1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended _______December 30, 2000______________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-16153
Coach, Inc.
(Exact name of registrant as specified in its charter)
Maryland 52-2242751
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
516 West 34th Street, New York, NY 10001
(Address of principal executive offices)
(Zip Code)
(212) 594-1850
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ___X____ No _______
On December 30, 2000, the Registrant had 43,513,333 outstanding shares
of common stock, which is the Registrant's only class of common stock.
The document contains 27 pages excluding exhibits.
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COACH, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page Number
-----------
ITEM 1. FINANCIAL STATEMENTS -
Preface 3
Condensed Consolidated and Combined Balance Sheets -
At December 30, 2000 and July 1, 2000 4
Condensed Consolidated and Combined Statements of Income -
For the thirteen and twenty-six weeks ended
December 30, 2000 and January 1, 2000 5
Consolidated and Combined Statements of Common
Stockholders' Equity -
For the period July 3, 1999 to December 30, 2000 6
Consolidated and Combined Statements of Cash Flows -
For the twenty-six weeks ended
December 30, 2000 and January 1, 2000 7
Notes to Consolidated and Combined Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
PART II - OTHER INFORMATION AND SIGNATURES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURE 27
3
ITEM 1.
COACH, INC. AND SUBSIDIARIES
PREFACE
The condensed consolidated and combined financial statements for the thirteen
and twenty-six weeks ended December 30, 2000 and January 1, 2000 and the balance
sheet as of December 30, 2000 included herein have not been audited by
independent public accountants, but, in the opinion of Coach, Inc. ("Company"),
all adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position at December 30, 2000 and the results of
operations and the cash flows for the periods presented herein have been made.
In the opinion of management, the information furnished reflects all
adjustments, all of which are of a normal recurring nature, necessary for a fair
presentation of the results for the reported interim periods. The results of
operations for the thirteen and twenty-six weeks ended December 30, 2000 are not
necessarily indicative of the operating results to be expected for the full
fiscal year ending June 30, 2001.
The consolidated financial statements included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Although the Company believes that the disclosures made are adequate to make the
information presented not misleading, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such regulations. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's Form S-1 for the fiscal year ended July 1, 2000.
Page 3
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COACH, INC.
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
AT DECEMBER 30, 2000 AND JULY 1, 2000
(IN THOUSANDS)
DECEMBER 30, JULY 1,
2000 2000
--------- ---------
(unaudited)
ASSETS
Cash $ 5,331 $ 162
Short term investments with Sara Lee 31,895 -
Receivables 28,698 15,567
Inventories 101,373 102,097
Other current assets 18,794 15,862
--------- ---------
Total current assets 186,091 133,688
Receivable from Sara Lee - 63,783
Property, net 69,383 65,184
Trademarks and other assets 28,558 33,998
--------- ---------
Total assets $ 284,032 $ 296,653
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank overdrafts $ 12,378 $ 4,940
Accounts payable 756 2,926
Accrued liabilities 90,974 71,693
Revolving credit facility - -
Long-term debt, classified as current 46,045 40
--------- ---------
Total current liabilities 150,153 79,599
Long-term debt 3,730 3,735
Other liabilities 2,275 511
Stockholders' equity 127,874 212,808
--------- ---------
Total liabilities and stockholders' equity $ 284,032 $ 296,653
========= =========
The accompanying Notes to Consolidated and Combined Financial Statements are an
integral part of these statements.
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COACH, INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF INCOME FOR THE
THIRTEEN AND TWENTY-SIX WEEKS ENDED DECEMBER 30, 2000 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
----------- --------- ----------- ---------
Net sales $214,158 $194,128 $348,710 $312,160
Cost of sales 74,146 73,641 123,710 128,368
-------- -------- -------- --------
Gross profit 140,012 120,487 225,000 183,792
Selling, general and administrative 78,300 79,666 146,546 139,922
expenses
Reorganization costs -- -- 4,950 --
-------- -------- -------- --------
Operating income 61,712 40,821 73,504 43,870
Interest expense, net 1,399 97 1,512 194
-------- -------- -------- --------
Income before income taxes 60,313 40,724 71,992 43,676
Provision for income taxes 21,109 12,462 25,197 13,365
-------- -------- -------- --------
Net income $ 39,204 $ 28,262 $ 46,795 $ 30,311
======== ======== ======== ========
Net income per share $ 0.90 $ 0.81 $ 1.19 $ 0.87
======== ======== ======== ========
Shares used in computing basic net income per 43,513 35,026 39,270 35,026
share ======== ======== ======== ========
Diluted net income per share $ 0.88 $ 0.81 $ 1.18 $ 0.87
======== ======== ======== ========
Shares used in computing diluted net income per 44,513 35,026 39,769 35,026
share ======== ======== ======== ========
The accompanying Notes to Consolidated and Combined Financial Statements are an
integral part of these statements.
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COACH, INC.
CONSOLIDATED AND COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JULY 3, 1999 TO DECEMBER 30, 2000
(IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
TOTAL COMMON OTHER
STOCKHOLDERS' STOCKHOLDERS' COMPREHENSIVE COMPREHENSIVE
EQUITY EQUITY INCOME (LOSS) INCOME (LOSS)
--------------------------------------------------------------------------
Balances at July 3, 1999 $ 203,162 $ 203,966 $ (804)
Net income 30,311 30,311 -- $ 30,311
Translation adjustments 111 -- 111 111
---------
Comprehensive income $ 30,422
=========
--------- --------- ---------
Balances at January 1, 2000 233,584 234,277 (693)
Net income 8,292 8,292 -- 8,292
Equity distribution (29,466) (29,466) -- --
Translation adjustments 41 -- 41 41
Minimum pension liability 357 -- 357 357
---------
Comprehensive income $ 8,690
=========
--------- --------- ---------
Balances at July 1, 2000 212,808 213,103 (295)
Net income 46,795 46,795 -- 46,795
Capitalization of receivable from (63,783) (63,783) -- --
Sara Lee
Assumption of long-term debt (190,000) (190,000) --
Issuance of common stock, net 122,000 122,000 --
Translation adjustments 54 -- 54 54
Comprehensive income ---------
$ 46,849
=========
--------- --------- ---------
Balances at December 30, 2000 $ 127,874 $ 128,115 $ (241)
========= ========= =========
The accompanying Notes to Consolidated and Combined Financial Statements are an
integral part of these statements.
