10-K 1 coh7022016-10k.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-K
 
þ

 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended July 2, 2016
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-16153
 
Coach, Inc.
(Exact name of registrant as specified in its charter)
 
 
Maryland
 
52-2242751
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
10 Hudson Yards, New York, NY 10001
(Address of principal executive offices); (Zip Code)
(212) 594-1850
(Registrant’s telephone number, including area code)
 
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class:
 
Name of Each Exchange on which Registered
Common Stock, par value $.01 per share
 
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the Act).Yes o No þ
The aggregate market value of Coach, Inc. common stock held by non-affiliates as of December 26, 2015 (the last business day of the most recently completed second fiscal quarter) was approximately $9.1 billion. For purposes of determining this amount only, the registrant has excluded shares of common stock held by directors and officers. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant.
On August 5, 2016, the Registrant had 278,942,860 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents
 
Form 10-K Reference
Proxy Statement for the 2016 Annual Meeting of Stockholders
 
Part III, Items 10 – 14





COACH, INC.

TABLE OF CONTENTS

 
 
 
 
 
Page Number
 
PART I
 
 
PART II
 
 
PART III
 
 
PART IV
 


i


SPECIAL NOTE ON FORWARD-LOOKING INFORMATION
This document, and the documents incorporated by reference in this document, in our press releases and in oral statements made from time to time by us or on our behalf, contain certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and are based on management’s current expectations. These forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “may,” “will,” “should,” “expect,” “confidence,” “trends,” “intend,” “estimate,” “on track,” “are positioned to,” “on course,” “opportunity,” “continue,” “project,” “guidance,” “target,” “forecast,” “anticipated,” “plan,” “potential,” the negative of these terms or comparable terms. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Coach, Inc.’s actual results could differ materially from the results contemplated by these forward-looking statements due to a number of important factors, including those discussed in the sections of this Form 10-K filing entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements.
INFORMATION REGARDING HONG KONG DEPOSITARY RECEIPTS
Coach’s Hong Kong Depositary Receipts are traded on The Stock Exchange of Hong Kong Limited under the symbol 6388. Neither the Hong Kong Depositary Receipts nor the Hong Kong Depositary Shares evidenced thereby have been or will be registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), and may not be offered or sold in the United States or to, or for the account of, a U.S. Person (within the meaning of Regulation S under the Securities Act), absent registration or an applicable exemption from the registration requirements. Hedging transactions involving these securities may not be conducted unless in compliance with the Securities Act.


1


In this Form 10-K, references to “we,” “our,” “us,” "Coach" and the “Company” refer to Coach, Inc., including consolidated subsidiaries. Unless the context requires otherwise, references to the "Coach brand" do not include the Stuart Weitzman brand and references to the "Stuart Weitzman brand" do not include the Coach brand. The fiscal year ended July 2, 2016 ("fiscal 2016") was a 53-week period, and the fiscal years ended June 27, 2015 (“fiscal 2015”) and June 28, 2014 (“fiscal 2014") were each 52-week periods.
PART I
ITEM 1. BUSINESS
Coach, Inc. (the "Company") is a leading New York design house of modern luxury accessories and lifestyle brands. The Coach brand was established in New York City in 1941, and has a rich heritage of pairing exceptional leathers and materials with innovative design. The Stuart Weitzman brand ("Stuart Weitzman") is a leader in women's designer footwear, and is built upon the concept of crafting a beautifully-constructed shoe, merging fashion and function.
NARRATIVE DESCRIPTION OF COACH BRAND
The Coach brand is one of the most recognized fine accessories brands in both North America and in targeted international markets. The Coach brand offers premium lifestyle accessories to an engaged customer base and provides consumers with fresh, compelling and innovative products that are extremely well made, at an attractive price. Our product offering uses a broad range of high quality leathers, fabrics and materials. In response to our customer’s demands for both fashion and function, the Coach brand offers updated styles and multiple product categories which address an increasing share of our customer’s accessory wardrobe. We present a sophisticated, modern and inviting environment to showcase our product assortment and reinforce a consistent brand positioning wherever the consumer may shop. We utilize a flexible, cost-effective global sourcing model, in which independent manufacturers supply our products, allowing us to efficiently bring our broad range of products to market.
We offer a number of key differentiating elements, including:
A Distinctive Brand — The Coach brand represents a blend of classic American style with a distinctive New York spirit, offering a design that is known for a distinguishing combination of style and function. Coach brand offers lifestyle products that are relevant, extremely well made and provide excellent value.
A Market Leadership Position With Growing International Recognition — The Coach brand is a global leader in premium handbags and lifestyle accessories. Our long-standing reputation and distinctive image have been consistently developed across an expanding number of products, sales channels and international markets.
A Loyal And Involved Consumer — Consumers have maintained a strong emotional connection with the Coach brand. Part of our everyday mission is to continue to cultivate consumer relationships by strengthening this sentiment and brand loyalty.
A Multi-Channel Global Distribution Model — Products are available in image-enhancing environments globally wherever our consumer chooses to shop including: retail and outlet stores, directly operated concession shop-in-shops, online, and department and specialty stores. This allows us to maintain a dynamic balance as results do not depend solely on the performance of a single channel or geographic area. Our stores showcase our products and enhance the shopping experience while reinforcing the image of our brand. The modern luxury store design creates a distinctive environment to display our products. We continue to be committed to the elevation and enhancement of our in-store imagery through strategic investments in Coach branded stores and wholesale locations. Furthermore, store associates are trained to maintain high standards of visual presentation, merchandising and customer service.
Innovation With A Consumer-Centric Focus — We listen to our consumers through rigorous consumer research and strong consumer orientation. To truly understand globalization and its related impact, we understand the local context in each market, learning about our consumer wherever our products are sold. The Coach brand works to anticipate the consumer’s changing needs by keeping the product assortment fresh and compelling.
NARRATIVE DESCRIPTION OF STUART WEITZMAN BRAND
Stuart Weitzman is a leading global women's premium footwear brand, with a strong opportunity for growth both within North America and international markets. The design team, under Mr. Stuart Weitzman, is responsible for conceptualizing and directing the design of all products, and works closely with its manufacturing partners, primarily in Spain, to construct a broad mix of footwear styles. These manufacturers in aggregate support a broad mix of materials and seasonal influx of new, fashion oriented styles, which allows the Stuart Weitzman brand to quickly meet marketplace demands and changing consumer preferences. Stuart Weitzman products, which substantially consist of footwear, are sold primarily through department stores in North America and international locations, within numerous independent third party distributors and within Stuart Weitzman operated stores (including the Internet) in the United States, Canada and Europe.

2


GENERAL DEVELOPMENT OF BUSINESS
Founded in 1941, Coach Inc. was acquired by Sara Lee Corporation (“Sara Lee”) in 1985. In June 2000, the Company was incorporated in the state of Maryland. In October 2000, Coach was listed on the New York Stock Exchange and sold approximately 68 million shares of common stock, split adjusted, representing 19.5% of the then outstanding shares. In April 2001, Sara Lee completed a distribution of its remaining ownership in Coach via an exchange offer, which allowed Sara Lee stockholders to tender Sara Lee common stock for Coach common stock.
The Company's international expansion strategy has been to enter into joint ventures and distributor relationships to build market presence and capability. To further accelerate brand awareness, aggressively grow market share and to exercise greater control of our brand, Coach has historically acquired its partner’s interests.
In June 2001, Coach Japan was initially formed as a joint venture with Sumitomo Corporation. On July 1, 2005, we purchased Sumitomo’s 50% interest in Coach Japan.
In fiscal 2011, the Company purchased a non-controlling interest in a joint venture with Hackett Limited to expand the Coach business in Europe. Through the joint venture, the Company opened retail locations in Spain, Portugal and the United Kingdom in fiscal 2011, in France and Ireland in fiscal 2012 and in Germany in fiscal 2013. In the beginning of fiscal 2014, the Company purchased Hackett Limited’s remaining 50% interest in the joint venture, and has continued to expand its presence in Europe.
Coach acquired the domestic retail businesses from its distributors as follows:
-
Fiscal 2009: Hong Kong, Macau and mainland China (“Greater China”).
-
Fiscal 2012: Singapore and Taiwan.
-
Fiscal 2013: Malaysia and South Korea.
On May 4, 2015, the Company completed the acquisition of Stuart Weitzman, a luxury women's footwear company, to complement its current leadership position in premium handbags and accessories. The operating results of the Stuart Weitzman brand have been consolidated in the Company's operating results commencing on May 4, 2015. During the fourth quarter of fiscal 2016, the Company acquired the Stuart Weitzman Canadian retail distributor.
SEGMENTS
In fiscal 2016, the Company has three reportable segments:
North America, which is composed of Coach brand sales to North American consumers through stores, including the Internet, and sales to wholesale customers. This segment represented approximately 53% of Coach's total net sales in fiscal 2016.
International, which is composed of Coach brand sales to consumers through stores and concession shop-in-shops in Japan, mainland China, Hong Kong, Macau, Singapore, Taiwan, Malaysia, South Korea, the United Kingdom, France, Ireland, Spain, Portugal, Germany, Italy, Austria, Belgium, the Netherlands and Switzerland. Additionally, International includes Coach brand sales to consumers through the Internet in Japan, mainland China, the United Kingdom and South Korea, as well as sales to wholesale customers and distributors in approximately 55 countries. This segment represented approximately 38% of total net sales in fiscal 2016.
Stuart Weitzman, which includes worldwide sales generated by the Stuart Weitzman brand, primarily through department stores in North America and international locations, within numerous independent third party distributors and within Stuart Weitzman operated stores (including the Internet) in the United States, Canada and Europe. This segment represented approximately 8% of total net sales in fiscal 2016.
Other, which is not a reportable segment, consists of Coach brand sales and expenses generated in licensing and disposition channels, and represented approximately of 1% of total net sales in fiscal 2016.
Coach Brand North America Segment
North American Retail Stores — Coach retail stores are located in both regional shopping centers and metropolitan areas throughout the U.S., Canada and Puerto Rico. The retail stores carry an assortment of products depending on their size, location and customer preferences. Our flagship stores, which offer the broadest assortment of Coach brand products, are located in high-visibility locations.

3


In fiscal 2016, we have reduced the number of retail stores and total square footage, as we continue to optimize our real estate position. We expect this trend to continue in the next fiscal year with the anticipated net closure of approximately 10-15 North America retail stores in the fiscal year ending July 1, 2017 ("fiscal 2017"). Furthermore, we expect to continue investing in the elevation of our existing store environments.
The change in the number of North America Coach retail stores and their total and average square footage is shown in the following table:
 
 
Fiscal Year Ended
  
 
7/2/2016
 
June 27,
2015
 
June 28,
2014
Retail stores
 
228

 
258

 
332

Net decrease vs. prior year
 
(30
)
 
(74
)
 
(19
)
% decrease vs. prior year
 
(11.6
)%
 
(22.3
)%
 
(5.4
)%
Retail square footage
 
659,376

 
728,833

 
910,003

Net decrease vs. prior year
 
(69,457
)
 
(181,170
)
 
(42,419
)
% decrease vs. prior year
 
(9.5
)%
 
(19.9
)%
 
(4.5
)%
Average square footage
 
2,892

 
2,825

 
2,741

North American Outlet Stores — Coach brand's outlet stores serve as an efficient means to sell manufactured-for-outlet product, including outlet exclusives, and to a lesser extent, discontinued retail inventory outside the retail channel. These stores operate under the Coach brand name and are geographically positioned primarily in established outlet centers that are generally in close proximity to major markets and Coach branded retail locations.
Our outlet store design, visual presentations and customer service levels support and reinforce the brand's image. Through these outlet stores, we target value-oriented customers.
Over the next few years, we generally expect to see no significant growth in outlet store square footage as we continue to optimize our real estate position across channels by expanding our most productive stores to accommodate a broader expression of lifestyle assortment while continuing to assess opportunities to consolidate standalone Men's locations into core stores.
The change in the number of North America Coach outlet stores and their total and average square footage is shown in the following table:
 
 
Fiscal Year Ended
  
 
July 2,
2016
 
June 27,
2015
 
June 28,
2014
Outlet stores
 
204

 
204

 
207

Net (decrease) increase vs. prior year
 

 
(3
)
 
14

% (decrease) increase vs. prior year
 
%
 
(1.4
)%
 
7.3
%
Outlet square footage
 
1,232,770

 
1,189,018

 
1,132,714

Net increase vs. prior year
 
43,752

 
56,304

 
150,512

% increase vs. prior year
 
3.7
%
 
5.0
 %
 
15.3
%
Average square footage
 
6,043

 
5,829

 
5,472

Internet — We view our www.coach.com website as a key communications vehicle for the brand to promote traffic in retail stores and department store locations and build brand awareness, as well as an additional channel to sell Coach brand products directly to customers. With approximately 57 million unique visits to www.coach.com in fiscal 2016, our online store provides a showcase environment where consumers can browse through a selected offering of the latest styles and colors. Our e-commerce programs also include our invitation-only outlet Internet sales site, where we have considerably reduced the number of promotional events since fiscal 2014.

4


North America Wholesale — The Coach brand began as a U.S. wholesaler to department stores and this channel continues to remain a part of our overall consumer reach. Today, we work closely with our partners to ensure a clear and consistent product presentation. We enhance our presentation through the creation of shop-in-shops with proprietary Coach brand fixtures within the department store environment. We custom tailor our assortments through wholesale product planning and allocation processes to match the attributes of our department store consumers in each local market. We continue to closely manage inventories in this channel given the current highly promotional environment at point-of-sale. We utilize automatic replenishment with major accounts in an effort to optimize inventory across wholesale doors.
Over the next year, we expect to continue investing in the elevation of shop-in-shop environments, while also elevating Coach brand’s positioning in the North American wholesale channel by rationalizing the distribution footprint, including the closure of about 25% of doors from fiscal 2016 year-end levels and a reduction in markdown allowances.
As of July 2, 2016, Coach brand's products are sold in approximately 1,000 wholesale locations in the U.S. and Canada. Our most significant U.S. wholesale customers are Macy’s (including Bloomingdale's), Dillard's, Bon Ton, Lord & Taylor, The Bay, Nordstrom, Belk and Von Maur. Coach products are also available on these customers' websites.
As of July 2, 2016 and June 27, 2015, we did not have any customers who individually accounted for more than 10% of the North America segment's total net sales.
Coach Brand International Segment
Our International Markets operate department store concession shop-in-shop locations and freestanding flagship, retail and outlet stores as well as e-commerce websites. Flagship stores, which offer the broadest assortment of Coach products, are located in select high-visibility shopping districts.
We expect our International segment to reflect modest growth in store count over the next few years, particularly within mainland China and Europe.
The following table shows the number of international directly-operated locations and their total and average square footage:
 
 
Fiscal Year Ended
  
 
7/2/2016
 
June 27,
2015
 
June 28,
2014
Coach International:
 
 
 
 
 
  

Locations:
 
522

 
503

 
475

Net increase vs. prior year
 
19

 
28

 
66

% increase vs. prior year
 
3.8
%
 
5.9
%
 
16.1
%
Square footage:
 
1,086,315

 
1,030,695

 
918,995

Net increase vs. prior year
 
55,620

 
111,700

 
150,428

% increase vs. prior year
 
5.4
%
 
12.2
%
 
19.6
%
Average square footage
 
2,081

 
2,049

 
1,935

International Wholesale — Our international segment also includes sales to international wholesale distributors and authorized retailers. Travel retail represents the largest portion of our sales in this channel. However, we continue to drive growth by expanding our distribution to reach local consumers in new markets. Coach has developed relationships with a select group of distributors who sell Coach products through department stores and freestanding retail locations in approximately 55 countries. Coach's current network of international distributors serve the following markets: Australia, Austria, Bahamas, Bahrain, Belgium, Brazil, Cambodia, Canada, Chile, Greater China, Colombia, Denmark, Dominican Republic, Finland, France, Germany, Greece, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, South Korea, Kuwait, Lebanon, Luxembourg, Malaysia, Mexico, Netherlands, New Zealand, Nigeria, Norway, Panama, Peru, Philippines, Portugal, Qatar, Russia, Saudi Arabia, Singapore, Slovakia, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, Uruguay, U.S. & Territories, Venezuela and Vietnam.
For locations not in freestanding stores, the Coach brand has created shop-in-shops and other image enhancing environments to increase brand appeal and stimulate growth. We will continue to seek opportunities for productivity improvements in this channel by opening larger image-enhancing locations, expanding existing stores and closing less productive stores. Coach's most significant international wholesale customers are the DFS Group, True Alliance, Al Tayer Insignia, Lotte Group and Everrich DFS Corp. Coach's products are sold in approximately 600 international wholesale locations.
As of July 2, 2016 and June 27, 2015, we did not have any customers who individually accounted for more than 10% of the International segment's total net sales.

