TAPESTRY, INC. - Quarter Report: 2014 March (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 29, 2014

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)

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). þ Yes ¨ 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 April 25, 2014, the Registrant had 274,172,356 outstanding shares of common stock, which is the Registrant’s only class of common stock.

The document contains 44 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 trends are not indicative of future trends, which will depend upon a number of factors, including but not limited to: (i) the successful execution of our business 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 FLOWS

(amounts 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)

1. Basis of Presentation and Organization

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 nine months (which represents 13 and 39 week periods, respectively) ended March 29, 2014 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.

2. Sale of Reed Krakoff Business; Restructuring and Transformational Related Charges

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 March 29, 2014.

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.

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.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

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

3. Acquisition

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 acquisition has been substantially completed resulting in goodwill of $22,534.

4. Goodwill and Intangible Assets

The change in the carrying amount of the Company’s goodwill, all of which is included within the International reportable segment, for the nine months ended March 29, 2014 is as follows:

At March 29, 2014 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.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

5. Stockholders’ Equity

Activity for the nine months ended March 29, 2014 and March 30, 2013 in the accounts of Stockholders’ Equity is summarized below:

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

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

^(a) The ending balances of accumulated other comprehensive loss related to cash flow hedges are net of tax of $(1,759) and $(4,863) as of March 29, 2014 and March 30, 2013, respectively. The amounts reclassified from accumulated other comprehensive loss are net of tax of $(2,817) and $(84) as of March 29, 2014 and March 30, 2013, 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 $0 and $(2,009) as of March 29, 2014 and $(1,072) and $(3,352) as of March 30, 2013, respectively. As of March 29, 2014 and March 30, 2013 the balances of accumulated other comprehensive loss are net of tax of $1,490 and $2,656, respectively.

6. Earnings per Share

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.

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

Outstanding options to purchase shares of common stock not included in the computation of diluted earnings per share, as these options’ exercise prices 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, were as follows:

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

7. Share-Based Compensation

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:

^(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. See Footnote 2 for information as it relates to the sale of the Reed Krakoff business.

Stock Options

A summary of stock option activity under the Coach stock option plans during the nine months ended March 29, 2014 is as follows:

At March 29, 2014, $30,623 of total unrecognized compensation cost related to non-vested stock option awards is expected to be recognized over a weighted-average period of 1.0 years.

The weighted-average grant-date fair value of individual options granted during the first nine months of fiscal 2014 and fiscal 2013 was $9.94 and $13.07, respectively. The total intrinsic value of options exercised during the first nine months of fiscal 2014 and fiscal 2013 was $26,138 and $50,502, respectively.

The total cash received from these option exercises was $42,479 and $56,586, respectively, and the actual tax benefit realized from these option exercises was $9,665 and $19,377, respectively.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

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

A summary of service-based RSU activity during the nine months ended March 29, 2014 is as follows:

At March 29, 2014, $109,669 of total unrecognized compensation cost related to non-vested RSU awards is expected to be recognized over a weighted-average period of 1.1 years.

The weighted-average grant-date fair value per share of RSU awards granted during the first nine months of fiscal 2014 and fiscal 2013 was $53.09 and $54.94, respectively. The total fair value of RSUs vested during the first nine months of fiscal 2014 and fiscal 2013 was $76,895 and $79,641, 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 nine months ended March 29, 2014 is as follows:

At March 29, 2014, $16,546 of total unrecognized compensation cost related to non-vested PRSU awards is expected to be recognized over a weighted-average period of 1.5 years.

The weighted-average grant-date fair value per share of PRSU awards granted during the first nine months of fiscal 2014 and fiscal 2013 was $32.29 and $50.55, respectively. The total fair value of shares vested during the first nine months of fiscal 2014 and fiscal 2013 was $23,149 and $0, respectively.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

During the first nine 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 compares 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 nine months of fiscal 2014 and 2013, the cash tax benefit realized for the tax deductions from all service and performance-based RSUs were $33,091 and $23,247, respectively.

8. Fair Value Measurements

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 March 29, 2014 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, 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 is determined using vendor or broker priced securities. These securities have maturity dates between calendar years 2014 and 2017.

^(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)

The following table present a reconciliation of the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended March 29, 2014 and March 30, 2013. Level 3 available-for-sale securities consist of an auction rate security.

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.

9. Debt

The Company has a $700 million credit facility with certain lenders and JP Morgan Chase Bank, N.A. as the primary lender and administrative agent (the “JP Morgan facility”) with a maturity date of March 26, 2018. The JP Morgan facility is available to finance the seasonal working capital requirements and general corporate purposes of the Company and its subsidiaries. At Coach’s request and lenders’ consent, revolving commitments of the JP Morgan facility may be increased to $1 billion. As of March 29, 2014 and June 29, 2013, there was $210,000 and $0 outstanding on the JP Morgan facility. Due to the short-term nature of this borrowing, the fair value approximates carrying value.

