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Article by DailyStocks_admin    (01-11-08 04:56 AM)

Description
The Daily Magic Formula Stock for 01/10/2008 is Coach Inc. According to the Magic Formula Investing Web Site, the ebit yield is 10% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

General Development of Business

Founded in 1941, Coach was acquired by Sara Lee Corporation (“Sara Lee”) in 1985. In June 2000, Coach 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 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.

In June 2001, Coach Japan, Inc. (“Coach Japan”) was formed to expand our presence in the Japanese market and to exercise greater control over our brand in that country. 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, resulting in Coach Japan becoming a 100% owned subsidiary of Coach, Inc.

In March 2007, the Company exited its corporate accounts business in order to better control the location and image of the brand where Coach product is sold. Through the corporate accounts business, Coach sold products primarily to distributors for gift-giving and incentive programs. The results of the corporate accounts business, previously included in the Indirect segment, have been segregated from continuing operations and reported as discontinued operations in the Consolidated Statements of Income for all periods presented.
Financial Information about Segments

Segment information is presented in Note 13 to the Consolidated Financial Statements.
Narrative Description of Business

Coach has grown from a family-run workshop in a Manhattan loft to a leading American marketer of fine accessories and gifts for women and men. Coach is one of the most recognized fine accessories brands in the U.S. and in targeted international markets. We offer premium lifestyle accessories to a loyal and rapidly growing customer base and provide consumers with fresh, relevant and innovative products that are extremely well made, at an attractive price. Coach’s modern, fashionable handbags and accessories use a broad range of high quality fabrics and materials. In response to our customer’s demands for both fashion and function, Coach offers updated styles and multiple product categories which address an increasing portion of our customer’s accessory wardrobe. Coach has created a sophisticated, modern and inviting environment to showcase our product assortment and reinforce a consistent brand position wherever the consumer may shop. Finally, we utilize a flexible, cost-effective global sourcing model, in which independent manufacturers supply our products, allowing us to bring our broad range of products to market rapidly and efficiently.

Coach offers a number of key differentiating elements that set it apart from the competition, including:

A Distinctive Brand — Coach offers distinctive, easily recognizable, accessible luxury products that are relevant, extremely well made and provide excellent value.

A Market Leadership Position With Growing Share — Coach is America’s leading premium handbag and accessories brand and each year, as our market share increases, our leadership position strengthens.

Coach’s Loyal And Involved Consumer — Coach consumers have a specific emotional connection with the brand. Part of the Company’s everyday mission is to cultivate consumer relationships by strengthening this emotional connection.

Multi-Channel International Distribution — This allows Coach to maintain a critical balance as results do not depend solely on the performance of a single channel or geographic area. The Direct-to-Consumer channel provides us with immediate, controlled access to consumers through Coach-owned stores in North America and Japan, the Internet and the Coach catalog. The Indirect channel provides us with access to consumers via U.S. and international wholesale locations.

Coach Is Innovative And Consumer-Centric — Coach listens to its consumer through rigorous consumer research and strong consumer orientation. Coach works to anticipate the consumer’s changing needs by keeping the product assortment fresh and relevant.

We believe that these differentiating elements have enabled the Company to offer a unique proposition to the marketplace. We hold the number one position within the U.S. premium handbag and accessories market and the number two position within the Japanese imported luxury handbag and accessories market.

Handbags — Handbag collections feature classically inspired designs as well as fashion designs. Typically, there are three to four collections per quarter and four to seven styles per collection. Periodically, we also offer new lifestyle collections, which are collections designed to meet the fashion and functional requirements of our broad and diverse consumer base. During fiscal 2007, we introduced three major lifestyle collections: Signature Stripe, Legacy and Ergo. In fiscal 2008, we plan to introduce three additional major lifestyle collections: Bleecker, Heritage Stripe and Soho.

Accessories — Accessories include women’s and men’s small leather goods, novelty accessories and women’s and men’s belts. Women’s small leather goods, which coordinate with our handbags, include money pieces, wristlets, and cosmetic cases. Men’s small leather goods consist primarily of wallets and card cases. Novelty accessories include electronic, time management and pet accessories. Key fobs and charms are also included in this category.

Footwear — Jimlar Corporation (“Jimlar”) has been Coach’s footwear licensee since 1999. Footwear is distributed through over 700 locations in the U.S., including leading Coach retail stores and U.S. department stores. Footwear sales are comprised primarily of women’s styles, which coordinate with Coach’s handbag collections.

Outerwear — This category includes jackets, sweaters, gloves, hats and scarves. The assortment is primarily women’s and contains a fashion assortment in all components of this category.

Business Cases — This assortment is primarily men’s and includes computer bags, messenger-style bags and totes.

Sunwear — Marchon Eyewear (“Marchon”) has been Coach’s eyewear licensee since 2003. This collection is a collaborative effort from Marchon and Coach that combines the Coach aesthetic for fashion accessories with the latest fashion directions in sunglasses. Coach sunglasses are sold in Coach retail stores, department stores, select sunglass retailers and optical retailers in major 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 the women’s collections with select men’s styles.

Travel Bags — The travel collections are comprised of luggage and related accessories, such as travel kits and valet trays.

Jewelry — In November 2006, Coach launched a jewelry line, consisting primarily of bangle bracelets. The Company plans to expand this category by introducing sterling silver, glass and gold plated brass pieces in fiscal 2008.

Fragrance — In March 2007, Coach launched its first fragrance in partnership with Beauty Bank, a division of Estee Lauder, Inc. This collection includes a perfume spray, a purse spray and a perfume solid and is sold exclusively in Coach stores and on the Coach internet site. The Company plans to expand this category by introducing body lotions in fiscal 2008.
Design and Merchandising

Coach’s New York-based design team, led by its Executive Creative Director, is responsible for conceptualizing and directing the design of all Coach products. Designers have access to Coach’s extensive archives of product designs created over the past 65 years, which are a valuable resource for new product concepts. Coach designers are also supported by a strong merchandising team that analyzes sales, market trends and consumer preferences to identify business opportunities that help guide each season’s design process. Merchandisers also analyze products to edit, add and delete to achieve profitable sales across all channels. The product category teams, each comprised of design, merchandising/product development and sourcing specialists, help Coach execute design concepts that are consistent with the brand’s strategic direction.

Coach’s design and merchandising teams work in close collaboration with all of our licensing partners to ensure that the licensed products (watches, footwear and eyewear) are conceptualized and designed to address the intended market opportunity and convey the distinctive perspective and lifestyle associated with the Coach brand.
Segments

Coach operates in two reportable segments: Direct-to-Consumer and Indirect. The reportable segments represent channels of distribution that offer similar products, service and marketing strategies.
Direct-to-Consumer Segment

The Direct-to-Consumer segment consists of channels that provide us with immediate, controlled access to consumers: retail stores and factory stores in North America and Japan, the Internet and Coach catalogs. This segment represented approximately 80% of Coach’s total net sales in fiscal 2007, with North American stores and Coach Japan contributing approximately 58% and 18% of total net sales, respectively.

North American Retail Stores — Coach stores are located in upscale regional shopping centers and metropolitan areas. The retail stores carry an assortment of products depending on their size and location. Our flagship stores, which offer the broadest assortment of Coach products, are located in high-visibility locations such as New York, Chicago and San Francisco.

Our stores are sophisticated, sleek, modern and inviting. They showcase the world of Coach and enhance the shopping experience while reinforcing the image of the Coach brand. The modern store design creates a distinctive environment to display our products. Store associates are trained to maintain high standards of visual presentation, merchandising and customer service. The result is a complete statement of the Coach modern American style at the retail level.

North American Factory Stores — Coach’s factory stores serve as an efficient means to sell manufactured-for-factory- store product, including factory exclusives, as well as discontinued and irregular inventory outside the retail channel. These stores operate under the Coach Factory name and are geographically positioned primarily in established centers that are generally more than 50 miles from major markets.

