TAPESTRY, INC. - Quarter Report: 2013 December (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

_______________________________

FORM 10-Q

For the Quarterly Period Ended December 28, 2013

or

Commission file number: 1-16153

Coach, Inc.

(Exact name of registrant as specified in its charter)

516 West 34^th 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. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes þ No

On January 24, 2014, the Registrant had 277,581,114 outstanding shares of common stock, which is the Registrant’s only class of common stock.

The document contains 46 pages excluding exhibits.

COACH, INC.

TABLE OF CONTENTS

SPECIAL NOTE ON FORWARD-LOOKING INFORMATION

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 our management’s current expectations. These forward-looking statements can be identified by the use of forward-looking terminology such as “believe,” “may,” “will,” “should,” “expect,” “generate,” “intend,” “estimate,” “are positioned to,” “continue,” “project,” “guidance,” “target,” “forecast,” “anticipated,” “plan,” “potential,” the negative of these terms or comparable terms. 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 execution of our growth and transformation strategies; (ii) the effect of existing and new competition in the marketplace; (iii) our exposure to international risks, including currency fluctuations; (iv) changes in economic or political conditions in the markets where we sell or source our products; (v) our ability to successfully anticipate consumer preferences for accessories, footwear, ready to wear and fashion trends; (vi) our ability to control costs; (vii) the effect of seasonal and quarterly fluctuations in our sales on our operating results; (viii) our ability to protect against infringement of our trademarks and other proprietary rights; and such other risk factors as set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2013. Coach, Inc. assumes no obligation to revise or update any such forward-looking statements for any reason, except as required by law.

WHERE YOU CAN FIND MORE INFORMATION

Coach’s quarterly financial results and other important information are available by calling the Investor Relations Department at (212) 629-2618.

Coach maintains a website at www.coach.com where investors and other interested parties may obtain, free of charge, press releases and other information as well as gain access to our periodic filings with the SEC.

INFORMATION regarding hong kong depositary receipts

Coach’s Hong Kong Depositary Receipts are traded on The Stock Exchange of Hong Kong Limited under the symbol 6388. Neither the Hong Kong Depositary Receipts nor the Hong Kong Depositary Shares evidenced thereby have been or will be registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold in the United States or to, or for the account of, a U.S. Person (within the meaning of Regulation S under the Securities Act), absent registration or an applicable exemption from the registration requirements. Hedging transactions involving these securities may not be conducted unless in compliance with the Securities Act.

PART I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

COACH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

COACH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

COACH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

COACH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(in thousands)

(unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands, except per share data) 

The accompanying unaudited condensed consolidated financial statements include the accounts of Coach, Inc. (“Coach” or the “Company”) and all 100% owned subsidiaries. These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from this report as is permitted by SEC rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the audited consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended June 29, 2013 (“fiscal 2013”).

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial position, results of operations, comprehensive income and cash flows of the Company for the interim periods presented. The results of operations, cash flows and comprehensive income for the quarter and six months (which represents 13 and 26 week periods, respectively) ended December 28, 2013 are not necessarily indicative of results to be expected for the entire fiscal year, which will end on June 28, 2014 (“fiscal 2014”).

In connection with the acquisition of the retail business in Europe, the Company evaluated the composition of its reportable segments and concluded that sales in this region should be included in the International segment. Accordingly, prior year sales related to Europe have been reclassified to the International segment to conform to the current year presentation.

On August 30, 2013, the Company sold the Reed Krakoff business, involving the sale of the equity interests of Reed Krakoff LLC and certain assets, including the Reed Krakoff brand name and related intellectual property rights, to Reed Krakoff International LLC (“Buyer”). The sale was pursuant to the Asset Purchase and Sale Agreement dated July 29, 2013 (the “Purchase Agreement”) with Buyer and Reed Krakoff, the Company’s former President and Executive Creative Director.  Coach received a de minimus amount of cash and convertible preferred membership interests representing 8.0% of Buyer’s issued and outstanding convertible preferred units and initial equity value immediately following such issuance.  Coach recorded a cost method investment of $3,261, included in Long-term investments in the condensed consolidated balance sheet at December 28, 2013.

Concurrent with the Closing under the Purchase Agreement, the parties executed certain ancillary agreements including a transition services agreement between Coach and Buyer for up to nine months.

In connection with the Purchase Agreement, Mr. Krakoff’s resignation from Coach and the closing of the sale, Mr. Krakoff waived his right to receive compensation, salary, bonuses, equity vesting and certain other benefits.  The Company recorded a loss of $2,683 during the first quarter of fiscal 2014 related to the sale, which is recorded in Selling, general and administrative expenses on the condensed consolidated statement of income.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited) 

In the fourth quarter of fiscal 2013, the Company recorded restructuring and transformation related charges of $53,202, primarily related to our North America segment. Coach substantially completed its reduction in workforce related to this restructuring during the first quarter of fiscal 2014.