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COACH, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED DECEMBER 30, 2000 AND JANUARY 1, 2000
(IN THOUSANDS)
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
------------------------
DECEMBER 30, JANUARY 1,
2000 2000
------------ ----------
OPERATING ACTIVITIES
Net Income $ 46,795 $ 30,311
Adjustments for noncash charges included in net income:
Depreciation 11,002 10,262
Amortization of intangibles 445 448
Reorganization costs 4,950 --
Decrease (increase) in deferred taxes 494 (6,412)
Other noncash credits, net 52 111
Changes in current assets and
liabilities:
(Increase) in trade accounts (13,131) (8,881)
receivable
Decrease in inventories 724 10,128
Decrease in other current assets 1,569 1,125
(Decrease) in accounts payable (2,170) (8,095)
Increase in accrued liabilities 17,092 28,696
Decrease in receivable from Sara Lee 11,304 5,042
--------- ---------
Net cash from operating activities 79,126 62,735
--------- ---------
INVESTMENT ACTIVITIES
Purchases of property and equipment (17,003) (13,089)
Dispositions of property and equipment 807 1,541
--------- ---------
Net cash (used in) investment activities (16,196) (11,548)
--------- ---------
FINANCING ACTIVITIES
Issuance of common stock,net 122,000 --
Repayment of long-term debt (144,000) --
Borrowings from Sara Lee 319,043 264,004
Repayments to Sara Lee (362,242) (317,098)
Bank overdrafts 7,438 1,917
--------- ---------
Net cash (used in) financing activities (57,761) (51,177)
--------- ---------
Increase in cash and equivalents 5,169 10
Cash and equivalents at beginning of period 162 148
--------- ---------
Cash and equivalents at end of period $ 5,331 $ 158
========= =========
The accompanying Notes to Consolidated and Combined Financial Statements are an
integral part of these statements.
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COACH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
THIRTEEN AND TWENTY-SIX WEEKS ENDED DECEMBER 30, 2000 AND JANUARY 1, 2000
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1 BASIS OF PRESENTATION
Coach was formed in 1941 and was acquired by Sara Lee Corporation ("Sara
Lee") in July 1985 in a transaction accounted for as a purchase. Coach
has operated as a division in the United States and as subsidiaries in
foreign countries.
On May 30, 2000, Sara Lee announced its plan to create an independent
publicly traded company, Coach, Inc. ("Coach", the "Company") comprised
of Sara Lee's branded leathergoods and accessories business. On June 1,
2000, Coach was incorporated under the laws of the State of Maryland.
On October 2, 2000, Coach began to operate as a wholly owned subsidiary
of Sara Lee.
During October 2000 Coach completed an initial public offering of 8,487
shares of common stock. This reduced Sara Lee's ownership to 80.5%.
The historical financial statements have been prepared using Sara Lee's
historical basis in the assets and liabilities and the results of
Coach's business.
2 INVENTORIES
Inventories are valued at the lower of cost (determined by the
first-in, first-out method) or market. Inventory cost includes material
and conversion costs.
Components of inventories are as follows:
DECEMBER 30, JULY 1,
2000 2000
-------- --------
Finished Goods $ 98,287 $ 95,446
Work in process 666 677
Materials and supplies 2,420 5,974
-------- --------
$101,373 $102,097
======== ========
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COACH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
THIRTEEN AND TWENTY-SIX WEEKS ENDED DECEMBER 30, 2000 AND JANUARY 1, 2000
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
3 REVOLVING CREDIT FACILITY/LONG TERM DEBT
Coach participates in a cash concentration system that requires that
cash balances be deposited with Sara Lee which are netted against any
borrowings or billings that are provided by Sara Lee. On July 2, 2000,
Coach entered into a revolving credit facility with Sara Lee. The
maximum borrowing from Sara Lee permitted under this facility is $75,000
which accrues interest at US dollar LIBOR plus 30 basis points. Any
receivable balance from Sara Lee under this facility earns interest at
US dollar LIBOR minus 20 basis points. When Sara Lee owns less than 50%
of Coach's outstanding capital stock this facility will terminate and
become due. The credit facility contains certain covenants including a
requirement that Coach maintain an interest coverage ratio of at least
1.75, and restrictions on mergers, significant property disposals,
dividends, additional secured debt, sale and leaseback transactions or
lease obligations in excess of amounts approved by Sara Lee. As of
December 30, 2000 we are in compliance with all note covenants. We are
required to repay these borrowings from cash provided by operations as
reduced by capital expenditures.
During October 2000, Coach completed an equity restructuring which
resulted in the assumption of $190,000 of long-term debt payable to a
subsidiary of Sara Lee. The net proceeds of the initial public offering
were used to partially repay this loan resulting in a balance of
$68,000.
This long-term debt has a maturity date of September 30, 2002 and
accrues interest at U.S. dollar LIBOR plus 30 basis points while Sara
Lee owns greater than a majority of Coach's common stock, and U.S.
dollar LIBOR plus 250 basis points when Sara Lee owns less than 80% of
Coach's capital stock. The note contains certain covenants, including a
requirement that Coach maintain an interest coverage ratio of at least
1.75, and restrictions on mergers, significant property disposals,
dividends, additional secured debt, sale and leaseback transactions or
lease obligations in excess of amounts approved by Sara Lee. Primarily
all cash flows from operations less capital expenditures after debt
service payments under the cash concentration system are required as
payments under this note. During the second quarter additional payments
were made in the amount of $22,000 reducing the balance to $46,000 at
December 30, 2000. In January 2001, this loan was fully paid off by the
Company, by redeeming the short-term investments with Sara Lee and
drawing down on the revolving credit facility.
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COACH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
THIRTEEN AND TWENTY-SIX WEEKS ENDED DECEMBER 30, 2000 AND JANUARY 1, 2000
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
4 REORGANIZATION COSTS
In the first quarter of fiscal year 2001, management of Coach committed
to and announced a plan to cease production at the Medley, Florida
manufacturing facility in October 2000, (the "Medley reorganization").
This reorganization involves the termination of 362 manufacturing,
warehousing and management employees at the Medley, Florida facility.
These actions are intended to reduce costs by the resulting transfer of
production to lower cost third-party manufacturers.
Coach recognized a reorganization cost of $4,950 in the first quarter
of fiscal year 2001. This reorganization cost includes $3,168 for
worker separation costs, $785 for lease termination costs, and $997
for the write down of long-lived assets to their estimated net
realizable values.
The composition of the reorganization reserves is set forth in the
table below. We expect that the Medley reorganization actions will be
completed by the end of this fiscal year.
