Coach 2007 Annual Report Download - page 19

store closures and a decline in the Internet and direct marketing channels.
Indirect — Net sales increased by 24.7% to $636.7 million in fiscal 2008 from $510.7 million in fiscal 2007, driven primarily by a
16.4% increase in sales in the U.S. wholesale division and a 40.3% increase in sales in the international wholesale division. Licensing
revenue of approximately $27 million and $15 million in fiscal 2008 and fiscal 2007, respectively, is included in Indirect sales.
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Operating income increased 15.5% to $1.15 billion in fiscal 2008 as compared to $993.4 million in fiscal 2007, driven by increases in
net sales and gross profit, partially offset by an increase in selling, general and administrative expenses. Excluding one-time items of $32.1
million, operating income increased 18.7% to $1.18 billion. Operating margin was 36.1% in fiscal 2008 compared to 38.0% in fiscal 2007
as gains from increased net sales were offset by a decrease in gross margin and increase in operating expenses. Excluding one-time items,
operating margin was 37.1%.
Gross profit increased 19.0% to $2.41 billion in fiscal 2008 compared to $2.02 billion in fiscal 2007. Gross margin was 75.7% in
fiscal 2008 compared to 77.4% in fiscal 2007. The change in gross margin was driven by promotional activities in Coach-operated North
American stores, the fluctuation in foreign currency translation rates and channel mix. 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.
Selling, general and administrative (“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 operating expenses. These
expenses are affected by the number of Coach-operated stores in North America and Japan open during any fiscal period and the related
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proportion of retail and wholesale sales. Advertising, marketing and design expenses include employee compensation, media space and
production, advertising agency fees, new product design costs, public relations, market research expenses and mail order costs.
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, as well as 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.
During fiscal 2008, SG&A expenses increased 22.4% to $1.26 billion, compared to $1.03 billion in fiscal 2007, driven primarily by
increased selling expenses. As a percentage of net sales, SG&A expenses were 39.6% and 39.4% during fiscal 2008 and fiscal 2007,
respectively. Excluding one-time costs of $32.1 million, SG&A expenses were $1.23 billion, representing 38.6% of net sales, an
improvement of 80 basis points over fiscal 2007, as we continue to leverage our expense base on higher sales.
The following table presents the components of SG&A expenses and the percentage of sales that each component represented for fiscal
2008 compared to fiscal 2007:

  



 







 (dollars in millions)   
Selling $ 865.2 $ 718.0 20.5% 27.2% 27.5%
Advertising, Marketing and Design 147.7 119.8 23.3 4.6 4.6
Distribution and Consumer Service 47.6 53.2 (10.5) 1.5 2.0
Administrative 199.5 138.6 43.9 6.3 5.3
Total SG&A Expenses $ 1,260.0 $ 1,029.6 22.4% 39.6% 39.4%
The following table presents administrative expenses and total SG&A expenses and the percentage of sales that each represented for
fiscal 2008, excluding one-time items of $32.1 million recorded in fiscal 2008:

  
  

 

 (dollars in millions)
As Reported: $ 199.5 6.3% $ 1,260.0 39.6%
Less: One-time items (32.1) (1.0) (32.1) (1.0)
Adjusted: $ 167.4 5.3% $ 1,227.9 38.6%
The increase in selling expenses was primarily due to an increase in operating expenses of North America stores and Coach Japan. The
increase in North America store expenses is attributable to increased variable expenses related to higher sales, new stores opened during the