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 March 31, 2001
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 March 31, 2001, the Registrant had 43,513,333 outstanding shares of
common stock, which is the Registrant's only class of common stock.
The document contains 31 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 March 31, 2001 and July 1, 2000 4
Condensed Consolidated and Combined Statements of Income -
For the thirteen and thirty-nine weeks ended
March 31, 2001 and April 1, 2000 5
Condensed Consolidated and Combined Statements of
Stockholders' Equity -
For the period from July 3, 1999 to March 31, 2001 6
Condensed Consolidated and Combined Statements of Cash Flows -
For the thirty-nine weeks ended
March 31, 2001 and April 1, 2000 7
Notes to Condensed 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 28
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 30
SIGNATURE 31
3
ITEM 1.
COACH, INC. AND SUBSIDIARIES
PREFACE
The condensed consolidated and combined financial statements for the thirteen
and thirty-nine weeks ended March 31, 2001 and April 1, 2000 and the balance
sheet as of March 31, 2001 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 March 31, 2001 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 thirty-nine weeks ended March 31, 2001 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.
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4
COACH, INC.
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEETS
AT MARCH 31, 2001 AND JULY 1, 2000
(IN THOUSANDS)
MARCH 31, JULY 1,
2001 2000
-------- --------
(unaudited)
ASSETS
Cash $ 7,241 $ 162
Receivables, net 20,642 15,567
Inventories, net 104,183 102,097
Other current assets 20,701 15,862
-------- --------
Total current assets 152,767 133,688
Receivable from Sara Lee -- 63,783
Property, net 70,609 65,184
Trademarks and other assets 28,333 33,998
-------- --------
Total assets $251,709 $296,653
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Outstanding checks $ 7,774 $ 4,940
Accounts payable 4,564 2,926
Accrued liabilities 78,330 71,693
Revolving credit facility 19,000 --
Long-term debt, classified as current 45 40
-------- --------
Total current liabilities 109,713 79,599
Long-term debt 3,690 3,735
Other liabilities 2,303 511
Stockholders' equity 136,003 212,808
-------- --------
Total liabilities and stockholders' equity $251,709 $296,653
======== ========
The accompanying Notes to the Condensed Consolidated and Combined Financial
Statements are an integral part of these statements.
Page 4
5
COACH, INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED MARCH 31, 2001 AND APRIL 1, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------------- -------------------------
MARCH 31, APRIL 1, MARCH 31, APRIL 1,
2001 2000 2001 2000
--------- --------- --------- ---------
Net sales $ 130,598 $ 115,072 $ 479,308 $ 427,232
Cost of sales 45,272 44,835 168,982 173,203
--------- --------- --------- ---------
Gross profit 85,326 70,237 310,326 254,029
Selling, general and administrative expenses 72,963 65,768 219,509 205,690
Reorganization costs (363) -- 4,587 --
--------- --------- --------- ---------
Operating income 12,726 4,469 86,230 48,339
Interest expense, net 430 97 1,942 291
--------- --------- --------- ---------
Income before income taxes 12,296 4,372 84,288 48,048
Provision for income taxes 4,303 1,338 29,500 14,703
--------- --------- --------- ---------
Net income $ 7,993 $ 3,034 $ 54,788 $ 33,345
========= ========= ========= =========
Net income per share $ 0.18 $ 0.09 $ 1.35 $ 0.95
========= ========= ========= =========
Shares used in computing
basic net income per share 43,513 35,026 40,684 35,026
========= ========= ========= =========
Diluted net income per share $ 0.18 $ 0.09 $ 1.32 $ 0.95
========= ========= ========= =========
Shares used in computing
diluted net income per share 45,385 35,026 41,641 35,026
========= ========= ========= =========
The accompanying Notes to the Condensed Consolidated and Combined Financial
Statements are an integral part of these statements.
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COACH, INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JULY 3, 1999 TO MARCH 31, 2001
(IN THOUSANDS)
(UNAUDITED)
ACCUMULATED SHARES
TOTAL COMMON OTHER OF
STOCKHOLDERS' STOCKHOLDERS' COMPREHENSIVE COMPREHENSIVE COMMON
EQUITY EQUITY INCOME (LOSS) INCOME (LOSS) STOCK
------------ ------------ ------------- ------------- -------
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
Initial capitalization of Coach, Inc. 35,026
---------
Comprehensive income $ 8,690
=========
--------- --------- ------ ------
Balances at July 1, 2000 212,808 213,103 (295) 35,026
Net income 54,788 54,788 - 54,788
Capitalization of receivable from Sara Lee (63,783) (63,783) - -
Assumption of long-term debt (190,000) (190,000) -
Issuance of common stock, net 122,000 122,000 - 8,487
Translation adjustments 190 - 190 190
---------
Comprehensive income $ 54,978
=========
--------- --------- ------ ------
Balances at March 31, 2001 $ 136,003 $ 136,108 $ (105) 43,513
========= ========= ====== ======
The accompanying Notes to the Condensed Consolidated and Combined Financial
Statements are an integral part of these statements.