5



Stuart Weitzman Segment
The Stuart Weitzman brand is sold primarily through approximately 620 North America and international wholesale locations, as well as numerous independent third party distributors. Its most significant wholesale customers include Nordstrom, Saks, Bloomingdales and Neiman Marcus. Furthermore, Stuart Weitzman products are also sold in freestanding flagship and retail stores in North America and Europe, and e-commerce websites.
As of July 2, 2016, Stuart Weitzman had 75 directly operated stores with a total square footage of 117,820 and an average square footage of 1,571 (including 14 retail stores related to our Canadian retail distributor acquisition in the fourth quarter of fiscal 2016).
As of June 27, 2015, Stuart Weitzman had 54 directly operated stores with a total square footage of 91,101 and an average square footage of 1,687.
We expect our Stuart Weitzman segment to reflect modest growth in new store count and square footage over the next few years as we grow our business domestically and internationally.
As of July 2, 2016 and June 27, 2015, we did not have any customers who individually accounted for more than 10% of the Stuart Weitzman segment's total net sales.
See Note 15, "Segment Information" for more information about the Company's segments.
Other
Licensing — In our worldwide licensing relationships, Coach takes an active role in the design process and controls the marketing and distribution of products under the Coach brand. Licensing revenue was approximately $29.7 million and $31.9 million in fiscal 2016 and fiscal 2015, respectively. Our key licensing relationships as of July 2, 2016 are as follows:
 
 
 
 
Date
Category
 
Partner
 
Introduction
 
Expiration
Footwear(1)
 
Jimlar Corporation
 
1999
 
2017
Eyewear
 
Luxottica
 
2012
 
2020
Watches
 
Movado
 
1998
 
2020
Fragrance
 
Interparfums
 
2015
 
2026
 
(1) 
Upon the expiration of the footwear license in June 2017, it is the Company's intention to bring all of the Coach brand women's footwear business in-house.
Products made under license are, in most cases, sold through all of the channels discussed above and, with the Company's approval, these licensees have the right to distribute products selectively through several other channels, including: shoes in department store salons, watches in selected jewelry stores and eyewear and sunwear in selected optical retailers. These venues provide additional, yet controlled, exposure of our brands. Our licensing partners pay royalties on their net sales of our branded products. However, such royalties are not material to our business as they currently comprise less than 1% of the Company's total net sales. The licensing agreements generally give Coach the right to terminate the license if specified sales targets are not achieved.
Other also consists of Coach brand sales generated in disposition channels.

6


PRODUCTS
The following table shows net sales for each product category represented (in millions):
 
 Fiscal Year Ended
 
July 2,
2016
 
June 27,
2015
 
June 28,
2014
 
Amount
 
% of total
net sales
 
Amount
 
% of total
net sales
 
Amount
 
% of total
net sales
 Women's Handbags
$
2,392.9

 
53
%
 
$
2,389.6

 
57
%
 
$
2,826.1

 
59
%
 Men's
725.7

 
16

 
680.4

 
16

 
691.8

 
14

 Women's Accessories
721.6

 
16

 
709.4

 
17

 
860.3

 
18

 All Other Products
306.9

 
7

 
369.2

 
9

 
428.0

 
9

Coach brand
$
4,147.1

 
92
%
 
$
4,148.6

 
99
%
 
$
4,806.2

 
100
%
Stuart Weitzman brand(1)
344.7

 
8

 
43.0

 
1

 

 

Total Sales
$
4,491.8

 
100
%
 
$
4,191.6

 
100
%
 
$
4,806.2

 
100
%
 
(1) 
The significant majority of sales for the Stuart Weitzman brand is attributable to women's footwear.
Women’s Handbags — Women’s handbag collections feature classically inspired designs as well as fashion designs. These collections are designed to meet the fashion and functional requirements of our broad and diverse consumer base.
Men’s — Men’s includes bag collections (including business cases, computer bags, messenger-style bags, backpacks and totes), small leather goods (including wallets, card cases and belts), footwear, novelty accessories (including time management and electronic accessories) and ready-to-wear.
Women’s Accessories — Women’s accessories include small leather goods and novelty accessories. Women’s small leather goods, which complement our handbags, include money pieces, wristlets and cosmetic cases. Key rings and charms are also included in this category.
All Other Products (excluding the Stuart Weitzman brand) consist of the following:
Footwear — Jimlar Corporation has been Coach brand's footwear licensee since 1999. Footwear is distributed through select Coach retail stores our Internet sales sites and U.S. department stores and military locations. Footwear sales are comprised primarily of women’s styles.
Wearables — This category is comprised of certain women's seasonal lifestyle apparel collections, including outerwear, ready-to-wear and cold weather accessories, such as gloves, scarves and hats. These products contain a fashion assortment in all components of this category.
Jewelry — This category is comprised of bracelets, necklaces, rings and earrings offered in sterling silver, leather and non-precious metals.
Sunwear — Luxottica Group SPA (“Luxottica”) has been Coach’s eyewear licensee since 2012. This collection is a collaborative effort that combines the Coach aesthetic for fashion accessories with the latest fashion directions, primarily in sunglasses. Our sunglasses are sold in retail stores and on our Internet sales sites, department stores worldwide, select sunglass retailers and optical retailers in major global markets.
Watches — Movado Group, Inc. (“Movado”) has been Coach's watch licensee since 1998 and has developed a distinctive collection of watches inspired primarily by women's collections with select men's styles. The Coach watch collection is currently sold in Coach retail stores and on our Internet sales sites, department stores worldwide, and select watch retailers in major global markets.
Fragrance — Interparfums SA ("Interparfums") has been Coach's fragrance licensee since 2015. Fragrance is distributed through Coach brand retail stores, our Internet sales sites, department and specialty stores worldwide, and select perfumeries in major global markets. Coach offers women's fragrance collections which include eau de perfume spray, eau de toilette spray, purse spray, and body lotion.

7


DESIGN AND MERCHANDISING
Coach brand's design team, led by the Executive Creative Director, Mr. Stuart Vevers, and Stuart Weitzman brand's design team, currently led by Mr. Stuart Weitzman, are responsible for conceptualizing and directing the design of all products. Designers have access to the Company's extensive archives of product designs created since each brand's inception, which are a valuable resource for new product concepts. Our designers are also supported by a strong merchandising team that analyzes sales, market trends and consumer preferences to identify market opportunities that help guide each season's design process and create a globally relevant product assortment. Merchandisers also manage the product life cycle to maximize sales and profitability across all channels. The product category teams, each comprised of design, merchandising/product development and sourcing specialists help each brand execute design concepts that are consistent with the brand's strategic direction.
Our design and merchandising teams also work in close collaboration with all of our licensing partners to ensure that the licensed products (e.g., watches, footwear, eyewear and fragrance under the Coach brand) are conceptualized and designed to address the intended market opportunity and convey the distinctive perspective and lifestyle associated with our brands.
MARKETING
Our global marketing strategy is to deliver a consistent, relevant and multi-layered message every time the consumer comes in contact with our brands through our communications and visual merchandising. Our image is created and executed by our creative marketing, visual merchandising and public relations teams, as well as with outside creative agencies. We also have a sophisticated consumer and market research capability, which helps us assess consumer attitudes and trends.
In conjunction with promoting a consistent global image, we use our extensive customer database and consumer knowledge to target specific products and communications to specific consumers to efficiently stimulate sales across all distribution channels.
We engage in several consumer communication initiatives, including direct marketing activities and national, regional and local advertising. Total expenses attributable to the Company's marketing-related events in fiscal 2016 were $202.2 million, or approximately 5% of net sales, compared to $160.9 million in fiscal 2015, or approximately 4% of net sales.
Our wide range of direct marketing activities include email contacts and catalogs targeted to promote sales to consumers in their preferred shopping venue. In addition to building brand awareness and driving online revenue, our websites serve as an effective brand communication vehicle by providing a showcase environment where consumers can browse through a strategic offering of the latest styles and colors, which drives store traffic and enables the collection of customer data.
As part of our direct marketing strategy, we use databases primarily consisting of approximately 32 million households in North America, approximately 13 million households in Asia and approximately 776,000 households in Europe. Email contacts and direct mail pieces are an important part of our communication and are sent to selected households to stimulate consumer purchases and build brand awareness. Visitors to our e-commerce sites in the U.S., Canada, Japan, mainland China, the United Kingdom and South Korea provide an opportunity to increase the size of these databases, as well as point of sale transactions globally except where restricted.
In fiscal 2016, Coach had informational websites in Mexico, Hong Kong, Korea, Malaysia, Singapore, Taiwan, France, Spain and Saudi Arabia, as well as a global informational website where customers from various other countries are directed. In addition, the Company utilizes and continues to explore digital technologies such as blogs and social media websites, including Twitter, Facebook, Instagram, Pinterest, WeChat and Sina Weibo, as a cost effective consumer communication opportunity to increase on-line and store sales, acquire new customers and build brand awareness.
The Coach brand and Stuart Weitzman brand also run national, regional and local marketing campaigns in support of major selling seasons. As a key pillar of the transformation plan, Coach brand has expanded its marketing initiatives to more clearly message the brand's unique modern luxury positioning, rooted in a 75 year history of authenticity and craftsmanship, augmented by Executive Creative Director Stuart Vevers's modern interpretation of American fashion. We plan to continue to support this strategy in the future through an increased presence in relevant fashion, media events and publications.
MANUFACTURING
Coach carefully balances its commitments to a limited number of “better brand” partners with demonstrated integrity, quality and reliable delivery. Our manufacturers are located in many countries, including Vietnam, mainland China, the Philippines, India, Thailand, Italy, Spain, Hong Kong, Myanmar and the United States. Coach continues to evaluate new manufacturing sources and geographies to deliver the finest quality products at the lowest cost and help limit the impact of manufacturing in inflationary markets. During fiscal 2016, the Coach brand had two vendors, both located in Vietnam, who individually provided over 10% of the brand's total units (or approximately 28% in the aggregate). During fiscal 2016, Stuart Weitzman had two vendors, both located in Spain, who individually provided over 10% of the brands total units (or approximately 30% in the aggregate). No other individual vendor currently provides more than approximately 10% of either brand’s total units.

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Before partnering with a new vendor, Coach evaluates each facility by conducting a quality and business practice standards audit. Periodic evaluations of existing, previously approved facilities are conducted on a random basis. We believe that our manufacturing partners are in material compliance with Coach’s integrity standards.
These independent manufacturers each or in aggregate support a broad mix of product types, materials and a seasonal influx of new, fashion oriented styles, which allows us to meet shifts in marketplace demand and changes in consumer preferences.
Our raw material suppliers, independent manufacturers and licensing partners, must achieve and maintain high quality standards, which are an integral part of our identity. One of our keys to success lies in the rigorous selection of raw materials. We have longstanding relationships with purveyors of fine leathers and hardware. Although our products are manufactured by independent manufacturers, we maintain a level of oversight in the selection of the raw materials that are used in all of our products. Compliance with quality control standards is monitored through on-site quality inspections at independent manufacturing facilities.
We maintain control of the supply chain process from design through manufacture. We are able to do this by qualifying raw material suppliers and by maintaining sourcing management offices in Vietnam, China, Hong Kong the Philippines and Spain that work closely with our independent manufacturers. This broad-based, global manufacturing strategy is designed to optimize the mix of cost, lead times and construction capabilities.
DISTRIBUTION
In North America, the Company operates an 850,000 square foot distribution and consumer service facility in Jacksonville, Florida for Coach brand products. This automated facility uses a bar code scanning warehouse management system. Coach's distribution center employees use handheld scanners to read product bar codes, which allow them to more accurately process and pack orders, track shipments, manage inventory and generally provide excellent service to our customers. Coach brand products are primarily shipped to Coach retail stores and wholesale customers via express delivery providers and common carriers, and direct to consumers via express delivery providers.
Outside of North America, the Company has established regional distribution centers, through third-parties, in Shanghai, China and Oldenzaal, The Netherlands for Coach brand products. Coach also operates local distribution centers, through third-parties, in Japan, China, Hong Kong, Macau, South Korea, Taiwan, Malaysia and Singapore for Coach brand products as well as in the United States, Canada and Spain for Stuart Weitzman brand products.
INFORMATION SYSTEMS
The foundation of Coach's information systems is its Enterprise Resource Planning (“ERP”) system. Within the Coach brand, this integrated system supports finance and accounting, procurement, inventory control, sales and store replenishment. The system functions as a central repository for our transactional information. Complementing our current ERP system are several other solutions. The Company's data warehouse system summarizes the transaction information and provides a global platform for management reporting. The supply chain management systems support product development, procurement, inventory planning and reporting functions.
Under the Coach brand, in North America, product fulfillment is facilitated by our highly automated warehouse management system and electronic data interchange system, while the unique requirements of our Internet business are supported by Coach’s order management and e-commerce systems. Internationally, the Coach brand selectively relies on the warehouse and distribution systems owned by the third-parties that operate certain of our international distributions centers. Additionally, the point-of-sale system supports all in-store transactions, distributes management reporting to each store, and collects sales and payroll information on a daily basis. This daily collection of store sales and inventory information results in early identification of business trends and provides a detailed baseline for store inventory replenishment. Updates and upgrades of these systems are made on a periodic basis in order to ensure that we constantly improve our functionality.
Stuart Weitzman warehouse and distribution fulfillment is facilitated by the brand's warehouse management system in North America and Europe. Stuart Weitzman's retail point-of-sale system supports all in-store transactions, including daily management sales reporting, payroll, sales tax, and store inventory management.
As discussed further within Note 3, "Restructuring Activities," on April 26, 2016, the Company announced a series of operational efficiency initiatives focused on creating an agile and scalable business model, including the replacing and updating our core technology platforms and the retirement of certain information systems, including Stuart Weitzman.
TRADEMARKS AND PATENTS
Coach owns all of the material worldwide trademark rights used in connection with the production, marketing and distribution of all Coach branded and Stuart Weitzman branded products. In addition, it licenses trademarks and copyrights used in connection with the production, marketing and distribution of certain categories of goods and limited edition collaborative special projects. Coach also owns and maintains worldwide registrations for trademarks in all relevant classes of products in each of the countries in which all of its products are sold. Major trademarks include COACH, COACH NEW YORK, COACH and Horse & Carriage

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Design, COACH and Story Patch Design, COACH and Lozenge Design, COACH and Tag Design, Signature C Design, and Op Art C Design, COACH LEATHERWARE EST. 1941, SW1, IN OUR SHOES, and STUART WEITZMAN. Coach is not dependent on any one particular trademark or design patent although Coach believes that the Coach and Stuart Weitzman names are important for its business. In addition, Coach owns several design patents and utility patents for its Coach and Stuart Weitzman branded products. Coach aggressively polices its trademarks and trade dress, and pursues infringers both domestically and internationally. It also pursues counterfeiters domestically and internationally through leads generated internally, as well as through its network of investigators, the Coach hotline and business partners around the world.
The Company expects that its material trademarks will remain in full force and effect for as long as we continue to use and renew them.
SEASONALITY
Seasonality primarily impacts the Coach brand. Because Coach brand's products are frequently given as gifts, we experience seasonal variations in net sales, operating cash flows and working capital requirements, primarily related to seasonal holiday shopping. During the first fiscal quarter, we build inventory for the holiday selling season. In the second fiscal quarter, working capital requirements are reduced substantially as we generate higher net sales and operating income, especially during the holiday months of November and December.
Fluctuations in net sales, operating income and operating cash flows of the Company in any fiscal quarter may be affected by the timing of wholesale shipments and other events affecting retail sales, including adverse weather conditions or other macroeconomic events.
GOVERNMENT REGULATION
Most of Coach's imported products are subject to duties, indirect taxes, quotas and non-tariff trade barriers that may limit the quantity of products that we may import into the U.S. and other countries or may impact the cost of such products. Coach is not materially restricted by quotas or other government restrictions in the operation of its business, however customs duties do represent a component of total product cost. To maximize opportunities, we operate complex supply chains through foreign trade zones, bonded logistic parks and other strategic initiatives such as free trade agreements. Additionally, Coach operates a direct import business in many countries worldwide. As a result, Coach is subject to stringent government regulations and restrictions with respect to its cross-border activity either by the various customs and border protection agencies or by other government agencies which control the quality and safety of Coach’s products. Coach maintains an internal global trade and customs organization to help manage its import/export activity.
COMPETITION
The global premium men's and women's handbag, accessories and footwear categories are highly competitive. Coach, Inc. competes primarily with European and American luxury and accessible luxury brands as well as private label retailers. Over the last several years these industries have grown, encouraging the entry of new competitors as well as increasing the competition from existing competitors. This increased competition drives interest in these brand loyal categories.
EMPLOYEES
As of July 2, 2016, Coach brand employed approximately 15,100 globally, including both full and part time employees, but excluding seasonal and temporary employees. Of these employees, approximately 8,600 and 3,900 were full time and part time employees, respectively, in the global retail field. As of July 2, 2016, Stuart Weitzman employed approximately 700 people globally, including both full and part-time employees, but excluding seasonal and temporary employees. Of these employees, approximately 400 were employees in the global retail field.
Coach believes that its relations with its employees are good, and has never encountered a strike or work stoppage.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
See the Note 15, "Segment Information" presented in the Notes to the Consolidated Financial Statements for geographic information.

