This summary is based on the first quarter fiscal 2009 earnings call conducted by Coach, Inc. (COH) on October 21, 2008.
Management:
Senior Vice President, Investor Relations: Andrea Shaw Resnick
Chairman and Chief Executive Officer: Lew Frankfort
President of North American Retail: Michael Tucci
Chief Financial Officer and Executive Vice President: Michael F. Devine
Key Investors Issues
- EPS were 44 cents a share from 41 cents a year earlier.
- Profit dropped to $145.8 million from $154.8 million a year ago.
- Sales rose to $752.5 million from $676.7 million last year.
First Quarter Highlights
Earnings per share rose 7% to 44 cents compared with 42 cents in the prior year as net income declined to $146 million from $155 million.
- Net sales totaled $753 million versus $677 million a year ago, a gain of 11%.
- Direct to Consumer sales rose 16% to $592 million from $511 million in the prior year on a comparable basis.
- North American same-store sales rose 1%.
- Sales in Japan rose 12% in constant currency and 22% in dollars, driven by new stores and expansions.
The company completed the first phase of the acquisition of Retail business in China from ImagineX, transitioning the 10 stores in Hong Kong and Macau.
- The company opened 21 net North American retail stores, including six in new markets for Coach: Calgary in Ottawa, Canada; Baton Rouge, Louisiana; Appleton, Wisconsin; Bakersfield, California, and Fort Myers, Florida, as well as one factory store. In addition, 7 retail stores and 3 factory stores were expanded. Thus at the end of the period there were 318 full price and 103 factory stores in operation in North America.
- In Japan, four locations were added while one was expanded. At quarter end there were 158 total locations in Japan, with 20 full price stores including 8 flagships, 113 shop in shops, 20 factory stores, and 5 distributor operated locations.
Indirect Sales decreased 3% to $160 million from $166 million in the same period last year on a comparable basis.
- This decline was due to reduced shipments into U.S. department stores as the company continues to manage inventories into the channel given weakening sales at POS, which declined 8%.
- International POS sales posted strong gains in the period, driven by both distribution and comparable location sales gains.
- The premium U.S. handbag and accessory category grew at a mid single-digit pace during the third quarter of calendar 2008. At the same time, Coach''s bag sales rose 9% across all channels in North America.
- Total revenues in North America were up 8%, with directly operated stores generating a 15% gain driven by both distribution and positive comparable store sales.
- Business in department stores rose 6% at POS.
Operating income totaled $233 million versus $239 million in the same period last year.
- Operating margin was 31% flat compared to 35.3% in the year ago quarter.
- Gross profit rose 8% to $558 million from $518 million a year ago, and gross margin continued to be strong and on target at 74.2% versus 76.6% in the prior year.
- As expected, promotional activity was the primary driver of the year-over-year change. Channel mix and the sharper pricing initiative also dampened gross margin.
- As expected, SG&A expenses as a percentage of net sales rose from prior year levels and represented 43.1% of sales versus 41.3%.
- Inventory levels at quarter end were $402 million, up about 19% from prior year levels on a comparable basis, driven in part by an investment in key initiatives which position the company well for the holiday season. In addition, the increase included the purchase of $5 million of inventory in China as part of the transition and was also impacted by the strengthening of the yen over the period. Excluding these items, inventories would have been up 16% year-over-year.
- The company has changed method of accounting for inventories of Coach Japan from last in first out or LIFO to first in first out or FIFO. As a result prior year inventory number was restated by $25 million to be presented on a comparable FIFO basis.
- This inventory increase allows supporting 53 net new North American stores, 12 net new locations at Coach Japan, and increasing sales levels from the year ago period.
- Accounts receivable balances remained well controlled as they rose less than $8 million or 5%.
- Cash and short-term investments stood at $410 million as compared with $1.2 billion a year ago, reflecting the aggressive buyback activity over the last year.
- The company repurchased 10.5 million shares of common stock at an average cost of $28.53. At the end of the period, $863 million was available under the current repurchase authorization.
- Free cash flow was an inflow of $10 million versus $83 million in the same period last year, primarily driven by changes in working capital, the investment in China, and the timing of new store openings.
- Capex spending for new stores and renovations as well as investment spending for the China acquisition was $54 million versus $39 million in the same quarter a year ago.
First Quarter 2009 Outlook
For the second fiscal quarter the company is targeting net sales of about $1.05 billion, representing a year-on-year increase of about 8%, an operating margin of about 39%, with a gross margin similar to first quarter''s rate of about 74%, and an expense ratio of about 35%, resulting in operating income up about 2% year-over-year and earnings per share of 77 cents.
Fiscal 2009 Outlook