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COACH, INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED MARCH 31, 2001 AND APRIL 1, 2000
(IN THOUSANDS)
(UNAUDITED)
THIRTY-NINE WEEKS ENDED
--------------------------
MARCH 31, APRIL 1,
2001 2000
--------- ---------
OPERATING ACTIVITIES
Net Income $ 54,788 $ 33,345
Adjustments for noncash charges included in net income:
Depreciation 16,321 15,741
Amortization of intangibles 671 672
Reorganization costs 4,587 --
Decrease (increase) in deferred taxes 494 1,805
Other noncash credits, net 190 165
Changes in current assets and liabilities:
(Increase) in trade accounts receivable (5,075) (10,881)
(Increase)/decrease in inventories (2,086) 753
Decrease in other current assets and liabilities 1,453 1,922
Increase/(decrease) in accounts payable 1,638 (3,128)
Increase in accrued liabilities 2,684 13,676
Decrease in receivable from Sara Lee 31,437 21,231
--------- ---------
Net cash from operating activities 107,102 75,301
--------- ---------
INVESTMENT ACTIVITIES
Purchases of property and equipment (23,247) (19,444)
Dispositions of property and equipment 867 2,593
--------- ---------
Net cash (used in) investment activities (22,380) (16,851)
--------- ---------
FINANCING ACTIVITIES
Issuance of common stock, net 122,000 --
Repayment of long-term debt (190,040) (35)
Borrowings from Sara Lee 451,534 384,390
Repayments to Sara Lee (482,971) (441,008)
Borrowings on Revolving Credit Facility 40,000 --
Repayments of Revolving Credit Facility (21,000) --
Outstanding checks 2,834 (1,781)
--------- ---------
Net cash (used in) financing activities (77,643) (58,434)
--------- ---------
Increase in cash and equivalents 7,079 16
Cash and equivalents at beginning of period 162 148
--------- ---------
Cash and equivalents at end of period $ 7,241 $ 164
========= =========
The accompanying Notes to the Condensed Consolidated and Combined Financial
Statements are an integral part these statements.
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COACH, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
THIRTEEN AND THIRTY-NINE WEEKS ENDED MARCH 31, 2001 AND APRIL 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
was 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", or 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 (the "Separation Date"), Sara Lee
transferred the assets and liabilities of the Coach business to Coach,
Inc., including Coach's assumption of indebtedness in the form of a note
payable to a subsidiary of Sara Lee. On this date, 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%.
On January 24, 2001, Sara Lee announced its intent to divest its
remaining 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. On March 5, 2001, Sara Lee announced
the terms of the exchange offer. The exchange offer period for
stockholders to tender their Sara Lee common shares for Coach common
shares concluded on April 4, 2001. The exchange offer was
oversubscribed. The distribution was completed after the close of our
third fiscal quarter.
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:
MARCH 31, JULY 1,
2001 2000
-------- --------
Finished Goods $102,803 $ 95,446
Work in process 580 677
Materials and supplies 800 5,974
-------- --------
$104,183 $102,097
======== ========
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COACH, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
THIRTEEN AND THIRTY-NINE WEEKS ENDED MARCH 31, 2001 AND APRIL 1, 2000
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
3 REVOLVING CREDIT FACILITY/LONG TERM DEBT
Coach had participated in a cash concentration system requiring that
cash balances be deposited with Sara Lee which were netted against
borrowings/billings provided by Sara Lee. On July 2, 2000, Coach entered
into a revolving credit facility with Sara Lee. The maximum borrowing
permitted under this facility was $75,000 which accrued interest at US
dollar LIBOR plus 30 basis points. Any receivable balance from Sara Lee
under this facility earned interest at US dollar LIBOR minus 20 basis
points. The credit facility contained certain covenants including an
interest coverage ratio, 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, all of which were complied with. This facility was terminated on
February 27, 2001.
During October 2000, Coach completed an equity restructuring which
included 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 had an original maturity date of September
30, 2002, accruing interest at U.S. dollar LIBOR plus 30 basis points
while Sara Lee owned greater than a majority of Coach's common stock.
The note contained certain covenants, consistent with the above
mentioned revolving credit facility. 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 Sara Lee revolving credit
facility.
On February 27, 2001, Coach, certain lenders and Fleet National Bank, as
a lender and administrative agent, entered into a $100,000 senior
unsecured revolving credit facility ("Fleet facility") to provide
funding for working capital for operations and general corporate
purposes. Indebtedness under this revolving credit facility bears
interest calculated, at Coach's option, at either:
- a rate of LIBOR plus 75 to 150 basis points based on a fixed
charge coverage grid; or
- the prime rate announced by Fleet.
The initial LIBOR margin under the facility is 125 basis points. Under
this revolving credit facility, Coach will pay a commitment fee of 20 to
35 basis points based on a fixed charge coverage grid on any unborrowed
amounts. The initial commitment fee is 30 basis points. This credit
facility may be prepaid without penalty or premium.
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COACH, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
THIRTEEN AND THIRTY-NINE WEEKS ENDED MARCH 31, 2001 AND APRIL 1, 2000
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The Fleet facility contains various covenants and customary events of
default, including:
- Maintenance of a cash flow leverage ratio not greater than 1.5
to 1.0;
- Maintenance of a fixed charge coverage ratio greater than 1.75
to 1.0 until March 30, 2002 and greater than 2.0 to 1.0
thereafter;
- Annual paydown to $25,000 for 30 consecutive days during the
period November 1st through June 30th; and
- Restrictions on other indebtedness, liens, payment of dividends,
mergers and acquisitions, dispositions, transactions with
affiliates, and sale and leaseback transactions in excess of
amounts approved by the lenders.