A summary of charges and status of related liabilities are as follows:

The liabilities outstanding at December 28, 2013 are anticipated to be substantially paid in fiscal 2014.

Coach became the 100% owner of its European joint venture by purchasing Hackett Limited’s 50% interest in the joint venture on July 1, 2013, enabling Coach to assume direct control and consolidate its European retail business. The joint venture included 18 retail locations in Spain, Portugal, Great Britain, France, Ireland and Germany. The purchase price consisted of cash payments of approximately $15,105 and the forgiveness of a loan from Coach to Hackett Limited of approximately $18,019. The cash payments were made in installments with $7,893 paid in fiscal 2013, $5,437 paid in the first quarter of fiscal 2014 offset by cash acquired as part of the acquisition of $3,453. The remaining $1,775 was paid at the beginning of the third quarter of fiscal 2014. Unaudited pro forma information related to this acquisition is not included, as the impact of this transaction is not material to the consolidated results of the Company. The allocation of the purchase price of the acquisition is expected to be finalized later this year. The preliminary purchase price allocation resulted in goodwill of $21,745.

The change in the carrying amount of the Company’s goodwill, all of which is included within the International reportable segment, for the six months ended December 28, 2013 is as follows:

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited) 

At December 28, 2013 and June 29, 2013, the Company’s intangible assets, which are not subject to amortization, consisted of $9,788 of trademarks and are included in Other assets.

Activity for the six months ended December 28, 2013 and December 29, 2012 in the accounts of Stockholders’ Equity is summarized below:

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

The components of accumulated other comprehensive income (loss), as of the dates indicated, are as follows:

^(a) The ending balances of accumulated other comprehensive loss are net of tax of $(3,109) and $(4,395) as of December 28, 2013 and December 29, 2012, respectively. The amounts reclassified from accumulated other comprehensive loss are net of tax of $(2,462) and $476 as of December 28, 2013 and December 29, 2012, respectively.

^(b) The components of Other includes the cumulative effect of the adoption of Accounting Standards Codification (“ASC”) 320-10-35-17 and the ASC 715 adjustment and minimum pension liability of $(1,072) and $(2,009) as of December 28, 2013 and $(1,072) and $(3,352) as of December 29, 2012, respectively. As of December 28, 2013 and December 29, 2012, the balances of accumulated other comprehensive loss are net of tax of $2,118 and $2,656, respectively.

Basic net income per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted net income per share is calculated similarly but includes potential dilution from the exercise of stock options and employee benefit and share awards.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited) 

The following is a reconciliation of the weighted-average shares outstanding and calculation of basic and diluted net income per share:

At December 28, 2013, options to purchase 3,397 shares of common stock were outstanding but not included in the computation of diluted earnings per share, as these options’ exercise prices, ranging from $54.53 to $78.46, were greater than the average market price of the common shares and therefore, would have had an anti-dilutive impact on diluted earnings per share.

At December 29, 2012, options to purchase 2,186 shares of common stock were outstanding but not included in the computation of diluted earnings per share, as these options’ exercise prices, ranging from $56.95 to $78.46, were greater than the average market price of the common shares and therefore, would have had an anti-dilutive impact on diluted earnings per share.

The following table shows the total compensation cost and the related tax benefits recognized for share-based compensation plans in the income statement for the periods indicated:

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

^(a) Approximately $9,834 of share based compensation expense and $3,793 of related income tax benefit are related to the sale of the Reed Krakoff business and restructuring and transformation recognized by the Company in the first quarter of fiscal 2014.

Stock Options

A summary of stock option activity under the Coach stock option plans during the six months ended December 28, 2013 is as follows:

At December 28, 2013, $35,884 of total unrecognized compensation cost related to non-vested stock option awards is expected to be recognized over a weighted-average period of 1.1 years.

The weighted-average grant-date fair value of individual options granted during the first six months of fiscal 2014 and fiscal 2013 was $10.02 and $14.16, respectively. The total intrinsic value of options exercised during the first six months of fiscal 2014 and fiscal 2013 was $22,292 and $47,696, respectively.

The total cash received from these option exercises was $36,778 and $52,415, respectively, and the actual tax benefit realized from these option exercises was $8,341 and $17,209, respectively.

Service-based Restricted Stock Unit Awards (“RSUs”)

A summary of service-based RSU activity during the six months ended December 28, 2013 is as follows:

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

At December 28, 2013, $123,173 of total unrecognized compensation cost related to non-vested share awards is expected to be recognized over a weighted-average period of 1.2 years.