WRITE-DOWN OF
ORIGINAL LONG-LIVED ASSETS REORGANIZATION
REORGANIZATION TO NET REALIZABLE CASH RESERVES AS OF
RESERVES VALUE PAYMENTS DECEMBER 30, 2000
------- ------- ------- -------
Workers' separation costs $ 3,168 -- $(1,964) $ 1,204
Lease termination costs 785 -- (126) 659
Anticipated losses on
disposal of fixed assets 997 $ (997) -- --
------- ------- ------- -------
Total reorganization reserve $ 4,950 $ (997) $(2,090) $ 1,863
======= ======= ======= =======
During 1999, Coach closed its Carlstadt, New Jersey warehouse and
distribution center, and its Italian manufacturing operation and
reorganized its Medley, Florida manufacturing facility, (the "Carlstadt
reorganization"). As contemplated in the original plan, a portion of the
Carlstadt facility remains in use for product development. Related to
these facility closures and the reorganization activities, 737 employees
were terminated. At July 1, 2000, these reorganization actions were
complete and certain workers' separation costs remained to be paid
subject to the separation agreements with each employee. During the
first half, workers' separation costs of $142 were paid. The Carlstadt
reorganization is now complete.
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COACH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
THIRTEEN AND TWENTY-SIX WEEKS ENDED DECEMBER 30, 2000 AND JANUARY 1, 2000
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
5 EARNINGS PER SHARE
Prior to October 2, 2000, Coach operated as a division of Sara Lee and
did not have any shares outstanding. The initial capitalization of
Coach, Inc. was 1 share. Subsequently, a stock dividend was declared
resulting in 35,026 shares held by Sara Lee. The number of shares
outstanding has been restated to reflect the effect of this stock
dividend for all periods presented. During October 2000, the initial
public offering of our common stock was accomplished resulting in the
issuance of an additional 8,487 shares. Following the offering, 43,513
shares are outstanding. Dilutive securities include share equivalents
held in employee benefit programs and the impact of stock option
programs. The following is a reconciliation of shares outstanding:
THIRTEEN WEEKS ENDED
---------------------------------
DEC. 30, 2000 JAN. 1, 2000
------ ------
Shares held by Sara Lee 35,026 35,026
Shares held by the public 8,487 --
------ ------
Total basic shares 43,513 35,026
Dilutive securities
Employee benefit and stock award plans 165 --
Stock option programs 835 --
------ ------
Total diluted shares 44,513 35,026
====== ======
TWENTY-SIX WEEKS ENDED
---------------------------------
DEC. 30, 2000 JAN. 1, 2000
------ ------
Shares held by Sara Lee 35,026 35,026
Shares held by the public 4,244 --
------ ------
Total basic shares 39,270 35,026
Dilutive securities
Employee benefit and stock award plans 82 --
Stock option programs 417 --
------ ------
Total diluted shares 39,769 35,026
====== ======
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COACH, INC. INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
THIRTEEN AND TWENTY-SIX WEEKS ENDED DECEMBER 30, 2000 AND JANUARY 1, 2000
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
6 SEGMENT INFORMATION
The Company operates its business in two reportable segments: Direct to
Consumer and Wholesale. The Company's reportable segments represent
channels of distribution that offer similar merchandise, service and
marketing strategies. Sales of Coach products through Company owned
retail and factory stores, the Coach catalogue and the internet
constitute the Direct to Consumer segment. Wholesale refers to sales of
Coach products to other retailers. In deciding how to allocate
resources and assess performance, Coach's executive officers regularly
evaluate the sales and operating income of these segments. Operating
income is the gross margin of the segment at standard cost less direct
expenses of the segment. Unallocated corporate expenses include
manufacturing variances, general marketing, administration and
information systems, distribution and customer service expenses.
DIRECT TO CORPORATE
THIRTEEN WEEKS ENDED DEC. 30, 2000 CONSUMER WHOLESALE UNALLOCATED TOTAL
- ---------------------------------------------------------------------------------------------------------------
Net Sales $145,732 $ 68,426 -- $214,158
Operating income (loss) 59,216 29,868 $(27,372) 61,712
Interest income -- -- 5 5
Interest expense -- -- 1,404 1,404
Income (loss) before taxes 59,216 29,868 (28,771) 60,313
Depreciation and amortization 3,443 376 2,010 5,829
Total assets 136,702 64,230 83,100 284,032
Additions to long-lived assets 7,713 683 1,034 9,430
DIRECT TO CORPORATE
THIRTEEN WEEKS ENDED JAN. 1, 2000 CONSUMER WHOLESALE UNALLOCATED TOTAL
- ---------------------------------------------------------------------------------------------------------------
Net sales $ 134,814 $ 59,314 -- $ 194,128
Operating income (loss) 51,915 22,637 $ (33,731) 40,821
Interest income -- -- 8 8
Interest expense -- -- 105 105
Income (loss) before taxes 51,915 22,637 (33,828) 40,724
Depreciation and amortization 2,473 375 2,479 5,327
Total assets 121,035 56,269 157,724 335,028
Additions to long-lived assets 6,337 333 797 7,467
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COACH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
THIRTEEN AND TWENTY-SIX WEEKS ENDED DECEMBER 30, 2000 AND JANUARY 1, 2000
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
DIRECT TO CORPORATE
TWENTY-SIX WEEKS ENDED DEC. 30, 2000 CONSUMER WHOLESALE UNALLOCATED TOTAL
- ---------------------------------------------------------------------------------------------------------------
Net Sales $226,240 $122,470 -- $348,710
Operating income (loss) 79,268 51,994 $(57,758) 73,504
Interest income -- -- 13 13
Interest expense -- -- 1,525 1,525
Income (loss) before taxes 79,268 51,994 (59,270) 71,992
Depreciation and amortization 6,510 770 4,167 11,447
Total assets 136,702 64,230 83,100 284,032
Additions to long-lived assets 13,951 1,582 1,470 17,003
DIRECT TO CORPORATE
TWENTY-SIX WEEKS ENDED JAN. 1, 2000 CONSUMER WHOLESALE UNALLOCATED TOTAL
- ---------------------------------------------------------------------------------------------------------------
Net sales $ 205,175 $ 106,985 -- $ 312,160
Operating income (loss) 66,670 39,111 $ (61,911) 43,870
Interest income -- -- 16 16
Interest expense -- -- 210 210
Income (loss) before taxes 66,670 39,111 (62,105) 43,676
Depreciation and amortization 4,986 752 4,972 10,710
Total assets 121,035 56,269 157,724 335,028
Additions to long-lived assets 9,226 689 3,174 13,089
The following is a summary of the common costs not allocated in the
determination of segment performance.
