Coach 2010 Annual Report Download - page 31

TABLE OF CONTENTS
Indirect — Net sales decreased 10.3% driven primarily by a 18.2% decrease in U.S. wholesale as the Company continued to control
shipments into U.S. department stores in order to manage customer inventory levels due to a weak sales environment. The net sales decrease
was partially offset by an additional week of sales, which represented approximately $8 million. We continue to experience better
performance with international locations catering to indigenous consumers, where the brand is gaining recognition, whereas the Company’s
travel business has experienced weakness, as it is heavily dependent on the Japanese traveler. Licensing revenue of approximately $19.2
million and $19.5 million in fiscal 2010 and fiscal 2009, respectively, is included in Indirect sales.
Operating Income
Operating income increased 18.3% to $1.15 billion in fiscal 2010 as compared to $971.9 million in fiscal 2009. Excluding items
affecting comparability of $28.4 million in fiscal 2009, operating income increased 15.0% from $1.00 billion. Operating margin increased
to 31.9% as compared to 30.1% in the prior year, as gross margin increased while SG&A expenses declined as a percentage of sales.
Excluding items affecting comparability, operating margin was 31.0% in fiscal 2009.
Gross profit increased 13.4% to $2.63 billion in fiscal 2010 from $2.32 billion in fiscal 2009. Gross margin was 73.0% in fiscal 2010
as compared to 71.9% during fiscal 2009. The change in gross margin was driven primarily by lower manufacturing costs and product
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.
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 and the related
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, corporate headquarters occupancy costs, and 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 2010, SG&A expenses increased 9.8% to $1.48 billion, compared to $1.35 billion in fiscal 2009. Excluding items
affecting comparability of $28.4 million in fiscal 2009, SG&A expenses were $1.32 billion. As a percentage of net sales, SG&A expenses
were 41.1% and 41.8% during fiscal 2010 and fiscal 2009, respectively. Excluding items affecting comparability during fiscal 2009, selling
general and administrative expenses as a percentage of net sales were 40.9%. Overall SG&A expenses increased primarily from higher
administrative expenses driven by performance-based compensation and a prior year reversal of a straight-line rent accrual, resulting from
the purchase of our corporate headquarters building that did not recur in fiscal 2010.
Selling expenses were $1.05 billion, or 29.1% of net sales, in fiscal 2010 compared to $981.5 million, or 30.4% of net sales, in fiscal
2009. Excluding items affecting comparability during fiscal 2009 of $5.0 million related to the planned closure of four underperforming
stores during the stores lease terms, selling expenses were $976.5 million, representing 30.2% of net sales. The dollar increase in selling
expenses was primarily due to an increase in operating expenses of North American stores and Coach China. The increase in North
American store expenses was primarily attributable to expenses from new and expanded stores opened during fiscal 2010 and the
incremental expense associated with having a full year of expenses related to stores opened in the prior year. Coach China and North
American store expenses as a percentage of sales decreased primarily attributable to operating efficiencies achieved since the end of the fiscal
2009. The increase in
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