The weighted-average grant-date fair value per share of share awards granted during the first six months of fiscal 2014 and fiscal 2013 was $53.44 and $55.20, respectively. The total fair value of shares vested during the first six months of fiscal 2014 and fiscal 2013 was $72,509 and $73,425, respectively.

Performance-based Restricted Stock Unit Awards (“PRSU”)

The Company grants performance-based share awards to key executives, the vesting of which is subject to the executive’s continuing employment and the Company's achievement of certain performance goals. A summary of performance-based share award activity during the six months ended December 28, 2013 is as follows:

At December 28, 2013, $18,503 of total unrecognized compensation cost related to non-vested share awards is expected to be recognized over a weighted-average period of 1.6 years.

The weighted-average grant-date fair value per share of share awards granted during the first six months of fiscal 2014 and fiscal 2013 was $31.84 and $57.00, respectively. The total fair value of shares vested during the first six months of fiscal 2014 and fiscal 2013 was $23,149 and $0, respectively.

During the first six months of fiscal 2014, the Company granted 241 shares of common stock with a fair value of $6,814 to selected executives as retention PRSU awards with a maximum potential number of shares issued and fair value (excluding dividends) of 321 shares and $9,085, respectively. These shares are included within the PRSU tables above. The shares of common stock under these PRSU awards will be earned and distributed based on performance criteria which compare the Company’s total stockholder return over the performance period to the total stockholder return of the companies included in the Standard & Poor’s 500 Index on the date of grant (excluding the Company). The grant date fair value of the PRSU awards was determined utilizing a Monte Carlo simulation and the following assumptions: expected volatility of 32.61%, risk-free interest rate of 0.63%, and dividend yield of 0.00%.

In the first six months of fiscal 2014 and 2013, the cash tax benefit realized for the tax deductions from all RSUs (service and performance-based) was $31,595 and $21,651, respectively.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

In accordance with Accounting Standards Codification ASC 820-10, “Fair Value Measurements and Disclosures,” the Company categorizes its assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth below. The three levels of the hierarchy are defined as follows:

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for substantially the full term of the asset or liability.

Level 3 — Unobservable inputs reflecting management’s own assumptions about the input used in pricing the asset or liability.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

The following table shows the fair value measurements of the Company’s assets and liabilities at December 28, 2013 and June 29, 2013:

^(a) Cash equivalents consist of money market funds, time deposits and commercial paper with maturities of three months or less at the date of purchase. Due to their short term maturity, management believes that their carrying value approximates fair value.

^(b) Short-term investments consist of time deposits, U.S. Treasuries and government agency securities, commercial paper and high-credit quality U.S. and non U.S. issued corporate debt securities with maturities of less than one year in which management believes their carrying value approximates fair value based on their short maturity.

^(c) Fair value, which approximates amortized cost, is determined using vendor or broker priced securities. These securities have maturity dates between calendar years 2014 and 2016.

^(d) Fair value is determined using a valuation model that takes into consideration the financial conditions of the issuer and the bond insurer, current market conditions and the value of the collateral bonds. The Company has determined that the significant majority of the inputs used to value this security fall within Level 3 of the fair value hierarchy as the inputs are based on unobservable estimates.

^(e) The fair value of these cash flow hedges is primarily based on the forward curves of the specific indices upon which settlement is based and includes an adjustment for the counterparty’s or Company’s credit risk.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

Non-Financial Assets and Liabilities

The Company’s non-financial instruments, which primarily consist of goodwill and property and equipment, are not required to be measured at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill), non-financial instruments are assessed for impairment and, if applicable, written-down to and recorded at fair value, considering market participant assumptions.

Adverse changes in future market conditions or weaker operating results compared to our expectations could result in losses or a potential impairment charge if the Company is unable to recover the carrying value of certain assets.

In April 2013, the Company entered into a joint venture agreement with Related Companies, L.P. to develop a new office tower in Manhattan in the Husdon Yards district (“Hudson Yards joint venture”). The formation of the Hudson Yards joint venture serves as a financing vehicle for the construction project. Upon expected completion of the office tower in calendar 2015, the Company will retain a condominium interest in the office tower, which will serve as its new corporate headquarters.

The Company expects to invest approximately $400,000 in the Hudson Yards joint venture between the beginning of the third quarter of fiscal 2014 through fiscal 2016, with $70,000 to $80,000 estimated for the remainder of fiscal 2014, depending on construction progress. During the quarter and six months ended December 28, 2013, the Company invested $23,130 and $41,338, respectively, in the joint venture. Outside of investment in the joint venture, the Company expects to incur approximately $190,000 of capital expenditures over the remaining period of construction.