Borrowings under the JP Morgan Facility bear interest at a rate per annum equal to, at Coach’s option, either (a) a rate based on the rates applicable for deposits in the interbank market for U.S. dollars or the applicable currency in which the loans are made plus an applicable margin or (b) an alternate base rate (which is a rate equal to the greatest of (1) the Prime Rate in effect on such day, (2) the Federal Funds Effective Rate in effect on such day plus ½ of 1% or (3) the Adjusted LIBO Rate for a one month Interest Period on such day plus 1%). Additionally, Coach pays a commitment fee on the average daily unused amount of the JP Morgan Facility. At March 29, 2014, the commitment fee was 7.5 basis points.

As of March 29, 2014, Coach Japan, a wholly owned subsidiary of the Company, had credit facilities with several Japanese financial institutions to provide funding for working capital and general corporate purposes, allowing a maximum borrowing of 5.3 billion yen, or approximately $51 million, as of March 29, 2014. Interest is based on the Tokyo Interbank rate plus a margin of 25 to 30 basis points. During fiscal 2013 and through the third quarter of fiscal 2014, there were no borrowings under these facilities.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

As of March 29, 2014, Coach Shanghai Limited, a wholly owned subsidiary of the Company, had a credit facility to provide funding for working capital and general corporate purposes, allowing a maximum borrowing of 63 million Chinese renminbi, or approximately $10 million, as of March 29, 2014. Interest is based on the People's Bank of China rate. During fiscal 2013 and through the third quarter of fiscal 2014, there were no borrowings under this facility.

Both the Coach Japan and Coach Shanghai Limited credit facilities can be terminated at any time by the respective financial institutions, and there is no guarantee that they will be available to the Company in future periods.

10. Commitments and Contingencies

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 Hudson 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 $370,000 in the Hudson Yards joint venture between the beginning of the fourth quarter of fiscal 2014 through fiscal 2016, with approximately $30,000 estimated for the remainder of fiscal 2014, depending on construction progress. During the quarter and nine months ended March 29, 2014, the Company invested $21,518 and $62,856, respectively, in the joint venture. Outside of investments 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)

11. Investments

The following table summarizes the Company’s investments recorded within the consolidated balance sheet as of March 29, 2014 and June 29, 2013:

^(a) Portfolio of high-credit quality U.S. Treasuries and government agency debt securities and U.S. and non-U.S. issued corporate debt 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 2017.

^(b) The investment was sold in the third quarter of fiscal 2014. Refer to Footnote 8 for further information.

^(c) Portfolio of high-credit quality U.S. government agency debt securities, U.S. and non-U.S. issued corporate debt securities, and commercial paper classified as held to maturity and recorded at amortized cost which approximates fair value. These securities have maturity dates in the calendar year 2014 and 2015.

^(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)

12. Derivative Instruments and Hedging Activities

Substantially all of the Company’s transactions involving international parties, excluding international customer 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 March 29, 2014 and June 29, 2013, zero-cost collar options with aggregate notional amounts of $93,997 and $193,352 were outstanding, respectively. Current maturity dates range from April 2014 to June 2015.

As of March 29, 2014, and June 29, 2013, the Company had entered into various short-term intercompany and related party loans denominated in various foreign currencies. Current maturity dates range from May 2014 to March 2018. 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 $15,687 and $147,591, respectively as of March 29, 2014, and June 29, 2013 to hedge the total principal amount of the short-term intercompany and related party loans. 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 March 29, 2014 and June 29, 2013, the Company had entered into forward contracts to manage the exchange rate risk of contractual obligations with notional values of $4,000 and $16,944, respectively. Contractual obligations as of March 29, 2014 and June 29, 2013 consist of $4,000 and $10,000, respectively, due to Shinsegae International related to the acquisition of the domestic retail business in Korea. The Company also had contractual obligations at June 29, 2013 of $6,944 due to Hackett Limited related to the acquired European joint venture.

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 third quarter of fiscal 2014 and fiscal 2013, the amounts above are net of tax of $994 and $(1,029), respectively. For the first nine months of fiscal 2014 and fiscal 2013, the amounts above are net of tax of $(2,239) and $(5,523), respectively.

For the third quarter of fiscal 2014 and fiscal 2013, the amounts above are net of tax of $(355) and $(560), respectively. For the first nine months of fiscal 2014 and fiscal 2013, the amounts above are net of tax of $(2,817) and $(84), respectively.

During the nine months ended March 29, 2014 and March 30, 2013, there were no material gains or losses recognized in income due to hedge ineffectiveness.

The Company expects $4,736 of net derivative gains included in accumulated other comprehensive income at March 29, 2014 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)

13. Segment Information

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)

^(a) As a result of the acquisition of the European joint venture (as discussed in Note 3), certain amounts have been reclassed from Other to International to conform to the 2014 presentation of the European results. For the quarter ended March 30, 2013, these amounts are net sales of $3,658, gross profit of $1,887, operating income of $1,858, and income before provision for income taxes of $1,858. For the nine months ended March 30, 2013, amounts reclassified are net sales of $15,845, gross profit of $7,657, operating income of $7,738, and income before provision for income taxes of $7,738.

^(b) Other, which is not a reportable segment, consists of sales generated in ancillary channels including licensing and disposition.

COACH, INC.

