,993 | | | | 6,715 | | | | 7,194 | |
| Total weighted-average diluted shares | | | 377,356 | | | | 388,495 | | | | 390,191 | | | | 360,332 | | | | 377,356 | | | | 388,495 | |
Earnings from continuing operations per share:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | 1.72 | | | $ | 1.22 | | | $ | 0.89 | | | $ | 2.20 | | | $ | 1.72 | | | $ | 1.22 | |
| Diluted | | $ | 1.69 | | | $ | 1.19 | | | $ | 0.86 | | | $ | 2.17 | | | $ | 1.69 | | | $ | 1.19 | |
At June 28, 2008, options to purchase 11,439 shares of common stock were outstanding but not included in the computation of diluted earnings per share, as these options’ exercise prices, ranging from $33.69 to $51.56, were greater than the average market price of the common shares.
At June 30, 2007, options to purchase 99 shares of common stock were outstanding but not included in the computation of diluted earnings per share, as these options’ exercise prices, ranging from $50.00 to $51.56, were greater than the average market price of the common shares.
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COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
15. Earnings Per Share – (continued)
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.
15. Discontinued Operations
At July 2, 2005, optionsIn March 2007, the Company exited its corporate accounts business in order to purchase 1,093 sharesbetter control the location and image of common stock were outstanding but notthe brand where Coach product is sold. Through the corporate accounts business, Coach sold products primarily to distributors for gift-giving and incentive programs. The results of the corporate accounts business, previously included in the computationIndirect segment, have been segregated from continuing operations and reported as discontinued operations in the Consolidated Statements of diluted earningsIncome for all periods presented. As the Company uses a centralized approach to cash management, interest income was not allocated to the corporate accounts business. The following table summarizes results of the corporate accounts business:
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TABLE OF CONTENTS
COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share as these options’ exercise prices, ranging from $29.75data)
15. Discontinued Operations – (continued)
| | | | | | |
| | Fiscal Year Ended |
| | | June 28,
2008 | | June 30,
2007 | | July 1,
2006 |
| Net sales | | $ | 102 | | | $ | 66,463 | | | $ | 76,416 | |
| Income before provision for income taxes | | | 31 | | | | 44,483 | | | | 49,897 | |
| Income from discontinued operations | | | 16 | | | | 27,136 | | | | 30,437 | |
The consolidated balance sheet at June 28, 2008 includes $1,492 of accrued liabilities related to $32.79, were greater than the average market pricecorporate accounts business. The Consolidated Statement of Cash Flows includes the common shares.corporate accounts business for all periods presented.
16. Stock Repurchase Program
The Coach Board of Directors approved common stock repurchase programs as follows:
| | | | |
Date Share Repurchase Programs
Were Publicly Announced | | Total Dollar
Amount Approved | | Expiration
Date of Plan |
| September 17, 2001 | | $ | 80,000 | | | | September 2004 | |
| January 30, 2003 | | $ | 100,000 | | | | January 2006 | |
| August 12, 2004 | | $ | 200,000 | | | | August 2006 | |
| May 11, 2005 | | $ | 250,000 | | | | May 2007 | |
| May 9, 2006 | | $ | 500,000 | | | | June 2007 | |
| October 20, 2006 | | $ | 500,000 | | | | June 2008 | |
Purchases of Coach’s common stock will beare 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. The Company may terminate or limit the stock repurchase program at any time.
During fiscal 2008, fiscal 2007 2006 and 2005,fiscal 2006, the Company repurchased and retired 39,688, 5,002 19,055 and 11,00019,055 shares of common stock at an average cost of $33.68, $29.99 $31.50 and $24.09$31.50 per share, respectively. As of June 30, 2007,28, 2008, Coach had $500,000$163,410 remaining in the stock repurchase program.