As of March 31, 2001, we were in compliance with all covenants of the
Fleet facility.
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 involved the termination of 362 manufacturing,
warehousing and management employees at the Medley facility. These
actions are intended to reduce costs by the resulting transfer of
production to lower cost third-party manufacturers. The Medley facility
is a cost center and separate profitability measures are not available.
This facility was treated as a held for sale facility under SFAS No. 121
since the decision to dispose of it was made. Depreciation expense of
$852 and $252 for fiscal year 2000 and the thirty-nine weeks ended March
31, 2001 respectively, was recognized for this facility.
Coach recorded reorganization costs of $4,950 in the first quarter of
fiscal year 2001. In the third quarter of fiscal year 2001, this charge
was reduced to $4,587. This was due to the complete disposition of the
fixed assets. The net proceeds from the disposition were greater than
the estimate. These reorganization costs include $3,168 for worker
separation costs, $785 for lease termination costs, and $634 for the
write down of long-lived assets to their net realizable values. The
$4,587 of Medley reorganization cost recognized in the financial
statements for the thirty-nine weeks ended March 31, 2001 differs from
management's earlier estimate of $6,300 included in the notes to the
fiscal year 2000 financial statements. This change is attributable to
management's continued negotiations with both the landlord and the
employees at the facility and the resulting refinement of the cost
estimates made prior to the finalization and recognition of this plan of
reorganization.
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COACH, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
THIRTEEN AND THIRTY-NINE WEEKS ENDED MARCH 31, 2001 AND APRIL 1, 2000
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The composition of the reorganization reserve is set forth in the table
below. By March 31, 2001, production ceased at the Medley facility,
disposition of the fixed assets had been accomplished and the
termination of the 362 employees had been completed. We expect the
Medley reorganization actions will be completed by the end of this
fiscal year.
WRITE-DOWN OF
REVISED LONG-LIVED ASSETS REORGANIZATION
REORGANIZATION TO NET REALIZABLE CASH RESERVES AS OF
RESERVES VALUE PAYMENTS MARCH 31, 2001
---------------------------------------------------------------------------
Workers' separation costs $ 3,168 -- $(2,369) $ 799
Lease termination costs 785 -- (342) 443
Losses on
disposal of fixed assets 634 $ (634) -- --
------- ------- ------- -------
Total reorganization reserve $ 4,587 $ (634) $(2,711) $ 1,242
======= ======= ======= =======
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 thirty-nine weeks of fiscal 2001 workers' separation costs of $142
were paid. The Carlstadt reorganization is now complete and the reserve
was fully utilized.
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. On October 2, 2000, 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.
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COACH, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
THIRTEEN AND THIRTY-NINE WEEKS ENDED MARCH 31, 2001 AND APRIL 1, 2000
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The following is a reconciliation of shares outstanding:
THIRTEEN WEEKS ENDED
---------------------------
MAR. 31, 2001 APR. 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 160 --
Stock option programs 1,712 --
------ ------
Total diluted shares 45,385 35,026
====== ======
THIRTY-NINE WEEKS ENDED
---------------------------
MAR. 31, 2001 APR. 1, 2000
------------- ------------
Shares held by Sara Lee 35,026 35,026
Shares held by the public 5,658 --
------ ------
Total basic shares 40,684 35,026
Dilutive securities
Employee benefit and stock award plans 108 --
Stock option programs 849 --
------ ------
Total diluted shares 41,641 35,026
On January 24, 2001, Sara Lee announced its intent to divest its
remaining 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. On March 5, 2001, Sara Lee announced
the terms of the exchange offer. The exchange offer period for
stockholders to tender their Sara Lee common shares for Coach common
shares concluded on April 4, 2001. The exchange offer was
oversubscribed. The distribution was completed after the close of our
third fiscal quarter.
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
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COACH, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
THIRTEEN AND THIRTY-NINE WEEKS ENDED MARCH 31, 2001 AND APRIL 1, 2000
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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 MAR. 31, 2001 CONSUMER WHOLESALE UNALLOCATED TOTAL
- -------------------------------------------------------------------------------------------
Net Sales $ 76,967 $ 53,631 -- $130,598
Operating income (loss) 16,300 21,917 $(25,491) 12,726
Interest income -- -- 114 114
Interest expense -- -- 544 544
Income (loss) before taxes 16,300 21,917 (25,921) 12,296
Depreciation and amortization 3,478 241 1,826 5,545
Total assets 133,412 59,948 58,349 251,709
Additions to long-lived assets 4,374 153 1,717 6,244
DIRECT TO CORPORATE
THIRTEEN WEEKS ENDED APR. 1, 2000 CONSUMER WHOLESALE UNALLOCATED TOTAL
- -----------------------------------------------------------------------------------------------
Net sales $ 66,356 $ 48,716 -- $ 115,072
Operating income (loss) 13,508 17,179 $ (26,218) 4,469
Interest income -- -- 8 8
Interest expense -- -- 105 105
Income (loss) before taxes 13,508 17,179 (26,315) 4,372
Depreciation and amortization 2,722 382 2,599 5,703
Total assets 123,706 57,240 143,384 324,330
Additions to long-lived assets 4,881 279 1,195 6,355