Coach’s factory store design, visual presentations and customer service levels support and reinforce the brand’s image. Through these factory stores, Coach targets value-oriented customers who would not otherwise buy the Coach brand. Prices are
generally discounted from 10% to 50% below full retail prices.

Internet — Coach views its website as a key communications vehicle for the brand to promote traffic in Coach retail stores and department store locations and build brand awareness. Our online store provides a showcase environment where consumers can browse through a selected offering of the latest styles and colors. During fiscal 2007, our Internet business generated net sales of approximately $82 million, up 51% from prior year. The growth in the Internet business was driven by the strength of the Coach brand as well as advertising and email contacts. In fiscal 2007, there were approximately 50 million unique visits to the website. In addition, the Company sent approximately 47 million emails to strategically selected customers as we continue to evolve our internet outreach to maximize productivity while streamlining distribution. Revenue from Internet sales is recognized upon shipment of the product.

Coach Catalog — In fiscal 2007, the Company distributed approximately 7 million catalogs in Coach stores in North America and Japan and mailed approximately 3 million catalogs to strategically selected North American households from its database of customers. Over the past few years, Coach has reduced catalog mailings in favor of more cost effective means of communication, notably emails. While direct mail sales comprise a small portion of Coach’s net sales, Coach views its catalog as a key communications vehicle for the brand because it promotes store traffic, facilitates the shopping experience in Coach retail stores and builds brand awareness. As an integral component of our communications strategy, the graphics, models and photography are upscale and modern and present the product in an environment consistent with the Coach brand. The catalogs highlight selected products and serve as a reference for customers, whether ordering through the catalog, making in-store purchases or purchasing over the Internet.
Indirect Segment

Coach began as a U.S. wholesaler to department stores and this segment remains important to our overall consumer reach. Today, we work closely with our partners, both domestic and international, to ensure a clear and consistent product presentation. The Indirect segment represented approximately 20% of total net sales in fiscal 2007, with U.S. Wholesale and International Wholesale representing approximately 12% and 5% of total net sales, respectively.

U.S. Wholesale — This channel offers access to Coach products to consumers who prefer shopping at department stores or who live in markets with no Coach store. While overall U.S. department store sales have not increased over the last few years, the handbag and accessories category has remained strong, in large part due to the strength of the Coach brand. Net sales to U.S. wholesale customers grew 31% in fiscal 2007 from fiscal 2006.

Coach recognizes the continued importance of U.S. department stores as a distribution channel for premier accessories. Department stores also continue to devote increased square footage to Coach, providing an additional driver to this channel’s growth. We continue to fine-tune our strategy to increase productivity and drive volume by enhancing presentation, primarily through the creation of more shop-in-shops, and the introduction of caseline enhancements with proprietary Coach fixtures, while exiting lower performing doors and working with the department stores to re-allocate their Coach spending to higher volume locations. Coach has also improved wholesale product planning and allocation processes by custom tailoring assortments to better match the attributes of our department store consumers in each local market.

Coach’s products are sold in approximately 900 wholesale locations in the U.S. and Canada. Our most significant U.S. wholesale customers are Macy’s, Inc. (including Bloomingdale’s), Dillard’s, Nordstrom, Saks, Inc., Carson’s and Lord and Taylor.

International Wholesale — This channel represents sales to international wholesale distributors and authorized retailers. Japanese tourists represent the largest portion of our customers’ sales in this channel. However, we continue to drive growth by expanding our distribution to reach local consumers in emerging markets. Coach has developed relationships with a select group of distributors who sell Coach products through department stores and freestanding retail locations in 21 countries. Coach’s current network of international distributors serves the following markets: Korea, the United States (primarily Hawaii and Guam), Taiwan, Hong Kong, Japan, Singapore, Saudi Arabia, Mexico, China, the Caribbean, Thailand, Malaysia, Australia, the United Arab Emirates, New Zealand, Indonesia and France. For locations not in freestanding stores, Coach has created shop-in-shops and other image enhancing environments to increase brand appeal and stimulate growth. Coach continues to improve productivity in this channel by opening larger image-enhancing locations, expanding existing stores and closing smaller, less productive stores. Coach’s most significant international wholesale customers are the DFS Group, Lotte Group, Tasa Meng Corp., Shilla Group, Imaginex and Shinsegae International.

Products made under license are, in most cases, sold through all of the channels discussed above and, with Coach’s approval, these licensees have the right to distribute Coach brand products selectively through several other channels: shoes in department store shoe salons, watches in selected jewelry stores and eyewear in selected optical retailers. These venues provide additional, yet controlled, exposure of the Coach brand. Coach’s licensing partners pay royalties to Coach on their net sales of Coach branded products. However, such royalties are not material to the Coach business as they currently comprise less than 1% of Coach’s total revenues. The licensing agreements generally give Coach the right to terminate the license if specified sales targets are not achieved.
Marketing

Coach’s marketing strategy is to deliver a consistent message each time the consumer comes in contact with the Coach brand, through our communications and visual merchandising. The Coach image is created internally and executed by the creative marketing, visual merchandising and public relations teams. Coach also has a sophisticated consumer and market research capability, which helps us assess consumer attitudes and trends and gauge the likelihood of a product’s success in the marketplace prior to its introduction.

In conjunction with promoting a consistent global image, Coach uses its extensive customer database and consumer knowledge to target specific products and communications to specific consumers to efficiently stimulate sales across all distribution channels.

Coach engages in several consumer communication initiatives, including direct marketing activities and national, regional and local advertising. In fiscal 2007, consumer contacts increased 4% to over 114 million. However, the Company continues to leverage marketing expenses by refining our marketing programs to increase productivity and optimize distribution. Total expenses related to consumer communications in fiscal 2007 were $47 million, representing less than 2% of net sales.

Coach’s wide range of direct marketing activities includes catalogs, brochures and email contacts, targeted to promote sales to consumers in their preferred shopping venue. In addition to building brand awareness, Coach catalogs and www.coach.com serve as effective brand communications vehicles by providing a showcase environment where consumers can browse through a strategic offering of the latest styles and colors, which drives store traffic.

As part of Coach’s direct marketing strategy, it uses its database consisting of approximately 12 million active North American households. Catalogs and email contacts are Coach’s principal means of communication and are sent to selected households to stimulate consumer purchases and build brand awareness. The rapidly growing number of visitors to the www.coach.com online store provides an opportunity to increase the size of this database.

The Company also runs national, regional and local advertising campaigns, primarily print and outdoor advertising, in support of its major selling seasons.
Manufacturing

All of our products are manufactured by independent manufacturers. However, we maintain control of the supply chain from design through manufacture. We are able to do this by qualifying all raw material suppliers and by maintaining sourcing offices in Hong Kong, China and South Korea that work closely with our independent manufacturers. Coach also operates a European sourcing and product development organization based in Florence, Italy that works closely with the New York design team. This broad-based, multi-country manufacturing strategy is designed to optimize the mix of cost, lead times and construction capabilities. We have increased the presence of our senior management at the manufacturers’ facilities to enhance control over decision making and ensure the speed with which we bring new product to market is maximized.

These independent manufacturers support a broader 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. During fiscal 2007, approximately 73% of Coach’s total net sales were generated from products introduced within the fiscal year. As the collections are seasonal and planned to be sold in stores for short durations, our production quantities are limited which limits our exposure to excess and obsolete inventory.

All product sources, including independent manufacturers and licensing partners, must achieve and maintain Coach’s high quality standards, which are an integral part of the Coach identity. One of Coach’s keys to success lies in the rigorous selection of raw materials. Coach has longstanding relationships with purveyors of fine leathers and hardware. As Coach has moved its production to external sources, it has maintained control of the raw materials that are used in all of its products, wherever they are made. Compliance with quality control standards is monitored through on-site quality inspections at all independent manufacturing facilities.