17. Supplemental Balance Sheet Information
The components of certain balance sheet accounts are as follows:
| | | | | | | | |
| | June 30,
2007 | | July 1,
2006 | | June 28,
2008 | | June 30,
2007 |
Property and equipment
| | | | | | | | | | | | | | | | |
| Land | | $ | 27,954 | | | $ | 27,954 | | | $ | 27,954 | | | $ | 27,954 | |
| Machinery and equipment | | | 12,007 | | | | 14,187 | | | | 16,116 | | | | 12,007 | |
| Furniture and fixtures | | | 143,442 | | | | 136,730 | | | | 271,957 | | | | 143,442 | |
| Leasehold improvements | | | 267,935 | | | | 270,232 | | | | 373,260 | | | | 267,935 | |
| Construction in progress | | | 148,191 | | | | 66,240 | | | | 65,486 | | | | 148,191 | |
| Less: accumulated depreciation | | | (231,068 | ) | | | (216,812 | ) | | | (290,547 | ) | | | (231,068 | ) |
| Total property and equipment, net | | $ | 368,461 | | | $ | 298,531 | | | $ | 464,226 | | | $ | 368,461 | |
Accrued liabilities
| | | | | | | | | | | | | | | | |
| Income and other taxes | | $ | 56,486 | | | $ | 69,017 | | | $ | 12,189 | | | $ | 56,486 | |
| Payroll and employee benefits | | | 90,435 | | | | 78,215 | | | | 104,122 | | | | 90,435 | |
| Accrued rent | | | | 26,272 | | | | 18,513 | |
| Capital expenditures | | | 32,459 | | | | 21,243 | | | | 43,821 | | | | 32,459 | |
| Operating expenses | | | 119,072 | | | | 93,360 | | | | 129,526 | | | | 100,559 | |
| Total accrued liabilities | | $ | 298,452 | | | $ | 261,835 | | | $ | 315,930 | | | $ | 298,452 | |
Other liabilities
| | | | | | | | | |
| Deferred lease incentives | | | $ | 108,612 | | | $ | 75,839 | |
| Non-current tax liabilities | | | | 131,185 | | | | — | |
| Other | | | | 38,289 | | | | 16,010 | |
| Total other liabilities | | | $ | 278,086 | | | $ | 91,849 | |
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COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
17. Supplemental Balance Sheet Information – (continued)
| | | | |
| | June 30,
2007 | | July 1,
2006 |
Other liabilities
| | | | | | | | |
| Deferred lease incentives | | $ | 75,839 | | | $ | 55,038 | |
| Other | | | 16,010 | | | | 6,169 | |
| Total other liabilities | | $ | 91,849 | | | $ | 61,207 | |
Accumulated other comprehensive loss
| | | | | | | | |
| Cumulative translation adjustments | | $ | (12,450 | ) | | $ | (2,506 | ) |
| Unrealized gains (losses) on cash flow hedging derivatives, net of taxes of $(796) and $2,365 | | | 1,161 | | | | (3,547 | ) |
| SFAS 158 adjustment and minimum pension liability, net of taxes of $981 and $743 | | | (1,503 | ) | | | (1,207 | ) |
| Accumulated other comprehensive loss | | $ | (12,792 | ) | | $ | (7,260 | ) |
| | | | |
| | June 28,
2008 | | June 30,
2007 |
Accumulated other comprehensive income (loss)
| | | | | | | | |
| Cumulative translation adjustments | | $ | 15,513 | | | $ | (12,450 | ) |
| Unrealized gains on cash flow hedging derivatives, net of taxes of $4,762 and $796 | | | 6,943 | | | | 1,161 | |
| SFAS 158 adjustment and minimum pension liability, net of taxes of $657 and $981 | | | (993 | ) | | | (1,503 | ) |
| Accumulated other comprehensive income (loss) | | $ | 21,463 | | | $ | (12,792 | ) |
18. Shareholder Rights Plan
On May 3, 2001, Coach declared a “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 exceptions, Coach’s Board of Directors will be entitled to redeem the rights at $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 2007,2008, there were no shareholders whose common stock holdings exceeded the 10% threshold established by the rights plan.
19. Subsequent Event
On July 11, 2008, Coach entered into an agreement with Bauman 34th Street, LLC and Goldberg 34th Street, LLC (the “Sellers”) to purchase the Company’s principal corporate headquarters building in New York City from the Sellers. Pursuant to this agreement, Coach will pay $128,000 for the land and building located at 516 West 34th Street, New York, New York. One of the Sellers has been granted an option to defer the closing of the sale of its 50% interest in the building for a period of up to two years after the initial closing date.
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COACH, INC.
