Coach 2014 Annual Report Download - page 34

TABLE OF CONTENTS
International Gross Profit increased 3.2% or $40.0 million to $1.30 billion in fiscal 2014. Gross margin decreased 180 basis points from 80.6% in fiscal
2013 to 78.8% in fiscal 2014. The decrease in gross margin is primarily due to the negative translation effect of changes in foreign currency, primarily
associated with fluctuations in the Japanese Yen. Other factors negatively impacting gross margin were increased promotions, selling products with a higher
average unit cost, as well as increased penetration of our broadened lifestyle categories which were partially offset by the lower step-up of inventory as part of
the purchase accounting related to our acquisitions.
Corporate Unallocated Gross Profit decreased $92.6 million from $64.7 million in fiscal 2013 to a loss of $27.9 million in fiscal 2014. Excluding items
affecting comparability of $82.2 million in fiscal 2014 and $4.8 million in fiscal 2013, gross profit decreased by $15.2 million from $69.5 million to $54.3
million in fiscal 2014, primarily due to less favorable production variances.
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SG&A expenses are comprised of four categories: (i) selling; (ii) advertising, marketing and design; (iii) distribution and customer service; and (iv)
administrative. Selling expenses include store employee compensation, occupancy costs and supply costs, wholesale and retail account administration
compensation globally and Coach international operating expenses. These expenses are affected by the number of Coach-operated stores open during any
fiscal period and store performance, as compensation and rent expenses vary with sales. Advertising, marketing and design expenses include employee
compensation, media space and production, advertising agency fees (primarily to support North America), new product design costs, public relations and
market research expenses. Distribution and customer service expenses include warehousing, order fulfillment, shipping and handling, customer service and
bag repair costs. Administrative expenses include compensation costs for “corporate” functions including: executive, finance, human resources, legal and
information systems departments, as well as corporate headquarters occupancy costs, consulting and software expenses. Administrative expenses also include
global equity compensation expense.
Coach includes inbound product-related transportation costs from our service providers within cost of sales. Coach, similar to some companies, includes
certain transportation-related 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.
SG&A expenses increased 0.2% or $3.3 million to $2.18 billion in fiscal 2014 as compared to $2.17 billion in fiscal 2013, primarily driven by an
increase in selling expenses. As a percentage of net sales, SG&A expenses increased to 45.3% during fiscal 2014 as compared to 42.8% during fiscal 2013.
Excluding items affecting comparability of $49.3 million in fiscal 2014 and $48.4 million in fiscal 2013, SG&A expenses increased $2.4 million from fiscal
2013; and SG&A expenses as a percentage of net sales increased, primarily due to the increase in selling expenses as a percentage of net sales, to 44.3% in
fiscal 2014 from 41.9% in fiscal 2013.
Selling expenses were $1.55 billion, or 32.2% of net sales, in fiscal 2014 compared to $1.51 billion, or 29.8% of net sales, in fiscal 2013. The dollar
increase in selling expenses reflected increases in new store openings in our International business including the impact of acquiring our former partner
Hackett’s 50% interest in our European joint venture. These expenses were mostly offset by a favorable impact of foreign currency exchange rates primarily
related to Coach Japan and lower expenses in North America due to the divestiture of the Reed Krakoff business.
Advertising, marketing, and design costs were $242.3 million, or 5.0% of net sales, in fiscal 2014, compared to $265.4 million, or 5.2% of net sales,
during fiscal 2013. The decrease was primarily due to the divestiture of the Reed Krakoff business. This decrease was partially offset by increased advertising,
marketing, and design costs related to the Company’s transformation efforts.
Distribution and consumer service expenses of $87.2 million, or 1.8% of net sales, in fiscal 2014, were fairly consistent with fiscal 2013 expenses of
$86.1 million, or 1.7% of net sales.
Administrative expenses were $300.5 million, or 6.3% of net sales, in fiscal 2014 compared to $307.1 million, or 6.1% of net sales, during fiscal 2013.
Excluding items affecting comparability of $49.3 million in fiscal 2014 and $48.4 million in fiscal 2013, administrative expenses were $251.2 million, or
5.2% of net sales, in fiscal 2014 and $258.7 million, or 5.1% of net sales, in fiscal 2013. Lower compensation expense was mostly offset by additional costs
incurred as part of investments made in the business, particularly related to increased depreciation expense.
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Operating income decreased 26.5% or $404.4 million to $1.12 billion during fiscal 2014 as compared to $1.52 billion in fiscal 2013. Operating margin
decreased to 23.3% as compared to 30.0% in fiscal 2013. Excluding items affecting comparability of $131.5 million in fiscal 2014 and $53.2 million in fiscal
2013, operating income decreased 20.7% or $326.1 million to $1.25 billion from $1.58 billion in fiscal 2013; and operating margin was 26.0%, in fiscal
2014 as compared to 31.1% in fiscal 2013.
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