DIRECT TO CORPORATE
THIRTY-NINE WEEKS ENDED MAR. 31, 2001 CONSUMER WHOLESALE UNALLOCATED TOTAL
- -------------------------------------------------------------------------------------------------
Net Sales $303,207 $176,101 -- $479,308
Operating income (loss) 95,568 73,911 $(83,249) 86,230
Interest income -- -- 268 268
Interest expense -- -- 2,210 2,210
Income (loss) before taxes 95,568 73,911 (85,191) 84,288
Depreciation and amortization 9,988 1,011 5,993 16,992
Total assets 133,412 59,948 58,349 251,709
Additions to long-lived assets 18,325 1,735 3,187 23,247
Page 13
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COACH, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
THIRTEEN AND THIRTY-NINE WEEKS ENDED MARCH 31, 2001 AND APRIL 1, 2000
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
DIRECT TO CORPORATE
THIRTY-NINE WEEKS ENDED APR. 1, 2000 CONSUMER WHOLESALE UNALLOCATED TOTAL
- ------------------------------------------------------------------------------------------------------
Net sales $ 271,531 $ 155,701 -- $ 427,232
Operating income (loss) 80,178 56,290 $ (88,129) 48,339
Interest income -- -- 24 24
Interest expense -- -- 315 315
Income (loss) before taxes 80,178 56,290 (88,420) 48,048
Depreciation and amortization 7,708 1,134 7,571 16,413
Total assets 123,706 57,240 143,384 324,330
Additions to long-lived assets 14,107 967 4,370 19,444
The following is a summary of the common costs not allocated in the
determination of segment performance.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
----------------------------- -----------------------------
MAR. 31, 2001 APR. 1, 2000 MAR. 31, 2001 APR. 1, 2000
------------- ------------ ------------- ------------
Manufacturing variances $ 1,251 $ 259 $ (602) $ (9,143)
Advertising, marketing and design (10,238) (7,615) (33,014) (29,665)
Administration and information systems (11,294) (13,152) (26,978) (31,791)
Distribution and customer service (5,573) (5,710) (18,068) (17,530)
Reorganization costs 363 -- (4,587) --
-------- -------- -------- --------
Total corporate unallocated $(25,491) $(26,218) $(83,249) $(88,129)
========= ========= ========= =========
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", 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.
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COACH, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
THIRTEEN AND THIRTY-NINE WEEKS ENDED MARCH 31, 2001 AND APRIL 1, 2000
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
8 PUBLIC OFFERING AND EXCHANGE OFFER
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 to 1 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 and used to repay a portion
of the indebtedness to a subsidiary of Sara Lee resulting in the
then remaining obligation of $68,000. In January 2001, this loan
was fully paid off by the Company from operating cash flow and
drawings on the revolving credit facility.
- Coach issued options to purchase 3,206 shares of our common
stock to full time employees and outside members of the Board of
Directors 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.
In January 2001, Sara Lee commenced an exchange offer to distribute its
shares of Coach common stock.
- On January 24, 2001, Sara Lee announced its intent to divest its
remaining 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.
- On March 5, 2001, Sara Lee announced the terms of the exchange
offer.
- The exchange offer period for stockholders to tender their Sara
Lee common shares for Coach common shares concluded on April 4,
2001. The exchange offer was oversubscribed. The distribution
was completed after the close of our third fiscal quarter.
Page 15
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
third quarter and first nine months of fiscal 2001 compared to the third quarter
and first nine months of fiscal 2000, and a discussion of the changes in
financial condition during the first nine 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
THIRD QUARTER FISCAL 2001 COMPARED TO THIRD QUARTER FISCAL 2000
Net sales by business segment in the third quarter of fiscal 2001
compared to the third quarter of fiscal 2000 are as follows:
THIRTEEN WEEKS ENDED
----------------------------------------------------------------------
NET SALES PERCENTAGE OF TOTAL NET SALES
-------------------------------------- -----------------------------
(UNAUDITED)
MAR. 31, APR. 1, MAR. 31, APR. 1,
2001 2000 RATE OF INCREASE 2001 2000
------- ------ ---------------- ------- -------
(DOLLARS IN MILLIONS*)
Direct to Consumer $ 77.0 $ 66.4 16.0% 58.9% 57.7%
Wholesale 53.6 48.7 10.1 41.1 42.3
-------- -------- ---- ----- -----
Total Net Sales $ 130.6 $ 115.1 13.5% 100.0% 100.0%
======== ======== ==== ===== =====
Combined statements of income for the third quarter of fiscal 2001
compared to the third quarter of fiscal 2000 are as follows:
THIRTEEN WEEKS ENDED
------------------------------------------------------
(DOLLARS IN MILLIONS*, EXCEPT FOR EARNINGS PER SHARE)
MAR. 31, 2001 APR. 1, 2000
------------- ------------
(UNAUDITED) (UNAUDITED)
$ % TO NET SALES $ % TO NET SALES
--- -------------- --- --------------
Net sales $ 129.9 99.5% $ 114.7 99.7%
Licensing revenue 0.7 0.5 0.4 0.3
-------- ---- -------- ----
Total net sales 130.6 100.0 115.1 100.0
-------- ---- -------- ----
Gross profit 85.3 65.3 70.2 61.0
Selling, general and administrative expenses 73.0 55.9 65.8 57.2
-------- ---- -------- ----
Operating income before reorganization costs 12.4 9.5 4.5 3.9
Reorganization costs (0.4) (0.3) -- --
-------- ---- -------- ----
Operating income 12.7 9.7 4.5 3.9
Net interest expense 0.4 0.3 0.1 0.1
-------- ---- -------- ----
Income before taxes 12.3 9.4 4.4 3.8
Income taxes 4.3 3.3 1.3 1.2
-------- ---- -------- ----
Net income $ 8.0 6.1% $ 3.0 2.6%
======== ==== ======== ====
*Components may not add to total due to rounding.
