View:
November
30, 2009
VIA
EDGAR
Ms. Tia
Jenkins
Senior
Assistant Chief Accountant
Division
of Corporation Finance
Mail Stop
3561
United
States Securities and Exchange Commission
100 F
Street, N.E.
Washington,
D.C. 20549
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Re:
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Coach,
Inc.
Form
10-K for Fiscal Year Ended June 27, 2009
Filed
August 19, 2009
File
No. 001-16153
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Dear Ms.
Jenkins:
Thank you
for your November 6 letter to Coach, Inc. setting forth the Commission’s
comments to our Form 10-K for the fiscal year ended June 27,
2009. This letter presents Coach's responses to the Commission's
comments. We agree that the items identified in your comments will
assist us in our compliance with the applicable disclosure requirements and will
enhance the overall disclosure in our filings. To assist you in your
review of our responses, we have keyed the paragraph numbers in our responses to
the numbered comments in your comment letter.
Form 10-K for the Fiscal
Year Ended June 27, 2009
Non-GAAP Measures, page
20
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1.
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We
note you have adjusted operating income, interest income, provision for
taxes, net income and diluted earnings per share to exclude certain
items. Your GAAP amounts were adjusted to exclude cost saving
measures, charitable foundation contributions, tax adjustments and
resulting adjustments to incentive compensation. Please
demonstrate to us how exclusion of these items is consistent with the
requirements of Question 8 of the Commission’s FAQ Regarding the Use of
Non-GAAP Financial Measures. In your response, please ensure to
clarify the following for each
measure:
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The manner in which management
uses this measure to conduct or evaluate its
business,
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The economic substance behind
management’s decision to use this
measure,
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The material limitations
associated with use of this measure as compared to the use of the most
directly comparable GAAP financial
measure,
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The manner in which management
compensates for these limitations when using this measure,
and
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The substantive reasons why
management believes this measure provides useful information to
investors.
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1
Response:
We
understand the requirements of Question 8 of the Commission’s FAQ Regarding the
Use of Non-GAAP Financial Measures (“FAQ 8”) and included disclosures which we
thought were responsive to such requirements, but acknowledge that additional
disclosures could help investors better understand our use of non-GAAP measures
and their limitations.
We
disclosed the following on page 20 of the Coach, Inc. (the “Company”) Form 10-K
for the fiscal year ended June 27, 2009:
“The
Company’s reported results are presented in accordance with U.S. Generally
Accepted Accounting Principles (‘‘GAAP’’). The reported selling,
general, and administrative expenses, operating income, interest income, net,
provision for income taxes, income from continuing operations, net income and
earnings per diluted share from continuing operations reflect certain items
which affect the comparability of our results. These metrics are also reported
on a non-GAAP basis to exclude the impact of these items. The Company believes
these non-GAAP financial measures are useful to investors in evaluating the
Company’s ongoing operating and financial results and understanding how such
results compare with the Company’s historical performance. The non-GAAP
financial measures should be considered in addition to, and not in lieu of, U.S.
GAAP financial measures.”
These
non-GAAP performance measures (operating income, interest income, provision for
taxes, net income and diluted earnings per share, each excluding the items
affecting comparability, or collectively, the “non-GAAP measures”) were used by
management to conduct and evaluate its business during its regular review of
operating results for the periods affected. Management utilized these
non-GAAP measures to make decisions about the uses of Company resources, analyze
performance between periods, develop internal projections and measure management
performance. The Company’s primary internal financial reporting
excluded these items affecting comparability. We believe these
non-GAAP measures are useful to investors in evaluating the Company’s ongoing
operating and financial results and in understanding how such results compare
with the Company’s historical performance. As further described
below, these non-GAAP measures in fiscal 2008 and 2009 involved both increases
and decreases to net income including eliminating large and unusual favorable
tax settlements and related funding to the Coach Foundation with a portion of
the tax settlements. Fiscal 2008 non-GAAP amounts also included an
adjustment to exclude the impact of the tax settlements on contractually based
incentive compensation. Fiscal 2009 non-GAAP amounts also included an adjustment
to exclude cost savings measures incurred that were highly unusual for the
Company in its history.
The
Company’s tax adjustments are primarily the result of discrete favorable tax
settlements. Although tax adjustments occurred in both fiscal years,
the underlying events and circumstances for the tax settlements are unusual, not
related to each other, and unlikely to recur in the near future. The
resulting increase to the Company’s net income was the primary reason for the
creation in fiscal 2008, and the significant funding in fiscal 2008 and 2009, of
the Coach Foundation. Funding of the Coach Foundation may be likely
to occur in the future at far smaller amounts; however, the net income
favorability from the tax adjustments was the primary reason for these
significant fundings in fiscal 2008 and 2009. The Company believes
excluding both the tax adjustments and the resulting foundation funding assists
investors in evaluating the Company’s direct, ongoing performance.
