This summary is based on the fourth quarter fiscal 2008 earnings call conducted by Coach, Inc. (COH) on July 29, 2008.
Management:
IR: Andrea Shaw Resnick
CEO: Lew Frankfort
Executive VP & CFO: Michael Devine
Key Investors Issues
- EPS were 62 cents per share compared to 42 cents per share last year.
- Net income was $213.5 million compared to $160.6 million a year earlier.
- Sales climbed to $781.5 million from $652.1 million.
Second Quarter Highlights
Performance was highlighted by an increase of 22% in both revenues and EPS.
- It was a year of many accomplishments including the opening of 47 total net new stores in North America, 38 net new retail stores and nine new factory stores, a 10% increase in North American comparable store sales for the year, continued strong growth in indirect businesses driven by both productivity and location growth notably in international wholesale, another excellent year for Coach Japan, retail sales there rose 14% in constant currency and 23% in dollars to nearly $600 million despite flat category sales for imported bags and accessories in Japan. Coach strengthened its number two position in this market with an approximate 13% share this year, up from 11% last year.
- The company announced the phased buyout of retail businesses in Greater China along with development strategy for the region.
Coach opened 12 North American retail stores including six in new markets for Coach: Malvern, Florida; Shreveport, Louisiana; Edmonton, Alberta, Canada; McAllen, Texas; Wichita, Kansas; and Springfield, Missouri.
- The company expanded an additional four locations and closed two others.
- In addition on new factory store was opened and 11 were expanded. At the end of the period there were 297 full price and 102 factory stores in operation in North America. In Japan the company opened seven new locations. At quarter-end there were 154 total locations in Japan. This was a net increase of 12 locations from the 142 at year end 2007. In addition Coach expanded two locations during the fourth quarter bringing the year end total to 11 expansions in Japan.
Indirect sales increased 11% to $123 million from $111 million in the same period last year.
- POS sales at US department stores were essentially even while international POS sales grew by more then 30%. The premium US handbag and accessory category grew between 5% and 10% during the first half of calendar 2008. At the same time, Coach’s bag sales rose 15% across all channels in North America.
- Total revenues in North America were up 18% with directly operated stores generating a 22% gain driven by both distribution and an overall high single-digit comparison.
- In full price stores weak traffic patterns from the previous two quarters continued while conversion rose and average transaction size fell. In factory the company continued to see increases across all three metrics. It was another strong season for Coach women’s footwear as business in US department stores where the company has sold through nearly 900 locations rose 21% for the most recent quarter.
- Across all channels, handbags and women’s accessories continued to drive business as the look of product continues to evolve reflecting changing consumer preferences.
Revenues increased 20% with sales of direct business up 22% and the indirect business as expected up 11%.
- Excluding the impact of certain one-time items, earnings per share increased 20% to 50 cents as compared to 42 cents in the year ago period as net income rose to $172 million from $159 million.
- Operating income rose 14% to $281 million versus $245 million in the same period last year.
- Operating margin was 35.9% compared to 37.6% in the year ago quarter.
- Gross profit rose 16% to $593 million from $509 million a year ago and gross margin was 75.9% versus 78.1% in prior year
- Accounts receivable balances were essentially unchanged as DSO fell to 31 days versus 36 days last year. Net cash from operating activities was $323 million compared to $258 million last year. Free cash flow was an inflow of $268 million versus $216 million in the same period last year primarily due to higher net income.
- CapEx spending primarily for new stores and renovations was $55 million versus $42 million in the same quarter a year ago.
- The company repurchased and retired over 4.8 million shares of common stock at an average cost of $35.18 spending a total of $170 million.
Fiscal 2008 Highlights
- Strong annual performance was capped off by a solid fourth quarter as the company announced increases of 20% in both sales and earnings per share.
- Revenues rose 22% which sales generated by direct channel rising 21% while indirect revenues rose by 25%.
- Earnings per share rose 22% to $2.06 as compared to $1.69 posted in 2007 as net income rose to $742 million from $637 million.
- Operating income rose to nearly $1.2 billion, a 19% increase.
- Operating margin was 37.1% compared with 38% even a year ago.
- Gross profit rose 19% to $2.41 billion as compared to $2.02 billion a year ago while gross margin rate was 75.7% versus last year’s 77.4%.
- SG&A expenses as a percentage of net sales improved 80 basis points to 38.6% from 39.4% a year ago.
- Net cash from operating activities was $923 million compared to $781 million a year ago. Free cash flow in fiscal year 2008 was an inflow of $749 million versus $641 million in fiscal year 2007 while CapEx spending totaled $175 million, again primarily for new stores and expansions as well as technology and corporate infrastructure investments.
- The company repurchased and retired nearly 39.7 million shares of common stock at an average cost of $33.68 spending a total of over $1.3 billion.
- At the end of the period $163 million was available under current repurchase authorization which was put in place in November of 2007.
- The company experienced 20% growth in North America including a 22% sales increase generated by stores.
- In third quarter due to the unprecedented single quarter move in the Yen the company experienced gross margin hit when it marked to market Yen inventory margin elimination. At that time the company provided guidance to fourth quarter gross margin of 75% flat. The company assumed that the Yen would end the quarter also flat at around 100 to the dollar.
As the Yen actually weakened over the period ending at about 106 the company had a benefit to gross margin of about 80 basis points. Before one-time items and as expected SG&A expenses as a percentage of net sales were below prior year levels in the fourth quarter and represented 40% of sales versus 40.5% a year ago, a 50 basis point improvement.