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 China, the United States, India, Hungary, Indonesia, Italy, Korea, Mauritius, Singapore, Spain, Taiwan and Turkey. No one vendor provides more than 13% of Coach’s total units. Before partnering with a 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 all of our manufacturing partners are in compliance with Coach’s integrity standards.
Distribution

Coach operates a distribution and consumer service facility in Jacksonville, Florida. This automated, 560,000 square foot facility uses a bar code scanning warehouse management system. Coach’s distribution center employees use handheld radio frequency scanners to read product bar codes, which allow them to more accurately process and pack orders, track shipments, manage inventory and generally provide better service to our customers. Coach’s products are primarily shipped to Coach retail stores and wholesale customers via Federal Express and common carrier, and direct to consumers via Federal Express.
Management Information Systems

The foundation of Coach’s information systems is its Enterprise Resource Planning system. This fully integrated system supports all aspects of finance and accounting, procurement, inventory control, sales and store replenishment. The system functions as a central repository for all of Coach’s transactional information, resulting in increased efficiencies, improved inventory control and a better understanding of consumer demand. This system is fully scalable to accommodate rapid growth.

Complementing its Enterprise Resource Planning system are several other system solutions, each of which Coach believes is well suited for its needs. The data warehouse system summarizes the transaction information and provides a single platform for all management reporting. The supply chain management system supports sales and inventory planning and reporting functions. Product fulfillment is facilitated by Coach’s highly automated warehouse management system and electronic data interchange system, while the unique requirements of Coach’s internet and catalog businesses are supported by Coach’s order management system. Finally, 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. All complementary systems are integrated with the central Enterprise Resource Planning system.
Trademarks and Patents

Coach owns all of the material trademark rights used in connection with the production, marketing and distribution of all of its products, both in the U.S. and in other countries in which the products are principally sold. Coach also owns and maintains worldwide registrations for trademarks in all relevant classes of products in each of the countries in which Coach products are sold. Major trademarks include Coach, Coach and lozenge design, Coach and tag design and Signature C design. Coach is not dependent on any one particular trademark or design patent although Coach believes that the Coach name is important for its business. In addition, several of Coach’s products are covered by design patents or patent applications. 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.

Coach’s trademarks in the United States will remain in existence for as long as Coach continues to use and renew them. Coach has no material patents.
Seasonality

Because Coach products are frequently given as gifts, Coach has historically realized, and expects to continue to realize, higher sales and operating income in the second quarter of its fiscal year, which includes the holiday months of November and December. In addition, fluctuations in sales and operating income in any fiscal quarter are affected by the timing of seasonal wholesale shipments and other events affecting retail sales. However, over the past several years, we have achieved higher levels of growth in the non holiday quarters, which has reduced these seasonal fluctuations. We expect that these trends will continue.
Government Regulation

Most of Coach’s imported products are subject to existing or potential duties, tariffs or quotas that may limit the quantity of products that Coach may import into the U.S. and other countries or may impact the cost of such products. Coach has not been restricted by quotas in the operation of its business and customs duties have not comprised a material portion of the total cost of its products. In addition, Coach is subject to foreign governmental regulation and trade restrictions, including U.S. retaliation against certain prohibited foreign practices, with respect to its product sourcing and international sales operations.
Competition

The premium handbag and accessories industry is highly competitive. The Company mainly competes with European luxury brands as well as private label retailers, including some of Coach’s wholesale customers. Over the last several years the category has grown rapidly, encouraging the entry of new competitors as well as increasing the competition from existing competitors. However, the Company believes that as a market leader we benefit from this increased competition as it drives consumer interest in this brand loyal category.

The Company believes that there are several factors that differentiate us from our competitors, including but not limited to: distinct newness, innovation and quality of our products, ability to meet consumer’s changing preferences and our superior customer service.

Employees

As of June 30, 2007, Coach employed approximately 10,100 people, including both full and part time employees. Of these employees, approximately 3,100 and 4,900 were full time and part time employees, respectively, in the retail field in North America and Japan. Approximately 50 of Coach’s employees are covered by collective bargaining agreements. Coach believes that its relations with its employees are good, and it has never encountered a strike or work stoppage.
Financial Information about Geographic Areas

Geographic information is presented in Note 13 to the Consolidated Financial Statements.
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 website, located at www.coach.com, 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.

CEO BACKGROUND

Lew Frankfort has been involved with the Coach business for more than 25 years. He has served as Chairman and Chief Executive Officer of Coach since November 1995. He has served as a member of Coach’s Board of Directors since June 1, 2000, the date of incorporation. Mr. Frankfort served as Senior Vice President of Sara Lee Corporation from January 1994 to October 2000. Mr. Frankfort was appointed President and Chief Executive Officer of the Sara Lee Champion, Intimates & Accessories group in January 1994, and held this position through November 1995. From September 1991 through January 1994, Mr. Frankfort held the positions of Executive Vice President, Sara Lee Personal Products and Chief Executive Officer of Sara Lee Accessories. Mr. Frankfort was appointed President of Coach in July 1985, after Sara Lee acquired Coach, and held this position through September 1991. Mr. Frankfort joined Coach in 1979 as Vice President of New Business Development. Prior to joining Coach, Mr. Frankfort held various New York City government management positions and served as Commissioner, New York City Agency for Child Development. He also serves on the Board of Directors of Teach for America, a public-private partnership aimed at eliminating educational inequity in America, and is a member of the Board of Overseers at Columbia Business School. Mr. Frankfort holds a Bachelor of Arts degree from Hunter College and an M.B.A. in Marketing from Columbia University.

Susan Kropf was elected to Coach's Board of Directors in June 2006. From 2001 to January, 2007, Ms. Kropf served as President and Chief Operating Officer of Avon Products, where she had day-to-day oversight of Avon’s worldwide operations. Before that, she was executive vice president and chief operating officer, Avon North America and Global Business Operations, with responsibility for the company's North American operating business unit as well as global marketing, R&D, supply chain operations and information technology. Ms. Kropf also serves on the Boards of MeadWestvaco Corp., Sherwin Williams Co., and the Wallace Foundation. Ms. Kropf holds a Bachelor of Arts degree from St. John’s University and an M.B.A. in finance from New York University.

Gary Loveman was elected to Coach’s Board of Directors in January 2002. Mr. Loveman has served as Chairman of Harrah’s Entertainment, Inc. since January 2005 and as its Chief Executive Officer and President since January 2003; he had served as President of Harrah’s since April 2001 and as Chief Operating Officer of Harrah’s since May 1998. He was a member of the three-executive Office of the President of Harrah’s from May 1999 to April 2001 and was Executive Vice President from May 1998 to May 1999. From 1989 to 1998, Mr. Loveman was Associate Professor of Business Administration, Harvard University Graduate School of Business Administration, where his responsibilities included teaching M.B.A. and executive education students, research and publishing in the field of service management, and consulting and advising large service companies. Mr. Loveman also serves as a Director of Harrah’s and Fedex Corporation, on the Board of Trustees at Joslin Diabetes Center in Boston and on the Trust Board at Children's Hospital Boston. He holds a Bachelor of Arts degree in economics from Wesleyan University and a Ph.D. in economics from the Massachusetts Institute of Technology.

Ivan Menezes was elected to Coach’s Board of Directors in February 2005. Mr. Menezes has served as President and Chief Executive Officer of Diageo North America, the world’s leading premium drinks company, since January 2004, after having served as its President and Chief Operating Officer from July 2002, and as President of Diageo, Venture Markets since July 2000. Since joining Diageo in 1997 he has held various progressively senior management positions. Before joining Diageo, he held senior marketing positions with Whirlpool Europe in Milan and was a principal with Booz Allen Hamilton, Inc., both in Chicago and in London. Mr. Menezes holds a Bachelor of Arts degree in economics from St Stephen's College, Delhi, a post graduate diploma from the Indian Institute of Management, Ahmedabad and an M.B.A. from Northwestern University's Kellogg School of Management.