2
While
the goals approved by the Company’s Human Resource Committee resolution for
fiscal 2008 incentive compensation did not contemplate unusual gains and was
based on income related metrics, management of the Company concluded that the
inclusion of these items in performance measures utilized for employee incentive
compensation would not be consistent with their objectives. Executive
management waived their contractual incentive compensation associated with the
favorable tax adjustments in fiscal 2008. Therefore, while the
Company paid the contractual incentive compensation for non-executives in fiscal
2008, executive management incentive compensation was based on the lower,
non-GAAP financial measures. Beginning in fiscal 2009, the Human
Resource Committee resolution for incentive compensation goals for all employees
excluded unusual charges or gains from measurement of corporate
performance. The Company’s fiscal 2008 non-recurring variable expense
items represent incentive compensation directly related to the increase to the
Company’s net income and earnings per share as a direct result of, and directly
attributable to, the aforementioned tax settlements. The Company
believes excluding the non-recurring variable expenses assists investors in
evaluating the Company’s direct, ongoing performance.
The
Company’s third quarter cost savings measures in fiscal 2009 were non-recurring
in nature due to the fact that the Company has no recent past history of similar
elimination of positions, closure of facilities, or closure of underperforming
stores during the stores’ lease terms. These cost savings measures
were highly unusual for the Company and management believes that measures of
this type and magnitude are unlikely to recur in the near
future. Management reasonably believes it is probable that the
financial impact of this item will disappear or become immaterial within a
near-term finite period.
We
believe our non-GAAP measures assist investors in evaluating the Company’s
ongoing operations and financial results, and in understanding how such results
compare with the Company’s historical performance. In addition, we
believe excluding the items affecting comparability assists investors in
developing expectations of future performance. These items affecting
comparability do not represent our direct, ongoing business operations as they
are unusual items and are unlikely to recur in the near
future. The primary material limitations associated with the
use of these non-GAAP measures are that they may be unique to the Company and
may be different from non-GAAP measures used by other companies. The
Company compensated for these limitations by providing the U.S. GAAP financial
measures with greater prominence than the non-GAAP measures. The
Company included the statement above to stress that the non-GAAP measures should
be considered in addition to, and not in lieu of, U.S. GAAP financial
measures. In addition, the Company provided an explanation describing
the items affecting comparability and why they were being adjusted in our Form
10-K.
We
believe the disclosures in our fiscal 2009 Form 10-K and the preceding
discussion of our items affecting comparability demonstrate how the exclusion is
consistent with the requirements of FAQ 8. In addition, these
non-GAAP measures were included in the Company’s Press Release, as filed under
Form 8-K on July 30, 2009. The Company believed that it would be
beneficial to investors to be consistent with the information provided in the
Press Release and to include the non-GAAP measures in its Form 10-K
filing. In future filings, we will expand our disclosure around these
non-GAAP amounts to more clearly meet the disclosure requirements of the
Commission’s FAQ Regarding the Use of Non-GAAP Financial Measures, including the
specific five discussion
3
points
required under FAQ 8. We acknowledge that additional disclosures
could help investors better understand our use of non-GAAP measures and their
limitations. The following is an example of the type of disclosure
the Company will provide in future filings (with the enhanced disclosure
language in bold):
Items
Affecting Comparability of Our Financial Results
Fiscal
2009 Items
Cost
Savings Measures
During
the third quarter of fiscal 2009, the Company recorded a charge of $13.4
million, related to cost savings initiatives. These initiatives included the
elimination of approximately 150 positions from the Company’s corporate offices
in New York, New Jersey and Jacksonville, the closure of four underperforming
retail stores and the closure of Coach Europe Services, the Company’s
sample-making facility in Italy. The cost savings measures in fiscal
2009 are non-recurring in nature due to the fact that the Company has no recent
past history of similar elimination of positions, closure of facilities, or
closure of underperforming stores during the stores’ lease
terms. These cost savings measures were highly unusual for the
Company and are unlikely to recur in the near future.
Charitable
Contribution and Tax Adjustments
During
the fourth quarter of fiscal 2009, the Company decreased the provision for
income taxes by $16.8 million and increased interest income by $2.0 million,
primarily as a result of a favorable settlement of a multi-year tax return
examination and other tax accounting adjustments. The underlying events and
circumstances for the tax settlement and adjustments were unusual and not
related to the fiscal 2008 settlement, and settlements of this magnitude are
unlikely to recur in the near future. The Company used the net
income favorability to contribute $15.0 million to the Coach Foundation. The Company believed that in order to
reflect the direct results of the normal, ongoing business operations, both the
tax adjustments and the resulting foundation funding needed to be
adjusted. This exclusion is consistent with the way management views
its results and is the basis on which incentive compensation was calculated and
paid for fiscal 2009.
Fiscal
2008 Items
Charitable
Contribution and Tax Adjustments
During
the fourth quarter of fiscal 2008, the Company decreased the provision for
income taxes by $50.0 million and increased interest income by $10.7 million,
primarily as a result of a favorable settlement of a tax return examination.
The underlying events and
circumstances for the tax settlement were unusual and not related to the fiscal
2009 settlement, and settlements of this magnitude are unlikely to recur in the
near future. The Company used the net income favorability to create the
Coach Foundation. The Company recorded an initial contribution to the Coach
Foundation in the amount of $20.0 million. The Company believed that in order to
reflect the direct results of the business operations as was done for executive
management incentive compensation, both the tax adjustments and the resulting
foundation funding needed to be adjusted.