Page 16
17
COACH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
THIRTEEN WEEKS ENDED
-----------------------------------------
MAR. 31, 2001 APR 1, 2000
------------- -----------
Net income per share:
Basic $0.18 $0.09 (2)
Diluted $0.18 (1) $0.09 (2)
Weighted average number of common shares:
Basic 43,513 35,026
Diluted 45,385 35,026
(1) $0.17 per share excluding the impact of the reorganization charge.
(2) $0.07 per share if common shares sold in October 2000 public offering had
been outstanding for the prior periods.
NET SALES
Net sales increased by 13.5% to $130.6 million in the third quarter of
fiscal 2001 from $115.1 million during the same period of fiscal 2000. These
results reflect increased volume in both the direct to consumer and wholesale
channels.
Direct to Consumer. Net sales increased 16.0% to $77.0 million during
the third quarter of fiscal 2001 from $66.4 million during the same period in
fiscal 2000. The increase was primarily due to new store openings, store
renovations, store expansions and comparable stores sales growth. Since the end
of the third quarter of fiscal 2000, Coach has opened ten new retail stores and
four new factory stores. In addition, twenty-five retail stores and five factory
stores were remodeled while six retail stores and one factory store were
expanded.
Wholesale. Net sales attributable to domestic and international
wholesale shipments increased 10.1% to $53.6 million in the third quarter of
fiscal 2001 from $48.7 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 and increased demand for new products. These new
products also positively impacted our U.S. wholesale channel.
GROSS PROFIT
Gross profit increased 21.5% to $ 85.3 million in the third quarter of
fiscal 2001 from $70.2 million during the same period in fiscal 2000. Gross
margin increased approximately 430 basis points to 65.3% in the third quarter of
fiscal 2001 from 61.0% during the same period in fiscal 2000. These results were
primarily due to increased demand for new higher margin leather and fabric
products, the continuing impact of manufacturing and sourcing cost reductions
realized during fiscal 2001 from the reorganization that commenced in 1999, and
favorable channel mix.
Page 17
18
COACH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GROSS PROFIT (CONTINUED)
The following chart illustrates the gross margin performance which we
have experienced over the last seven 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 Q3
(UNAUDITED)
----------------------------------------------
Gross Margin 63.2% 65.4% 64.5% 65.3%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 10.9% to 73.0
million in the third quarter of fiscal 2001 from $65.8 million during the same
period in fiscal 2000. Selling, general and administrative expenses decreased to
55.9% as percentage of net sales versus 57.2% in the comparable prior year
quarter.
Selling expenses increased by 18.7% to $44.0 million, or 33.7% of net
sales, in the third quarter of fiscal 2001 from $37.1 million, or 32.2% of net
sales, during the same period in fiscal 2000. The dollar increase in these
expenses was primarily due to $5.1 million of operating costs associated with
new retail and factory stores; store remodels and costs to support the
additional stores. The remaining selling expense increase was caused by volume
related costs in our wholesale segment.
Advertising, marketing, and design expenses increased by 25.8% to $11.5
million or 8.8% of net sales, in the third quarter of fiscal 2001 from $9.2
million, or 8.0% of net sales, during the same period in fiscal 2000. The dollar
increase in these expenses was primarily due to the timing of media and
production costs versus the fiscal 2000 media calendar.
Distribution and customer service expenses decreased by 3.5% to $6.2
million, or 4.7% of net sales, in the third quarter of fiscal 2001, from $6.4
million, or 5.5% of net sales, during the same period in fiscal 2000. The dollar
decrease was due to lower customer service related expenses.
Administrative expenses decreased to $11.3 million, or 8.6% of net
sales, in the third quarter of fiscal 2001 from $13.2 million, or 11.4% 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.
Page 18
19
COACH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING INCOME
Before the impact of a small positive adjustment to reorganization
costs, operating income increased 177% to $12.4 million or 9.5% of net sales in
the third quarter of fiscal 2001 from $4.5 million, or 3.9% of net sales, during
the same period in fiscal 2000. After the impact of the adjustment to
reorganization costs in the third quarter operating income increased 185% to
$12.7 million from $4.5 million during the same period in fiscal 2000. This
increase resulted from higher sales, improved gross margins and a decrease in
selling, general and administrative expenses as a percentage to sales.
INTEREST EXPENSE
Net interest expense increased 343% to $0.4 million, or 0.3% of net sales, in
the third quarter of fiscal 2001 from $0.1 million or 0.1% of net sales, during
the same period in fiscal 2000. This increase was due to interest expense on the
note payable to an affiliate of Sara Lee that Coach assumed in October 2000 and
interest expense on borrowings under the Fleet facility. There was no interest
expense incurred on the facility provided by Sara Lee in the prior year.
INCOME TAXES
The effective tax rate increased to 35.0% in the third 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
Before the impact of a small positive adjustment to reorganization
costs, net income increased 156% to $7.8 million, or 5.9% of net sales, in the
third quarter of fiscal 2001 from $3.0 million, or 2.6% of net sales, during the
same period in fiscal 2000. After the impact of the adjustment to reorganization
cost in the third quarter of fiscal 2001, net income increased 163% to $8.0
million from $3.0 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 and increased interest expense.