Irene Miller was elected to Coach's Board of Directors in May 2001. Ms. Miller is Chief Executive Officer of Akim, Inc., an investment management and consulting firm, and until June 1997 was Vice Chairman and Chief Financial Officer of Barnes & Noble, Inc., the world's largest bookseller. She joined Barnes & Noble in 1991, became Chief Financial Officer in 1993 and Vice Chairman in 1995. From 1986 to 1990, Ms. Miller was an investment banker at Morgan Stanley & Co. Incorporated. Ms. Miller also serves as a Director of Barnes & Noble, Inc., Inditex, S.A. and TD Bank Financial Group. Ms. Miller holds a Bachelor of Science degree from the University of Toronto and a Master of Science degree from Cornell University.

Keith Monda was appointed Executive Vice President and Chief Operating Officer of Coach in June 1998 and President of Coach in February 2002. He has served as a member of Coach’s Board of Directors since June 1, 2000, the date of incorporation. Prior to joining Coach, Mr. Monda served as Senior Vice President, Finance & Administration and Chief Financial Officer of Timberland Company from December 1993 until May 1996, and was promoted to, and held the position of, Senior Vice President, Operations from May 1996 until January 1998. From May 1990 to December 1993, Mr. Monda served as Executive Vice President, Finance and Administration of J. Crew, Inc. Mr. Monda holds Bachelor of Science and Master of Arts degrees from Ohio State University.

Michael Murphy was elected to Coach’s Board of Directors in September 2000. From 1994 to 1997, Mr. Murphy served as Vice Chairman and Chief Administrative Officer of Sara Lee Corporation. Mr. Murphy also served as a Director of Sara Lee from 1979 through October 1997. Mr. Murphy joined Sara Lee in 1979 as Executive Vice President and Chief Financial and Administrative Officer and, from 1993 until 1994, also served as Vice Chairman. Mr. Murphy is also a Director of Civic Federation, Big Shoulders Fund, Metropolitan Pier and Exposition Authority, Chicago Cultural Center Foundation, GATX Corporation and The Joffrey Ballet. He is also a member of the Board of Trustees of Northern Funds (a family of mutual funds). Mr. Murphy holds a Bachelor of Science degree in business administration from Boston College and an M.B.A. degree in finance from the Harvard Business School.

Jide Zeitlin was elected to Coach's Board of Directors in June 2006. Since December 2005, Mr. Zeitlin has served as founder of Independent Mobile Infrastructure (Pvt.) Limited, a privately held company that is focused on Indian telecommunications infrastructure. From 1996 until December 2005, Mr. Zeitlin was a partner at The Goldman Sachs Group, Inc.; he most recently held the post of Global Chief Operating Officer of the company's investment banking businesses, after joining the firm in 1983. Mr. Zeitlin is Chairman of the Board of Trustees of Amherst College, serves as a Director of Affiliated Managers Group, Inc. and is a member of several not-for-profit boards, including: Common Ground Community, Milton Academy, Montefiore Medical Center, Playwrights Horizons and Teach for America, as well as the Harvard Business School Visiting Committee. Mr. Zeitlin holds an A.B. degree in economics and English from Amherst College and an M.B.A. from Harvard University.

SHARE OWNERSHIP
(1) Based upon a Schedule 13G filed with the Securities and Exchange Commission on February 9, 2007. Includes 355,800 shares held by Prudential Financial, Inc. for the benefit of Prudential Insurance Company of America (“PICOA”) through its beneficial ownership of PlCOA, and 21,360,420 shares beneficially owned by Prudential Financial, Inc. The address of Prudential Financial, Inc. is 751 Broad Street, Newark, New Jersey 07102.
(2) Includes 4,712,170 shares of common stock that may be purchased within 60 days of August 31, 2007 pursuant to the exercise of options.
(3) Includes 675,366 shares of common stock that may be purchased within 60 days of August 31, 2007 pursuant to the exercise of options.
(4) Includes 2,032,753 shares of common stock that may be purchased within 60 days of August 31, 2007 pursuant to the exercise of options.
(5) Includes 428,105 shares of common stock that may be purchased within 60 days of August 31, 2007 pursuant to the exercise of options.
(6) Includes 364,830 shares of common stock that may be purchased within 60 days of August 31, 2007 pursuant to the exercise of options.
(7) Includes 29,000 shares of common stock that may be purchased within 60 days of August 31, 2007 pursuant to the exercise of options.
(8) Includes 57,000 shares of common stock that may be purchased within 60 days of August 31, 2007. pursuant to the exercise of options and 8,894 stock equivalents held under the Coach, Inc. Non-Qualified Deferred Compensation Plan for Outside Directors.
(9) Includes 27,000 shares of common stock that may be purchased within 60 days of August 31, 2007 pursuant to the exercise of options and 1,937 stock equivalents held under the Coach, Inc. Non-Qualified Deferred Compensation Plan for Outside Directors.
(10) Includes 127,868 shares of common stock that may be purchased within 60 days of August 31, 2007 pursuant to the exercise of options.
(11) Includes 136,972 shares of common stock that may be purchased within 60 days of August 31, 2007 pursuant to the exercise of options.
(12) Includes 29,000 shares of common stock that may be purchased within 60 days of August 31, 2007 pursuant to the exercise of options and 756 stock equivalents held under the Coach, Inc. Non-Qualified Deferred Compensation Plan for Outside Directors.
(13) Includes 9,157,013 shares subject to options exercisable within 60 days of August 31, 2007 and 11,587 stock equivalents held by our outside Directors.
COMPENSATION

Executive compensation includes both fixed components (base salary, benefits and executive perquisites), and variable components (annual bonus/incentive, annual stock option and restricted stock unit grants, and a profit sharing contribution to our retirement plan), with the heaviest weight placed on the variable components. Each component is linked to one or more of the strategic objectives listed above. The fixed components of compensation are designed to be competitive, typically at the middle of the market. The variable components are either tied specifically to the achievement of our annual financial objectives, or to the value of our stock, and are designed so that above-average performance is recognized with above-average rewards.
Base salary

Coach employees are paid a fixed base salary based on the responsibilities of their positions, the skills and experience required for the job, their individual performance, business performance, labor market conditions and by reference to market median salary levels. For all employees of Coach, including our executives, salaries are reviewed annually and salary increases typically take effect in September of each year, unless business circumstances require different timing.
Benefits and other compensation

Our health & welfare benefit program includes a broad-based health insurance plan, and executive long-term disability and life insurance programs, again designed to attract and retain executives. The executive disability and life insurance programs are provided to approximately 50 employees titled Vice President or higher, for whom benefit limits within our broad-based plans would result in under-competitive coverage. An executive medical insurance program was eliminated in 2004.

We do not have a defined benefit pension plan for our executives or other non-union employees; rather our retirement plan consists of a qualified 401(k) and profit sharing plan (the “Savings and Profit Sharing Plan”), and a non-qualified defined contribution plan (the “Supplemental Retirement Plan”) for all highly-compensated employees affected by the various IRS limits on contributions to qualified retirement plans. Contributions, earnings and account balances in the non-qualified plan are detailed in the Non-qualified Deferred Compensation table. In the past, a deferred compensation program allowed executives to defer salary, annual bonus and restricted stock unit earnings, with the choice to invest in Coach common stock or a prime rate interest account. That program was closed to new deferrals for executives in 2005, and none of our named executive officers has an outstanding balance in the plan. We also offer a qualified employee stock purchase plan to all US-based employees who work more than 20 hours per week.