Non-Recurring
Variable Expenses
As a
result of the higher interest income, net (related to the tax
settlements) and lower income tax provision, the Company incurred
additional incentive compensation expense of $12.1 million, as a portion of the
Company’s incentive compensation plan is based on net income and earnings per
share. Incremental
incentive compensation driven by tax settlements of this magnitude is unlikely
to recur in the near future as the Company has modified its incentive
compensation plans during fiscal 2009 to be measured exclusive of any unusual
accounting adjustments. The Company believes excluding the
non-recurring variable expenses assists investors in evaluating the Company’s
direct, ongoing business operations.
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Non-GAAP
Measures
The
Company’s reported results are presented in accordance with U.S. Generally
Accepted Accounting Principles (“GAAP”). The reported selling, general, and
administrative expenses, operating income, interest income, net, provision for
income taxes, income from continuing operations, net income and earnings per
diluted share from continuing operations reflect certain items which affect the
comparability of our results. These metrics are also reported on a non-GAAP
basis to exclude the impact of these items.
These
non-GAAP performance measures were used by management to conduct and evaluate
its business during its regular review of operating results for the periods
affected. Management and the Company’s Board of Directors utilized
these non-GAAP measures to make decisions about the uses of Company resources,
analyze performance between periods, develop internal projections and measure
management performance. The Company’s primary internal financial
reporting excluded these items affecting comparability. In addition,
the compensation committee of the Company’s Board of Directors used these
non-GAAP measures when setting and assessing achievement of incentive
compensation goals.
We
believe these non-GAAP measures are useful to investors in evaluating the
Company’s ongoing operating and financial results and understanding how such
results compare with the Company’s historical performance. In addition, we believe excluding the
items affecting comparability assists investors in developing expectations of
future performance. These items affecting comparability do not
represent the Company’s direct, ongoing business operations and are not expected
to recur in the near future. By providing the non-GAAP
measures, as a supplement to GAAP information, we believe we are enhancing
investors’ understanding of our business and our results of
operations. The non-GAAP financial measures are limited in their usefulness
and should be considered in addition to, and not in lieu of, U.S. GAAP
financial measures. Further, these
non-GAAP measures may be unique to the Company, as they may be different from
non-GAAP measures used by other companies.
Financial
Statements
Notes to Financial
Statements
Note 22 – Quarterly
Financial Data (unaudited), page 68
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2.
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We
note you adjusted income from continuing operations and diluted earnings
per share from continuing operations for certain items resulting in the
presentation of non-GAAP financial measures. Tell us how
inclusion of these non-GAAP financial measures in your financial statement
footnotes is appropriate considering the guidance in Item 10(e)(ii)(C) of
Regulation S-K.
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Response:
The
Company’s inclusion of Note 22 – Quarterly Financial Data (unaudited) was
intended to fulfill the requirements of Item 302(a)(3) of Regulation
S-K. As required by Item 302(a)(3), the Company disclosed the items
affecting comparability to meet the requirement to describe unusual or
infrequently occurring items recognized during each full quarter. The
Company included the non-GAAP measures in Note 22 as we believed the items
affecting comparability were unusual and infrequent and useful to investors in
evaluating the Company’s ongoing operating and financial results as discussed in
the above response to comment 1. These items affecting comparability
do not represent our direct, historical, ongoing business
operations. Additionally, the Company believed that it would be
beneficial to investors to be consistent with the information provided in the
Press Release
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and to
include the non-GAAP measures in its Form 10-K filing. In future
filings, in order to be in conformity with Item 10(e)(ii)(C) of
Regulation S-K, the Item 302 information will be included in our Form
10-K outside of the consolidated financial statements and notes
thereto. The Company will ensure that it meets the disclosure
requirements of Item 302, as well as the guidance of Item 10(e)(ii)(C) of
Regulation S-K and the Commission’s FAQ Regarding the Use of Non-GAAP Financial
Measures. The Company will include the specific required disclosures
regarding permissible non-GAAP financial measures. The content of the
disclosures will be consistent with the sample disclosure in response to comment
1.
In
connection with the above comments and our responses, we would also like to
acknowledge our understanding that the Company is responsible for the adequacy
and accuracy of all disclosures in our filings; that staff comments or changes
to disclosures in response to staff comments do not foreclose the Commission
from taking any action with respect to the filings; and that the Company may not
assert staff comments as a defense in any proceeding initiated by the Commission
or any person under the federal securities laws of the United States. We believe
that these responses address your comments. If you have any further
questions, please do not hesitate to call me directly at (212)
629-2240.
Sincerely,
/s/
Michael F. Devine, III .
Michael
F. Devine, III
Executive
Vice President and Chief Financial Officer
(as
principal financial officer and principal accounting officer of Coach,
Inc.)
cc:
Mr.
Blaise Rhodes, Staff Accountant - SEC Division of Corporation
Finance
Mr. Brian
Bhandari, Branch Chief – SEC Division of Corporate Finance
Mr. Lew
Frankfort, Chairman and Chief Executive Officer of Coach, Inc.
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