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AVAILABLE INFORMATION
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge on our investor website, located at www.coach.com/investors under the caption “SEC Filings”, as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission. These reports are also available on the Securities and Exchange Commission’s website at www.sec.gov. No information contained on any of our websites is intended to be included as part of, or incorporated by reference into, this Annual Report on Form 10-K.
The Company has included the Chief Executive Officer (“CEO”) and Chief Financial Officer certifications regarding its public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibit 31.1 to this report on Form 10-K. Additionally, the Company filed with the New York Stock Exchange (“NYSE”) the CEO’s certification regarding the Company’s compliance with the NYSE’s Corporate Governance Listing Standards (“Listing Standards”) pursuant to Section 303A.12(a) of the Listing Standards, which indicated that the CEO was not aware of any violations of the Listing Standards by the Company.

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ITEM 1A. RISK FACTORS
You should consider carefully all of the information set forth or incorporated by reference in this document and, in particular, the following risk factors associated with the business of the Company and forward-looking information in this document. Please also see “Special Note on Forward-Looking Information” at the beginning of this report. The risks described below are not the only ones we face. Additional risks not presently known to us or that we currently deem immaterial may also have an adverse effect on us. If any of the risks below actually occur, our business, results of operations, cash flows or financial condition could suffer.
The successful execution of our multi-year transformation and operational efficiency initiatives is key to the long-term growth of our business.
During the fourth quarter of fiscal 2014, we announced a multi-year strategic plan with the objective of transforming the brand and reinvigorating growth, which will enable the Company to return to ‘best-in-class’ profitability. Key operational and cost elements in order to fund and execute this plan included: (i) the investment in capital improvements in our stores and wholesale locations to drive comparable sales improvement; (ii) the optimization and streamlining of our organizational model as well as the closure of underperforming stores in North America, and select International stores, (iii) the realignment of inventory levels and mix to reflect our elevated product strategy and consumer preferences; (iv) the investment in incremental advertising costs to elevate consumer perception of our Coach brand, drive sales growth and promote our new strategy; and (v) the significant scale-back of our promotional cadence in an increased global promotional environment, particularly within our outlet Internet sales site. The Company's execution of these key operational and cost measures was concluded during fiscal 2016. The Company believes that long-term growth will be realized through these transformational efforts over time. There is no assurance that such efforts will be successful in achieving long-term growth or changing the perception of the Company from an accessories brand to a global lifestyle brand.
During the fourth quarter of fiscal 2016, we announced a plan to enhance organizational efficiency, update core technology platforms and streamline the Company’s supply chain network. These initiatives were undertaken as a result of a strategic review of the Company’s corporate structure which focused on creating an agile and scalable business model. The charges under this plan began in the fourth quarter of fiscal 2016 and we anticipate they will be substantially complete by the end of fiscal year 2017. There is no assurance these actions will be successful in achieving our intended results.
Actual costs incurred and the timeline of these initiatives may differ from our expectations. Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3, "Restructuring Activities" for further information regarding these initiatives.
If the execution of our plans or strategies fall short, our business, financial condition and results of operation could be materially adversely affected.
The growth of our business depends on the successful execution of our growth strategies, including our efforts to expand internationally into a global lifestyle brand.
Our growth depends on the continued success of existing products, as well as the successful design and introduction of new products. Our ability to create new products and to sustain existing products is affected by whether we can successfully anticipate and respond to consumer preferences and fashion trends. The failure to develop and launch successful new products could hinder the growth of our business. Also, any delay in the development or launch of a new product could result in our company not being the first to bring product to market, which could compromise our competitive position.
Additionally, our current growth strategy includes plans to expand in a number of international regions, including Asia and Europe. We currently plan to open additional Coach and Stuart Weitzman stores in mainland China, Europe and other international markets, both directly and through strategic partners. Our brands may not be well-established or widely sold in some of these markets, and we may have limited experience operating directly or working with our partners there. In addition, some of these markets have different operational characteristics, including but not limited to employment and labor, transportation, logistics, real estate, environmental regulations and local reporting or legal requirements.
Furthermore, consumer demand and behavior, as well as tastes and purchasing trends may differ in these countries, and as a result, sales of our product may not be successful, or the margins on those sales may not be in line with those we currently anticipate. Further, such markets will have upfront investment costs that may not be accompanied by sufficient revenues to achieve typical or expected operational and financial performance and therefore may be dilutive to our brands in the short-term. In many of these countries, there is significant competition to attract and retain experienced and talented employees.
Consequently, if our international expansion plans are unsuccessful, or we are unable to retain and/or attract key personnel, our business, financial condition and results of operation could be materially adversely affected.

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We face risks associated with operating in international markets.
We operate on a global basis, with approximately 45% of our net sales coming from operations outside of United States. While geographic diversity helps to reduce the Company’s exposure to risks in any one country, we are subject to risks associated with international operations, including, but not limited to:
political or economic instability or changing macroeconomic conditions in our major markets, including the impact of (1) the United Kingdom voting to leave the European Union in its referendum on June 23, 2016 and (2) the outcome of the 2016 U.S. Presidential election. On June 23, 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit from the European Union (E.U.), commonly referred to as “Brexit.” As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s future relationship with the E.U. Although it is unknown what those terms will be, it is possible that there will be increased regulatory and legal complexities, including potentially divergent national laws and regulations between the U.K. and E.U. Brexit may also cause disruption and create uncertainty surrounding our business, including affecting our relationship with our existing and future customers, suppliers and employees, which could have an adverse effect on our business, financial results and operations;
changes in exchange rates for foreign currencies, which may adversely affect the retail prices of our products, result in decreased international consumer demand, or increase our supply costs in those markets, with a corresponding negative impact on our gross margin rates;
compliance with laws relating to foreign operations, including the Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act, which in general concern the bribery of foreign public officials;
changes in tourist shopping patterns, particularly that of the Chinese consumer;
natural and other disasters;
changes in legal and regulatory requirements, including, but not limited to safeguard measures, anti-dumping duties, cargo restrictions to prevent terrorism, restrictions on the transfer of currency, climate change legislation, product safety regulations or other charges or restrictions, resulting in the imposition of new or more onerous trade restrictions, tariffs, embargoes, exchange or other government controls; and
the repatriation of foreign cash.
Economic conditions could materially adversely affect our financial condition, results of operations and consumer purchases of luxury items.
Our results can be impacted by a number of macroeconomic factors, including but not limited to consumer confidence and spending levels, unemployment, consumer credit availability, raw materials costs, fuel and energy costs (including oil prices), global factory production, commercial real estate market conditions, credit market conditions and the level of customer traffic in malls and shopping centers.
Demand for our products, and consumer spending in the premium handbag, footwear and accessories categories generally, is significantly impacted by trends in consumer confidence, general business conditions, interest rates, foreign currency exchange rates, the availability of consumer credit, and taxation. Consumer purchases of discretionary luxury items, such as the Company's products, tend to decline during recessionary periods or periods of sustained high unemployment, when disposable income is lower.
Unfavorable economic conditions may also reduce consumers’ willingness and ability to travel to major cities and vacation destinations in which our stores are located.
In addition, the success of our retail stores located within malls and shopping centers may be impacted by (1) the location of the store within the mall or shopping center, (2) surrounding tenants or vacancies; (3) increased competition in areas where malls or shopping centers are located; (4) the amount spent on advertising and promotion to attract consumers to the mall; and (5) a shift towards online shopping resulting in a decrease in mall traffic.
Our business may be subject to increased costs due to excess inventories and a decline in profitability as a result of increasing pressure on margins if we misjudge the demand for our products.
Our industry is subject to significant pricing pressure caused by many factors, including intense competition and a highly promotional environment, fragmentation in the retail industry, pressure from retailers to reduce the costs of products, and changes in consumer spending patterns. If we misjudge the market for our products we may be faced with significant excess inventories for some products and missed opportunities for other products. If that occurs, we may be forced to rely on destruction, donation, markdowns or promotional sales to dispose of excess, slow-moving inventory, which may negatively impact our gross margin, overall profitability and efficacy of our brands.

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Increases in our costs, such as raw materials, labor or freight could negatively impact our gross margin. Labor costs at many of our manufacturers have been increasing significantly and, as the middle class in developing countries continues to grow, it is unlikely that such cost pressure will abate. Furthermore, the cost of transportation may fluctuate significantly if oil prices show volatility. We may not be able to offset such increases in raw materials, labor or transportation costs through pricing measures or other means.
Significant competition in our industry could adversely affect our business.
We face intense competition in the product lines and markets in which we operate. Our competitors are European and American luxury brands, as well as private label retailers, including some of the Company's wholesale customers. There is a risk that our competitors may develop new products or product categories that are more popular with our customers. We may be unable to anticipate the timing and scale of such product introductions by competitors, which could harm our business. Our ability to compete also depends on the strength of our brand, whether we can attract and retain key talent, and our ability to protect our trademarks and design patents. A failure to compete effectively could adversely affect our growth and profitability.
Acquisitions may not be successful in achieving intended benefits, cost savings and synergies and may disrupt current operations.
One component of our growth strategy is acquisitions, such as our acquisition of Stuart Weitzman Holdings, LLC during fiscal 2015. Our management team has and will consider growth strategies and expected synergies when considering any acquisition, and while we continually review potential acquisition opportunities, there can be no assurance that we will be able to identify suitable candidates or consummate these transactions on acceptable terms.
The integration process of any newly acquired company may be complex, costly and time-consuming. The potential difficulties of integrating the operations of an acquired business, such as Stuart Weitzman, and realizing our expectations for an acquisition, including the benefits that may be realized, include, among other things:
failure of the business to perform as planned following the acquisition or achieve anticipated revenue or profitability targets;
delays, unexpected costs or difficulties in completing the integration of acquired companies or assets;
higher than expected costs, lower than expected cost savings or synergies and/or a need to allocate resources to manage unexpected operating difficulties;
difficulties assimilating the operations and personnel of acquired companies into our operations;
diversion of the attention and resources of management or other disruptions to current operations;
the impact on our or an acquired business’ internal controls and compliance with the requirements under the Sarbanes-Oxley Act of 2002;
unanticipated issues in integrating manufacturing, logistics, information, communications and other systems;
unanticipated changes in applicable laws and regulations;
unanticipated changes in the combined business due to potential divestitures or other requirements imposed by antitrust regulators;
retaining key customers, suppliers and employees;
retaining and obtaining required regulatory approvals, licenses and permits;
operating risks inherent in the acquired business and our business;
consumers’ failure to accept product offerings by us or our licensees;
assumption of liabilities not identified in due diligence; and
other unanticipated issues, expenses and liabilities.
Our failure to successfully complete the integration of any acquired business, including Stuart Weitzman, and any adverse consequences associated with future acquisition activities, could have an adverse effect on our business, financial condition and operating results.
Completed acquisitions may result in additional goodwill and/or an increase in other intangible assets on our balance sheet.  We are required annually, or as facts and circumstances exist, to test goodwill and other intangible assets to determine if impairment has occurred. If the testing performed indicates that impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value of the goodwill or other intangible assets and the implied fair value of the goodwill or the fair value of other intangible assets in the period the determination is made. We determined there was no impairment in fiscal 2016, fiscal 2015 and fiscal 2014; however, we cannot accurately predict the amount and timing of any impairment of assets. Should the value of goodwill or other intangible assets become impaired, there could be a material adverse effect on our financial condition and results of operations.

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Computer system disruption and cyber security threats, including a privacy or data security breach, could damage our relationships with our customers, harm our reputation, expose us to litigation and adversely affect our business.
We depend on digital technologies for the successful operation of our business, including corporate email communications to and from employees, customers and stores, the design, manufacture and distribution of our finished goods, digital marketing efforts, collection and retention of customer data, employee information, the processing of credit card transactions, online e-commerce activities and our interaction with the public in the social media space. The possibility of a cyber-attack on any one or all of these systems is a serious threat. The retail industry, in particular, has been the target of many recent cyber-attacks. As part of our business model, we collect, retain, and transmit confidential information over public networks. In addition to our own databases, we use third party service providers to store, process and transmit this information on our behalf. Although we contractually require these service providers to implement and use reasonable security measures, we cannot control third parties and cannot guarantee that a security breach will not occur in the future either at their location or within their systems. We also store all designs, goods specifications, projected sales and distribution plans for our finished products digitally. We have confidential security measures in place to protect both our physical facilities and digital systems from attacks. Despite these efforts, however, we may be vulnerable to targeted or random security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events.
Awareness and sensitivity to privacy breaches and cyber security threats by consumers, employees and lawmakers is at an all-time high. Any misappropriation of confidential or personally identifiable information gathered, stored or used by us, be it intentional or accidental, could have a material impact on the operation of our business, including severely damaging our reputation and our relationships with our customers, employees and investors. We may also incur significant costs implementing additional security measures to protect against new or enhanced data security or privacy threats, or to comply with state, federal and international laws governing the unauthorized disclosure of confidential information as well as increased cyber security protection costs such as organizational changes, deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants and lost revenues resulting from unauthorized use of proprietary information including our intellectual property. Lastly, we could face sizable fines, significant breach-notification costs and increased litigation as a result of cyber security breaches.
In addition, we maintain e-commerce sites in the U.S., Canada, U.K., Japan, mainland China and South Korea and have plans for additional e-commerce sites in other parts of the world. Additionally, Coach has informational websites in various countries, as described in Item I, "Business." Lastly, our e-commerce programs also include an invitation-only Coach outlet flash sale site. Given the robust nature of our e-commerce presence and digital strategy, it is imperative that we and our e-commerce partners maintain uninterrupted operation of our: (i) computer hardware, (ii) software systems, (iii) customer marketing databases, and (iv) ability to email our current and potential customers. Despite our preventative efforts, our systems are vulnerable from time-to-time to damage, disruption or interruption from, among other things, physical damage, natural disasters, inadequate system capacity, system issues, security breaches, email blocking lists, computer viruses or power outages. Any material disruptions in our e-commerce presence or information technology systems could have a material adverse effect on our business, financial condition and results of operations.
The success of our business depends on our ability to retain the value of the Coach brand and the Stuart Weitzman brand and to respond to changing fashion and retail trends in a timely manner.
We believe that the Coach brand, established 75 years ago, is regarded as America's preeminent designer, producer, and marketer of fine accessories and gifts for women and men. We attribute the prominence of the Coach brand to the unique combination of our original American attitude and design, our heritage of fine leather goods and custom fabrics, our superior product quality and durability and our commitment to customer service. Furthermore, the Stuart Weitzman brand is viewed as a leading design house of women's luxury footwear within North America, with a strong opportunity for growth globally, and is built upon the idea of crafting a beautifully-constructed shoe, merging fashion and function. Any misstep in product quality or design, customer service, marketing, unfavorable publicity or excessive product discounting could negatively affect the image of our brands with our customers. Furthermore, the product lines we have historically marketed and those that we plan to market in the future are becoming increasingly subject to rapidly changing fashion trends and consumer preferences, including the increasing shift to digital brand engagement and social media communication. If we do not anticipate and respond promptly to changing customer preferences and fashion trends in the design, production, and styling of our products, as well as create compelling marketing campaigns that appeal to our customers, our sales and results of operations may be negatively impacted. Our success also depends in part on our ability to execute on our plans and strategies, including our Transformation Plan and operational efficiency initiatives. Even if our products, marketing campaigns and retail environments do meet changing customer preferences and/or stay ahead of changing fashion trends, our brand image could become tarnished or undesirable in the minds of our customers or target markets, which could materially adversely impact our business, financial condition, and results of operations.