Employees may elect to participate in the Savings and Profit Sharing Plan after completing one year of service. For employees defined as “highly compensated” under the United States Internal Revenue Code of 1986 (the “Code”), Coach matches 50% of employee contributions up to 6% of compensation deferred. Matching contributions vest at a rate of 20% per year, starting on first anniversary of the “highly compensated” employee’s start date of service. For employees defined as “non-highly compensated” under the Code, Coach matches 100% of employee contributions up to 3% of compensation deferred, plus 50% of employee contributions up to an additional 2% of compensation deferred. Matching contributions are fully vested for “non-highly compensated” employees. Coach may also elect to make discretionary profit-sharing contributions to all employees who satisfy plan participation requirements. These contributions vest in full on the fifth anniversary of the employee’s date of hire with the Company. For employees whose matching contributions and/or discretionary profit sharing contributions in the Savings and Profit Sharing Plan are limited by the Code, Coach also maintains a non-tax-qualified plan, the Supplemental Retirement Plan. Coach contributes to the Supplemental Retirement Plan any matching or profit sharing contributions described above that would be in excess of the limits allowed by the Code. In the case of matching contributions, if an employee has contributed the maximum amount allowable under the Code into the Savings and Profit Sharing Plan, Coach will contribute into the Supplemental Retirement Plan the difference between the amount matched under the Savings and Profit Sharing Plan and 3% of such employee’s total compensation for the applicable year. Because our employees lost their eligibility to participate in the Sara Lee Corporation pension plan after our 2001 split-off from Sara Lee, employees with at least 10 years of service at Coach as of July 1, 2001 received double their contribution percentage if they had reached age 35 by that date or triple their percentage if they had reached age 40 by that date.

We provide a limited number of executive perquisites, chiefly for personal transportation, as we have found this practice to be typical in the retail industry. As described below in “Determination of FY07 Compensation”, we completed a revamping of our perquisites program during fiscal 2007. Our executives are responsible for paying the required taxes on the value of their executive life insurance and transportation benefits.
Annual incentives Turning to variable compensation, our annual incentive plan is designed to encourage our executives to exceed our aggressive annual financial objectives. The Performance-Based Annual Incentive Plan (the “Annual Incentive Plan”) provides Coach’s senior executives with annual incentive compensation that is tied to achieving pre-established objective performance goals. The HR Committee, each member of which is an “outside director” within the meaning of Section 162(m) of the Code, administers the Annual Incentive Plan. Under the Annual Incentive Plan, each participant is eligible to receive a predetermined maximum annual award if the maximum objective performance levels have been satisfied. For target performance, 75% of the maximum incentive is paid. No individual may receive an annual incentive payment exceeding $6.0 million under this plan for any fiscal year.

The measures used are typically the same ones we believe our shareholders value. For fiscal 2007, those were growth in earnings per share, net sales, net profit and operating cash flow. Each year we set our financial objectives and bonus payout schedules so that target performance will result in median cash compensation (base plus annual bonus), and above-target performance will result in above average cash compensation. The financial goals are set with reference to achieving significant growth versus the prior year. Actual payments are made in cash to all participants within two and one-half months of the end of our fiscal year based on the degree to which the financial objectives have been achieved, as certified and approved by the HR Committee. Details of our fiscal 2007 goals and results are provided below in the section titled “Determination of FY2007 Compensation”.

Adjustment or Recovery of Awards

The Company has not created a particular policy to recover any incentive payments if the relevant performance measures and financial targets on which they were based are restated or otherwise adjusted in a manner that would reduce the size of a payment already made. The Company would review this, if and when a situation arose.

However, under Section 304 of the Sarbanes-Oxley Act, if the company is required to restate its financial results due to material noncompliance with any financial reporting requirements as a result of misconduct, the CEO and CFO could be required to reimburse the Company for (1) any bonus or other incentive-based or equity-based compensation received during the twelve months following the first public issuance or filing with the SEC of the non-complying document, and (2) any profits realized from the sale of securities of the Company during those twelve months.
Long term incentives

Over 600 Coach employees below the Senior Vice President level receive annual long-term incentive grants in the form of stock options and/or restricted stock units (“RSUs”), with the form of the award at the election of the individual. Previously, most employees received only stock options. Our named executive officers and other senior executives receive annual grants of stock options and RSUs, or stock options only, depending on their role in the organization. The purpose of the grants is to align executives with the interests of our shareholders, reward performance in the form of enhanced shareholder value, encourage retention, and provide a means to increase ownership of Coach common stock. We also grant RSUs on a selective basis to other employees as part of new hire agreements, to encourage retention, or to reward extraordinary individual results.

All awards are made under the terms and conditions of the 2000 and 2004 Stock Incentive Plans. All awards are made on pre-determined dates, with the bulk of the awards made on the date of the HR Committee’s regularly scheduled August meeting, at the same time that salary increases and bonus payments are approved. Effective July 2006 new hire, promotion and other special grants to Coach employees are made on the first business day of the fiscal month following the relevant event.

The legal agreement documenting each grant includes specific provisions relating to the executive’s termination. Our stock option grants have always contained a financial penalty for executives who violate our non-competition and/or non-solicitation rules, or who violate any other business standard established by the Company. The same provision applies to all RSUs granted after February 2007. Special rules accelerating vesting apply to terminations due to death or permanent disability, a business closing, or a change in control, and vesting may continue in the case of a qualified retirement.
Stock options

Stock option grants typically carry a term of ten years, and most awards vest in one-third increments over three years, with the exception of special awards made in new hire agreements or employment contracts, as described below in “Employment Agreements”. The exercise price is defined in our plans as the average of the high and low price on the date of grant, an approach which we believe mitigates the higher volatility typically associated with using the closing price. The only exception to this practice applies to restoration stock options, defined in the next paragraph.
Role of reloads

Historically, to assist and encourage ownership, we used restoration stock options (more commonly known as “reloads”) as a feature within our stock option program. Restoration stock options encourage executives to own shares of Coach’s stock for purposes of exercising their stock options. Restoration stock options were granted when executives used shares they had held for at least six months as payment of the purchase price upon exercise of their stock options. Restoration stock options are subject to the same terms and conditions as the original options they replace, except that the restoration options’ exercise price is equal to the market value of Coach’s common stock on the date and time the restoration stock option is granted. Although the program was successful in driving executives to increase their ownership of Coach common stock, it was eliminated on stock option grants made beginning in July 2003 (other than for restoration stock options resulting from grants originally made prior to July 2003).

Restricted Stock Units (RSUs)

Since their primary purpose is to encourage executive retention, RSUs granted annually to our named executive officers cliff-vest in full three years after the grant date. RSUs granted more broadly have a variety of vesting and termination provisions, depending on the underlying purpose of the grant.
Stock ownership recommendations and policies

Because we believe that our executives should have a meaningful stake in Coach, we have suggested levels of stock ownership for about 50 of Coach’s key executives at the level of Vice President and above based on a multiple of the executive’s salary. Executive ownership reflects shares owned and shares held in Coach’s Savings and Profit Sharing Plan. Unvested restricted stock units and unexercised stock options are not considered in calculating ownership.

Coach employees are prohibited from initiating trades of Coach stock during certain prescribed blackout periods, typically beginning two weeks prior to the end of each fiscal quarter and ending two days after the public release of our quarterly earnings announcement. Coach employees are prohibited from engaging in short sales, buying or selling derivative securities, and other similar hedging activities related to Coach stock.
Executive contracts

We believe that employment contracts are an effective retention tool for senior executives in our industry. To that end, our Board and the HR Committee have entered into agreements with our named executive officers, the terms of which are described in more detail under “Employment Agreements” below. Each agreement details severance payments to be made in the event of various termination situations and includes protections for Coach in the form of non-competition and non-solicitation provisions, stock compensation clawbacks, and the requirement that the executive sign a release to receive the severance. An estimate of the payments that would have been due in the event of termination at the end of fiscal 2007 is displayed in the section titled “Potential Payments Upon Termination”.