EARNINGS PER SHARE
Before the impact of a small positive adjustment to reorganization
costs diluted net income per share was $0.17 in the third quarter of 2001. After
the impact of the adjustment to reorganization costs diluted net income per
share was $0.18 in the third quarter of 2001. Prior year earnings per share were
$0.09 for the third quarter because only the shares owned by Sara Lee are used
in the calculation. Comparable earnings per share in 2000 would have been $0.07
if the common shares sold in the October 2000 public offering had been
outstanding for the prior period.
Page 19
20
COACH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FIRST NINE MONTHS FISCAL 2001 COMPARED TO FIRST NINE MONTHS OF FISCAL 2000
Net sales by business segment in the first nine months of fiscal 2001
compared to the first nine months of fiscal 2000 are as follows:
THIRTY-NINE WEEKS ENDED
-----------------------------------------------------------------------------------------
NET SALES PERCENTAGE OF TOTAL NET SALES
--------------------------------------------------- -----------------------------
(UNAUDITED)
MAR. 31, APR. 1, MAR. 31, APR. 1,
2001 2000 RATE OF INCREASE 2001 2000
------- ------ ---------------- ------- -------
(dollars in millions*)
Direct to Consumer $303.2 $271.5 11.7% 63.3% 63.6%
Wholesale 176.1 155.7 13.1 36.7 36.4
------ ------ ---- ----- -----
Total Net Sales $479.3 $427.2 12.2% 100.0% 100.0%
====== ====== ==== ===== =====
Combined statements of income for the first nine months of fiscal 2001
compared to the first nine months of fiscal 2000 are as follows:
THIRTY-NINE WEEKS ENDED
-------------------------------------------------------------
(dollars in millions*, except for earnings per share)
MAR. 31, 2001 APR. 1, 2000
------------- -------------
(UNAUDITED) (UNAUDITED)
$ % TO NET SALES $ % TO NET SALES
------ -------------- ------ --------------
Net sales $477.5 99.6% $425.9 99.7%
Licensing revenue 1.8 0.4 1.3 0.3
------ ----- ------ ------
Total net sales 479.3 100.0 427.2 100.0
------ ----- ------ ------
Gross profit 310.3 64.7 254.0 59.5
Selling, general and administrative expenses 219.5 45.8 205.7 48.1
------ ----- ------ ------
Operating income before reorganization costs 90.8 18.9 48.3 11.3
Reorganization costs 4.6 1.0 -- --
------ ----- ------ ------
Operating income 86.2 18.0 48.3 11.3
Net interest expense 1.9 0.4 0.3 0.1
------ ----- ------ ------
Income before taxes 84.3 17.6 48.0 11.2
Income taxes 29.5 6.2 14.7 3.4
------ ----- ------ ------
Net income $54.8 11.4% $33.3 7.8%
====== ===== ====== ====
*Components may not add to total due to rounding.
THIRTY-NINE WEEKS ENDED
-----------------------------------------------
MAR. 31, 2001 APR. 1, 2000
------------- ------------
Net income per share:
Basic $1.35 (3) $0.95 (5)
Diluted $1.32 (4) $0.95 (5)
Weighted average number of common shares:
Basic 40,684 35,026
Diluted 41,641 35,026
(3) $1.33 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 nine month period.
(4) $1.30 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 nine month period.
(5) $0.77 per share if the common shares sold in October 2000 public offering
had been outstanding for the prior periods.
Page 20
21
COACH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
NET SALES
Net sales increased by 12.2% to $479.3 million in the first nine months
of fiscal 2001 from $427.2 million during the same period in fiscal 2000. These
results reflect increased volume in both the direct to consumer and wholesale
channels.
Direct to Consumer. Net sales increased 11.7% to $303.2 million during
the first nine months of fiscal 2001 from $271.5 million during the same period
in fiscal 2000. The increase was primarily due to new store openings, store
renovations, store expansions and comparable stores sales growth. Since the end
of the first nine months of fiscal 2000, Coach has opened ten new retail stores
and four new factory stores. In addition, twenty-five retail stores and five
factory stores were remodeled while six retail stores and one factory store were
expanded.
Wholesale. Net sales attributable to domestic and international
wholesale shipments increased 13.1% to $176.1 million in the first nine months
of fiscal 2001 from $155.7 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 and increased demand for new products.
These new products also positively impacted our U.S. wholesale channel.
Licensing revenue increased 40% to $1.8 million in the first nine months of
fiscal 2001 from $1.3 million during the first nine months of fiscal 2000 caused
primarily by expanded distribution of licensed footwear product.
GROSS PROFIT
Gross profit increased 22.2% to $310.3 million in the first nine months
of fiscal 2001 from $254.0 million during the same period in fiscal 2000. Gross
margin increased approximately 530 basis points to 64.7% the first nine months
of fiscal 2001 from 59.5% during the same period in fiscal 2000. These results
were primarily due to increased demand for new higher margin leather and fabric
products, the continuing impact of manufacturing and sourcing cost reductions
realized during fiscal 2001 from the reorganization that commenced in 1999, and
favorable channel mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling general and administrative expenses increased 6.7% to $219.5
million in the first nine months of fiscal 2001 from $205.7 million during the
same period in fiscal 2000. Selling, general and administrative expenses
decreased to 45.8% as a percentage of net sales versus 48.1% in fiscal in 2000.
