Coach 2012 Annual Report Download - page 33

Operating Income
Operating income increased 15.9% to $1.51 billion in fiscal 2012 as compared to $1.30 billion in fiscal
2011. Excluding items affecting comparability of $39.2 million in fiscal 2012 and $25.7 million in fiscal 2011,
operating income increased 16.6% to $1.55 billion. Operating margin increased to 31.7% as compared to
31.4% in the prior year, as gross margin increased while selling, general, and administrative (‘‘SG&A’’)
expenses decreased as a percentage of sales. Excluding items affecting comparability, operating margin was
32.6% in fiscal 2012 as compared to 32.0% in fiscal 2011.
Gross profit increased 14.6% to $3.47 billion in fiscal 2012 from $3.02 billion in fiscal 2011. Gross
margin was 72.8% in fiscal 2012 as compared to 72.7% during fiscal 2011. 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, Coach China, Coach Singapore and Coach Taiwan operating expenses. These expenses are
affected by the number of Coach-operated stores in North America; Japan; Hong Kong, Macau, mainland
China; Taiwan and Singapore 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 2012, SG&A expenses increased 13.7% to $1.95 billion, compared to $1.72 billion during
fiscal 2011. Excluding items affecting comparability of $39.2 million in fiscal 2012 and $25.7 million in fiscal
2011, SG&A expenses were $1.91 billion and $1.69 billion, respectively. As a percentage of net sales, SG&A
expenses were 41.0% and 41.3% during fiscal 2012 and fiscal 2011, respectively. Excluding items affecting
comparability during fiscal 2012 and fiscal 2011, SG&A expenses as a percentage of net sales were 40.2%
and 40.7%, respectively, as we leveraged our selling expense base on higher sales.
Selling expenses were $1.36 billion, or 28.5% of net sales compared to $1.18 billion, or 28.5% of net
sales, during fiscal 2011. 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. Coach Japan operating
expenses decreased by $0.4 million in constant currency, but was more than offset by the impact of foreign
currency exchange rates which increased reported expenses by approximately $15.2 million.
Advertising, marketing, and design costs were $245.2 million, or 5.1% of net sales, compared to
$224.4 million, or 5.4% of net sales, during fiscal 2011. The dollar increase was primarily due to marketing
expenses related to consumer communications, which includes our digital strategy through coach.com, our
global e-commerce sites, third-party flash sites, marketing sites and social networking. The Company operates
marketing websites in 23 countries, and utilizes social networking and blogs as cost-effective consumer
communication opportunities to increase online and store sales and build brand awareness. Also contributing
to the increase were new design expenditures and development costs for new merchandising initiatives.
Distribution and consumer service expenses were $68.9 million, or 1.4% of net sales, compared to
$58.2 million, or 1.4% of net sales, during fiscal 2011.
Administrative expenses were $282.2 million, or 5.9% of net sales, compared to $252.4 million, or 6.1%
of net sales, during fiscal 2011. Excluding items affecting comparability of $39.2 in fiscal 2012 and
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