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
--------------------------------- ----------------------------------
DEC. 30, 2000 JAN. 1, 2000 DEC. 30, 2000 JAN. 1, 2000
-------- -------- -------- --------
Manufacturing variances $ (1,470) $ (2,412) $ (1,853) $ (9,401)
Advertising, marketing and design (13,848) (14,270) (22,776) (22,050)
Administration and information systems (5,408) (11,045) (15,684) (18,640)
Distribution and customer service (6,646) (6,004) (12,495) (11,820)
Reorganization costs -- -- (4,950) --
-------- -------- -------- --------
Total corporate unallocated $(27,372) $(33,731) $(57,758) $(61,911)
======== ======== ======== ========
7 RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, June 1999 and June 2000, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities"
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COACH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
THIRTEEN AND TWENTY-SIX WEEKS ENDED DECEMBER 30, 2000 AND JANUARY 1, 2000
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133"
and SFAS No. 138, "Accounting for Derivative Instruments and Hedging
Activities - an amendment of SFAS No. 133". These statements outline
the accounting treatment for derivative and hedging activities. Coach
adopted SFAS No. 133, as amended, as of July 2, 2000. Coach does not
hold or use derivative instruments, hence this adoption had no effect
on Coach's operating income or financial position.
8 PUBLIC OFFERING
In October 2000, Coach completed an initial public offering of common
stock. In conjunction with this offering, the following transactions
occurred:
On July 2, 2000, the receivable from Sara Lee was capitalized
into stockholders' net investment. No cash was paid or
collected by either party.
On October 2, 2000, Coach assumed $190,000 of indebtedness to
a subsidiary of Sara Lee resulting in a reduction in equity.
Coach declared and paid a 35,025.333 to 1.0 common stock
dividend.
Coach sold 8,487 shares of common stock in an initial public
offering at a price of $16.00 per share. After deducting the
underwriting discount and estimated offering expenses, net
proceeds of $122,000 were received.
The net offering proceeds were used to repay a portion of the
indebtedness to a subsidiary of Sara Lee resulting in a
remaining obligation of $68,000.
Coach issued options to purchase 3,206 shares of our common
stock at the offering price.
Coach employees elected to convert previously held Sara Lee
options into options to purchase 1,204 shares of our common
stock.
Coach employees elected to convert previously held Sara Lee
service-based restricted stock units into 34 Coach
service-based restricted stock units.
Coach employees elected to convert previously held Sara Lee
restricted stock units under deferred compensation agreements,
into 125 shares of Coach restricted stock units.
9 STOCK-BASED COMPENSATION
Coach has established the 2000 Stock Incentive Plan and the 2000
Non-Employee Director Stock Plan to award stock options and other forms of
equity compensation to certain members of Coach management and the outside
members of our Board of Directors. The exercise price of each stock option
equals 100% of the market price of Coach's stock on the date of grant and
generally has a maximum term of 10 years. Options generally vest ratably over
three years.
Concurrent with the initial public offering in October 2000, Coach granted
3,191 options to essentially all full-time employees and 15 options to outside
members of the Board of Directors at the initial public offering price of $16.
Certain employees with the tile of Director or above who held Sara Lee stock
options at the initial public offering date were given the right to convert the
Sara Lee options into Coach options. Any Sara Lee option converted into a Coach
option generally may not be exercised until the earlier of one year following
conversion, or that time that Sara Lee ceases to own at least 80% of Coach's
outstanding capital stock, subject to the original vesting requirements. Coach
employees converted at the initial public of offering date 1,204 Sara Lee
options into the same number of Coach options while maintaining the same
exercise price.
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COACH, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
THIRTEEN AND TWENTY-SIX WEEKS ENDED DECEMBER 30, 2000 AND JANUARY 1, 2000
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
A summary of Coach options held by Coach employees follows:
WEIGHTED
AVERAGE
EXERCISE
(SHARES IN THOUSANDS) NUMBER OF OPTIONS PRICE
- --------------------- ----------------- --------
Options granted at the initial
public offering date 3,206 $16.00
Sara Lee options converted 1,204 $24.12
Granted 186 $22.83
Canceled / Expired (79) $16.48
Options outstanding at -------
December 30, 2000 4,517 $18.42
=======
The fair value of each Coach option grant is estimated on the date of grant
using the Black-Scholes option-pricing model and the assumptions for expected
lives of 3 years, a risk free interest rate of 4.8%, expected volatility of
40% and no dividend yield.
The weighted average fair value of individual options granted during the
quarter ended December 30, 2000 was $5.30. Under APB No. 25, no compensation
cost is recognized for stock options under the Coach stock-based compensation
plans. Had compensation cost for the grants for stock based compensation been
determined consistent with SFAS No. 123, Coach's net income, net income per
share basic and net income per share diluted would have been:
13 Weeks Ended 26 Weeks Ended
December 30, 2000 December 30, 2000
------------------ -------------------
Net Income $38,020 $45,611
Net Income per share
- - Basic $0.87 $1.16
- - Diluted $0.85 $1.15
Sara Lee has announced its intent to divest its 80.5% ownership in Coach
pursuant to an exchange offer to Sara Lee shareholders. Upon the completion of
this exchange offer all remaining Sara Lee options held by Coach employees will
convert into Coach options using a conversion ratio of Coach's stock price to
Sara Lee's stock price immediately preceding the conversion. At December 30,
2000, Coach employees held 298 Sara Lee options with an average exercise
price of $20.47. Of these options, 263 were excercisable at a weighted average
excercise price of $20.17. Upon conversion into Coach options, these options
will continue to vest based upon the original vesting schedule.
10 SUBSEQUENT EVENT
On January 24, 2001, Sara Lee announced its intent to divest its 80.5%
ownership in Coach, pursuant to an exchange offer to Sara Lee
shareholders. On January 26, 2001, Coach filed a registration statement on
Form S-4 with the Securities and Exchange Commission to begin the exchange
offer process. The exchange offer is expected to be completed by the end
of April 2001.
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16
ITEM 2.
COACH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the results of operations for the
second quarter and first six months of fiscal 2001 compared to the second
quarter and first six months of fiscal 2000, and a discussion of the changes in
financial condition during the first six months of fiscal 2001.
This Management's Discussion and Analysis should be read in conjunction
with Coach's Consolidated and Combined Financial Statements and accompanying
footnotes thereto, along with the cautionary statement of risk factors at the
end of this section.