In the ordinary course of business, Coach is a party to several pending legal proceedings and claims. Although the outcome of such items cannot be determined with certainty, Coach’s General Counsel and management are of the opinion that the final outcome will not have a material effect on Coach’s financial position, results of operations or cash flows.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

The following table summarizes the Company’s investments recorded within the consolidated balance sheet as of December 28, 2013 and June 29, 2013:

^(a) Portfolio of high-credit quality U.S. and non-U.S. issued corporate debt securities and U.S. government securities classified as available-for-sale and recorded at fair value, which approximates amortized cost. These securities have maturity dates between calendar years 2014 and 2016.

^(b) The underlying investments are scheduled to mature in 2035.

^(c) Portfolio of high-credit quality U.S. and non-U.S. issued commercial paper classified as held to maturity and recorded at amortized cost. These securities have maturity dates in the calendar year 2014.

^(d) Portfolio of time deposits with original maturities greater than 3 months.

^(e) Equity method investment related to Hudson Yards joint venture and Reed Krakoff cost method investment. The Hudson Yards joint venture is determined to be a variable interest entity primarily due to the fact that it has insufficient equity to finance its activities without additional subordinated financial support from its two joint venture partners. Coach is not considered the primary beneficiary of the entity primarily because the Company does not have the power to direct the activities that most significantly impact the entity’s economic performance. The Company’s maximum loss exposure is limited to the committed capital.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

Substantially all of the Company’s transactions involving international parties, excluding international consumer sales, are denominated in U.S. dollars, which limits the Company’s exposure to the effects of foreign currency exchange rate fluctuations. However, the Company is exposed to foreign currency exchange risk related to its foreign operating subsidiaries’ U.S. dollar-denominated inventory purchases and various cross-currency intercompany and related party loans. Coach uses derivative financial instruments to manage these risks. These derivative transactions are in accordance with the Company’s risk management policies. Coach does not enter into derivative transactions for speculative or trading purposes.

Two of the Company’s businesses outside of the United States, Coach Japan and Coach Canada, enter into zero-cost collar options, to manage the exchange rate risk related to their inventory purchases. As of December 28, 2013 and June 29, 2013, zero-cost collar options with aggregate notional amounts of $153,754 and $193,352 were outstanding, respectively. Current maturity dates range from January 2014 to August 2014.

As of December 28, 2013, and June 29, 2013, the Company had entered into various short-term and long-term intercompany and related party loans denominated in various foreign currencies, with a total principal amount of $288,821 and $253,037 at December 28, 2013, and June 29, 2013, respectively. Current maturity dates range from February 2014 to November 2023. To manage the exchange rate risk related to these loans, the Company entered into forward exchange and cross-currency swap contracts with notional amounts of $102,240 and $147,591, respectively as of December 28, 2013, and June 29, 2013. The terms of these contracts include the exchange of foreign currency fixed interest for U.S. dollar fixed interest and an exchange of the foreign currency and U.S. dollar based notional values at the maturity dates.

As of December 28, 2013 and June 29, 2013, the Company had entered into forward contracts to manage the exchange rate risk of contractual obligations with notional values of $5,775 and $16,944, respectively. Contractual obligations as of December 28, 2013 and June 29, 2013 consist of $1,775 and $6,944, respectively, due to Hackett Limited related to the European joint venture acquisition and $4,000 and $10,000, respectively, due to Shinsegae International related to the acquisition of the domestic retail business in Korea.

The Company’s derivative instruments are designated as cash flow hedges. The effective portion of gains or losses on the derivative instruments are reported as a component of other comprehensive income and reclassified into earnings in the same periods during which the hedged transaction affects earnings. The ineffective portion of gains or losses on the derivative instruments are recognized in current earnings and are included within net cash provided by operating activities.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

The following tables provide information related to the Company’s derivatives:

For the second quarter of fiscal 2014 and fiscal 2013, the amounts above are net of tax of $(4,091) and $(6,493), respectively. For the first six months of fiscal 2014 and fiscal 2013, the amounts above are net of tax of $(3,229) and $(4,494), respectively.

For the second quarter of fiscal 2014 and fiscal 2013, the amounts above are net of tax of $(413) and $591, respectively. For the first six months of fiscal 2014 and fiscal 2013, the amounts above are net of tax of $(2,462) and $476, respectively.

During the six months ended December 28, 2013 and December 29, 2012, there were no material gains or losses recognized in income due to hedge ineffectiveness.

The Company expects $8,248 of net derivative gains included in accumulated other comprehensive income at December 28, 2013 will be reclassified into earnings within the next 12 months. This amount will vary due to fluctuations in the Japanese yen and Canadian dollar exchange rates.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

The Company operates its business in five operating segments aggregated into two reportable segments, North America and International.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)