Selling expenses increased by 14.9% to $134.1 million, or 28.0% of net
sales, in the first nine months of fiscal 2001 from $116.7 million, or 27.3% of
net sales, during the same period in fiscal 2000. The dollar increase in these
expenses was primarily due to $11.0 million of operating costs associated with
new retail and factory stores; store remodels and costs to support the
additional stores. The remaining selling expense increase was primarily caused
by volume related costs in our wholesale segment.
Page 21
22
COACH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (CONTINUED)
Advertising, marketing, and design expenses increased by 2.9% to $38.7
million, or 8.1% of net sales, in the first nine months of fiscal 2001 from
$37.5 million, or 8.8% of net sales, during the same period in fiscal 2000. The
dollar increase in these expenses was primarily due to the timing of media and
production costs versus the fiscal 2000 media calendar partially offset by a
reduction in catalogue circulation, and a shift from magazine and outdoor
advertising to newspaper advertising.
Distribution and customer service expenses increased slightly to $19.8
million, or 4.1% of net sales, in the first nine months of fiscal 2001 from
$19.7 million, or 4.6% of net sales, during the same period in fiscal 2000. The
dollar increase in these expenses was due to higher sales volumes.
Administrative expenses decreased to $27.0 million, or 5.6% of net
sales, in the first nine months of fiscal 2001 from $31.8 million, or 7.4% 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 involved the termination of 362
manufacturing, warehousing and management employees at the Medley facility.
These actions are intended to reduce costs by the resulting transfer of
production to lower cost third-party manufacturers. Coach expects to achieve
cost savings of $2.7 million in the current fiscal year and $4.5 million in
annual savings in future years from these actions. Coach recorded a
reorganization cost of $5.0 million in the first quarter of fiscal year 2001. In
the third quarter of fiscal year 2001, this charge was reduced to $4.6 million.
This was due to the complete disposition of the fixed assets. The net proceeds
from the disposition were greater than the estimate. This reorganization cost
includes $3.2 million for worker separation costs, $0.8 million for lease
termination costs and $0.6 million for the write down of long-lived assets to
net realizable value. By March 31, 2001, production ceased at the Medley
facility, disposition of the fixed assets has been accomplished and the
termination of the 362 employees has been completed. We expect that these
reorganization actions will be completed by the end of this fiscal year.
OPERATING INCOME
Before the impact of reorganization costs operating income increased
87.9 % to $90.8 million, or 18.9% of net sales, in the first nine months of
fiscal 2001 from $48.3 million, or 11.3% of net sales, during the same period in
fiscal 2000. After the impact of reorganization costs in the first nine months
of fiscal 2001, operating income increased 78.4% to $86.2 million from $48.3
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.
Page 22
23
COACH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST EXPENSE
Net interest expense increased 567% to $1.9 million, or 0.4% of net
sales, in the first nine months of fiscal 2001 from $0.3 million or 0.1% of net
sales, during the same period in fiscal 2000. This increase was due to interest
expense on the note payable to an affiliate of Sara Lee that Coach assumed in
October 2000, and interest expense on borrowings against the Fleet facility.
There was no interest expense incurred on the facility provided by Sara Lee in
the prior year.
INCOME TAXES
The effective tax rate increased to 35.0% in the first nine 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
Before the impact of reorganization costs, net income increased 73.2%
to $57.8 million, or 12.1% of net sales, in the first nine months of fiscal 2001
from $33.3 million, or 7.8% of net sales, during the same period in fiscal 2000.
After the impact of reorganization costs in the first nine months of fiscal
2001, net income increased 64.3% to $54.8 million from $33.3 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 and increased interest
expense
EARNINGS PER SHARE
Diluted net income per share was $1.32 for the first nine 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 had been outstanding for
the nine months, net income before the impact of reorganization costs per
diluted share would have been $1.30. Prior year diluted net income per share was
$0.95 since only the shares owned by Sara Lee are used in the calculation.
Comparable net earnings per share in the first nine months of fiscal 2000 would
have been $0.77 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 managed cash on a centralized basis for Coach and its other
businesses. Coach participated in this system until February 27, 2001. Cash
receipts associated with our business were transferred directly to Sara Lee on a
daily basis and Sara Lee provided 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 $107.1
million for the first nine months of fiscal 2001, 42.2% higher than the $75.3
million provided in the same period of fiscal 2000. The $31.8 million
year-to-year increase in cash provided from operating activities was primarily
the result of higher earnings.
Page 23
24
COACH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Capital expenditures amounted to $23.2 million in the first nine months
of fiscal 2001, compared to $19.4 million in the first nine months 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 Coach could borrow up to $75 million from Sara Lee. This
facility was paid off and terminated on February 27, 2001.
To provide funding for working capital for operations and general
corporate purposes, on February 27, 2001, Coach, certain lenders and Fleet
National Bank, as a lender and administrative agent, entered into a $100 million
senior unsecured revolving credit facility. Indebtedness under this revolving
credit facility bears interest calculated, at Coach's option, at either:
- a rate of LIBOR plus 70 to 150 basis points based on a fixed
charge coverage grid; or
- the prime rate announced by Fleet.