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Overview

Coach is a leading American marketer of fine accessories and gifts for men and women. Our product offerings include handbags, women’s and men’s accessories, footwear, outerwear, business cases, sunwear, watches, travel bags, jewelry and fragrance. Coach operates in two segments: Direct-to-Consumer and Indirect. The Direct-to-Consumer segment includes sales to consumers through Company-operated stores in North America and Japan, the Internet and Coach catalogs. The Indirect segment includes sales to wholesale customers in the U.S. and Asia as well as licensing revenue. As Coach’s business model is based on multi-channel international distribution, our success does not depend solely on the performance of a single channel or geographic area.

In order to sustain growth within our global framework, we continue to focus on two key growth strategies: increased global distribution, with an emphasis on our direct retail distribution in North America and Japan, and improved productivity. To that end we are focused on four key initiatives:
• Build market share in the rapidly growing North American women’s accessories market by leveraging our leadership position as a preferred brand for both self purchase and gifts. As part of this initiative, we continue to emphasize new usage occasions, such as weekend casual and evening. We also continue to introduce more sophisticated product to heighten our cachet, especially with our higher-end customers. Lastly, we continue to enhance the level of customer service in our stores by focusing on additional opportunities to deliver excellent customer service.
• Rapidly grow our North American retail store base by adding stores within existing markets, opening in new markets in the U.S. and by accelerating store openings in Canada. We plan to add about 40 retail stores in North America in each of the next several years and believe that North America can support about 500 retail stores in total, including up to 20 in Canada. In addition, we will continue to expand select, highly productive retail and factory locations.
• Expand market share with the Japanese consumer, driving growth in Japan primarily by opening new retail locations and expanding existing ones. We plan to add about 15 – 20 new locations in fiscal 2008 and believe that Japan can support about 180 locations in total. We will also continue to expand key locations.
• Raise brand awareness in emerging markets to build the foundation for substantial sales in the future. Specifically, Greater China, Korea and other emerging geographies are increasing in importance as the handbag and accessories category grows in these areas. In fiscal 2008, we intend to open approximately 30 net new locations, through distributors, in Greater China, Southeast Asia and the Middle East. This includes at least five more locations in major cities in mainland China, bringing the total number of locations in mainland China to at least 16.

In addition to the strategies outlined above, we continue to focus on improving our rate of profitability and delivering superior returns on investments. By leveraging expenses, our operating margin expansion will continue to outpace our sales growth, which will drive increased cash flows from operating activities.
Fiscal 2007 Highlights

During fiscal 2007, an increase in sales, combined with an improvement in margins, continued to drive net income and earnings per share growth. The highlights of fiscal 2007 were:
• Net income from continuing operations increased 37.2% to $636.5 million.
• Earnings per diluted share from continuing operations increased 41.3% to $1.69 per diluted share.
• Net sales increased 28.4% to $2.6 billion.
• Direct-to-consumer sales rose 30.5% to $2.1 billion.
• Comparable store sales in North America rose 22.3%, with retail stores up 16.4% and factory stores up 30.0%.
• Coach Japan sales, when translated into U.S. dollars, rose 15.9% driven by expanded distribution and mid-single-digit comparable store sales. These increases in sales reflect a 2.9% decrease due to currency translation.
• In North America, Coach opened 41 new retail stores and seven net new factory stores, bringing the total number of retail and factory stores to 259 and 93, respectively, at the end of fiscal 2007. We also expanded six retail stores and seven factory stores in North America.
• Coach Japan opened 19 net new locations, bringing the total number of locations at the end of fiscal 2007 to 137. In addition, we expanded nine locations.
• In mainland China, together with our distributors, Coach opened eight net stores.

In March 2007, the Company exited its corporate accounts business in order to better control the location and image of the brand where Coach product is sold. Through the corporate accounts business, Coach sold products primarily to distributors for gift-giving and incentive programs. The results of the corporate accounts business, previously included in the Indirect segment, have been segregated from continuing operations and reported as discontinued operations in the Consolidated Statements of Income for all periods presented.

Direct-to-Consumer — Net sales increased by 30.5%, driven by increased sales from comparable stores, new stores and expanded stores. Comparable store sales measure sales performance at stores that have been open for at least 12 months. Coach excludes new locations from the comparable store base for the first year of operation. Similarly, stores that are expanded by 15% or more are also excluded from the comparable store base until the first anniversary of their reopening. Stores that are closed for renovations are removed from the comparable store base.

In North America, comparable store sales growth, sales from new stores and sales from expanded stores accounted for approximately $233 million, $142 million and $31 million, respectively, of the net sales increase. In Japan, sales from new stores, comparable store sales growth and sales from expanded stores accounted for approximately $46 million, $20 million and $8 million, respectively, of the net sales increase. Coach Japan’s reported net sales were negatively impacted by approximately $12 million as a result of foreign currency exchange. Sales growth in the Internet business accounted for the remaining sales increase. These sales increases were slightly offset by store closures and a decline in the direct marketing channel.

Indirect — Net sales increased by 20.3%, driven primarily by growth in the U.S. wholesale division, which contributed increased sales of approximately $73 million, as compared to the prior year. This sales increase was partially offset by an approximately $7 million decrease in net sales in the international wholesale division, as shipments to our customers were curbed in consideration of slowing Japanese travel trends in our markets and to ensure healthy inventory levels. Licensing revenue of approximately $15 million and $9 million in fiscal 2007 and fiscal 2006, respectively, is included in Indirect sales.
Operating Income

Operating income increased 39.0% to $993.4 million in fiscal 2007 as compared to $714.7 million in fiscal 2006, driven by increases in net sales and gross profit, partially offset by an increase in selling, general and administrative expenses. Operating margin rose to 38.0% in fiscal 2007 from 35.1% in fiscal 2006. This 290 basis point improvement is attributable to increased net sales, as discussed above, and the leveraging of selling, general and administrative expenses.

Gross profit increased 27.9% to $2.0 billion in fiscal 2007 compared to $1.6 billion in fiscal 2006. Gross margin remained strong at 77.4% in fiscal 2007 compared to 77.7% in fiscal 2006. Gross margin was negatively impacted by channel mix, as Coach Japan grew more slowly than the business as a whole while our factory store channel grew faster, as well as the fluctuation in currency translation rates. However, these negative impacts were partially offset by gains from product mix shifts, reflecting increased penetration of higher margin collections and supply chain initiatives. Coach’s gross profit is dependent upon a variety of factors, including changes in the relative sales mix among distribution channels, changes in the mix of products sold, foreign currency exchange rates, and fluctuations in material costs. These factors, among others, may cause gross profit to fluctuate from year to year.

Selling, general and administrative (“SG&A”) expenses comprise four categories: (1) selling; (2) advertising, marketing and design; (3) distribution and consumer service; and (4) administrative. Selling expenses include store employee compensation, store occupancy costs, store supply costs, wholesale account administration compensation and all Coach Japan operating expenses. These expenses are affected by the number of Coach and Coach Japan operated stores open during any fiscal period and the related proportion of retail and wholesale sales. Advertising, marketing and design expenses include employee compensation, media space and production, advertising agency fees, new product design costs, public relations, market research expenses and mail order costs. Distribution and consumer service expenses include warehousing, order fulfillment, shipping and handling, customer service and bag repair costs. Administrative expenses include compensation costs for the executive, finance, human resources, legal and information systems departments, as well as consulting and software expenses. SG&A expenses increase as Coach and Coach Japan operate more stores, although an increase in the number of stores generally results in the fixed portion of SG&A expenses being spread over a larger sales base.