RESULTS OF OPERATIONS
SECOND QUARTER FISCAL 2001 COMPARED TO SECOND QUARTER FISCAL 2000
Net sales by business segment in the second quarter of fiscal 2001
compared to the second quarter of fiscal 2000 are as follows:
THIRTEEN WEEKS ENDED
----------------------------------------------------------------------------------
NET SALES PERCENTAGE OF TOTAL NET SALES
(UNAUDITED)
DEC. 30, JAN. 1, DEC. 30, JAN. 1,
2000 2000 RATE OF INCREASE 2000 2000
------ ------ ---------------- ------ ------
(DOLLARS IN MILLIONS*)
Direct to Consumer $145.7 $134.8 8.1% 68.0% 69.4%
Wholesale 68.4 59.3 15.4% 32.0 30.6
------ ------ ------ ------
Total Net Sales $214.2 $194.1 10.3% 100.0% 100.0%
====== ====== ====== ======
Combined statements of income for the second quarter of fiscal 2001
compared to the second quarter of fiscal 2000 are as follows:
THIRTEEN WEEKS ENDED
-------------------------------------------------------------
(DOLLARS IN MILLIONS*, EXCEPT FOR EARNINGS PER SHARE)
DEC. 30, 2000 JAN 1, 2000
------------------------ ------------------------
(UNAUDITED) (UNAUDITED)
$ % TO NET SALES $ % TO NET SALES
------ ------ ------ ------
Net sales $213.7 99.8% $193.6 99.7%
Licensing revenue 0.5 0.2 0.5 0.3
------ ------ ------ ------
Total net sales 214.2 100.0 194.1 100.0
------ ------ ------ ------
Gross profit 140.0 65.4 120.5 62.1
Selling, general and administrative expenses 78.3 36.6 79.7 41.0
Operating income before reorganization costs 61.7 28.8 40.8 21.0
Reorganization costs -- -- -- --
Operating income 61.7 28.8 40.8 21.0
Net interest expense 1.4 0.7 0.1 --
------ ------ ------ ------
Income before taxes 60.3 28.2 40.7 21.0
Income taxes 21.1 9.9 12.4 6.4
------ ------ ------ ------
Net income $ 39.2 18.3% $ 28.3 14.6%
====== ====== ====== ======
*Components may not add to total due to rounding.
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17
THIRTEEN WEEKS ENDED
----------------------------------
DEC. 30, 2000 JAN. 1, 2000
---------- ----------
Net income per share:
Basic $ 0.90 $0.81(1)
Diluted $ 0.88 $0.81(1)
Weighted average number of common shares:
Basic 43,513 35,026
Diluted 44,513 35,026
(1) $0.65 per share if common shares sold in October 2000 public offering had
been outstanding for the prior periods.
NET SALES
Net sales increased by 10.3% to $214.2 million in the second quarter of
fiscal 2001 from $194.1 million during the second quarter of fiscal 2000. These
results reflect increased volume in both the direct to consumer and wholesale
channels.
Direct to Consumer. Net sales increased 8.1% to $145.7 million during
the second quarter of fiscal 2001 from $134.8 million during the same period in
fiscal 2000. The increase was primarily due to new store openings, comparable
stores sales growth, store renovations and store expansions. Since the end of
the second quarter of fiscal 2000, Coach has opened thirteen new retail stores
and three new factory stores. In addition, twenty-one retail stores and four
factory stores were remodeled while five retail stores and one factory store
were expanded. Coach also closed one factory store since the end of the second
quarter of fiscal 2000.
Wholesale. Net sales attributable to domestic and international
wholesale shipments increased 15.4% to $68.4 million in the second quarter of
fiscal 2001 from $59.3 million during the same period in fiscal 2000. The
increase was primarily due to strong gains in the international division,
highlighted by continued double-digit increases in comparable location sales to
Japanese consumers worldwide. The net sales increase was also driven by
increased demand for new products in both our U.S. and international wholesale
channels.
GROSS PROFIT
Gross profit increased 16.2% to $140.0 million in the second quarter of
fiscal 2001 from $120.5 million during the same period in fiscal 2000. Gross
margin increased 330 basis points to 65.4% in the second quarter of fiscal 2001
from 62.1% during the same period in fiscal 2000. These increases were primarily
due to the continuing impact of manufacturing and sourcing cost reductions
realized during fiscal 2001 from the reorganization that commenced in 1999, as
well as increased demand for new higher margin products.
The following chart illustrates the gross margin performance which we have
experienced over the last six quarters:
FISCAL YEAR ENDED JULY 1, 2000
----------------------------------------------------------------------------------------
Q1 Q2 1ST HALF Q3 Q4 2ND HALF TOTAL
(UNAUDITED) YEAR
---- ---- ---- ---- ---- ---- ----
Gross Margin 53.6% 62.1% 58.9% 61.0% 61.5% 61.3% 59.9%
FISCAL YEAR ENDING JUNE 30, 2001
Q1 Q2 1ST HALF
(UNAUDITED)
-------------------------------------------------
Gross Margin 63.2% 65.4% 64.5%
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18
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 1.7% to 78.3
million, or 36.6% of net sales, in the second quarter of fiscal 2001 from $79.7
million, or 41.0% of net sales, during the same period in fiscal 2000.
Selling expenses increased by 13.7% to $48.6 million, or 22.7% of net
sales, in the second quarter of fiscal 2001 from $42.7 million, or 22.0% of net
sales, during the same period in fiscal 2000. The dollar increase in these
expenses was primarily due to $2.5 million of operating costs associated with
thirteen new retail stores and three new factory stores that were not open
during the second quarter of fiscal 2000. Additionally, one store was
permanently closed since the end of the second quarter of fiscal 2000. The
remaining selling expense increase was caused by volume related costs in our
wholesale segment.
Advertising, marketing, and design expenses decreased by 11.0% to $17.1
million or 8.0% of net sales, in the second quarter of fiscal 2001 from $19.2
million, or 9.9% of net sales, during the same period in fiscal 2000. The dollar
decrease in these expenses was primarily due to a reduction in catalogue
circulation, timing of advertising media and production costs versus first
quarter of fiscal 2001, as well as a shift from magazine and outdoor advertising
to newspaper advertising.
Distribution and customer service expenses increased by 8.0% to $7.2
million, or 3.4% of net sales, in the second quarter of fiscal 2001, from $6.7
million, or 3.4% of net sales, during the same period in fiscal 2000. The dollar
increase was due to variable expenses to handle the increase in sales volume.
Administrative expenses decreased to $5.4 million, or 2.5% of net
sales, in the second quarter of fiscal 2001 from $11.0 million, or 5.7% of net
sales, during the same period in fiscal 2000. The decrease in these expenses was
due to lower fringe benefit costs and lower performance based compensation
expenses, partially offset by higher occupancy costs associated with the lease
renewal of our New York City corporate headquarters location and incremental
expenses incurred to support new corporate governance activities relating to the
Company becoming publicly owned.
OPERATING INCOME
Operating Income increased 51.2% to $61.7 million, or 28.8% of net
sales, in the second quarter of fiscal 2001 from $40.8 million, or 21.0% of net
sales, during the same period in fiscal 2000. This increase resulted from higher
sales and improved gross margins, and a decrease in selling, general and
administrative expenses.