The initial LIBOR margin under the facility is 125 basis points. Under this
revolving credit facility, Coach will pay a commitment fee of 20 to 35 basis
points based on a fixed charge coverage grid on any unborrowed amounts. The
initial commitment fee is 30 basis points. This credit facility may be prepaid
without penalty or premium.
The Fleet facility contains various covenants and customary events of
default, including:
- Maintenance of a cash flow leverage ratio not greater than 1.5 to
1.0;
- Maintenance of a fixed charge coverage ratio greater than 1.75 to
1.0 until March 30, 2002 and greater than 2.0 to 1.0 thereafter;
- Annual paydown to $25,000 for 30 consecutive days during the
period November 1st through June 30th; and
- Restrictions on other indebtedness, liens, payment of dividends,
mergers and acquisitions, dispositions, transactions with
affiliates, and sale and leaseback transactions in excess of
amounts approved by the lenders.
As of March 31, 2001 we were in compliance with all covenants of the
Fleet facility.
Page 24
25
COACH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
We plan to open at least 15 new retail stores and four factory stores
in fiscal year 2001, of which eleven were opened during the first nine months.
We also expect to continue our store renovations program in fiscal 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 $12 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 are reduced substantially
as we generate consumer sales and collect wholesale accounts receivable. In the
first nine months of fiscal 2001, we purchased approximately $172 million of
inventory, which was funded by operating cash flow and by borrowings under our
revolving credit facilities. As of March 31, 2001, the outstanding borrowings
under the revolving credit facility were $19 million. 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.
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. We have obtained a letter of credit for the benefit of Sara Lee
in an amount approximately equal to the annual minimum rental payments under
leases transferred to us by Sara Lee but for which Sara Lee retains contingent
liability. We are required to maintain the letter of credit until the annual
minimum rental payments under the relevant leases are less than $2.0 million.
The initial letter of credit has a face amount of $20.6 million and we expect
this amount to 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 AND EXCHANGE OFFER
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 million of indebtedness to
a subsidiary of Sara Lee resulting in a reduction in equity.
- Coach declared and paid a 35 million to 1.0 common stock
dividend.
Page 25
26
COACH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
PUBLIC OFFERING OF COMMON STOCK AND EXCHANGE OFFER (CONTINUED)
- Coach sold 8.5 million 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 and used to repay a
portion of the indebtedness to a subsidiary of Sara Lee resulting
in the then remaining obligation of $68 million. In January 2001,
this loan was fully paid off by the Company from operating cash
flow and drawings on the revolving credit facility.
- Coach issued options to purchase 3.2 million shares of our common
stock to full time employees and outside members of the Board of
Directors at the offering price.
- Coach employees elected to convert previously held Sara Lee
options into options to purchase 1.2 million shares of our common
stock.
- Coach employees elected to convert previously held Sara Lee
service-based restricted stock units into 0.03 million Coach
service-based restricted stock units.
- Coach employees elected to convert previously held Sara Lee
restricted stock units under deferred compensation agreements,
into 0.1 million shares of Coach restricted stock units.
In January 2001, Sara Lee commenced an exchange offer to distribute its
shares of Coach common stock.
- On January 24, 2001, Sara Lee announced its intent to divest its
remaining 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.
- On March 5, 2001, Sara Lee announced the terms of the exchange
offer.
- The exchange offer period for stockholders to tender their Sara
Lee common shares for Coach common shares concluded on April 4,
2001. The exchange offer was oversubscribed. The distribution was
completed after the close of our third fiscal quarter.
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.
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COACH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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-4 which was declared effective on April 3, 2001, 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.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE
As of March 31, 2001, we project that approximately 75% of our fiscal
year 2001 non-licensed product needs will be purchased from independent
manufacturers in countries other than the United States. These countries include
China, Costa Rica, Italy, India, Spain, Turkey, Thailand, Mexico, Taiwan, Korea,
Hungary, Singapore and the Dominican Republic. 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 March 31, 2001, 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, for the
current fiscal year. We use the sensitivity analysis technique to evaluate the
change in fair value of the leather purchases based upon longer-term price
trends. At March 31, 2001, 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.
In the longer term, prices for leather could increase due to European
cattle diseases. We do not expect the recent events to have a significant impact
on our costs for the following reasons:
- - Nearly 50% of Coach leather is procured in the United States.
- - We do not source any leather from the United Kingdom.
- - Our rapidly growing use of mixed materials in our products has reduced
our overall reliance on leather.
- - Hide prices represent only 15% of cost of goods sold.
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ITEM 5 - OTHER INFORMATION
STOCKHOLDER PROPOSALS
To be included in our proxy statement and form of proxy, proposals of
stockholders intended to be presented at our Annual Meeting of Stockholders to
be held November 8, 2001, must be received by us no later than August 1, 2001.
Such proposals must comply with the requirements as to form and substance
established by the Securities and Exchange Commission for such proposals to be
included in the proxy statement.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
EXHIBIT NO. DESCRIPTION
- ---------- -----------
10.1 Revolving Credit Agreement by and between Coach, certain lenders and Fleet
National Bank, which is incorporated herein by reference from Exhibit 10.18 to
Coach's Registration Statement on Form S-4 (Registration No. 333-54402).
(b) Reports on Form 8-K
None
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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)
By: ____________________________________
Name: Richard P. Randall
Title: Senior Vice President and
Chief Financial Officer
(as principal financial officer
and principal accounting officer
of Coach)
Dated: May 8, 2001
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