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Our business is exposed to foreign currency exchange rate fluctuations.
We monitor our global foreign currency exposure. In order to minimize the impact on earnings of foreign currency rate movements, we hedge our subsidiaries’ U.S. dollar-denominated inventory purchases in Japan and Canada and Euro-denominated inventory purchases in Spain, as well as the Company's cross currency denominated intercompany loan portfolio. We cannot ensure, however, that these hedges will fully offset the impact of foreign currency rate movements. Additionally, our international subsidiaries primarily use local currencies as the functional currency and translate their financial results from the local currency to U.S. dollars. If the U.S. dollar strengthens against these subsidiaries’ foreign currencies, the translation of their foreign currency denominated transactions may decrease consolidated net sales and profitability. Our continued international expansion will increase our exposure to foreign currency fluctuations. The majority of the Company's purchases and sales involving international parties, excluding international consumer sales, are denominated in U.S. dollars.
As a result of operating retail stores outside of the U.S., we are also exposed to market risk from fluctuations in foreign currency exchange rates. For example, the announcement of Brexit caused significant volatility in the global stock markets and currency exchange rate fluctuations. A substantial weakening of foreign currencies against the U.S. dollar could impact consumers’ willingness or ability to travel abroad and/or purchase our products while traveling, as well as require us to raise our retail prices or reduce our profit margin in various locations outside of the U.S. In addition, our sales and profitability could be negatively impacted if consumers in those markets were unwilling to purchase our products at increased prices.
Our stock price may periodically fluctuate based on the accuracy of our earnings guidance or other forward-looking statements regarding our financial performance, including our ability to return value to investors.
Our business and long-range planning process is designed to maximize our long-term strength, growth, and profitability, and not to achieve an earnings target in any particular fiscal quarter. We believe that this longer-term focus is in the best interests of the Company and our stockholders. At the same time, however, we recognize that it is helpful to provide investors with guidance as to our forecast of net sales, earnings per share and other financial metrics or projections. While we generally expect to provide updates to our financial guidance when we report our results each fiscal quarter, we do not have any responsibility to update any of our forward-looking statements at such times or otherwise. In addition, any longer-term guidance that we provide is based on goals that we believe, at the time guidance is given, are reasonably attainable for growth and performance over a number of years. However, such long-range targets are more difficult to predict than our current quarter and fiscal year expectations. If, or when, we announce actual results that differ from those that have been predicted by us, outside investment analysts, or others, our stock price could be adversely affected. Investors who rely on these predictions when making investment decisions with respect to our securities do so at their own risk. We take no responsibility for any losses suffered as a result of such changes in our stock price.
We periodically return value to investors through payment of quarterly dividends. Investors may have an expectation that we will continue to pay our quarterly dividend at certain levels. The market price of our securities could be adversely affected if our cash dividend rate differs from investors’ expectations. See “If we are unable to pay quarterly dividends at intended levels, our reputation and stock price may be harmed” for addition discussion of our quarterly dividend.
Failure to adequately protect our intellectual property and curb the sale of counterfeit merchandise could injure our brands and negatively affect sales.
We believe our trademarks, copyrights, patents, and other intellectual property rights are extremely important to our success and our competitive position. We devote significant resources to the registration and protection of our trademarks and to anti-counterfeiting efforts worldwide. In spite of our efforts, counterfeiting still occurs and if we are unsuccessful in challenging a third-party’s rights related to trademark, copyright, or patent this could adversely affect our future sales, financial condition, and results of operations. We are aggressive in pursuing entities involved in the trafficking and sale of counterfeit merchandise through legal action or other appropriate measures. We cannot guarantee that the actions we have taken to curb counterfeiting and protect our intellectual property will be adequate to protect the brand and prevent counterfeiting in the future. Our trademark applications may fail to result in registered trademarks or provide the scope of coverage sought. Furthermore, our efforts to enforce our intellectual property rights are often met with defenses and counterclaims attacking the validity and enforceability of our intellectual property rights. Unplanned increases in legal fees and other costs associated with defending our intellectual property rights could result in higher operating expenses. Finally, many countries’ laws do not protect intellectual property rights to the same degree as U.S. laws.
Our business is subject to the risks inherent in global sourcing activities.
As a Company engaged in sourcing on a global scale, we are subject to the risks inherent in such activities, including, but not limited to:
unavailability of, or significant fluctuations in the cost of, raw materials;
compliance by us and our independent manufacturers and suppliers with labor laws and other foreign governmental regulations;

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imposition of additional duties, taxes and other charges on imports or exports;
increases in the cost of labor, fuel (including volatility in the price of oil), travel and transportation;
compliance with our Global Business Integrity Program;
compliance by our independent manufacturers and suppliers with our Global Operating Principles and/or Supplier Code of Conduct, as applicable;
compliance with U.S. laws regarding the identification and reporting on the use of “conflict minerals” sourced from the Democratic Republic of the Congo in the Company’s products and the FCPA and U.K. Bribery Act, as applicable;
disruptions or delays in shipments;
loss or impairment of key manufacturing or distribution sites;
inability to engage new independent manufacturers that meet the Company’s cost-effective sourcing model;
product quality issues;
political unrest;
unforeseen public health crises, such as pandemic and epidemic diseases;
natural disasters or other extreme weather events, whether as a result of climate change or otherwise; and
acts of war or terrorism and other external factors over which we have no control.
We are subject to labor laws governing relationships with employees, including minimum wage requirements, overtime, working conditions, and citizenship requirements. Compliance with these laws may lead to increased costs and operational complexity and may increase our exposure to governmental investigations or litigation.
In addition, we require our independent manufacturers and suppliers to operate in compliance with applicable laws and regulations, as well as our Global Operating Principles and/or Supplier Code of Conduct; however, we do not control these manufacturers or suppliers or their labor, environmental or other business practices. Copies of our Global Business Integrity Program, Global Operating Principles and Supplier Code of Conduct are available through our website, www.coach.com. The violation of labor, environmental or other laws by an independent manufacturer or supplier, or divergence of an independent manufacturer’s or supplier’s labor practices from those generally accepted as ethical or appropriate in the U.S., could interrupt or otherwise disrupt the shipment of our products, harm our trademarks or damage our reputation. The occurrence of any of these events could materially adversely affect our business, financial condition and results of operations.
We are dependent on a limited number of distribution and sourcing centers. Our ability to meet the needs of our customers and our retail stores and e-commerce sites depends on the proper operation of these centers. If any of these centers were to shut down or otherwise become inoperable or inaccessible for any reason, we could suffer a substantial loss of inventory and/or disruptions of deliveries to our retail and wholesale customers. While we have business continuity and contingency plans for our sourcing and distribution center sites, significant disruption of manufacturing or distribution for any of the above reasons could interrupt product supply, result in a substantial loss of inventory, increase our costs, disrupt deliveries to our customers and our retail stores, and, if not remedied in a timely manner, could have a material adverse impact on our business. Because our distribution centers include automated and computer controlled equipment, they are susceptible to risks including power interruptions, hardware and system failures, software viruses, and security breaches. We maintain a distribution center in Jacksonville, Florida, operated by Coach. To support our growth in mainland China and Europe, we established distribution centers in Shanghai, China and Oldenzaal, The Netherlands, owned and operated by a third-party, allowing us to better manage the logistics in these regions while reducing costs. We also operate distribution centers, through third-parties, in Japan, mainland China, Hong Kong, Macau, Singapore, Taiwan, Malaysia, The United States, Spain, Canada and South Korea. The warehousing of the Company's merchandise, store replenishment and processing direct-to-customer orders is handled by these centers and a prolonged disruption in any center’s operation could materially adversely affect our business and operations.
We are subject to risks associated with leasing retail space subject to long-term and non-cancelable leases. We may be unable to renew leases at the end of their terms. If we close a leased retail space, we remain obligated under the applicable lease.
We do not own any of our retail store locations. We lease our corporate-owned stores under long-term, non-cancelable leases, which usually have initial terms ranging from five and ten years, with renewal options typically in five year increments. We believe that the leases we enter into in the future will likely be long-term and non-cancelable and have similar renewal options. Generally, our leases are “net” leases, which require us to pay our proportionate share of the cost of insurance, taxes, maintenance and utilities. We generally cannot cancel these leases at our option. If we determine that it is no longer economical to operate a retail store subject to a lease and decide to close it as we have done in the past and will do in the future, we may remain obligated under the applicable lease for, among other things, payment of the base rent for the balance of the lease term. In some instances, we may be

17


unable to close an underperforming retail store due to continuous operation clauses in our lease agreements. In addition, as each of our leases expire, we may be unable to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close retail stores in desirable locations. Our inability to secure desirable retail space or favorable lease terms could impact our ability to grow. Likewise, our obligation to continue making lease payments in respect of leases for closed retail spaces could have a material adverse effect on our business, financial condition and results of operations.
Our success depends, in part, on attracting, developing and retaining qualified employees, including key personnel.
The ability to successfully execute against our goals is heavily dependent on attracting, developing and retaining qualified employees, including our senior management team. Competition in our industry to attract and retain these employees is intense and is influenced by: our ability to offer competitive compensation and benefits, employee morale, our reputation, recruitment by other employers, perceived internal opportunities, non-competition and non-solicitation agreements and macro unemployment rates. Our transformation plan and operational efficiency initiatives and their attendant organizational changes, as well as the impact of Brexit, may intensify this risk.
We depend on the guidance of our senior management team and other key employees who have significant experience and expertise in our industry and our operations. In recent years, we have evolved our senior leadership team and have focused on retaining key roles. The unexpected loss of one or more of our key personnel or any negative public perception with respect to these individuals could have a material adverse effect on our business, results of operations and financial condition. We do not maintain key-person or similar life insurance policies on any of senior management team or other key personnel.
Our North American wholesale business could suffer as a result of consolidations, liquidations, restructurings and other ownership changes in the retail industry.
Our North American wholesale business comprised approximately 4% of total net sales for fiscal 2016. Continued fragmentation in the retail industry could further decrease the number of, or concentrate the ownership of, stores that carry our and our licensees’ products. Furthermore, a decision by the controlling owner of a group of stores or any other significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease or eliminate the amount of merchandise purchased from us or our licensing partners could result in an adverse effect on the sales and profitability within this channel.
Additionally, certain of our wholesale customers, particularly those located in the U.S., have become highly promotional and have aggressively marked down their merchandise. Despite our planned reduction in markdown allowances during fiscal 2017, such promotional activity could negatively impact our brands, which could affect our business, results of operations, and financial condition.
As we outsource functions, we will become more dependent on the third parties performing these functions.
As part of our long-term strategy, we look for opportunities to cost effectively enhance capability of business services. While we believe we conduct appropriate due diligence before entering into agreements with these third parties, the failure of any of these third parties to provide the expected services, provide them on a timely basis or to provide them at the prices we expect could disrupt or harm our business. Any significant interruption in the operations of these service providers, over which we have no control, could also have an adverse effect on our business. Furthermore, we may be unable to provide these services or implement substitute arrangements on a timely and cost-effective basis on terms favorable to us.
Fluctuations in our tax obligations and effective tax rate may result in volatility of our financial results and stock price.
We are subject to income taxes in many jurisdictions. We record tax expense based on our estimates of taxable income and required reserves for uncertain tax positions in multiple tax jurisdictions. At any one time, multiple tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may result in a settlement which differs from our original estimate. As a result, we expect that throughout the year there could be ongoing variability in our quarterly tax rates as events occur and exposures are evaluated. In addition, our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of earnings. Further, proposed tax changes that may be enacted in the future could negatively impact our current or future tax structure and effective tax rates.
Our operating results are subject to seasonal and quarterly fluctuations, which could adversely affect the market price of the Company's common stock.
Seasonality primarily impacts the Coach brand. Because Coach brand's products are frequently given as gifts, we have historically realized, and expect to continue to realize, higher sales and operating income in the second quarter of our fiscal year, which includes the holiday months of November and December. Poor sales in the Company's second fiscal quarter would have a material adverse effect on its full year operating results and result in higher inventories. In addition, fluctuations in net sales, operating income and operating cash flows of the Company in any fiscal quarter may be affected by the timing of wholesale shipments and other events affecting retail sales, including adverse weather conditions or other macroeconomic events.

18


We rely on our licensing partners to preserve the value of our licenses and the failure to maintain such partners could harm our business.
We currently have multi-year agreements with licensing partners for our footwear, eyewear, watches and fragrance products. See Item 1 - “Business - Products” for additional discussion of our licensing arrangements. In the future, we may enter into additional licensing arrangements. The risks associated with our own products also apply to our licensed products as well as unique problems that our licensing partners may experience, including risks associated with each licensing partner’s ability to obtain capital, manage its labor relations, maintain relationships with its suppliers, manage its credit and bankruptcy risks, and maintain customer relationships. While we maintain significant control over the products produced for us by our licensing partners, any of the foregoing risks, or the inability of any of our licensing partners to execute on the expected design and quality of the licensed products or otherwise exercise operational and financial control over its business, may result in loss of revenue and competitive harm to our operations in the product categories where we have entered into such licensing arrangements. Further, while we believe that we could replace our existing licensing partners if required, our inability to do so for any period of time could materially adversely affect our revenues and harm our business.
We also may decide not to renew our agreements with our licensing partners.  For example, we do not intend to renew our agreement with our existing footwear licensing partner when it expires in late fiscal 2017, and bring the category in-house.  While we believe we have the infrastructure and systems in place to bring this category in-house, we may face unexpected difficulties or costs in connection with this process.
If we are unable to pay quarterly dividends at intended levels, our reputation and stock price may be harmed.
The dividend program requires the use of a moderate portion of our cash flow. Our ability to pay dividends will depend on our ability to generate sufficient cash flows from operations in the future. This ability may be subject to certain economic, financial, competitive and other factors that are beyond our control. Our Board of Directors (“Board”) may, at its discretion, decrease the intended level of dividends or entirely discontinue the payment of dividends at any time. Any failure to pay dividends after we have announced our intention to do so may negatively impact our reputation, investor confidence in us and negatively impact our stock price.
Changes in our credit profile or deterioration in market conditions may limit our access to the credit and capital markets and adversely impact our financial results or our business initiatives.
We have maintained and accessed revolving credit facilities and issued debt securities as a source of liquidity, along with cash flows generated from our operations, our available cash and cash equivalents and short-term investments, our non-current investments, and other available financing options. We remain committed to maintaining a strong financial profile with ample liquidity. Our ability to access the credit and capital markets in the future as a source of funding, and the borrowing costs associated with such financing, is dependent upon market conditions and our credit rating and outlook.
We could experience disruptions to our operations in connection with the relocation to our new global corporate headquarters.
The Company entered into various agreements relating to the development of the Company’s new global corporate headquarters in a new office building located at 10 Hudson Yards in New York City. On August 1, 2016, the Company sold its ownership interest in the building and substantially all of the related tenant improvements for a purchase price of approximately $707 million (net of approximately $77 million due to the developer of Hudson Yards) before transaction costs of $26 million, resulting in a gain of about $30 million, which will be amortized through selling, general and administrative expenses over the lease term of 20 years. The Company has simultaneously entered into a 20-year lease for the headquarters space, comprised of approximately 694,000 square feet. Refer to Note 11, "Commitments and Contingencies," and Note 19, "Subsequent Events," for further information. We began occupying the new building during fiscal 2016, with occupancy in the new global headquarters expected to be complete in the first half of fiscal 2017.
Due to the inherent difficulty in estimating costs associated with projects of this scale and nature, certain of the costs associated with this project may be higher than estimated and it may take longer than expected to complete the project. In addition, the process of moving our headquarters is inherently complex and not part of our day to day operations. Thus, our move could cause significant disruption to our operations and cause the temporary diversion of management resources, all of which could have a material adverse effect on our business.
Provisions in the Company's charter, bylaws and Maryland law may delay or prevent an acquisition of the Company by a third party.
The Company's charter, bylaws and Maryland law contain provisions that could make it more difficult for a third party to acquire the Company without the consent of our Board. The Company's charter permits its Board, without stockholder approval, to amend the charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that the Company has the authority to issue. In addition, the Company's Board may classify or reclassify any unissued shares of common stock or preferred stock and may set the preferences, rights and other terms of the classified or reclassified