INCOME TAXES
The effective tax rate increased to 35.0% in the second quarter of
fiscal 2001 from 30.6% during the same period in fiscal 2000. This increase was
caused by a lower percentage of income in fiscal 2001 attributable to
company-owned offshore manufacturing, which is taxed at lower rates.
NET INCOME
Net income increased 38.7% to $39.2 million, or 18.3% of net sales, in
the second quarter of fiscal 2001 from $28.3 million, or 14.6% of net sales,
during the same period in fiscal 2000. This increase was the result of increased
operating income partially offset by a higher provision for taxes.
Page 18
19
EARNINGS PER SHARE
Diluted net income per share was $0.88 in the second quarter of 2001.
Prior year earnings per share were $0.81 for the second quarter because only the
shares owned by Sara Lee are used in the calculation. Comparable earnings per
share in 2000 would have been $0.65 if the common shares sold in the October
2000 public offering had been outstanding for the prior period.
FIRST SIX MONTHS FISCAL 2001 COMPARED TO FIRST SIX MONTHS OF FISCAL 2000
Net sales by business segment in the first six months of fiscal 2001
compared to the first six months of fiscal 2000 are as follows:
TWENTY-SIX WEEKS ENDED
----------------------------------------------------------------------------------
NET SALES PERCENTAGE OF TOTAL NET SALES
(UNAUDITED)
DEC. 30, JAN. 1, DEC. 30, JAN. 1,
2000 2000 RATE OF INCREASE 2000 2000
------ ------ ---------------- ------ ------
(DOLLARS IN MILLIONS*)
Direct to Consumer $226.2 $205.2 10.3% 64.9% 65.7%
Wholesale 122.5 107.0 14.5% 35.1 34.3
------ ------ ------ ------
Total Net Sales $348.7 $312.2 11.7% 100.0% 100.0%
====== ====== ====== ======
Combined statements of income for the first six months of fiscal 2001
compared to the first six months of fiscal 2000 are as follows:
TWENTY-SIX WEEKS ENDED
-------------------------------------------------------------
(DOLLARS IN MILLIONS*, EXCEPT FOR EARNINGS PER SHARE)
DEC. 30, 2000 JAN 1, 2000
------------------------ ------------------------
(UNAUDITED) (UNAUDITED)
$ % TO NET SALES $ % TO NET SALES
------ ------ ------ ------
Net sales $347.6 99.7% $311.3 99.7%
Licensing revenue 1.1 0.3 0.9 0.3
------ ------ ------ ------
Total net sales 348.7 100.0 312.2 100.0
------ ------ ------ ------
Gross profit 225.0 64.5 183.8 58.9
Selling, general and administrative expenses 146.5 42.0 139.9 44.8
------ ------ ------ ------
Operating income before reorganization costs 78.5 22.5 43.9 14.1
Reorganization costs 5.0 1.4 -- --
------ ------ ------ ------
Operating income 73.5 21.1 43.9 14.1
Net interest expense 1.5 0.4 0.2 0.1
------ ------ ------ ------
Income before taxes 72.0 20.6 43.7 14.0
Income taxes 25.2 7.2 13.4 4.3
------ ------ ------ ------
Net income $ 46.8 13.4% $ 30.3 9.7%
====== ====== ====== ======
*Components may not add to total due to rounding
<CAPTION)
TWENTY-SIX WEEKS ENDED
------------------------------
DEC. 30, 2000 JAN. 1, 2000
------------- ------------
Net income per share:
Basic $1.19 (2) $0.87 (4)
Diluted $1.18 (3) $0.87 (4)
Weighted average number of common shares:
Basic 39,270 35,026
Diluted 39,769 35,026
(2) $1.15 per share after adding back the impact of the reorganization
charge and if the common shares sold in October 2000 public offering
had been outstanding for the entire six-month period.
(3) $1.14 per share after adding back the impact of the reorganization
charge and if the common shares sold in October 2000 public offering
had been outstanding for the entire six-month period.
(4) $0.70 per share if the common shares sold in October 2000 public
offering had been outstanding for the prior periods.
Page 19
20
NET SALES
Net sales increased by 11.7% to $348.7 million in the first six months
of fiscal 2001 from $312.2 million during the first six months of fiscal 2000.
These results reflect increased volume in both the direct to consumer and
wholesale channels.
Direct to Consumer. Net sales increased 10.3% to $226.2 million during
the first six months of fiscal 2001 from $205.2 million during the same period
in fiscal 2000. The increase was primarily due to new store openings, comparable
stores sales growth, store renovations and store expansions. Since the end of
the first six months of fiscal 2000, Coach has opened thirteen new retail stores
and three new factory stores. In addition, twenty-one retail stores and four
factory stores were remodeled while five retail stores and one factory store
were expanded. Coach also closed one factory store since the end of the first
six months of fiscal 2000.
Wholesale. Net sales attributable to domestic and international
wholesale shipments increased 14.5% to $122.5 million in the first six months of
fiscal 2001 from $107.0 million during the same period in fiscal 2000. The
increase was primarily due to strong gains in the international wholesale
channel, highlighted by continued double-digit increases in comparable location
sales to Japanese consumers worldwide. Net sales also increased due to increased
demand for new products in both our U.S. and international wholesale channels.
Licensing revenue increased 17.2% to $1.1 million in the first six months of
fiscal 2001 from $0.9 million during the first six months of fiscal 2000 caused
primarily by expanded distribution of licensed footwear product.
GROSS PROFIT
Gross profit increased 22.4% to $225.0 million in the first six months
of fiscal 2001 from $183.8 million during the same period in fiscal 2000. Gross
margin increased 560 basis points to 64.5% the first six months of fiscal 2001
from 58.9% during the same period in fiscal 2000. These increases were primarily
due to the continuing impact of manufacturing and sourcing cost reductions
realized during fiscal 2001 from the reorganization that commenced in 1999, as
well as increased demand for new higher margin products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling general and administrative expenses increased 4.7% to $146.5
million, or 42.0% of net sales, in the first six months of fiscal 2001 from
$139.9 million, or 44.8% of net sales, during the same period in fiscal 2000.
Selling expenses increased by 13.1% to $90.1 million, or 25.8% of net
sales, in the first six months of fiscal 2001 from $79.6 million, or 25.5% of
net sales, during the same period in fiscal 2000. The dollar increase in these
expenses was primarily due to $4.7 million of operating costs associated with
thirteen new retail stores and three new factory stores that were not open
during the first six months of fiscal 2000. Additionally, one store was
permanently closed since the end of the first six months of fiscal 2000. The
remaining selling expense increase was primarily caused by volume related costs
in our wholesale segment.