Notes to Condensed Consolidated Financial Statements

(in thousands except per share data, unaudited)

The following is a summary of the common costs not allocated in the determination of segment performance:

14. Stock Repurchase Program

Purchases of Coach’s common stock are made subject to market conditions and at prevailing market prices, through the open market. Repurchased shares of common stock become authorized but unissued shares and may be issued in the future for general corporate and other purposes. The Company may terminate or limit the stock repurchase program at any time.

Coach accounts for stock repurchases and retirements by allocating the repurchase price to common stock, additional paid-in-capital and retained earnings. The repurchase price allocation is based upon the equity contribution associated with historical issuances, beginning with the earliest issuance. During the fourth quarter of fiscal 2010, cumulative stock repurchases allocated to retained earnings resulted in an accumulated deficit balance. Since its initial public offering, the Company has not experienced a net loss in any fiscal year, and the net accumulated deficit balance in stockholders’ equity is attributable to the cumulative stock repurchase activity and dividends declared.

For the third quarter of fiscal 2014, the Company repurchased and retired 3,646 shares, or $174,989 at an average cost of $47.99. The Company did not repurchase any shares during the third quarter of fiscal 2013.

For the first nine months of fiscal 2014, the Company repurchased and retired 10,239 shares, or $524,926 of common stock, at an average cost of $51.27 per share. For the first nine months of fiscal 2013, the Company repurchased and retired 7,066 shares, or $400,000 of common stock, at an average cost of $56.61 per share.

As of March 29, 2014, Coach had $836,701 remaining in the stock repurchase program.

The following discussion of Coach’s financial condition and results of operations should be read together with Coach’s condensed consolidated financial statements and notes to those statements, included elsewhere in this document. When used herein, the terms “Coach,” “Company,” “we,” “us” and “our” refer to Coach, Inc., including consolidated subsidiaries.

EXECUTIVE OVERVIEW

Coach is a leading New York design house of modern luxury accessories. Our product offerings includes fine accessories and gifts for women and men, including handbags, men’s bags, women’s and men’s small leather goods, footwear, outerwear, watches, weekend and travel accessories, scarves, sunwear, fragrance, jewelry and related accessories. We are in the process of transforming Coach from an international accessories business to a global lifestyle brand, anchored in accessories. We plan to accomplish this strategy by building upon our strong management and design teams and enhancing and building out the Coach experience through expanded and new product categories, notably footwear and outerwear, enhanced retail environments and integrated marketing communications.

Coach operates in two segments: North America and International. The North America segment includes sales to North American customers through Coach-operated stores (including Internet sales) and sales to North American wholesale customers. The International segment includes sales to customers through Coach-operated stores in Japan and mainland China (including Internet sales), Hong Kong and Macau, Singapore, Taiwan, Malaysia, Korea, Europe, and sales to wholesale customers and distributors in over 30 countries. As Coach’s business model is based on multi-channel global distribution, our success does not depend solely on the performance of a single channel or geographic area.

In order to drive growth within our global business, we are focused on four key initiatives:

However, certain trends and uncertainties, macroeconomic and other, may have a material effect on net sales, net income and cash flows. Today, primarily in North America, we are experiencing intensified competition and a highly promotional environment, as well as an industry wide deceleration of in-store traffic. Internet sales have also recently been negatively impacted by eliminating third-party internet sales events and our decision to limit access to our e-factory flash sales site. At the same time, the Company is making investments to its Internet business, as we continue to move to an “omni-channel” business, and is reviewing its store fleet systematically, assessing strategic opportunities for potential closures and additional investments.

The Company believes that long-term growth can be realized through its transformational efforts over time.

SUMMARY – THIRD QUARTER OF FISCAL 2014

During the third quarter of fiscal 2014, the Company generated net sales of $1.10 billion, net income of $190.7 million and net income per diluted share of $0.68. This compares to net sales of $1.19 billion, net income of $238.9 million and net income per diluted share of $0.84 for the third quarter of fiscal 2013.

Our operating performance for the third quarter of fiscal 2014 reflected a decline in net sales of 7.4% due to decreased net sales from our North America business, partially offset by increased net sales in our International business. Excluding the unfavorable effects of foreign currency, net sales declined 5.4%. Our gross profit decreased by 11.2% to $781.3 million during the quarter ended March 29, 2014. Selling, general and administrative ("SG&A") expenses decreased 2.5% as a result of lower performance-related compensation costs and lower sales in North America partially offset by additional expansion-related expenses incurred in our International business. As a result, operating income decreased to $262.7 million in the third quarter of fiscal 2014.

Net income decreased in the third quarter of fiscal 2014 as compared to the same period of fiscal 2013, primarily due to a decrease in gross profit of $98.9 million partially offset by decreases in the provision for income taxes and SG&A expenses of $38.8 million and $13.1 million, respectively. Net income per diluted share decreased due to lower net income.

THIRD QUARTER FISCAL 2014 COMPARED TO THIRD QUARTER FISCAL 2013

The following table summarizes results of operations for the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013. All percentages shown in the below table and the discussion that precedes and follows have been calculated using unrounded numbers.