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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 30, 2002

or


 [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-16153

COACH, INC.
(Exact name of registrant as specified in its charter)

 Maryland
(State or other jurisdiction of
incorporation or organization)

  52-2242751
(I.R.S. Employer
Identification No.) 		 

 516 West 34th Street, New York, NY
(Address of principal executive offices);

  10001
(Zip Code) 		 

(212) 594-1850
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [x] No [ ]

On April 19, 2002, the Registrant had 44,352,422 outstanding shares of common stock, which is the Registrant’s only class of common stock.

The document contains 31 pages excluding exhibits.



COACH, INC.

TABLE OF CONTENTS FORM 10-Q

      Page Number
    PART I    
         
Item 1.   Financial Statements    
         
    Preface   3
         
    Condensed Consolidated Balance Sheets — At March 30, 2002 and June 30, 2001   4
         
    Condensed Consolidated Statements of Income — For the Thirteen and Thirty-Nine
Weeks Ended March 30, 2002 and March 31, 2001		   5
         
    Condensed Consolidated Statement of Stockholders’ Equity — For the period
July 3, 1999 to March 30, 2002		   6
         
    Condensed Consolidated Statements of Cash Flows — For the Thirty-Nine Weeks Ended March 30, 2002 and March 31, 2001   7
         
    Notes to Condensed Consolidated Financial Statements   8
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   19
         
Item 3.   Quantitative and Qualitative Disclosures about Market Risk   29
         
         
         
    PART II    
         
Item 4.   Submission of Matters to a Vote of Security Holders   30
         
Item 5.   Exhibit and Reports on Form 8-K   30
         
         
         
SIGNATURE   31


2

PART I

Item 1. Financial Statements

Coach, Inc. and Subsidiaries

Preface

             The condensed consolidated financial statements for the thirteen and thirty-nine weeks ended March 30, 2002 and March 31, 2001 included herein have not been audited by independent public accountants, but, in the opinion of Coach, Inc. (the “Company”), all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position at March 30, 2002 and the results of operations and the cash flows for the periods presented herein have been made. In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the reported interim periods. The results of operations for the thirty-nine weeks ended March 30, 2002 are not necessarily indicative of the operating results to be expected for the full fiscal year ending June 29, 2002.

             The condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Although the Company believes that the disclosures made are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001.

3

COACH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
At March 30, 2002 and June 30, 2001
(amounts in thousands)

March 30,
2002		 June 30,
2001
(unaudited)
ASSETS            
Cash and cash equivalents   $76,278   $3,691  
Trade accounts receivable, net    25,563    20,608  
Inventories    131,783    105,162  
Other current assets    27,244    22,106  
           
Total current assets    260,868    151,567  
Goodwill, net    4,924    4,924  
Unallocated purchase price    5,248    —  
Intangible assets    9,078    9,389  
Other non current assets    15,146    1,382  
Property and equipment, net    84,295    72,388  
Deferred income taxes    19,061    19,061  
Total assets   $398,620   $258,711  
           
LIABILITIES AND STOCKHOLDERS’ EQUITY            
Accounts payable   $26,162   $14,313  
Accrued liabilities    86,184    82,390  
Revolving credit facilities    35,386    7,700  
Current portion of long term debt    75    45  
Total current liabilities    147,807    104,448  
Long-term debt    3,615    3,690  
Other liabilities    2,262    2,259  
Minority interest    15,586    —  
Total liabilities    169,270    110,397  
Stockholders’ equity    229,350    148,314  
Total liabilities and stockholders’ equity   $398,620   $258,711  

See accompanying Notes to Condensed Consolidated Financial Statements.