Advertising, marketing, and design expenses decreased by 4.4% to $27.1
million ,or 7.8% of net sales, in the first six months of fiscal 2001 from
$28.4 million, or 9.1% of net sales, during the same period in fiscal 2000. The
dollar decrease in these expenses was primarily due to a reduction in catalogue
circulation, and a shift from magazine and outdoor advertising to newspaper
advertising.
Page 20
21
Distribution and customer service expenses increased by 2.8% to $13.7
million, or 3.9% of net sales, in the first six months of fiscal 2001 from $13.3
million, or 4.3% of net sales, during the same period in fiscal 2000. The dollar
increase was due to variable expenses to handle the increase in sales volume
partially offset by efficiency gains associated with the consolidation of
warehouse and customer service activities into our Jacksonville, Florida
facility.
Administrative expenses decreased to $15.7 million, or 4.5% of net
sales, in the first six months of fiscal 2001 from $18.6 million, or 6.0% of net
sales, during the same period in fiscal 2000. The decrease in these expenses was
due to lower fringe benefit costs and lower performance based compensation
expenses partially offset by higher occupancy costs associated with the lease
renewal of our New York City corporate headquarters location and incremental
expenses incurred to support new corporate governance activities relating to the
Company becoming publicly owned.
REORGANIZATION COSTS
In the first fiscal quarter of 2001, management of Coach committed to
and announced a plan to cease production at the Medley, Florida manufacturing
facility in October 2000. This reorganization involves the termination of 362
manufacturing, warehousing and management employees at the Medley, Florida
facility. These actions are intended to reduce costs by the resulting transfer
of production to lower cost third-party manufacturers. Coach recorded a
reorganization cost of $5.0 million in the first quarter of fiscal year 2001.
This reorganization cost includes $3.2 million for worker separation costs, $0.8
million for lease termination costs and $1.0 million for the write down of
long-lived assets to estimated net realizable value. We expect that these
reorganization actions will be completed by the end of this fiscal year.
OPERATING INCOME
Operating income increased 67.5% to $73.5 million, or 21.1% of net
sales, in the first six months of fiscal 2001 from $43.9 million, or 14.1% of
net sales, during the same period in fiscal 2000. Before the impact of
reorganization costs in the first six months of fiscal 2001, operating income
increased 78.8% to $78.5 million from $43.9 million during the same period in
fiscal 2000. This increase resulted from higher sales and improved gross
margins, partially offset by an increase in selling, general and administrative
expenses.
INCOME TAXES
The effective tax rate increased to 35.0% in the first six months of
fiscal 2001 from 30.6% during the same period in fiscal 2000. This increase was
caused by a lower percentage of income in fiscal 2001 attributable to
company-owned offshore manufacturing, which is taxed at lower rates.
NET INCOME
Net income increased 54.4% to $46.8 million, or 13.4% of net sales, in
the first six months of fiscal 2001 from $30.3 million, or 9.7% of net sales,
during the same period in fiscal 2000. Before the impact of reorganization costs
in the first six months of fiscal 2001, net income increased 65% to $50.0
million from $30.3 million during the same period in fiscal 2000. This increase
was the result of increased operating income partially offset by a higher
provision for taxes.
EARNINGS PER SHARE
Diluted net income per share was $1.18 for the first six months of
fiscal year 2001. This reflects a weighted average of the shares outstanding
before and after the public offering of common stock in October 2000. If the
common shares sold in the October 2000 Public Offering
Page 21
22
had been outstanding for the entire half, net income before the impact of
reorganization costs per share would have been $1.14. Prior year diluted net
income per diluted share was $0.87 since only the shares owned by Sara Lee are
used in the calculation. Comparable net earnings per share in the first half of
fiscal 2000 would have been $0.70 if the common shares sold in the October 2000
public offering had been outstanding for the prior period.
FINANCIAL CONDITION
LIQUIDITY AND CAPITAL RESOURCES
Sara Lee manages cash on a centralized basis for Coach and its other
businesses. Cash receipts associated with our business are transferred directly
to Sara Lee on a daily basis and Sara Lee provides funds to cover our
disbursements.
Cash provided by operating activities, defined as net income plus
depreciation and amortization and the change in working capital, was $79.1
million for the first half of fiscal 2001. Cash provided by operating activities
was $62.7 million in the same period of fiscal 2000. The $16.4 million
year-to-year increase in cash provided from operating activities was the result
of higher earnings.
Capital expenditures amounted to $17.0 million in the first half of
fiscal 2001, compared to $13.1 million in the first half of fiscal 2000 and in
both periods related primarily to new and renovated retail stores. Our future
capital expenditures will depend on the timing and rate of expansion of our
businesses, new store openings, store renovations and international expansion
opportunities.
On July 2, 2000, we entered into a revolving credit facility with Sara
Lee under which we may borrow up to $75 million. At December 30, 2000 we had no
outstanding balance on this credit facility. The revolving credit facility is
available to fund general corporate purposes and terminates when Sara Lee no
longer holds 50% of our outstanding capital stock. To provide funding for
working capital for operations and general corporate purposes, on January 17,
2001, Coach entered into a commitment letter with Fleet National Bank under
which Fleet will act as exclusive administrative agent with respect to
syndicating a proposed senior unsecured revolving credit facility for up to $125
million. Coach expects this facility to be in effect by March 1, 2001.
At the time of the IPO, we assumed $190 million of indebtedness in
the form of a term note which matures on September 30, 2002, which was partially
repaid with the $122 million net proceeds of the IPO resulting in a balance of
$68 million. During the second quarter, this loan balance was reduced to $46
million as a result of payments made from free cash flow. In January 2001, we
paid off this debt in its entirety by redeeming the short term investments with
Sara Lee and drawing down on the revolving credit facility. Each of the
revolving credit facility and the term note covenants require us to maintain an
interest coverage ratio of at least 1.75 to 1.0, and contains restrictions on
liens, mergers and consolidations, significant property disposals, payment of
dividends, transactions with affiliates (other than Sara Lee), sale and
leaseback transactions and lease obligations in excess of amounts approved by
Sara Lee. As of December 30, 2000 we are in compliance with all note covenants.
We are required to repay these borrowings from cash provided by operations as
reduced by capital expenditures.
We plan to open at least 15 new retail stores in fiscal year 2001, of
which eight were opened during the first half. We also expect to continue our
store renovations program in fiscal
Page 22
23
2001. We expect that fiscal 2001 capital expenditures for new retail stores will
be approximately $10 million to $12 million and that capital expenditures for
store renovations will be approximately $11 million. We intend to finance these
investments from internally generated cash flow or by using funds from our
revolving credit facility.