Notes to Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
19.20. Quarterly Financial Data (Unaudited)
| | | | | | | | | | | | | | | | |
| | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
Fiscal 2007(1)(2)
| | | | | | | | | | | | | | | | | |
Fiscal 2008(1)(2)
| | | | | | | | | | | | | | | | | |
| Net sales | | $ | 529,421 | | | $ | 805,603 | | | $ | 625,303 | | | $ | 652,129 | | | $ | 676,718 | | | $ | 978,017 | | | $ | 744,522 | | | $ | 781,500 | |
| Gross profit | | | 406,005 | | | | 621,295 | | | | 486,410 | | | | 509,276 | | | | 518,221 | | | | 737,272 | | | | 558,318 | | | | 593,292 | |
| Income from continuing operations | | | 115,239 | | | | 214,497 | | | | 147,390 | | | | 159,403 | | | | 154,786 | | | | 252,317 | | | | 162,412 | | | | 213,524 | |
| Income from discontinued operations | | | 10,377 | | | | 12,976 | | | | 2,574 | | | | 1,209 | | | | 20 | | | | — | | | | (4 | ) | | | — | |
| Net income | | | 125,616 | | | | 227,473 | | | | 149,964 | | | | 160,612 | | | | 154,806 | | | | 252,317 | | | | 162,408 | | | | 213,524 | |
Basic earnings per common share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | | 0.31 | | | | 0.58 | | | | 0.40 | | | | 0.43 | | | | 0.42 | | | | 0.70 | | | | 0.47 | | | | 0.63 | |
| Discontinued operations | | | 0.03 | | | | 0.04 | | | | 0.01 | | | | 0.00 | | | | 0.00 | | | | — | | | | (0.00 | ) | | | — | |
| Net income | | | 0.34 | | | | 0.62 | | | | 0.41 | | | | 0.43 | | | | 0.42 | | | | 0.70 | | | | 0.47 | | | | 0.63 | |
Diluted earnings per common share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | | 0.31 | | | | 0.57 | | | | 0.39 | | | | 0.42 | | | | 0.41 | | | | 0.69 | | | | 0.46 | | | | 0.62 | |
| Discontinued operations | | | 0.03 | | | | 0.03 | | | | 0.01 | | | | 0.00 | | | | 0.00 | | | | — | | | | (0.00 | ) | | | — | |
| Net income | | | 0.34 | | | | 0.61 | | | | 0.40 | | | | 0.42 | | | | 0.41 | | | | 0.69 | | | | 0.46 | | | | 0.62 | |
Fiscal 2006(1)(2)
| | | | | | | | | | | | | | | | | |
Fiscal 2007(1)
| | | | | | | | | | | | | | | | | |
| Net sales | | $ | 433,964 | | | $ | 619,830 | | | $ | 479,718 | | | $ | 501,573 | | | $ | 529,421 | | | $ | 805,603 | | | $ | 625,303 | | | $ | 652,129 | |
| Gross profit | | | 330,096 | | | | 481,753 | | | | 376,199 | | | | 393,519 | | | | 406,005 | | | | 621,295 | | | | 486,410 | | | | 509,276 | |
| Income from continuing operations | | | 87,860 | | | | 161,513 | | | | 101,672 | | | | 112,795 | | | | 115,239 | | | | 214,497 | | | | 147,390 | | | | 159,403 | |
| Income from discontinued operations | | | 5,755 | | | | 12,661 | | | | 7,174 | | | | 4,847 | | | | 10,377 | | | | 12,976 | | | | 2,574 | | | | 1,209 | |
| Net income | | | 93,615 | | | | 174,174 | | | | 108,846 | | | | 117,642 | | | | 125,616 | | | | 227,473 | | | | 149,964 | | | | 160,612 | |
Basic earnings per common share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | | 0.23 | | | | 0.42 | | | | 0.26 | | | | 0.30 | | | | 0.31 | | | | 0.58 | | | | 0.40 | | | | 0.43 | |
| Discontinued operations | | | 0.02 | | | | 0.03 | | | | 0.02 | | | | 0.01 | | | | 0.03 | | | | 0.04 | | | | 0.01 | | | | 0.00 | |
| Net income | | | 0.25 | | | | 0.46 | | | | 0.28 | | | | 0.31 | | | | 0.34 | | | | 0.62 | | | | 0.41 | | | | 0.43 | |
Diluted earnings per common share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | | 0.23 | | | | 0.41 | | | | 0.26 | | | | 0.29 | | | | 0.31 | | | | 0.57 | | | | 0.39 | | | | 0.42 | |
| Discontinued operations | | | 0.01 | | | | 0.03 | | | | 0.02 | | | | 0.01 | | | | 0.03 | | | | 0.03 | | | | 0.01 | | | | 0.00 | |
| Net income | | | 0.24 | | | | 0.45 | | | | 0.28 | | | | 0.31 | | | | 0.34 | | | | 0.61 | | | | 0.40 | | | | 0.42 | |
Fiscal 2005(1)(2)
| | | | | | | | | | | | | | | | | |
Fiscal 2006(1)