4

COACH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Thirteen and Thirty-Nine Weeks Ended March 30, 2002 and March 31, 2001
(amounts in thousands, except per share data)
(unaudited)

Thirteen Weeks Ended Thirty-Nine Weeks Ended
March 30,
2002		 March 31,
2001		 March 30,
2002		 March 31,
2001
                     
Net sales   $161,571   $125,714   $548,023   $468,237  
                     
Cost of sales    50,465    45,272    178,728    168,982  
Gross profit    111,106    80,442    369,295    299,255  
Selling, general and administrative expenses    87,379    68,079    256,157    208,438  
Reorganization costs    4,467    (363 )  4,467    4,587  
Operating income    19,260    12,726    108,671    86,230  
Interest (income)/expense, net    (129 )  430    539    1,942  
Income before provision for income taxes
   and minority interest		    19,389    12,296    108,132    84,288  
Provision for income taxes    6,883    4,303    38,388    29,500  
Minority interest, net of tax    689    —    1,223    —  
Net income   $11,817   $7,993   $68,521   $54,788  
Net income per share                      
   Basic   $0.27   $0.18   $1.56   $1.35  
   Diluted   $0.26   $0.18   $1.52   $1.32  
Shares used in computing net income per share                      
   Basic    44,212    43,513    43,853    40,684  
   Diluted    45,823    45,385    45,210    41,641  

See accompanying Notes to Condensed Consolidated Financial Statements.

5

COACH, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Period July 3, 1999 to March 30, 2002
(amounts in thousands)
(unaudited)

Total
Stockholders’
Equity		 Preferred
Stockholders’
Equity		 Common
Stockholders’
Equity		 Capital in
Excess
of Par		 Retained
Earnings		 Accumulated
Other
Comprehensive
Income (loss)		 Comprehensive
Income (loss)		 Shares of
Common
Stock
                                         
Balances at July 3, 1999   $203,162   $—   $350   $—   $203,616   $(804 )       35,026 (1)
                                         
   Net income    38,603    —    —    —    38,603    —    38,603       
   Equity distribution    (29,466 )  —    —    —    (29,466 )  —    —       
   Translation adjustments    152    —    —    —    —    152    152       
   Minimum pension liability    357    —    —    —    —    357    357       
   Comprehensive income                                 $39,112       
Balances at July 1, 2000    212,808    —    350    —    212,753    (295 )       35,026  
                                         
   Net income    64,030    —    —    —    64,030    —    64,030       
   Capitalization of receivable from Sara Lee    (63,783 )  —    —    —    (63,783 )  —    —       
   Assumption of long-term debt    (190,000 )  —    —    —    (190,000 )  —    —       
   Issuance of common stock, net    122,000    —    85    121,915    —    —    —    8,487  
   Exercise of stock options    2,046    —    2    2,044    —    —    —    173  
   Tax benefit from exercise of stock options    1,405    —    —    1,405    —    —    —       
   Translation adjustments    338    —    —    —    —    338    338       
   Minimum pension liability    (530 )  —    —    —    —    (530 )  (530 )     
   Comprehensive income                                 $63,838       
Balances at June 30, 2001   $148,314   $—   $437   $125,364   $23,000   $(487 )       43,686  
                                         
   Net income    68,521    —    —    —    68,521    —    68,521       
   Exercise of stock options    15,975    —    11    15,964    —    —    —    1,057  
   Tax benefit from exercise of stock options    7,652    —    —    7,652    —    —    —       
   Repurchase of common stock    (9,848 )  —    (4 )  (6,876 )  (2,968 )  —    —    (430 )
   Translation adjustments    (1,263 )  —    —    —    —    (1,263 )  (1,263 )     
   Comprehensive income                                 $67,258       
Balances at March 30, 2002   $229,350   $—   $443   $142,104   $88,553   $(1,750 )       44,313  

______________

(1)   Stock dividend issued in October 2000 was retroactively applied to the prior periods.


See accompanying Notes to Condensed Consolidated Financial Statements.

6

COACH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Thirty-Nine Weeks Ended March 30, 2002 and March 31, 2001
(amounts in thousands)
(unaudited)