19


shares. Although the Company's Board has no intention to do so at the present time, it could establish a series of preferred stock that could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for the Company's common stock or otherwise be in the best interest of the Company's stockholders.
The Company's bylaws can only be amended by our Board. The Company's bylaws also provide that nominations of persons for election to the Company's Board and the proposal of business to be considered at a stockholders meeting may be made only in the notice of the meeting, by the Company's Board or by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures of the Company's bylaws. Also, under Maryland law, business combinations, including issuances of equity securities, between the Company and any person who beneficially owns 10% or more of the Company's common stock or an affiliate of such person are prohibited for a five-year period, beginning on the date such person last becomes a 10% stockholder, unless exempted in accordance with the statute. After this period, a combination of this type must be approved by two super-majority stockholder votes, unless some conditions are met or the business combination is exempted by the Company's Board.
Risks relating to our Hong Kong Depositary Receipts (“HDRs”)
An active trading market for the Hong Kong Depositary Receipts on the Hong Kong Stock Exchange might not develop or be sustained and their trading prices might fluctuate significantly.
We cannot assure you that an active trading market for the HDRs on the Hong Kong Stock Exchange will develop or be sustained. If an active trading market of the HDRs on the Hong Kong Stock Exchange does not develop or is not sustained, the market price and liquidity of the HDRs could be materially and adversely affected. As a result, the market price for HDRs in Hong Kong might not be indicative of the trading prices of Coach’s common stock on the NYSE, even allowing for currency differences.
The characteristics of the U.S. capital markets and the Hong Kong capital markets are different.
The NYSE and the Hong Kong Stock Exchange have different trading hours, trading characteristics (including trading volume and liquidity), trading and listing rules, and investor bases (including different levels of retail and institutional participation). As a result of these differences, the trading prices of common stock and the HDRs representing them might not be the same, even allowing for currency differences. Fluctuations in the price of our common stock due to circumstances particular to the U.S. capital markets could materially and adversely affect the price of the HDRs. Because of the different characteristics of the U.S. and Hong Kong equity markets, the historic market prices of our common stock may not be indicative of the performance of the HDRs.
We are a corporation incorporated in the State of Maryland in the United States and our corporate governance practices are principally governed by U.S. federal and Maryland state laws and regulations.
We are a corporation incorporated in the State of Maryland in the United States and our HDRs are listed on the Hong Kong Stock Exchange. Our corporate governance practices are primarily governed by and subject to U.S. federal and Maryland laws and regulations. U.S. federal and Maryland laws and regulations differ in a number of respects from comparable laws and regulations in Hong Kong. There are certain differences between the stockholder protection regimes in Maryland and the United States and in Hong Kong.
We have obtained a ruling from the Securities and Futures Commission of Hong Kong (the “SFC”) that we will not be regarded as a public Company in Hong Kong for the purposes of the Code on Takeovers and Mergers and the Share Repurchases Code of Hong Kong and hence, these codes will not apply to us. We have also obtained a partial exemption from the SFC in respect of the disclosure of interest provisions set out in the Securities and Futures Ordinance of Hong Kong. In addition, we have been granted waivers or exemptions by the Hong Kong Stock Exchange from certain requirements under its listing rules. Neither our stockholders nor the HDR holders will have the benefit of those Hong Kong rules, regulations and the listing rules of the Hong Kong Stock Exchange for which we have applied, and been granted, waivers or exemptions by the Hong Kong Stock Exchange and SFC.
Additionally, if any of these waivers or exemptions were to be revoked in circumstances including our non-compliance with applicable undertakings for any reason, additional legal and compliance obligations might be costly and time consuming, and might result in issues of interjurisdictional compliance, which could adversely affect us and HDR holders.
As the SFC does not have extra-territorial jurisdiction on any of its powers of investigation and enforcement, it will also have to rely on the regulatory regimes of Maryland state authorities and the SEC to enforce any corporate governance breaches committed by us in the United States. Investors in the HDRs should be aware that it could be difficult to enforce any judgment obtained outside the United States against us or any of our associates.
Furthermore, prospective investors in the HDRs should be aware, among other things, that there are U.S. federal withholding and estate tax implications for HDR holders.

20


HDR holders are not stockholders of the Company and must rely on the depositary for the HDRs (the “HDR Depositary”) to exercise on their behalf the rights that are otherwise available to the stockholders of the Company.
HDR holders do not have the rights of stockholders. They only have the contractual rights set forth for their benefit under the deposit agreement for the HDRs (the “Deposit Agreement”). Holders of HDRs are not permitted to vote at stockholders’ meetings, and they may only vote by providing instructions to the HDR Depositary. There is no guarantee that holders of HDRs will receive voting materials in time to instruct the HDR Depositary to vote and it is possible that holders of HDRs, or persons who hold their Hong Kong depositary shares through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote, although both we and the HDR Depositary will endeavor to make arrangements to ensure as far as practicable that all holders of HDRs will be able to vote. As the HDR Depositary or its nominee will be the registered owner of the common stock underlying their HDRs, holders of HDRs must rely on the HDR Depositary (or its nominee) to exercise rights on their behalf. In addition, holders of HDRs will also incur charges on any cash distribution made pursuant to the Deposit Agreement and on transfers of certificated HDRs.
Holders of HDRs will experience dilution in their indirect interest in the Company in the event of an equity offering which is not extended to them.
If we decide to undertake an equity offering (that is not a rights or other offering that is extended to HDR holders), HDR holders may suffer a dilution in their indirect ownership and voting interest in the common stock, as compared to their holdings in the HDRs immediately prior to such an offering.
Holders of HDRs will be reliant upon the performance of several service providers. Any breach of those service providers of their contractual obligations could have adverse consequences for an investment in HDRs.
An investment in HDRs will depend for its continuing viability on the performance of several service providers, including but not limited to the HDR Depositary, the registrar for the HDRs, the custodian and any sub-custodian appointed in respect of the underlying common stock. A failure by any of those service providers to meet their contractual obligations, whether or not by culpable default, could detract from the continuing viability of the HDRs as an investment. The Company will not have direct contractual recourse against the custodian, any sub-custodian or the registrar; hence the potential for redress in circumstances of default will be limited. However, the Company and the HDR Depositary have executed a deed poll in favor of HDR holders in relation to the exercise by them of their rights as HDR holders under the Deposit Agreement against the Company or the HDR Depositary.
Withdrawals and exchanges of HDRs into common stock traded on the NYSE might adversely affect the liquidity of the HDRs.
Our common stock is presently traded on the NYSE. Any HDR holder may at any time request that their HDRs be withdrawn and exchanged into common stock for trading on the NYSE. Upon the exchange of HDRs into common stock, the relevant HDRs will be canceled. In the event that a substantial number of HDRs are withdrawn and exchanged into Common Stock and subsequently canceled, the liquidity of the HDRs on the Hong Kong Stock Exchange might be adversely affected.
The time required for HDRs to be exchanged into common stock (and vice versa) might be longer than expected and investors might not be able to settle or effect any sales of their securities during this period.
There is no direct trading or settlement between the NYSE and the Hong Kong Stock Exchange on which the common stock and the HDRs are respectively traded. In addition, the time differences between Hong Kong and New York and unforeseen market circumstances or other factors may delay the exchange of HDRs into common stock (and vice versa). Investors will be prevented from settling or effecting the sale of their securities across the various stock exchanges during such periods of delay. In addition, there is no assurance that any exchange of HDRs into common stock (and vice versa) will be completed in accordance with the timelines investors might anticipate.
Investors are subject to exchange rate risk between Hong Kong dollars and U.S. dollars.
The value of an investment in the HDRs quoted in Hong Kong dollars and the value of dividend payments in respect of the HDRs could be affected by fluctuations in the U.S. dollar/Hong Kong dollar exchange rate. While the Hong Kong dollar is currently linked to the U.S. dollar using a specified trading band, no assurance can be given that the Hong Kong government will maintain the trading band at its current limits or at all.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.


21


ITEM 2. PROPERTIES
The following table sets forth the location, use and size of the Company's key distribution, corporate and product development facilities as of July 2, 2016. The majority of the properties are leased, with the leases expiring at various times through 2027, subject to renewal options.
Location
 
Use
 
Approximate
Square Footage
Jacksonville, Florida
 
North America distribution and consumer service
 
850,000

New York, New York
 
Corporate, design, sourcing and product development
 
285,000(1)

Carlstadt, New Jersey
 
Corporate offices
 
65,000

New York, New York
 
Stuart Weitzman corporate, design, sourcing and product development
 
37,500

Tokyo, Japan
 
Coach Japan regional management
 
32,300

Shanghai, China
 
Greater China (including Hong Kong, Macau, and mainland China) regional management
 
23,000

Hong Kong
 
Coach Inc. regional management
 
20,200

South Korea
 
Coach South Korea regional management
 
18,000

Shanghai, China
 
Coach Asia shared service center
 
17,700

Hong Kong
 
Corporate sourcing and quality control
 
17,000(2)

Dongguan, China
 
Corporate sourcing, quality control and product development
 
16,700

Alicante, Spain
 
Stuart Weitzman regional management, sourcing and quality control
 
13,300

Ho Chi Minh City, Vietnam
 
Corporate sourcing and quality control
 
10,200

Fort Lauderdale, Florida
 
Stuart Weitzman corporate management
 
12,100

London
 
Coach Europe regional management
 
8,000

Taipei City, Taiwan
 
Coach Taiwan regional management
 
6,400

Malaysia
 
Coach Malaysia regional management
 
3,800

Singapore
 
Coach Singapore regional management
 
2,900

Beijing, China
 
Greater China regional management
 
2,800

Clark, Philippines
 
Corporate sourcing and quality control
 
2,400

 
(1) 
Represents a Coach-owned location. As of July 2, 2016, the Company possessed an equity method investment in Hudson Yards related to an entity formed during fiscal 2013 for the purpose of developing a new office tower in Manhattan, the Hudson Yards joint venture, with the Company owning less than 43% of the joint venture. On August 1, 2016, the Company sold its investments, and executed an agreement to lease back approximately 694,000 square feet of office space for a 20-year term. Refer to Note 19, "Subsequent Events," for further information. The property associated with this joint venture is not included in the square footage above.
(2) 
Represents a Coach-owned location.
As of July 2, 2016, the Company also occupied 228 Coach retail and 204 Coach outlet leased stores located in North America, 522 Coach-operated concession shop-in-shops within department stores, Coach retail and outlet stores in our international locations, and 75 Stuart Weitzman stores globally. These leases expire at various times through 2036. Coach considers these properties to be in generally good condition and believes that its facilities are adequate for its operations and provide sufficient capacity to meet its anticipated requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine legal proceedings as both plaintiff and defendant incident to the ordinary course of its business, including proceedings to protect Coach Inc.'s intellectual property rights, litigation instituted by persons alleged to have been injured by advertising claims or upon premises within the Company's control, and litigation with present or former employees.
As part of Coach’s policing program for its intellectual property rights, from time to time, the Company files lawsuits in the U.S. and abroad alleging acts of trademark counterfeiting, trademark infringement, patent infringement, trade dress infringement, copyright infringement, unfair competition, trademark dilution and/or state or foreign law claims. At any given point in time, Coach may have a number of such actions pending. These actions often result in seizure of counterfeit merchandise and/or out of

22


court settlements with defendants. From time to time, defendants will raise, either as affirmative defenses or as counterclaims, the invalidity or unenforceability of certain of Coach’s intellectual properties.
Although the Company's litigation as a defendant is routine and incidental to the conduct of Coach’s business, as well as for any business of its size, such litigation can result in large monetary awards when a civil jury is allowed to determine compensatory and/or punitive damages.
The Company believes that the outcome of all pending legal proceedings in the aggregate will not have a material effect on the Company's business or consolidated financial statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.


23


PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market and Dividend Information
Coach Inc.’s common stock is listed on the New York Stock Exchange and is traded under the symbol “COH.” Coach’s Hong Kong Depositary Receipts have been listed on the Hong Kong Stock Exchange since December 2011 and the issuance from time-to-time of these Hong Kong Depositary Receipts has not been registered under the Securities Act, or with any securities regulatory authority of any state or other jurisdiction of the United States and is being made pursuant to Regulation S of the Securities Act. Accordingly, they may not be re-offered, resold, pledged or otherwise transferred in the United States or to, or for the account of, a “U.S. person” (within the meaning of Regulation S promulgated under the Securities Act), unless the securities are registered under the Securities Act or pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, and hedging transactions involving the Hong Kong Depositary Receipts may not be conducted unless in compliance with the Securities Act. No additional common stock was issued, nor capital raised through this listing.
The following table sets forth, for the fiscal periods indicated, the high, low and closing prices per share of the Company's common stock as reported on the New York Stock Exchange Composite Index.
 
High
 
Low
 
Closing
 
Dividends Declared per Common Share
Fiscal 2016 Quarter ended:
  

 
  

 
  

 
  

September 26, 2015
$
35.98

 
$
27.62

 
 
 
$
0.3375

December 26, 2015
33.45

 
27.22

 
 
 
0.3375

March 26, 2016
39.95

 
30.06

 
 
 
0.3375

July 2, 2016
42.13

 
36.64

 
$
40.73

 
0.3375

 
 
 
 
 
 
 
 
Fiscal 2015 Quarter ended:
  

 
  

 
  

 
  

September 27, 2014
$
37.70

 
$
33.39

 
  

 
$
0.3375

December 27, 2014
37.60

 
32.72

 
  

 
0.3375

March 28, 2015
43.87

 
35.65

 
  

 
0.3375

June 27, 2015
43.45

 
34.00

 
$
36.12

 
0.3375

As of August 5, 2016, there were 3,901 holders of record of Coach’s common stock.
Any future determination to pay cash dividends will be at the discretion of Coach’s Board and will be dependent upon Coach’s financial condition, operating results, capital requirements and such other factors as the Board deems relevant.
The information under the principal heading “Securities Authorized For Issuance Under Equity Compensation Plans” in the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on November 10, 2016, to be filed with the Securities and Exchange Commission (The “Proxy Statement”), is incorporated herein by reference.

24


Performance Graph
The following graph compares the cumulative total stockholder return (assuming reinvestment of dividends) of the Company's common stock with the cumulative total return of the S&P 500 Stock Index and the “peer set" companies listed below over the five-fiscal-year period ending July 2, 2016, the last trading day of Coach’s most recent fiscal year. The graph assumes that $100 was invested on July 2, 2011 at the per share closing price in each of Coach’s common stock, the S&P 500 Stock Index and a peer set index compiled by us tracking the peer group companies listed below, and that all dividends were reinvested. The stock performance shown in the graph is not intended to forecast or be indicative of future performance.
L Brands, Inc.,
PVH Corp.,
Ralph Lauren Corporation,
Tiffany & Co.,
V.F. Corporation,
Estee Lauder, Inc.,
Kate Spade & Company,
Abercrombie & Fitch Co., and
Michael Kors Holdings Limited
 
 
Fiscal 2011
 
Fiscal 2012
 
Fiscal 2013
 
Fiscal 2014
 
Fiscal 2015
 
Fiscal 2016
COH
 
$100.00
 
$89.99
 
$89.82
 
$55.77
 
$60.60
 
$71.09
Peer Set
 
$100.00
 
$116.59
 
$166.57
 
$213.00
 
$243.61
 
$228.25
S&P 500
 
$100.00
 
$103.94
 
$125.34
 
$156.24
 
$170.88
 
$174.86



25


ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data presented below as of and for each of the fiscal years in the five-year period ended July 2, 2016 has been derived from Coach’s audited Consolidated Financial Statements. The financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Consolidated Financial Statements and Notes thereto and other financial data included elsewhere herein.
 