| | | | | | | | | | | | | | | | | |
| Net sales | | $ | 329,950 | | | $ | 510,297 | | | $ | 403,462 | | | $ | 407,995 | | | $ | 433,964 | | | $ | 619,830 | | | $ | 479,718 | | | $ | 501,573 | |
| Gross profit | | | 247,864 | | | | 387,107 | | | | 315,463 | | | | 317,117 | | | | 330,096 | | | | 481,753 | | | | 376,199 | | | | 393,519 | |
| Income from continuing operations | | | 55,556 | | | | 118,394 | | | | 76,218 | | | | 86,479 | | | | 87,860 | | | | 161,513 | | | | 101,672 | | | | 112,795 | |
| Income from discontinued operations | | | 5,425 | | | | 8,509 | | | | 4,654 | | | | 3,377 | | | | 5,755 | | | | 12,661 | | | | 7,174 | | | | 4,847 | |
| Net income | | | 60,981 | | | | 126,903 | | | | 80,872 | | | | 89,856 | | | | 93,615 | | | | 174,174 | | | | 108,846 | | | | 117,642 | |
Basic earnings per common share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | | 0.15 | | | | 0.31 | | | | 0.20 | | | | 0.23 | | | | 0.23 | | | | 0.42 | | | | 0.26 | | | | 0.30 | |
| Discontinued operations | | | 0.01 | | | | 0.02 | | | | 0.01 | | | | 0.01 | | | | 0.02 | | | | 0.03 | | | | 0.02 | | | | 0.01 | |
| Net income | | | 0.16 | | | | 0.33 | | | | 0.21 | | | | 0.24 | | | | 0.25 | | | | 0.46 | | | | 0.28 | | | | 0.31 | |
Diluted earnings per common share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Continuing operations | | | 0.14 | | | | 0.30 | | | | 0.19 | | | | 0.22 | | | | 0.23 | | | | 0.41 | | | | 0.26 | | | | 0.29 | |
| Discontinued operations | | | 0.01 | | | | 0.02 | | | | 0.01 | | | | 0.01 | | | | 0.01 | | | | 0.03 | | | | 0.02 | | | | 0.01 | |
| Net income | | | 0.16 | | | | 0.32 | | | | 0.21 | | | | 0.23 | | | | 0.24 | | | | 0.45 | | | | 0.28 | | | | 0.31 | |
| (1) | During the third quarter of fiscal 2007, the Company exited its corporate accounts business. The results of the corporate accounts business, previously included in the Indirect segment, have been segregated from continuing operations and reported as discontinued operations in the Consolidated Statements of Income for all periods presented. Accordingly, the information below differs from amounts previously reported as follows: in the first and second quarter of fiscal 2007, net sales were reduced by $24,430 and $30,784, respectively, and gross profit was reduced by $18,675 and $23,181, respectively; in the first, second, third and fourth quarters of fiscal 2006, net sales were reduced by $14,987, $30,506, $18,141 and $12,782, respectively, and gross profit was reduced by $11,265, $22,923, $13,570 and $9,554, respectively; in the first, second, third and fourth quarters of fiscal 2005, net sales were reduced by $14,115, $21,462, $12,477 and $10,665, respectively, and gross profit was reduced by $10,310, $15,861, $9,210 and $7,839, respectively. |
| (2) | The sum of the quarterly earnings per share may not equal the full-year amount, as the computations of the weighted-average number of common basic and diluted shares outstanding for each quarter and the full year are performed independently. |
| (2) | The reported results for the fourth quarter of fiscal 2008 include a one-time net gain of $41,037, or $0.12 per share. Excluding this one-time net gain, income from continuing operations and diluted earnings per share from continuing operations were $172,487 and $0.50 per share, respectively. |
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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.” 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 2007 |
| | | High | | Low |
Quarter ended:
| | | | | | | | |
| September 30, 2006 | | $ | 34.65 | | | $ | 25.58 | |
| December 30, 2006 | | | 44.28 | | | | 34.20 | |
| March 31, 2007 | | | 50.96 | | | | 43.82 | |
| June 30, 2007 | | | 53.79 | | | | 46.10 | |
| Closing price at June 29, 2007 | | | $47.39 | |