We experience significant seasonal variations in our working capital
requirements. During the first fiscal quarter we build inventory for the holiday
selling season, open new retail stores and increase trade receivables. In the
second fiscal quarter our working capital requirements were reduced
substantially as we generated consumer sales and collected wholesale accounts
receivable. In the first six months of fiscal 2001, we purchased approximately
$125 million of inventory which was funded by operating cash flow and by
borrowings under our revolving credit facility. As of December 30, 2000, there
were no outstanding borrowings under the revolving credit facility. We believe
that our operating cash flow, together with our revolving credit facility, will
provide sufficient capital to fund our operations for the foreseeable future.
Until Sara Lee effects a distribution of its Coach stock, we have
agreed not to cause Sara Lee's ownership of our outstanding capital stock to
fall below 80%. As a result, we may be required to purchase shares of our common
stock on the open market as options are exercised and use the repurchased shares
to satisfy options exercised and the vesting of restricted stock units. We
believe that our operating cash flow, together with our revolving credit
facility, will provide sufficient funds for any required share repurchases.
Currently, Sara Lee is a guarantor or a party to many of our store
leases. We have agreed to make efforts to remove Sara Lee from all of our
existing leases and Sara Lee will not guarantee or be a party to any new or
renewed leases that we enter into after our separation from Sara Lee, which
occurred on October 2, 2000. We have agreed to obtain a letter of credit for the
benefit of Sara Lee in an amount approximately equal to the annual minimum
rental payments under leases transferred to us by Sara Lee but for which Sara
Lee retains contingent liability. We are required to obtain this letter of
credit as of the date Sara Lee no longer is allowed to consolidate our results
of operations and financial position, and to maintain the letter of credit until
the annual minimum rental payments under the relevant leases are less than $2.0
million. We currently expect the initial letter of credit to have a face amount
of up to approximately $25.6 million and this amount will decrease annually
as our guaranteed obligations are reduced. We expect that we will be required to
maintain the letter of credit for at least 10 years.
PUBLIC OFFERING OF COMMON STOCK
During October 2000 we entered into several transactions relating to
the public offering of our common stock:
- - We assumed $190 million of indebtedness to a subsidiary of Sara Lee.
- - We declared a stock dividend on the common stock held by Sara Lee resulting
in 35,026,333 shares outstanding.
- - We sold 8,487,000 shares of common stock in an initial public offering at a
price of $16.00 per share. After deducting the underwriting discount and
estimated offering expenses, net proceeds of $122 million were received.
- - We used the net offering proceeds of $122 million from the IPO to make a
partial paydown of the assumed indebtedness, resulting in a remaining
indebtedness of $68 million. As of the
Page 23
24
end of the second quarter of fiscal 2001, the balance was reduced to $46
million. This debt has subsequently been repaid from operating cash flow.
SEASONALITY
Because our products are frequently given as gifts, we have
historically realized, and expect to continue to realize, higher sales and
operating income in the second quarter of our fiscal year which includes the
holiday months of November and December. We have sometimes experienced, and may
continue to experience, reduced income or net losses in any or all of our first,
third or fourth quarters. The higher sales in the second quarter typically
result in higher operating profits and margins. This is due to higher gross
profits, with no substantial corresponding increase in fixed costs related to
operating retail stores and other administrative and selling costs, which remain
fairly constant throughout the year. During the holiday season, these fixed
costs are spread over higher sales, resulting in greater operating income
expressed in both dollars and as a percentage of sales in the second quarter
compared to the other three quarters. We anticipate that our sales and operating
profit will continue to be seasonal in nature.
RISK FACTORS
This Form 10-Q contains certain "forward-looking statements", based on
current expectations, that involve risks and uncertainties that could cause our
actual results to differ materially from management's current expectations.
These forward-looking statements can be identified by the use of forward-looking
terminology such as "may," "will", "should," "expect," "intend", "estimate", or
"continue", or the negative thereof or comparable terminology. Future results
will vary from historical results and historical growth is not indicative of
future trends which will depend upon a number of factors, including but not
limited to: (i) the successful implementation of our growth strategies and
initiatives, including our store expansion and renovation program; (ii) the
effect of existing and new competition in the marketplace; (iii) our ability to
successfully anticipate consumer preferences for accessories and fashion trends;
(iv) our ability to control costs; (v) the effect of seasonal and quarterly
fluctuations in our sales on our operating results; (vi) our exposure to
international risks, including currency fluctuations; (vii) changes in economic
or political conditions in the markets where we sell or source our products;
(viii) our ability to protect against infringement of our trademarks and other
proprietary rights; and such other factors as set forth in the Company's Form
S-1 which was declared effective on October 4, 2000. Coach, Inc. assumes no
obligation to update or revise any such forward-looking statements, which speak
only as of their date, even if experience or future events or changes make it
clear that any projected financial or operating results will not be realized.
Page 24
25
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE
As of December 30, 2000, we are projecting that approximately 75% of
our fiscal year 2001 non-licensed product needs will be purchased from
independent manufacturers in other countries such as China, Costa Rica, Mexico,
India, the Dominican Republic, Italy, Spain, Hungary and Turkey. Additionally,
sales are made through international channels to third-party distributors.
Substantially all purchases and sales involving international parties are
denominated in U.S. dollars and, therefore, are not hedged using any derivative
instruments. We have not used foreign exchange instruments in the past nor do we
expect to use them in the future.
INTEREST RATE
We have fixed rate long-term debt related to the Jacksonville
distribution center and use the sensitivity analysis technique to evaluate the
change in fair value of this debt instrument. At December 30, 2000, the effect
on the fair value of this debt of a 10% change in market interest rates would
be approximately $0.2 million. We do not expect our operating results or cash
flows to be affected to any significant degree by the effect of a sudden change
in market interest rates.
COMMODITY
We buy tanned leather from various suppliers based upon fixed price
purchase contracts that extend for periods up to six months. These purchases are
not hedged with any derivative instrument. Due to the purchase contracts that
are in place, we do not expect that a sudden short-term change in leather prices
will have a significant effect on our operating results or cash flows. However,
we use the sensitivity analysis technique to evaluate the change in fair value
of the leather purchases based upon longer-term price trends. At December 30,
2000, we estimate that a change in the underlying price of tanned leather would
have no effect on the cost of sales for the fiscal year ending June 30, 2001, as
we have obtained purchase commitments for all leather expected to be purchased
between now and the end of our fiscal year.
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26
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
None
(b) Reports on Form 8-K
None
Page 26
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
COACH, INC.
(Registrant)
/S/ RICHARD P. RANDALL
By: ------------------------------------
Name: Richard P. Randall
Title: Senior Vice President and
Chief Financial Officer
Dated: February 6, 2001
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