Fiscal Year Ended(1)
  
July 2,
2016(2)(5)
 
June 27,
2015(3)(5)
 
June 28,
2014
(4)(5)
 
June 29,
2013
(4)(5)
 
June 30,
2012
(4)(5)
 
(millions, except per share data)
Consolidated Statements of Income:
  

 
  

 
  

 
  

 
  

Net sales
$
4,491.8

 
$
4,191.6

 
$
4,806.2

 
$
5,075.4

 
$
4,763.2

Gross profit
3,051.3

 
2,908.6

 
3,297.0

 
3,698.1

 
3,466.1

Selling, general and administrative ("SG&A") expenses
2,397.8

 
2,290.6

 
2,176.9

 
2,173.6

 
1,954.1

Operating income
653.5

 
618.0

 
1,120.1

 
1,524.5

 
1,512.0

Net income
460.5

 
402.4

 
781.3

 
1,034.4

 
1,038.9

Net income:
 
 
  

 
  

 
  

 
  

Per basic share
$
1.66

 
$
1.46

 
$
2.81

 
$
3.66

 
$
3.60

Per diluted share
$
1.65

 
$
1.45

 
$
2.79

 
$
3.61

 
$
3.53

Weighted-average basic shares outstanding
277.6

 
275.7

 
277.8

 
282.5

 
288.3

Weighted-average diluted shares outstanding
279.3

 
277.2

 
280.4

 
286.3

 
294.1

Dividends declared per common share
$
1.350

 
$
1.350

 
$
1.350

 
$
1.238

 
$
0.975

 
 
 
 
 
 
 
 
 
 
Consolidated Percentage of Net Sales Data:
 
 
  

 
  

 
  

 
  

Gross margin
67.9
%
 
69.4
%
 
68.6
%
 
72.9
%
 
72.8
%
SG&A expenses
53.4
%
 
54.6
%
 
45.3
%
 
42.8
%
 
41.0
%
Operating margin
14.5
%
 
14.7
%
 
23.3
%
 
30.0
%
 
31.7
%
Net income
10.3
%
 
9.6
%
 
16.3
%
 
20.4
%
 
21.8
%
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet Data:
 
 
  

 
  

 
  

 
  

Working capital
$
1,346.2

 
$
1,671.8

 
$
1,042.1

 
$
1,348.4

 
$
1,086.4

Total assets
4,892.7

 
4,666.9

 
3,663.1

 
3,531.9

 
3,104.3

Cash, cash equivalents and investments
1,878.0

 
1,931.8

 
1,353.1

 
1,332.2

 
923.2

Inventory
459.2

 
485.1

 
526.2

 
524.7

 
504.5

Total debt
876.2

 
890.4

 
140.5

 
1.0

 
23.4

Stockholders' equity
2,682.9

 
2,489.9

 
2,420.6

 
2,409.2

 
1,992.9


26


 
Fiscal Year Ended(1)
  
July 2,
2016
(2)
 
June 27,
2015
(3)
 
June 28,
2014
(4)
 
June 29,
2013
(4)
 
June 30,
2012
(4)
Coach Operated Store Data:
  

 
  

 
  

 
  

 
  

Stores open at fiscal year-end:
 
 
 
 
 
 
 
 
 
North American retail stores
228

 
258

 
332

 
351

 
354

North American outlet stores
204

 
204

 
207

 
193

 
169

Coach International
522

 
503

 
475

 
409

 
368

Stuart Weitzman stores
75

 
54

 

 

 

Total stores open at fiscal year-end
1,029

 
1,019

 
1,014

 
953

 
891

 
 
 
 
 
 
 
 
 
 
Store square footage at fiscal year-end:
 
 
 
 
 
 
 
 
 
North American retail stores
659,376

 
728,833

 
910,003

 
952,422

 
959,099

North American outlet stores
1,232,770

 
1,189,018

 
1,132,714

 
982,202

 
789,699

Coach International
1,086,315

 
1,030,695

 
918,995

 
768,567

 
665,396

Stuart Weitzman stores
117,820

 
91,101

 

 

 

Total store square footage at fiscal year-end
3,096,281

 
3,039,647

 
2,961,712

 
2,703,191

 
2,414,194

 
 
 
 
 
 
 
 
 
 
Average store square footage at fiscal year-end:
 
 
  

 
  

 
  

 
  

North American retail stores
2,892

 
2,825

 
2,741

 
2,713

 
2,709

North American outlet stores
6,043

 
5,829

 
5,472

 
5,089

 
4,673

Coach International
2,081

 
2,049

 
1,935

 
1,879

 
1,808

Stuart Weitzman stores
1,571

 
1,687

 

 

 

 
(1) 
The Company’s fiscal year ends on the Saturday closest to June 30. Fiscal year 2016 was a 53-week year. Fiscal years 2015, 2014, 2013 and 2012 were each 52-week years.
(2) 
The Company acquired the Stuart Weitzman Canada distributor in the fourth quarter of fiscal 2016 (which included the impact of an additional 14 retail stores).
(3) 
The Company acquired Stuart Weitzman in the fourth quarter of fiscal 2015.
(4) 
The Company acquired its international businesses from its former distributors as follows: fiscal 2014 — the remaining 50% interest in Europe; fiscal 2013 — Malaysia and South Korea; fiscal 2012 — Singapore and Taiwan.







27


(5) 
For all fiscal years presented below, the Company recorded certain items which affect the comparability of our results. See item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for further information on the items related to fiscal 2016, fiscal 2015, and fiscal 2014. During fiscal 2013, the Company incurred charges recorded in SG&A expenses and cost of sales of $48.4 million and $4.8 million, respectively, relating to the strategic reassessment of the Reed Krakoff business, streamlining our organizational model and reassessing the fleet of our retail stores and inventories. During fiscal 2012, the Company decreased its provision for income taxes by $23.9 million, primarily as a result of recording the effect of a revaluation of certain deferred tax asset balances due to a change in Japan's corporate tax laws and the favorable settlement of a multi-year transfer pricing agreement within Japan. The Company used the net income favorability to contribute an aggregate $39.2 million to the Coach Foundation. The following table reconciles the Company's reported results on a U.S. GAAP basis to our adjusted results that exclude these items:
 
 
 
 
 
 
 
Net Income
Fiscal 2016
Gross Profit
 
SG&A Expenses
 
Operating Income
 
Amount
 
Per Diluted Share
As Reported: (GAAP Basis)
$
3,051.3

 
$
2,397.8

 
$
653.5

 
$
460.5

 
$
1.65

Excluding Non-GAAP Charges
1.1

 
(122.0
)
 
123.1

 
91.2

 
0.33

Adjusted: (Non-GAAP Basis)
$
3,052.4

 
$
2,275.8

 
$
776.6

 
$
551.7

 
$
1.98

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
Fiscal 2015
Gross Profit
 
SG&A Expenses
 
Operating Income
 
Amount
 
Per Diluted Share
As Reported: (GAAP Basis)
$
2,908.6

 
$
2,290.6

 
$
618.0

 
$
402.4

 
$
1.45

Excluding Non-GAAP Charges
9.7

 
(160.8
)
 
170.5

 
128.8

 
0.47

Adjusted: (Non-GAAP Basis)
$
2,918.3

 
$
2,129.8

 
$
788.5

 
$
531.2

 
$
1.92

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
Fiscal 2014
Gross Profit
 
SG&A Expenses
 
Operating Income
 
Amount
 
Per Diluted Share
As Reported: (GAAP Basis)
$
3,297.0

 
$
2,176.9

 
$
1,120.1

 
$
781.3

 
$
2.79

Excluding Non-GAAP Charges
82.2

 
(49.3
)
 
131.5

 
88.3

 
0.31

Adjusted: (Non-GAAP Basis)
$
3,379.2

 
$
2,127.6

 
$
1,251.6

 
$
869.6

 
$
3.10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
Fiscal 2013
Gross Profit
 
SG&A Expenses
 
Operating Income
 
Amount
 
Per Diluted Share
As Reported: (GAAP Basis)
$
3,698.1

 
$
2,173.6

 
$
1,524.5

 
$
1,034.4

 
$
3.61

Excluding Non-GAAP Charges
4.8

 
(48.4
)
 
53.2

 
32.6

 
0.11

Adjusted: (Non-GAAP Basis)
$
3,702.9

 
$
2,125.2

 
$
1,577.7

 
$
1,067.0

 
$
3.73

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
Fiscal 2012
Gross Profit
 
SG&A Expenses
 
Operating Income
 
Amount
 
Per Diluted Share
As Reported: (GAAP Basis)
$
3,466.1

 
$
1,954.1

 
$
1,512.0

 
$
1,038.9

 
$
3.53

Excluding Non-GAAP Charges

 
(39.2
)
 
39.2

 

 

Adjusted: (Non-GAAP Basis)
$
3,466.1

 
$
1,914.9

 
$
1,551.2

 
$
1,038.9

 
$
3.53




28


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of Coach’s financial condition and results of operations should be read together with Coach’s consolidated financial statements and notes to those statements, included elsewhere in this document. When used herein, the terms “Company,” "Coach," “we,” “us” and “our” refer to Coach, Inc., including consolidated subsidiaries. Unless the context requires otherwise, references to the "Coach brand" do not include the Stuart Weitzman brand and references to the "Stuart Weitzman brand" do not include the Coach brand.
EXECUTIVE OVERVIEW
The fiscal year ended July 2, 2016 was a 53-week period, and the fiscal years ended June 27, 2015 and June 28, 2014 were each 52-week periods.
Coach, Inc. is a leading New York design house of modern luxury accessories and lifestyle brands. The Coach brand was established in New York City in 1941, and has a rich heritage of pairing exceptional leathers and materials with innovative design. Coach, Inc. acquired Stuart Weitzman, a leader in women's designer footwear, during the fourth quarter of fiscal 2015.
Coach, Inc. operates in three segments: North America (Coach brand), International (Coach brand), and Stuart Weitzman. The North America segment includes sales of Coach brand products to North American customers through Coach-operated stores (including the Internet) and sales to North American wholesale customers. The International segment includes sales of Coach brand products to customers through Coach-operated stores and concession shop-in-shops in Japan, mainland China, Hong Kong, Macau, Singapore, Taiwan, Malaysia, South Korea, the United Kingdom, France, Ireland, Spain, Portugal, Germany, Italy, Austria, Belgium, the Netherlands and Switzerland. Additionally, International includes sales to consumers through the Internet in Japan, mainland China, the United Kingdom and South Korea, as well as sales to wholesale customers and distributors in approximately 55 countries. The Stuart Weitzman segment includes worldwide sales generated by the Stuart Weitzman brand, primarily through department stores in North America and international locations, and within Stuart Weitzman operated stores (including the Internet) in the United States, Canada and Europe. Other, which is not a reportable segment, consists of sales and expenses generated by the Coach brand in licensing and disposition channels. As the Company's business model is based on multi-channel and brand global distribution, our success does not depend solely on the performance of a single channel or geographic area.
We are focused on driving long-term growth and best in class profitability through the following key initiatives:
Drive brand relevance
Transform the Coach brand into a modern luxury brand by continuing to evolve across the key consumer touchpoints of product, stores and marketing.
Reinvigorate growth and brand relevance through our differentiated positioning, which combines our history of heritage and craftsmanship with Stuart Vevers's modern creative vision.
Raise brand awareness and increase market share for the Stuart Weitzman brand globally, building upon the company's strong momentum and core brand equities of fusing fashion with fit.
Grow our business internationally
Continue to increase the Coach brand's penetration internationally, most notably in mainland China and Europe.
Support the development of the Stuart Weitzman brand, particularly in Asia.
Harness the power of the digital world
Continue to accelerate the development of our digital programs and capabilities world-wide, reflecting the change in consumer shopping behavior globally.
Build an infrastructure to support future growth initiatives
Create an agile and scalable business model to support sustainable/future growth for Coach, Inc.

29


Transformation Plan
During the fourth quarter of fiscal 2014, Coach, Inc. announced a multi-year strategic plan with the objective of transforming the Coach brand and reinvigorating growth, which we believe will enable the Company to return to ‘best-in-class’ profitability. This Transformation Plan was built on the core brand equities of quality and craftsmanship with the aim of evolving our competitive value proposition. We believe our strategy offers significant growth opportunities in handbags and accessories, as well as in the broader set of lifestyle categories that we have operated in for some time but have historically been less developed, including footwear and ready-to-wear. This strategy required an integrated holistic approach, across product, stores and marketing and promotional activities, and entails the roll-out of carefully crafted aspirational marketing campaigns to define the Coach brand and to deliver a fuller and more consistent brand expression.
Key operational and cost measures of the Transformation Plan included: (i) the investment in capital improvements in our stores and wholesale locations to drive comparable sales improvement; (ii) the optimization and streamlining of our organizational model as well as the closure of underperforming stores in North America, and select International stores; (iii) the realignment of inventory levels and mix to reflect our elevated product strategy and consumer preferences; (iv) the investment in incremental advertising costs to elevate consumer perception of our Coach brand, drives sales growth and promote our new strategy, which started in fiscal 2015; and (v) the significant scale-back of our promotional cadence in an increased global promotional environment, particularly within our outlet Internet sales site, which began in fiscal 2014. The Company's execution of these key operational and cost measures was concluded during fiscal 2016, and we believe that long-term growth will be realized through these transformational efforts over time. For further discussion of charges incurred in connection with the Transformation Plan, see "GAAP to Non-GAAP Reconciliation," herein.
Operational Efficiency Plan
On April 26, 2016, the Company announced a series of operational efficiency initiatives focused on creating an agile and scalable business model (the "Operational Efficiency Plan"). The significant majority of the charges under this plan will be recorded within SG&A expenses, and will be substantially complete by the end of fiscal 2017. These charges are associated with organizational efficiencies, primarily related to the reduction of corporate staffing levels globally, as well as accelerated depreciation, mainly associated with information systems retirement, technology infrastructure charges related to the initial costs of replacing and updating our core technology platforms, and international supply chain and office location optimization. Refer to Note 3, "Restructuring Activities," and "GAAP to Non-GAAP Reconciliation" for further information.
Current Trends and Outlook
Global consumer retail traffic remains relatively weak and inconsistent, which has led to a more promotional environment in the fragmented retail industry due to increased competition and a desire to offset traffic declines with increased levels of conversion. While certain developed geographic regions are withstanding these pressures better than others, the level of consumer travel and spending on discretionary items remains constrained due to the economic uncertainty.
Political and economic instability or changing macroeconomic conditions that exist in our major markets, including the impact of (1) the United Kingdom voting to leave the European Union in its referendum on June 23, 2016 and (2) the outcome of the 2016 U.S. Presidential election, have further contributed to this uncertainty. On June 23, 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit from the European Union (E.U.), commonly referred to as “Brexit.” As a result of the referendum, it's expected that the British government will begin negotiating the terms of the U.K.’s future relationship with the E.U. Although it is unknown what those terms will be, it is possible that there will be increased regulatory and legal complexities, including potentially divergent national laws and regulations between the U.K. and E.U. Brexit may also cause disruption and create uncertainty surrounding our business, including affecting our relationship with our existing and future customers, suppliers and employees.
Additional macroeconomic events including foreign exchange rate volatility in various parts of the world, recent and evolving impacts of economic and geopolitical events in Hong Kong, Macau and mainland China ("Greater China"), the impact of terrorist acts (particularly in Europe), disease epidemics and a slowdown in emerging market growth (particularly in Asia) have contributed to this uncertainty. Our results have been negatively impacted by foreign exchange rate fluctuations, and will continue to fluctuate with future volatility.
Certain of our wholesale customers, particularly those located in the U.S., have become highly promotional and have aggressively marked down their merchandise. Despite our planned reduction in markdown allowances during fiscal 2017, such promotional activity could negatively impact our brands, which could affect our business, results of operations, and financial condition. Over the next year, we expect to continue investing in the elevation of shop-in-shop environments, and rationalizing the distribution footprint in the North America wholesale channel by closing about 25% of doors from fiscal 2016 year-end levels.