During fiscal 2007, SG&A expenses increased 18.8% to $1.0 billion, compared to $866.9 million in fiscal 2006, driven primarily by increased selling expenses. However, as a percentage of net sales, SG&A expenses decreased to 39.4% during fiscal 2007, compared to 42.6% during fiscal 2006, as we continue to leverage our expense base on higher sales.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

EXECUTIVE OVERVIEW

Coach is a leading American marketer of fine accessories and gifts for men and women. Our product offerings include handbags, women’s and men’s accessories, footwear, outerwear, business cases, sunwear, watches, travel bags, jewelry and fragrance. Coach operates in two segments: Direct-to-Consumer and Indirect. The Direct-to-Consumer segment includes sales to consumers through Company-operated stores in North America and Japan, the Internet and Coach catalogs. The Indirect segment includes sales to wholesale customers in the U.S. and Asia as well as licensing revenue. As Coach’s business model is based on multi-channel international distribution, our success does not depend solely on the performance of a single channel or geographic area.

In order to sustain growth within our global framework, we continue to focus on two key growth strategies: increased global distribution, with an emphasis on our direct retail distribution in North America, Japan, and Greater China, and improved productivity. To that end we are focused on four key initiatives:


• Build market share in the growing North American women’s accessories market by leveraging our leadership position as a preferred brand for both self purchase and gifts. As part of this initiative, we continue to emphasize new usage occasions, such as weekend casual and evening. We also continue to introduce more sophisticated product to heighten our cachet, especially with our higher-end customers. Lastly, we continue to enhance the level of customer service in our stores by focusing on additional opportunities to deliver excellent customer service.

• Rapidly grow our North American retail store base by adding stores within existing markets, opening in new markets in the U.S. and by accelerating store openings in Canada. We plan to add about 40 retail stores in North America in each of the next several years and believe that North America can support about 500 retail stores in total, including up to 20 in Canada. In addition, we will continue to expand select, highly productive retail and factory locations.

• Expand market share with the Japanese consumer, driving growth in Japan primarily by opening new retail locations and expanding existing ones. We plan to add about 10 to 15 net new locations in fiscal 2008 and believe that Japan can support about 180 locations in total. We will also continue to expand key locations.


• Raise brand awareness in emerging markets to build the foundation for substantial sales in the future. Specifically, Greater China, Korea and other emerging geographies are increasing in importance as the handbag and accessories category grows in these areas. In fiscal 2008, we intend to open approximately 30 net new locations, through distributors, in Greater China, Southeast Asia and the Middle East. This includes at least five more locations in major cities in mainland China, bringing the total number of locations in mainland China to at least 16.

In addition to the strategies outlined above, we continue to focus on improving our rate of profitability and delivering superior returns on investments. By leveraging expenses, our operating margin expansion will continue to outpace our sales growth, which will drive increased cash flows from operating activities.

FIRST QUARTER OF FISCAL 2008 HIGHLIGHTS

In the first quarter of fiscal 2008, an increase in sales, combined with an improvement in operating margins, continued to drive net income and earnings per share growth. The highlights of the first quarter of fiscal 2008 were:


• Earnings per diluted share from continuing operations increased 32.3% to $0.41 per diluted share.


• Net income from continuing operations increased 34.4% to $154.8 million.


• Net sales increased 27.8% to $676.7 million.


• Direct-to-consumer sales rose 25.6% to $507.7 million.


• Comparable store sales in North America rose 19.3%, with retail stores up 10.8% and factory stores up 27.3%.


• Coach Japan sales, when translated into U.S. dollars, rose 15.1% driven by expanded distribution and low-single-digit comparable store sales. This 15.1% increase includes a 1.4% negative impact from currency translation.


• In North America, Coach opened 13 new retail stores and three new factory stores, bringing the total number of retail and factory stores to 272 and 96, respectively, at the end of the first quarter of fiscal 2008. We also expanded nine retail stores and four factory stores in North America.


• In Japan, Coach opened four new locations, bringing the total number of Coach Japan-operated locations at the end of the first quarter of fiscal 2008 to 141. In addition, we expanded one location.


• In Greater China, together with our distributors, Coach opened three new stores.


Direct-to-Consumer

Net sales increased 25.6% to $507.7 million during the first quarter of fiscal 2008 from $404.2 million during the same period in fiscal 2007, driven by increased comparable store sales, new store sales and expanded store sales.

In North America, comparable store sales growth, sales from new stores and sales from expanded stores accounted for approximately $53 million, $30 million and $6 million, respectively, of the net sales increase. Since the end of the first quarter of fiscal 2007, Coach has opened 42 new retail stores and nine new factory stores, and expanded 15 retail stores and nine factory stores in North America. In Japan, sales from new stores, expanded stores and comparable store sales growth accounted for approximately $12 million, $2 million and $2 million, respectively, of the net sales increase. Since the end of the first quarter of fiscal 2007, Coach has opened 15 net new locations and expanded eight locations in Japan. Coach Japan’s reported net sales were negatively impacted by approximately $1.4 million as a result of foreign currency exchange. Sales growth in the Internet business accounted for the remaining sales increase. These sales increases were slightly offset by store closures.

Indirect

Net sales increased 35.0% to $169.0 million in the first quarter of fiscal 2008 from $125.2 million during the same period of fiscal 2007, driven by growth primarily in the U.S. wholesale and international wholesale divisions, which contributed increased sales of approximately $30 million and $18 million, respectively. These sales increases were partially offset by declines in our other indirect channels. Licensing revenue of approximately $4 million and $3 million in the first quarter of fiscal 2008 and fiscal 2007, respectively, is included in indirect sales.

Operating Income

Operating income increased 32.2% to $238.8 million in the first quarter of fiscal 2008 as compared to $180.7 million in the first quarter of fiscal 2007, driven by increases in net sales and gross profit, partially offset by an increase in selling, general and administrative expenses. Operating margin rose to 35.3% as compared to the 34.1% operating margin in the same period of the prior year. This 120 basis point improvement is attributable to increased net sales, as discussed above, and the leveraging of selling, general and administrative expenses.

Gross profit increased 27.6% to $518.2 million in the first quarter of fiscal 2008 from $406.0 million during the same period of fiscal 2007. Gross margin remained strong at 76.6% in the first quarter of fiscal 2008 as compared to 76.7% during the same period of fiscal 2007. The change in gross margin was driven by the negative impact of channel mix, partially offset by a net increase in product margin.

Selling, general and administrative expenses were $279.5 million in the first quarter of fiscal 2008 as compared to $225.4 million in the first quarter of fiscal 2007. However, as a percentage of net sales, selling, general and administrative expenses decreased to 41.3% during the first quarter of fiscal 2008 as compared to 42.6% during the first quarter of fiscal 2007, as we continue to leverage our expense base on higher sales.

Selling expenses were $191.9 million, or 28.4% of net sales, in the first quarter of fiscal 2008 compared to $157.1 million, or 29.7% of net sales, in the first quarter of fiscal 2007. The dollar increase in selling expenses was primarily due to an increase in operating expenses of North America stores and Coach Japan. The increase in North America store expenses is attributable to increased variable expenses related to higher sales as well as expenses from new and expanded stores opened since the end of the first quarter of fiscal 2007. The increase in Coach Japan operating expenses was primarily driven by increased variable expenses related to higher sales and new store operating expenses. However, the impact of foreign currency exchange rates decreased reported expenses by approximately $0.5 million. The remaining increase in selling expenses was due to increased variable expenses to support sales growth in other channels.

Advertising, marketing, and design costs were $32.1 million, or 4.7% of net sales, in the first quarter of fiscal 2008, compared to $27.9 million, or 5.3% of net sales, during the same period of fiscal 2007. The increase in advertising, marketing and design costs was primarily due to increased staffing costs and design expenditures.

Distribution and consumer service expenses were $11.6 million in the first quarter of both fiscal 2008 and fiscal 2007, as a result of efficiency gains. In addition, these efficiency gains led to an improvement in distribution and consumer service expenses as a percentage of net sales from 2.2% in the first quarter of fiscal 2007 to 1.7% in the first quarter of fiscal 2008.