| | | | |
| | Fiscal Year Ended 2008 |
| | | High | | Low |
Quarter ended:
| | | | | | | | |
| September 29, 2007 | | $ | 50.70 | | | $ | 41.46 | |
| December 29, 2007 | | | 47.42 | | | | 30.41 | |
| March 29, 2008 | | | 32.64 | | | | 24.62 | |
| June 28, 2008 | | | 37.45 | | | | 29.29 | |
| Closing price at June 27, 2008 | | $ | 29.29 | |
| | | | |
| | Fiscal Year Ended 2006 |
| | | High | | Low |
Quarter ended:
| | | | | | | | |
| October 1, 2005 | | $ | 36.22 | | | $ | 30.25 | |
| December 31, 2005 | | | 36.64 | | | | 28.94 | |
| April 1, 2006 | | | 36.97 | | | | 31.75 | |
| July 1, 2006 | | | 35.35 | | | | 27.75 | |
| Closing price at June 30, 2006 | | | $29.90 | |
| | | | |
| | Fiscal Year Ended 2007 |
| | | High | | Low |
Quarter ended:
| | | | | | | | |
| September 30, 2006 | | $ | 34.65 | | | $ | 25.58 | |
| December 30, 2006 | | | 44.28 | | | | 34.20 | |
| March 31, 2007 | | | 50.96 | | | | 43.82 | |
| June 30, 2007 | | | 53.79 | | | | 46.10 | |
| Closing price at June 29, 2007 | | $ | 47.39 | |
| | | | |
| | 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 2006 |
| | | High | | Low |
Quarter ended:
| | | | | | | | |
| October 1, 2005 | | $ | 36.22 | | | $ | 30.25 | |
| December 31, 2005 | | | 36.64 | | | | 28.94 | |
| April 1, 2006 | | | 36.97 | | | | 31.75 | |
| July 1, 2006 | | | 35.35 | | | | 27.75 | |
| Closing price at June 30, 2006 | | $ | 29.90 | |
As of August 17, 2007,8, 2008, there were 2,7243,213 holders of record of Coach’s common stock.
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 inon its common stock. 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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COACH, INC.
Schedule II — Valuation and Qualifying Accounts
For the Fiscal Years Ended June 28, 2008, June 30, 2007 and July 1, 2006 and July 2, 2005
(amounts in thousands)
| | | | | | | | | | | | | | | | |
| | Balance at
Beginning of
Year | | Provision
Charged to
Costs and
Expenses | | Write-offs/
Allowances
Taken | | Balance at
End of Year | | Balance at
Beginning
of Year | | Provision
Charged to
Costs and
Expenses | | Write-offs/
Allowances
Taken | | Balance at
End of
Year |
Fiscal 2008
| | | | | | | | | | | | | | | | | |
| Allowance for bad debts | | | $ | 2,915 | | | $ | (350 | ) | | $ | (65 | ) | | $ | 2,500 | |
| Allowance for returns | | | | 3,664 | | | | 11,054 | | | | (9,501 | ) | | | 5,217 | |
| Total | | | $ | 6,579 | | | $ | 10,704 | | | $ | (9,566 | ) | | $ | 7,717 | |
Fiscal 2007
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for bad debts | | $ | 1,644 | | | $ | 1,381 | | | $ | (110 | ) | | $ | 2,915 | | | $ | 1,644 | | | $ | 1,381 | | | $ | (110 | ) | | $ | 2,915 | |
| Allowance for returns | | | 4,356 | | | | 4,752 | | | | (5,444 | ) | | | 3,664 | | | | 4,356 | | | | 4,752 | | | | (5,444 | ) | | | 3,664 | |
| Total | | $ | 6,000 | | | $ | 6,133 | | | $ | (5,554 | ) | | $ | 6,579 | | | $ | 6,000 | | | $ | 6,133 | | | $ | (5,554 | ) | | $ | 6,579 | |
Fiscal 2006
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Allowance for bad debts | | $ | 1,665 | | | $ | 29 | | | $ | (50 | ) | | $ | 1,644 | | | $ | 1,665 | | | $ | 29 | | | $ | (50 | ) | | $ | 1,644 | |
| Allowance for returns | | | 2,459 | | | | 6,572 | | | | (4,675 | ) | | | 4,356 | | | | 2,459 | | | | 6,572 | | | | (4,675 | ) | | | 4,356 | |
| Total | | $ | 4,124 | | | $ | 6,601 | | | $ | (4,725 | ) | | $ | 6,000 | | | $ | 4,124 | | | $ | 6,601 | | | $ | (4,725 | ) | | $ | 6,000 | |
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 | | |
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TABLE OF CONTENTS
COACH, INC.INC
EXHIBITS TO FORM 10-K
(a) Exhibit Table (numbered in accordance with Item 601 of Regulation S-K)
| | |
Exhibit
No. | | Description |
