Coach 2011 Annual Report Download - page 36

TABLE OF CONTENTS
Operating Income
Operating income increased 13.5% to $1.30 billion in fiscal 2011 as compared to $1.15 billion in fiscal 2010. Excluding items affecting
comparability of $25.7 million in fiscal 2011, operating income increased 15.7% to $1.33 billion. Operating margin decreased to 31.4% as
compared to 31.9% in the prior year, as gross margin decreased while selling, general, and administrative (“SG&A”) expenses slightly
increased as a percentage of sales. Excluding items affecting comparability, operating margin was 32.0% in fiscal 2011.
Gross profit increased 14.8% to $3.02 billion in fiscal 2011 from $2.63 billion in fiscal 2010. Gross margin was 72.7% in fiscal 2011
as compared to 73.0% during fiscal 2010. Coach’s gross profit is dependent upon a variety of factors, including changes in the relative sales
mix among distribution channels, changes in the mix of products sold, foreign currency exchange rates and fluctuations in material costs.
These factors, among, others may cause gross profit to fluctuate from year to year.
SG&A expenses are comprised of four categories: (1) selling; (2) advertising, marketing and design; (3) distribution and consumer
service; and (4) administrative. Selling expenses include store employee compensation, store occupancy costs, store supply costs, wholesale
account administration compensation and all Coach Japan and Coach China operating expenses. These expenses are affected by the number
of Coach-operated stores in North America; Japan; Hong Kong, Macau and mainland China open during any fiscal period. Advertising,
marketing and design expenses include employee compensation, media space and production, advertising agency fees, new product design
costs, public relations and market research expenses. Distribution and consumer service expenses include warehousing, order fulfillment,
shipping and handling, customer service and bag repair costs. Administrative expenses include compensation costs for the executive,
finance, human resources, legal and information systems departments, corporate headquarters occupancy costs, consulting and software
expenses. SG&A expenses increase as the number of Coach-operated stores increase, although an increase in the number of stores generally
results in the fixed portion of SG&A expenses being spread over a larger sales base.
Coach, similar to some companies, includes certain costs related to our distribution network in selling, general and administrative
expenses rather than in cost of sales; for this reason, our gross margins may not be comparable to that of entities that include all costs
related to their distribution network in cost of sales.
During fiscal 2011, SG&A expenses increased 15.8% to $1.72 billion, compared to $1.48 billion during fiscal 2010. Excluding items
affecting comparability of $25.7 million in fiscal 2011, SG&A expenses were $1.69 billion. As a percentage of net sales, SG&A expenses
were 41.3% and 41.1% during fiscal 2011 and fiscal 2010, respectively. Excluding items affecting comparability during fiscal 2011,
SG&A expenses as a percentage of net sales were 40.7% as we leveraged our selling expense base on higher sales.
Selling expenses were $1.18 billion, or 28.5% of net sales compared to $1.05 billion, or 29.1% of net sales, during fiscal 2010. The
dollar increase in selling expenses was due to higher operating expenses in Coach China and North American stores due to higher sales and
new store openings. Additionally, selling expenses of Reed Krakoff stores contributed to the dollar increase since the brand was not launched
until the beginning of fiscal 2011. Coach China and North American store expenses as a percentage of sales decreased primarily due to
operating efficiencies and sales leverage. The decrease in Coach Japan operating expenses in constant currency of $10.2 million was offset
by the impact of foreign currency exchange rates which increased reported expenses by approximately $33.5 million.
Advertising, marketing, and design costs were $224.4 million, or 5.4% of net sales, compared to $179.4 million, or 5.0% of net sales,
during fiscal 2010. The increase was primarily due to new design expenditures and development costs for new merchandising initiatives.
Also contributing to the increase were marketing expenses related to consumer communications, which includes our digital strategy through
coach.com, our global e-commerce sites, marketing sites and social networking. The Company utilizes and continues to explore
implementing new technologies such as our global web presence, with marketing websites in 23 countries, social networking and blogs as
cost-effective consumer communication opportunities to increase on-line and store sales and build brand awareness.
Distribution and consumer service expenses were $58.2 million, or 1.4% of net sales, compared to $48.0 million, or 1.3% of net sales,
during fiscal 2010. To support our growth in China and the region, during
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