Coach 2002 Annual Report Download - page 29

Table of Contents
U.S. wholesale category accounted for approximately $8 million of the increase in net sales offset by a decrease in net sales of approximately
$4 million in the business-to-business category.
Gross Profit
Gross profit increased 26.5% to $483.4 million in fiscal 2002 from $382.0 million in fiscal 2001. Gross margin increased approximately
360 basis points to 67.2% in fiscal 2002 from 63.6% in fiscal 2001. This improvement was driven by the consolidation of Coach Japan,
which contributed approximately 230 basis points. There was a shift in product mix, reflecting the continued diversification into non-leather
fabrications with new and successful mixed-material collections. This contributed approximately 100 basis points. In addition, gross margin
benefited from the continuing impact of sourcing cost reductions, which contributed 30 basis points.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 25.6% to $346.4 million in fiscal 2002 from $275.7 million in fiscal 2001.
Selling, general and administrative expenses increased to 48.1% as a percentage of net sales versus 45.9% in fiscal 2001.
Selling expenses increased by 40.9% to $229.3 million, or 31.9% of net sales, in fiscal 2002 from $162.7 million, or 27.1% of net sales,
in fiscal 2001. The dollar increase in these expenses was primarily due to the operating costs associated with Coach Japan, which were
borne by former distributors in prior periods. Operating costs associated with Coach Japan totaled $46.6 million in fiscal 2002. Included in
these costs was a $3.3 million fair value adjustment for open foreign currency forward contracts. Also contributing to the increase was
$20.1 million in operating costs associated with new retail and factory stores; increased variable costs for comparable store sales; store
remodels; costs to support the additional stores; and store sales promotions to enhance sales.
Advertising, marketing, and design expenses decreased by 0.8% to $51.7 million, or 7.2% of net sales, in fiscal 2002 from
$52.2 million, or 8.7% of net sales, in fiscal 2001. The dollar decrease in these expenses was primarily due to the leveraging of costs
through focused media placements, as well as greater usage of postcards and direct mail.
Distribution and customer service expenses increased to $26.9 million in fiscal 2002 from $25.8 million in fiscal 2001. The dollar
increase in these expenses was primarily due to higher sales volumes, partially offset by efficiency gains at the distribution and customer
service facility, which resulted in a decline in the ratio to net sales from 4.3% in fiscal 2001 to 3.7% in fiscal 2002.
Administrative expenses increased to $38.5 million, or 5.4% of net sales, in fiscal 2002 from $35.0 million, or 5.8% of net sales, in fiscal
2001. The absolute dollar increase in these expenses was primarily due to increased staffing costs and consulting services related to Coach
becoming a stand-alone company, offset by a business interruption proceeds gain recorded for $1.4 million in fiscal 2002 relating to our World
Trade Center location.
Reorganization Costs
In the third fiscal quarter of 2002, management of Coach committed to and announced a plan to cease production at the Lares, Puerto
Rico, manufacturing facility in March 2002. This reorganization involved the termination of 394 manufacturing, warehousing and
management employees at the Lares facility. These actions were intended to reduce costs by the resulting transfer of production to lower cost
third-party manufacturers. Coach recorded a reorganization cost of $3.4 million. The reorganization cost included $2.2 million for worker
separation costs, $0.7 million for lease termination costs and $0.5 million for the write-down of long-lived assets to net realizable value. By
June 28, 2003, production ceased at the Lares facility and disposition of the fixed assets and the termination of all employees had been
completed.
26