| 3.1 | | Amended and Restated Bylaws of Coach, Inc., dated May 3, 2001,February 7, 2008, which is incorporated herein by reference from Exhibit 3.1 to Coach’s Current Report on Form 8-K filed on May 9, 2001February 13, 2008 |
| 3.2 | | Articles 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 |
| 3.3 | | Articles 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 |
| 3.4 | | Articles 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 |
| 3.5 | | Articles 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 |
| 4.1 | | Amended 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 |
| 4.2 | | Specimen 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) |
| 10.1 | | Revolving Credit Agreement by and between Coach, certain lenders and Bank of America, N.A. |
10.5 | | Lease Indemnification and Reimbursement Agreement between Sara Lee and Coach, which is incorporated herein by reference from Exhibit 2.1010.1 to Coach’s Registration StatementAnnual Report on Form S-1 (Registration No. 333-39502)10-K for the fiscal year ended June 30, 2007 |
10.610.2 | | Coach, 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 |
10.7 | | Coach, 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 |
10.810.3 | | Coach, Inc. Performance-Based Annual Incentive Plan, which is incorporated by reference from Appendix A to the Registrant’s Definitive Proxy Statement for the 2005 Annual Meeting of
Stockholders, filed on September 28, 2005 |
10.910.4 | | Coach, 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 |
10.1010.5 | | Coach, 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 |
10.1110.6 | | Coach, 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 |
10.12 | | Jacksonville, FL Lease Agreement, which is incorporated herein by reference from Exhibit 10.6 to Coach’s Registration Statement on Form S-1 (Registration No. 333-39502) |
10.13 | | New York, NY Lease Agreement, which is incorporated herein by reference from Exhibit 10.7 to Coach’s Registration Statement on Form S-1 (Registration No. 333-39502) |
10.14 | | Coach, 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 |
10.1510.8 | | Employment 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 |
68
| | |
Exhibit No. | | Description |
10.1610.9 | | Employment 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 |
10.1710.10 | | Employment 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 |
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10.18 | | |
Exhibit
No. | | Description |
| 10.11 | | Amendment 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 |
10.1910.12 | | Amendment 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 |
10.2010.13 | | Amendment 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 |
10.2110.14 | | Employment 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 |
10.2210.15 | | Employment 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 |
| 10.16 | | Amendment to Employment Agreement, dated March 11, 2008, between Coach and Reed Krakoff |
| 10.17 | | Transition Employment Agreement, dated July 4, 2008, between Coach and Keith Monda |
| 10.18 | | Amendment to Employment Agreement, dated August 5, 2008, between Coach and Michael Tucci |
| 10.19 | | Agreement, dated July 11, 2008, among Bauman 34th Street, LLC, Goldberg 34th Street, LLC and 504-514 West 34th Street Corp. |
| 21.1 | | List of Subsidiaries of Coach |
| 23.1 | | Consent of Deloitte & Touche LLP |
| 31.1 | | Rule 13(a)-14(a)/15(d)-14(a) Certifications |
| 32.1 | | Section 1350 Certifications |
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![[GRAPHIC MISSING]](https://capedge.com/proxy/10-K/0001144204-07-046122/v085741_chrt-performance.jpg)
![[GRAPHIC MISSING]](https://capedge.com/proxy/10-K/0001144204-08-049205/v124224_chrt-line.jpg)