30


Certain limited and recent factors within the U.S., including an improvement in the labor and housing markets and modest growth in overall consumer spending, suggest a potential moderate strengthening in the U.S. economic outlook. It is still, however, too early to understand what kind of sustained impact this will have on consumer discretionary spending. If the global macroeconomic environment remains volatile or worsens, the constrained level of worldwide consumer spending and modified consumption behavior may continue to have a negative effect on our outlook. As a result of these factors, several organizations that monitor the world's economy, including the International Monetary Fund, have modestly decreased overall global growth forecasts for the remainder of calendar 2016 and calendar 2017.
We will continue to monitor these trends and evaluate and adjust our operating strategies and cost management opportunities to mitigate the related impact on our results of operations, while remaining focused on the long-term growth of our business and protecting the value of our brands.
Furthermore, refer to Part I, Item 1 - "Business," for additional discussion on our expected store openings and closures within each of our segments. For a detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, see Part I, Item 1A - "Risk Factors" included in this Annual Report on Form 10-K.

31


FISCAL 2016 COMPARED TO FISCAL 2015
The following table summarizes results of operations for fiscal 2016 compared to fiscal 2015. All percentages shown in the table below and the discussion that follows have been calculated using unrounded numbers.
 
Fiscal Year Ended
  
July 2, 2016
 
June 27, 2015
 
Variance
  
(millions, except per share data)
  
Amount
 
% of
net sales
 
Amount
 
% of
net sales
 
Amount
 
%
Net sales
$
4,491.8

 
100.0
%
 
$
4,191.6

 
100.0
%
 
$
300.2

 
7.2
 %
Gross profit
3,051.3

 
67.9

 
2,908.6

 
69.4

 
142.7

 
4.9

SG&A expenses
2,397.8

 
53.4

 
2,290.6

 
54.6

 
107.2

 
4.7

Operating income
653.5

 
14.5

 
618.0

 
14.7

 
35.5

 
5.7

Interest expense, net
(26.9
)
 
(0.6
)
 
(6.4
)
 
(0.2
)
 
(20.5
)
 
           NM
Income before provision for income taxes
626.6

 
14.0

 
611.6

 
14.6

 
15.0

 
2.5

Provision for income taxes
166.1

 
3.7

 
209.2

 
5.0

 
(43.1
)
 
(20.6
)
Net income
460.5

 
10.3

 
402.4

 
9.6

 
58.1

 
14.4

Net income per share:
  

 
  

 
  

 
  

 
  

 
  

     Basic
$
1.66

 
  

 
$
1.46

 
  

 
$
0.20

 
13.7
 %
     Diluted
$
1.65

 
  

 
$
1.45

 
  

 
$
0.20

 
13.6
 %
NM - Not meaningful
GAAP to Non-GAAP Reconciliation
The Company’s reported results are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The reported results during fiscal 2016 and 2015 reflect certain items, including the impact of the Transformation Plan, the Operational Efficiency Plan, and Acquisition-Related Costs, as noted in the following tables. Refer to page 43 for further discussion on the Non-GAAP Measures.

COACH, INC.

GAAP TO NON-GAAP RECONCILIATION
For the Years Ended July 2, 2016 and June 27, 2015
 
July 2, 2016
  
GAAP Basis
(As Reported)
Transformation and Other Actions
Operational Efficiency Plan
Acquisition-Related Costs
Non-GAAP Basis
(Excluding Items)
 
(millions, except per share data)
Gross profit
$
3,051.3

$

$

$
(1.1
)
$
3,052.4

SG&A expenses
2,397.8

44.1

43.9

34.0

2,275.8

Operating income
653.5

(44.1
)
(43.9
)
(35.1
)
776.6

Provision for income taxes
166.1

(10.7
)
(10.3
)
(10.9
)
198.0

Net income
460.5

(33.4
)
(33.6
)
(24.2
)
551.7

Diluted net income per share
1.65

(0.12
)
(0.12
)
(0.09
)
1.98


32


 
June 27, 2015
  
GAAP Basis
(As Reported)
Transformation and Other Actions
Operational Efficiency Plan
Acquisition-Related Costs
Non-GAAP Basis
(Excluding Items)
 
(millions, except per share data)
Gross profit
$
2,908.6

$
(5.0
)
$

$
(4.7
)
$
2,918.3

SG&A expenses
2,290.6

140.9


19.9

2,129.8

Operating income
618.0

(145.9
)

(24.6
)
788.5

Provision for income taxes
209.2

(38.1
)

(3.6
)
250.9

Net income
402.4

(107.8
)

(21.0
)
531.2

Diluted net income per share
1.45

(0.39
)

(0.08
)
1.92

Fiscal 2016 Items
In fiscal 2016, the Company incurred pre-tax charges, as follows:
Transformation and Other Actions - $44.1 million under our Coach brand Transformation Plan primarily due to organizational efficiency costs, lease termination charges and accelerated depreciation as a result of store renovations within North America and select International stores;
Operational Efficiency Plan - $43.9 million primarily related to organizational efficiency costs and, to a lesser extent, network optimization costs; and
Acquisition-Related Costs - $35.1 million total charges related to the acquisition of Stuart Weitzman Holdings LLC, of which $27.6 million is primarily related to charges attributable to contingent payments and integration-related activities (of which $19.4 million is recorded within unallocated corporate expenses within the Coach brand and $8.2 million is recorded within the Stuart Weitzman segment, resulting in a decrease in operating income of $19.4 million and $8.2 million, respectively), and $7.5 million is related to the limited life impact of purchase accounting, primarily due to the amortization of the fair value of the order backlog asset, distributor relationships and inventory step-up, all recorded within the Stuart Weitzman segment resulting in a $7.5 million decrease in operating income.
Total Transformation Plan, Operational Efficiency Plan and Acquisition-Related Costs taken together increased the Company's SG&A expenses by $122.0 million and cost of sales by $1.1 million, negatively impacting net income by $91.2 million, or $0.33 per diluted share. Refer to the "Executive Overview" herein and Note 3, "Restructuring Activities," for further information regarding these plans.
Additional actions under our Operational Efficiency Plan will continue into fiscal 2017, with expected incremental charges of around $20 million to $35 million (which will primarily relate to the costs of replacing and updating the Company’s core technology platforms, as well as office location and supply chain consolidations). Furthermore, the Company expects to incur additional aggregate Stuart Weitzman pre-tax Acquisition-Related Costs of around $20 million in fiscal 2017, which will primarily include the impact of contingent payments, and to a lesser extent, office lease termination charges.
Fiscal 2015 Items
In fiscal 2015, the Company incurred charges as follows:
Transformation and Other Actions - $145.9 million under our Coach brand Transformation Plan due to accelerated depreciation and lease termination charges as a result of store updates and closures within North America and select International stores, organizational efficiency charges and charges related to the destruction of inventory;
Acquisition-Related Costs - $24.6 million total acquisition-related costs, of which $17.1 million primarily related to consulting and legal costs related to the acquisition of Stuart Weitzman Holdings LLC, as well as costs attributable to contingent payments related to the acquisition (of which $15.8 million is recorded within unallocated corporate expenses within the Coach brand and $1.3 million is recorded within the Stuart Weitzman segment, resulting in a decrease in operating income of $15.8 million and $1.3 million, respectively), and $7.5 million is related to the limited life impact of purchase accounting, primarily due to the amortization of the fair value of the inventory step-up and order backlog asset, all recorded within the Stuart Weitzman segment resulting in a $7.5 million decrease in operating income.
These fiscal 2015 actions taken together increased the Company's SG&A expenses by $160.8 million and cost of sales by $9.7 million, negatively impacting net income by $128.8 million, or $0.47 per diluted share.

33


Summary - Fiscal 2016
Net sales in fiscal 2016 increased 7.2%, primarily due to the inclusion of a full fiscal year impact of the Stuart Weitzman brand, compared to approximately two months in the prior fiscal year, contributing to increased net sales of $301.7 million, as well as increased revenues from the Coach brand International business, partially offset by a decline in the North America business. This increase is inclusive of the favorable impact of the 53rd week in fiscal 2016, which resulted in incremental net revenues of $84.4 million. Excluding the effects of foreign currency, net sales increased 9.1%. Our gross profit increased by 4.9% to $3.05 billion during fiscal 2016 as compared to $2.91 billion in fiscal 2015. Excluding the impact of our non-GAAP charges as described in the "GAAP to Non-GAAP Reconciliation" herein, gross profit increased by 4.6%, to $3.05 billion. SG&A expenses increased by 4.7% to $2.40 billion in fiscal 2016. Excluding non-GAAP charges, SG&A expenses increased by 6.9% to $2.28 billion.
Net income increased 14.4% in fiscal 2016 as compared to fiscal 2015, primarily due to a decrease of $43.1 million in our provision for income taxes, as well as an increase in operating income of $35.5 million, partially offset by the impact of increased interest expense attributable to our debt. Net income per diluted share increased 13.6%, to $1.65, primarily due to higher net income. Excluding non-GAAP charges, net income and net income per diluted share increased 3.8% and 3.1%, respectively. The impact of the 53rd week contributed approximately $0.07 to net income per diluted share.
Currency Fluctuation Effects
The change in net sales in fiscal 2016 has been presented both including and excluding currency fluctuation effects.
Net Sales
Net sales increased 7.2% or $300.2 million to $4.49 billion in fiscal 2016, inclusive of the favorable impact of the 53rd week in fiscal 2016, which resulted in incremental net revenues of $84.4 million. Excluding the effects of foreign currency, net sales increased 9.1% or $382.1 million. This increase was primarily due to the inclusion of a full year impact of the Stuart Weitzman brand and gains in the International business, partially offset by lower sales in North America. The following table presents net sales by reportable segment for fiscal 2016 compared to fiscal 2015:
  
Fiscal Year Ended
 
  
Total Net Sales
 
Rate of
Change
 
 
Percentage of
Total Net Sales
  
July 2,
2016
 
June 27,
2015
 
 
July 2,
2016
 
 
June 27,
2015
 
  
(millions)
 
  
 
  
 
 
  
 
North America
$
2,397.1

 
$
2,467.5

 
(2.9
)
%
 
53.4

%
 
58.9

%
International
1,704.0

 
1,622.0

 
5.1

 
 
37.9

 
 
38.7

 
Other(1)
46.0

 
59.1

 
(22.2
)
 
 
1.0

 
 
1.4

 
Coach brand
$
4,147.1

 
$
4,148.6

 

 
 
92.3

%
 
99.0

%
Stuart Weitzman
344.7

 
43.0

 
NM

 
 
7.7

 
 
1.0

 
Total net sales
$
4,491.8

 
$
4,191.6

 
7.2

 
 
100.0

%
 
100.0

%
 
(1) 
Net sales in the Other category, which is not a reportable segment, consists of Coach brand sales generated in licensing and disposition channels.
NM - Not meaningful
Net sales for the Coach brand, which includes the North America and International segments, as well as sales in the Other category, remained relatively flat in fiscal 2016 as compared to fiscal 2015, as described below. Excluding the unfavorable impact of foreign currency, net sales increased 1.8%.
North America Net Sales decreased 2.9% or $70.4 million to $2.40 billion in fiscal 2016. Excluding the unfavorable impact of foreign currency due to the Canadian dollar, net sales decreased $50.7 million or 2.1%. The following discussion is presented excluding the favorable impact of the 53rd week to net sales of $43.7 million and the impact of foreign currency. The decrease in net sales was primarily driven by lower comparable store sales of $70.0 million or 3.3%, primarily due to lower traffic, partially offset by higher transaction size and improved conversion. Excluding the negative impact of the Internet business on comparable store sales, which was primarily attributable to the impact of reduced outlet Internet events, comparable store sales decreased 3.0%. Comparable store sales measure sales performance at stores that have been open for at least 12 months, and includes sales from the Internet. Coach excludes new locations from the comparable store base for the first twelve months of operation. Comparable store sales have not been adjusted for store expansions. Additionally, North America net sales declined by approximately $14

34


million due to the net impact of store closures and openings. Since the end of fiscal 2015, North America closed a net 30 retail stores. North America sales were also negatively impacted by lower wholesale sales of approximately $10.1 million, due to lower volume of shipments.
International Net Sales increased 5.1% or $82.0 million to $1.70 billion in fiscal 2016. Excluding the unfavorable impact of foreign currency, primarily within Asia, net sales increased $139.9 million or 8.6%. The following discussion is presented excluding the favorable impact of the 53rd week to net sales of $32.1 million and the impact of foreign currency. This increase was primarily due to an increase of $53.8 million in Europe due to an expanded wholesale and store distribution network and higher comparable store sales, an increase in Greater China (which includes Hong Kong and Macau) of $30.7 million due to net new stores and positive comparable store sales in mainland China, partially offset by declines in Hong Kong and Macau due to a continued slowdown in inbound tourist traffic, an increase in Asia (excluding Greater China and Japan) of $14.7 million due to the impact of net new store openings and an increase in Japan of $11.9 million due to overall higher transaction size and improved levels of customer conversion (particularly in retail) contributing to higher comparable store sales. Since the end of fiscal 2015, we opened 19 net new stores, with 13 net new stores in mainland China, Hong Kong and Macau and Japan, and 6 net new stores in the other regions.
Stuart Weitzman Net Sales increased $301.7 million to $344.7 million in fiscal 2016, including the favorable impact of the 53rd week in fiscal 2016, which resulted in incremental net revenues of $7.4 million. This increase was due to the inclusion of a full fiscal year impact of the Stuart Weitzman brand, compared to approximately two months in the prior fiscal year.
Gross Profit
Gross profit increased 4.9% or $142.7 million to $3.05 billion in fiscal 2016 from $2.91 billion in fiscal 2015. Gross margin for fiscal 2016 was 67.9% as compared to 69.4% in fiscal 2015. Excluding Non-GAAP charges of $1.1 million in fiscal 2016 and $9.7 million in fiscal 2015, as discussed in the "GAAP to Non-GAAP Reconciliation" herein, gross profit increased 4.6% or $134.1 million to $3.05 billion from $2.92 billion in fiscal 2015, and gross margin was 68.0% in fiscal 2016 as compared to 69.6% in fiscal 2015. The gross margin decline of 150 basis points (or 160 basis points excluding non-GAAP items) was primarily due to the unfavorable effects of foreign currency on the Coach brand, and the inclusion of the Stuart Weitzman business in our full year fiscal 2016 results (which contains lower gross margins compared to the Coach brand).
Gross profit for the Coach brand, which includes the North America and International segments, as well as Other and Corporate Unallocated results, decreased 1.4% or $39.8 million to $2.85 billion in fiscal 2016. Furthermore, gross margin for the Coach brand decreased 90 basis points from 69.6% in fiscal 2015 to 68.7% in the fiscal 2016, inclusive of an unfavorable 100 basis point foreign currency impact, as described below.
North America Gross Profit decreased 6.1% or $96.2 million to $1.48 billion in fiscal 2016. Gross margin decreased 210 basis points from 63.8% in fiscal 2015 to 61.7% in fiscal 2016. The decrease in gross margin is primarily attributable to increased promotional activity, primarily in our outlet and wholesale channels, negatively impacting gross margin by 240 basis points, partially offset by the impact of an improved mix of elevated product sales and higher initial mark-ups, primarily in our outlet stores, favorably impacting gross margin by 40 basis points.
International Gross Profit increased 3.0% or $37.4 million to $1.29 billion in fiscal 2016. Gross margin decreased 150 basis points from 77.0% in fiscal 2015 to 75.5% in fiscal 2016. Foreign currency negatively impacted gross margin by 210 basis points, primarily due to the Japanese Yen. Excluding the impact of foreign currency, International gross margin increased 60 basis points, primarily due to the favorable effects of decreased duty costs, positively impacting gross margin by 70 basis points. Furthermore, an improved mix of elevated product sales, particularly in Greater China and Japan, positively impacted gross margin by 50 basis points. These increases were partially offset by a less favorable geographic mix of our sales, negatively impacting gross margin by 40 basis points, particularly as a result of the growth of our Europe and international wholesale businesses.
Corporate Unallocated Gross Profit increased $24.8 million from $27.2 million in fiscal 2015 to $52.0 million in fiscal 2016, primarily due to the impact of favorable inventory production variances, decreased transformation-related charges and decreased inventory reserve charges.
Stuart Weitzman Gross Profit was $202.4 million in fiscal 2016, and $19.9 in fiscal 2015, due to the inclusion of a full fiscal year impact of the Stuart Weitzman brand, compared to approximately two months in the prior fiscal year. Furthermore, gross margin was 58.7% in fiscal 2016, compared to 46.4% in the short acquisition year of fiscal 2015 (which included the short-term impact of the amortization of the fair value of the inventory step-up).
Selling, General and Administrative Expenses
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, supply costs, wholesale and retail account administration compensation globally and Coach international operating expenses. These expenses are affected by the number of stores open during any fiscal period and store performance, as compensation and rent expenses vary