Administrative expenses were $43.9 million, or 6.5% of net sales, in the first quarter of fiscal 2008 compared to $28.8 million, or 5.4% of net sales, during the same period of fiscal 2007. The increase in administrative expenses was primarily due to an increase in employee staffing costs, including share-based compensation expense. In addition, consulting and depreciation expenses increased as compared to prior year as a result of investments in technology systems.

Interest Income, Net

Net interest income was $15.0 million in the first quarter of fiscal 2008 as compared to $6.6 million in the first quarter of fiscal 2007. This increase was primarily due to higher returns on our investments as a result of higher interest rates and higher average cash balances.

Provision for Income Taxes

The effective tax rate was 39.0% in the first quarter of fiscal 2008 as compared to 38.5% in the first quarter of fiscal 2007. The increase in the effective tax rate is attributable to incremental income being taxed at higher rates.

Income from Continuing Operations

Net income from continuing operations was $154.8 million in the first quarter of fiscal 2008 as compared to $115.2 million in the first quarter of fiscal 2007. This increase is attributable to increased net sales as well as significant operating margin improvement, as discussed above.

Income from Discontinued Operations

In March 2007, the Company exited its corporate accounts business in order to better control the location and image of the brand where Coach product is sold. Through the corporate accounts business, Coach sold products primarily to distributors for gift-giving and incentive programs. The results of the corporate accounts business, previously included in the Indirect segment, have been segregated from continuing operations and reported as discontinued operations in the Condensed Consolidated Statements of Income for all periods presented.

In the first quarter of fiscal 2007, net sales and net income from discontinued operations were $24.4 million and $10.4 million, respectively. In the first quarter of fiscal 2008, net sales and net income were not significant.

FINANCIAL CONDITION

Cash Flow

Net cash provided by operating activities was $125.2 million in the first quarter of fiscal 2008 compared to $80.7 million in the first quarter of fiscal 2007. The year-to-year improvement of $44.5 million was primarily the result of an increase in earnings of $29.2 million. In addition, depreciation and amortization increased $5.9 million, primarily as a result of new and expanded stores in North America and Japan, and share-based compensation increased $3.7 million. The changes in operating assets and liabilities were attributable to normal operating conditions.

Net cash provided by investing activities was $141.3 million in the first quarter of fiscal 2008 compared to $3.1 million net cash used in investing activities in the first quarter of fiscal 2007. The $144.4 million change is attributable to a $147.0 million increase in the net proceeds from maturities of investments, offset by a $2.5 million increase in capital expenditures, primarily related to new and expanded stores in North America and Japan. Coach’s future capital expenditures will depend on the timing and rate of expansion of our businesses, new store openings, store renovations and international expansion opportunities.

Net cash used in financing activities was $37.0 million in the first quarter of fiscal 2008 as compared to $125.5 million in the first quarter of fiscal 2007. The decrease of $88.5 million in net cash used is attributable to a $17.7 million decrease in funds expended to repurchase common stock in the first quarter of fiscal 2008 as compared to the first quarter of fiscal 2007 and the non-recurrence of a $16.7 million adjustment recorded in the first quarter of fiscal 2007 related to a previously recognized excess tax benefit. In addition, proceeds from the exercise of stock options and the excess tax benefit from share-based compensation increased $48.2 million and $13.4 million, respectively. The impact of these changes was partially offset by a $7.4 million decrease in net borrowings on the revolving credit facility in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007.

Revolving Credit Facilities

On July 26, 2007, the Company renewed its $100 million revolving credit facility with certain lenders and Bank of America, N.A as the primary lender and administrative agent (the “Bank of America facility”), extending the facility expiration to July 26, 2012. At Coach’s request, the Bank of America facility can be expanded to $200 million. The facility can also be extended for two additional one-year periods, at Coach’s request.

Coach’s Bank of America facility is available for seasonal working capital requirements or general corporate purposes and may be prepaid without penalty or premium. During the first quarter of fiscal 2008 and fiscal 2007, there were no borrowings under the Bank of America facility. As of September 29, 2007 and June 30, 2007, there were no outstanding borrowings under the Bank of America facility.

Coach pays a commitment fee of 6 to 12.5 basis points on any unused amounts of the Bank of America facility and interest of LIBOR plus 20 to 55 basis points on any outstanding borrowings. Both the commitment fee and the LIBOR margin are based on the Company’s fixed charge coverage ratio. At September 29, 2007, the commitment fee was 6 basis points and the LIBOR margin was 20 basis points.

The Bank of America facility contains various covenants and customary events of default. The Company has been in compliance with all covenants since the inception of the Bank of America facility.

To provide funding for working capital and general corporate purposes, Coach Japan has available credit facilities with several Japanese financial institutions. These facilities allow a maximum borrowing of 7.4 billion yen or approximately $64.4 million at September 29, 2007. Interest is based on the Tokyo Interbank Rate plus a margin of up to 50 basis points.

During the first quarter of fiscal 2008 and fiscal 2007, the peak borrowings under the Japanese credit facilities were $0 and $12.8 million, respectively. As of September 29, 2007 and June 30, 2007, the outstanding borrowings under the Japanese facilities were $0.

Common Stock Repurchase Program

On October 20, 2006, the Coach Board of Directors approved a new common stock repurchase program to acquire up to $500 million of Coach’s outstanding common stock through June 2008. Purchases of Coach stock may be made from time to time, subject to market conditions and at prevailing market prices, through open market purchases. Repurchased shares become authorized but unissued shares and may be issued in the future for general corporate and other uses. The Company may terminate or limit the stock repurchase program at any time.

During the first three months of fiscal 2008 and fiscal 2007, the Company repurchased and retired 3.0 million and 5.0 million shares, respectively, of common stock, at an average cost of $43.72 and $29.99, respectively, per share.

As of September 29, 2007, $368 million remained available for future repurchases under the existing program.

Liquidity and Capital Resources

We expect that fiscal 2008 capital expenditures will be approximately $200 million and will relate primarily to new stores and expansions both in North America and Japan as well as investments in corporate systems and infrastructure. In North America, we expect to open 40 new retail stores and six new factory stores, of which 13 and three, respectively, were opened by the end of the first quarter of fiscal 2008. In Japan, we expect to open 10 to 15 net new locations, of which four were opened by the end of the first quarter of fiscal 2008. We will also continue to invest in department store and distributor locations. In addition, we will invest in corporate infrastructure and expand our Jacksonville distribution center. We intend to finance these investments from on hand cash and operating cash flows.

Coach experiences significant seasonal variations in its working capital requirements. During the first fiscal quarter Coach builds inventory for the holiday selling season, opens new retail stores and generates higher levels of trade receivables. In the second fiscal quarter, working capital requirements are reduced substantially as Coach generates greater consumer sales and collects wholesale accounts receivable. During the first quarter of fiscal 2008, Coach purchased approximately $230 million of inventory, which was funded by operating cash flow.

Management believes that cash flow from continuing operations and on hand cash will provide adequate funds for the foreseeable working capital needs, planned capital expenditures and the common stock repurchase program. Any future acquisitions, joint ventures or other similar transactions may require additional capital and there can be no assurance that any such capital will be available to Coach on acceptable terms or at all. Coach’s ability to fund its working capital needs, planned capital expenditures and scheduled debt payments, and to comply with all of the financial covenants under its debt agreements, depends on its future operating performance and cash flow, which in turn are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond Coach’s control.

Reference should be made to our most recent Annual Report on Form 10-K for additional information regarding liquidity and capital resources.

Seasonality

Because Coach products are frequently given as gifts, the Company has historically realized, and expects to continue to realize, higher sales and operating income in the second quarter of its fiscal year, which includes the holiday months of November and December. In addition, fluctuations in sales and operating income in any fiscal quarter are affected by the timing of seasonal wholesale shipments and other events affecting retail sales. However, over the past several years, we have achieved higher levels of growth in the non-holiday quarters, which has reduced these seasonal fluctuations. We expect that these trends will continue and we will continue to balance our year round business.

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