35


with sales. 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 customer service expenses include warehousing, order fulfillment, shipping and handling, customer service, employee compensation 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 fees and software expenses. Administrative expenses also include global equity compensation expense.
The Company includes inbound product-related transportation costs from our service providers within cost of sales. The Company, similar to some companies, includes certain transportation-related costs related to our distribution network in SG&A 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 4.7% or $107.2 million to $2.40 billion in fiscal 2016 as compared to $2.29 billion in fiscal 2015. As a percentage of net sales, SG&A expenses decreased to 53.4% during fiscal 2016 as compared to 54.6% during fiscal 2015. Excluding non-GAAP adjustments of $122.0 million in fiscal 2016 and $160.8 million in fiscal 2015, as discussed in the "GAAP to Non-GAAP Reconciliation" herein, SG&A expenses increased 6.9% or $146.0 million from fiscal 2015; and SG&A expenses as a percentage of net sales remained relatively flat at 50.7% in fiscal 2016 compared to 50.8% in fiscal 2015.
Selling expenses were $1.57 billion, or 35.1% of net sales, in fiscal 2016 compared to $1.53 billion, or 36.6% of net sales, in fiscal 2015. This $41.8 million increase is primarily due to a $47.3 million increase attributable to the Stuart Weitzman segment as well as increases in Europe and mainland China to support growth in the business, partially offset by lower store-related costs in Japan, Asia (excluding Greater China) and North America including decreased employee compensation costs and occupancy costs, as well as the impact of favorable foreign currency. Excluding Non-GAAP charges of $4.1 million in fiscal 2015, selling expenses were 36.5% of net sales.
Advertising, marketing, and design costs were $285.7 million, or 6.4% of net sales, in fiscal 2016, compared to $246.8 million, or 5.9% of net sales, during fiscal 2015. This was primarily due to an increase of $25.4 million attributable to Stuart Weitzman, as well as higher costs for Coach brand marketing and advertising-related events, including our first true New York fashion week show in the first quarter of fiscal 2016, which increased by $17.9 million as compared to the same period prior year, partially offset by decreased employee-related costs.
Distribution and customer service expenses were $67.7 million, or 1.5% of net sales in fiscal 2016, relatively in-line with fiscal 2015 expenses of $69.6 million, or 1.7% of net sales.
Administrative expenses were $469.9 million, or 10.5% of net sales, in fiscal 2016 compared to $441.5 million, or 10.5% of net sales, during fiscal 2015. Excluding non-GAAP adjustments of $122.0 million in fiscal 2016 and $156.7 million in fiscal 2015, administrative expenses were $347.9 million, or 7.7% of net sales, in fiscal 2016 and $284.8 million, or 6.8% of net sales, in fiscal 2015. The increase is primarily due to the impact of Stuart Weitzman, contributing to $55.5 million of this increase, as well as increased Coach brand information system costs and litigation costs, partially offset by lower Coach brand occupancy costs.
Operating Income
Operating income increased 5.7% or $35.5 million to $653.5 million during fiscal 2016 as compared to $618.0 million in fiscal 2015. Operating margin decreased to 14.5% as compared to 14.7% in fiscal 2015. Excluding non-GAAP adjustments of $123.1 million in fiscal 2016 and $170.5 million in fiscal 2015, as discussed in the "GAAP to Non-GAAP Reconciliation" herein, operating income decreased 1.5% or $11.9 million to $776.6 million from $788.5 million in fiscal 2015; and operating margin was 17.3%, in fiscal 2016 as compared to 18.8% in fiscal 2015.

36


The following table presents operating income by reportable segment for fiscal 2016 compared to fiscal 2015:
 
 
Fiscal Year Ended
 
 
Operating Income
 
Variance
 
 
July 2, 2016
 
June 27,
2015
 
Amount
 
 %
 
 
(millions)
 
 
 
 
 
 
 
 
 
 
 
   North America
 
$
737.3

 
$
820.5

 
$
(83.2
)
 
(10.1
)%
   International
 
512.7

 
480.6

 
32.1

 
6.7

   Other(1)
 
22.9

 
30.1

 
(7.2
)
 
(23.9
)
   Corporate unallocated
 
(651.9
)
 
(708.6
)
 
56.7

 
(8.0
)
Coach brand
 
$
621.0

 
$
622.6

 
$
(1.6
)
 
(0.3
)%
Stuart Weitzman
 
32.5

 
(4.6
)
 
37.1

 
NM

Total operating income
 
$
653.5

 
$
618.0

 
$
35.5

 
5.7
 %
 
(1)
Operating income in the Other category, which is not a reportable segment, consists of Coach brand sales generated in licensing and disposition channels.
NM - Not meaningful
Operating income for the Coach brand decreased 0.3% or $1.6 million to $621.0 million in fiscal 2016. Furthermore, operating margin for the Coach brand remained flat at 15.0% in fiscal 2016 when compared to fiscal 2015. Excluding non-GAAP adjustments, Coach brand operating income totaled $728.4 million in fiscal 2016, resulting in an operating margin of 17.6%. This compared to Coach brand operating income of $784.3 million in fiscal 2015, or an operating margin of 18.9%.
North America Operating Income decreased 10.1% or $83.2 million to $737.3 million in fiscal 2016, reflecting the decrease in gross profit of $96.2 million which was partially offset by lower SG&A expenses of $13.0 million. The decrease in SG&A expenses was due to lower store-related costs, largely driven by net store closures, as well as decreased variable selling costs as a result of lower sales in North America stores, the Internet business and the wholesale channel. Operating margin decreased 250 basis points to 30.8% in fiscal 2016 from 33.3% during the same period in the prior year due to lower gross margin of 210 basis points and higher SG&A expense as a percentage of net sales of 40 basis points.
International Operating Income increased 6.7% or $32.1 million to $512.7 million in fiscal 2016, primarily reflecting an increase in gross profit of $37.4 million partially offset by higher SG&A expenses of $5.3 million. The increase in SG&A expenses is primarily related to an increase in employee compensation, depreciation expense related to our new modern luxury investments and increased occupancy costs in Europe and Greater China to support the growth of the business, partially offset by lower expenses in Japan and Asia (excluding Greater China) primarily due to decreased occupancy and employee compensation costs, as well as favorable foreign currency effects. Operating margin increased 50 basis points to 30.1% in fiscal 2016 from 29.6% during the same period in the prior year primarily due to lower overall SG&A as a percentage of net sales which increased operating margin by 200 basis points, partially offset by lower gross margin of 150 basis points.
Corporate Unallocated Operating Expense decreased $56.7 million to $651.9 million in fiscal 2016, a decrease of 8.0% from $708.6 million in fiscal 2015. This decrease was primarily attributable to lower non-GAAP charges incurred by the Company in fiscal 2016 as compared to fiscal 2015, as discussed in the "GAAP to Non-GAAP Reconciliation" herein. Excluding non-GAAP adjustments, unallocated operating expenses decreased by $2.5 million to $544.5 million. This decrease is primarily due to more favorable inventory production variances, lower Coach brand occupancy costs and lower inventory reserve charges, partially offset by increased information system and legal costs.
Stuart Weitzman Operating Income increased $37.1 million to $32.5 million in fiscal 2016, resulting in an operating margin of 9.4%, compared to an operating loss of $4.6 million in fiscal 2015, including the impact of non-GAAP charges as discussed in the "GAAP to Non-GAAP Reconciliation" herein. Excluding non-GAAP adjustments, including acquisition and integration-related costs as well as the short-term impact of purchase accounting, Stuart Weitzman operating income totaled $48.2 million in fiscal 2016, resulting in an operating margin of 14.0%. This compared to Stuart Weitzman operating income of approximately $4 million in fiscal 2015.

37


Provision for Income Taxes
The effective tax rate was 26.5% in fiscal 2016, as compared to 34.2% in fiscal 2015. Excluding non-GAAP charges as discussed in the "GAAP to Non-GAAP Reconciliation" herein, the effective tax rate was 26.4% in fiscal 2016, as compared to 32.1% in fiscal 2015. The decrease in our effective tax rate was primarily attributable to the expiration of certain statutes partially offset by the impact of certain ongoing audits, the benefit of available foreign tax credits, and the geographic mix of earnings.
Net Income
Net income increased 14.4% or $58.1 million to $460.5 million in fiscal 2016 as compared to $402.4 million in fiscal 2015. Excluding non-GAAP charges as discussed in the "GAAP to Non-GAAP Reconciliation" herein, net income increased 3.8% or $20.5 million to $551.7 million in fiscal 2016 from $531.2 million in fiscal 2015. This increase was primarily due to lower provision for income taxes, partially offset by the impact of increased interest expense attributable to our debt as well as lower operating income.
Earnings per Share
Net income per diluted share increased 13.6% to $1.65 in fiscal 2016 as compared to $1.45 in fiscal 2015. Excluding non-GAAP charges as discussed in the "GAAP to Non-GAAP Reconciliation" herein, net income per diluted share increased 3.1% or $0.06 to $1.98 in fiscal 2016 from $1.92 in fiscal 2015, due to higher net income. The impact of the 53rd week contributed approximately $0.07 to net income per diluted share.
FISCAL 2015 COMPARED TO FISCAL 2014
The following table summarizes results of operations for fiscal 2015 compared to fiscal 2014. All percentages shown in the table below and the discussion that follows have been calculated using unrounded numbers.
 
Fiscal Year Ended
  
June 27, 2015
 
June 28, 2014
 
Variance
  
(millions, except per share data)
  
Amount
 
% of
net sales
 
Amount
 
% of
net sales
 
Amount
 
%
Net sales
$
4,191.6

 
100.0
%
 
$
4,806.2

 
100.0
%
 
$
(614.6
)
 
(12.8
)%
Gross profit
2,908.6

 
69.4

 
3,297.0

 
68.6

 
(388.4
)
 
(11.8
)
SG&A expenses
2,290.6

 
54.6

 
2,176.9

 
45.3

 
113.7

 
5.2

Operating income
618.0

 
14.7

 
1,120.1

 
23.3

 
(502.1
)
 
(44.8
)
Interest income, net
(6.4
)
 
(0.2
)
 
2.2

 

 
(8.6
)
 
     NM
Income before provision for income taxes
611.6

 
14.6

 
1,122.3

 
23.4

 
(510.7
)
 
(45.5
)
Provision for income taxes
209.2

 
5.0

 
341.0

 
7.1

 
(131.8
)
 
(38.7
)
Net income
402.4

 
9.6

 
781.3

 
16.3

 
(378.9
)
 
(48.5
)
Net Income per share:
  

 
  

 
  

 
  

 
 
 
 
Basic
$
1.46

 
  

 
$
2.81

 
  

 
$
(1.35
)
 
(48.1
)%
Diluted
$
1.45

 
  

 
$
2.79

 
  

 
$
(1.33
)
 
(47.9
)%
GAAP to Non-GAAP Reconciliation
The Company’s reported results are presented in accordance with GAAP. The reported gross profit, SG&A expenses, operating income, income before provision for income taxes, provision for income taxes, net income and earnings per diluted share in fiscal 2015 and 2014 reflect certain items, including the impact of the Transformation Plan and Acquisition-Related Costs, as noted in the following reconciliation tables. Refer to page 43 for a discussion on the Non-GAAP Measures.


38


COACH, INC.

GAAP TO NON-GAAP RECONCILIATION
For the Years Ended June 27, 2015 and June 28, 2014
 
June 27, 2015
  
GAAP Basis
(As Reported)
 
Transformation and Other Actions
 
Acquisition-Related Costs
 
Non-GAAP Basis
(Excluding Items)
 
(millions, except per share data)
Gross profit
$
2,908.6

 
$
(5.0
)
 
$
(4.7
)
 
$
2,918.3

SG&A expenses
2,290.6

 
140.9

 
19.9

 
2,129.8

Operating income
618.0

 
(145.9
)
 
(24.6
)
 
788.5

Provision for income taxes
209.2

 
(38.1
)
 
(3.6
)
 
250.9

Net income
402.4

 
(107.8
)
 
(21.0
)
 
531.2

Diluted net income per share
1.45

 
(0.39
)
 
(0.08
)
 
1.92

 
June 28, 2014
  
GAAP Basis
(As Reported)
 
Transformation and Other Actions
 
Acquisition-Related Costs
 
Non-GAAP Basis
(Excluding Items)
 
(millions, except per share data)
Gross profit
$
3,297.0

 
$
(82.2
)
 
$

 
$
3,379.2

SG&A expenses
2,176.9

 
49.3

 

 
2,127.6

Operating income
1,120.1

 
(131.5
)
 

 
1,251.6

Provision for income taxes
341.0

 
(43.2
)
 

 
384.2

Net income
781.3

 
(88.3
)
 

 
869.6

Diluted net income per share
2.79

 
(0.31
)
 

 
3.10

Fiscal 2015 Items
In fiscal 2015, the Company incurred charges as follows:
Transformation and Other Actions - $145.9 million under our Coach brand Transformation Plan due to accelerated depreciation and lease termination charges as a result of store updates and closures within North America and select International stores, organizational efficiency charges, and charges related to the destruction of inventory;
Acquisition-Related Costs - $24.6 million total acquisition-related costs, of which $17.1 million primarily related to consulting and legal costs related to the acquisition of Stuart Weitzman Holdings LLC (of which $15.8 million was recorded within unallocated corporate expenses within the Coach brand and $1.3 million was recorded within the Stuart Weitzman segment, resulting in a decrease in operating income of $15.8 million and $1.3 million, respectively), and $7.5 million was related to the limited life impact of purchase accounting, primarily due to the amortization of the fair value of the inventory step-up and order backlog asset, all recorded within the Stuart Weitzman segment resulting in a $7.5 million decrease in operating income.
These fiscal 2015 actions taken together increased the Company's SG&A expenses by $160.8 million and cost of sales by $9.7 million, negatively impacting net income by $128.8 million, or $0.47 per diluted share.
Fiscal 2014 Items
In fiscal 2014, the Company incurred restructuring and transformation related charges of $131.5 million under its Transformation Plan announced in the fourth quarter of fiscal 2014. The charges recorded in cost of sales and SG&A expenses were $82.2 million and $49.3 million, respectively. These charges, which were primarily associated with our North America business, related to inventory and fleet related costs, including impairment, accelerated depreciation and severance related to store closures.

39


Currency Fluctuation Effects
The change in net sales in fiscal 2015 has been presented both including and excluding currency fluctuation effects.
Net Sales
Net sales decreased 12.8% or $614.6 million to $4.19 billion in fiscal 2015. Excluding the effects of foreign currency, net sales decreased 10.6% or $511.3 million, driven by lower sales in the North America business partially offset by gains in the International business, and a $43.0 million contribution due to the acquisition of Stuart Weitzman. The following table presents net sales by reportable segment for fiscal 2015 compared to fiscal 2014:
 
Fiscal Year Ended
 
 
  
Total Net Sales
 
Rate of
Change
 
Percentage of Total Net Sales
 
  
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
 
 
  
 
 
 
 
 
 
 
(millions)