Thirty-Nine Weeks Ended
March 30,
2002		 March 31,
2001
CASH FLOWS FROM OPERATING ACTIVITIES            
   Net income   $68,521   $54,788  
   Adjustments for noncash charges included in net income:            
   Depreciation    18,048    16,321  
   Amortization of intangibles    624    671  
   Reorganization costs    4,467    4,587  
   Tax benefit from exercise of stock options    7,652    —  
   Other noncash credits, net    (40 )  190  
   Changes in current assets and liabilities:            
     Increase in trade accounts receivable    (493 )  (5,075 )
     Decrease in receivable from Sara Lee    —    31,437  
     Increase in inventories    (12,017 )  (2,086 )
     Decrease in deferred taxes    73    494  
     (Increase) decrease in other current assets and liabilities    (9,439 )  1,453  
     Increase in accounts payable    9,014    4,472  
     (Decrease) increase in accrued liabilities    (5,056 )  2,684  
   Net cash provided from operating activities    81,354    109,936  
 
 
CASH FLOWS USED IN INVESTMENT ACTIVITIES            
   Purchases of property and equipment    (29,139 )  (23,247 )
   Acquisition of business, net of cash acquired    (14,804 )  —  
   Dispositions of property and equipment    475    867  
   Net cash used in investment activities    (43,468 )  (22,380 )
CASH FLOWS FROM FINANCING ACTIVITIES            
   Partner contribution to joint venture    14,363    —  
   Issuance of common stock    —    122,000  
   Repurchase of common stock    (9,848 )  —  
   Proceeds from exercise of stock options    15,975    —  
   Repayment of long-term debt    (45 )  (190,040 )
   Borrowings from Sara Lee    —    451,534  
   Repayments to Sara Lee    —    (482,971 )
   Borrowings on revolving credit facility agreements    185,222    40,000  
   Repayments of revolving credit facility agreements    (170,966 )  (21,000 )
   Net cash provided from (used in) financing activities    34,701    (80,477 )
           
Increase in cash and equivalents    72,587    7,079  
Cash and equivalents at beginning of period    3,691    162  
Cash and equivalents at end of period   $76,278   $7,241  

See accompanying Notes to Condensed Consolidated Financial Statements.

7

COACH, INC.

Notes to Condensed Consolidated Financial Statements
Thirteen and Thirty-Nine Weeks Ended March 30, 2002 and March 31, 2001
(dollars and shares in thousands, except per share data)
(unaudited)

1.   Basis of Presentation

             The condensed consolidated financial statements reflect all normal recurring adjustments which, in management’s opinion, are necessary for a fair presentation of the results for interim periods. Results of operations for the interim periods may not be representative of results to be expected for a full fiscal year. Certain items previously reported in specific captions in the accompanying financial statements have been reclassified to conform with the current period’s classifications.

             The balance sheet at June 30, 2001 was obtained from audited financial statements previously filed with the Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001 (the “2001 Form 10-K”). The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the 2001 Form 10-K.

2.   Inventories

             U.S. inventories are valued at the lower of cost (determined by the first-in, first-out method) or market. Inventories in Japan are valued at the lower of cost (determined by the last-in, first-out method) or market. Inventory costs include material, conversion costs, freight and duties.

             Components of inventories are as follows:

  March 30,
2002		   June 30,
2001		  
Finished goods   $131,132 (1) $104,326  
Work in process    40    257  
Materials and supplies    611    579  
           
Total inventory   $131,783   $105,162  

(1)   Included in finished goods inventory is $27,221 of inventory previously included on the Japanese distributors’ balance sheet.


3.   Debt

             The initial LIBOR margin under the Fleet National Bank facility (the “Fleet facility”) was 125 basis points. For the quarter ended March 30, 2002, the LIBOR margin was 100 basis points reflecting an improvement in our fixed-charge coverage ratio. Under this revolving credit facility, Coach pays a commitment fee of 20 to 35 basis points based on any unused amounts. The initial commitment fee was 30 basis points. For the quarter ended March 30, 2002, the commitment fee was 25 basis points. This credit facility may be prepaid without penalty or premium.

             During the first nine months of fiscal 2002 the peak borrowings under the Fleet facility were $46,850. In the first nine months of fiscal 2001 the peak borrowings under the Sara Lee credit facility were $37,667. As of March 30, 2002, the borrowings under the Fleet facility were fully repaid from operating cash flow. This facility remains available for seasonal working capital requirements or general corporate purposes.

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

8

COACH, INC.

Notes to Condensed Consolidated Financial Statements
Thirteen and Thirty-Nine Weeks Ended March 30, 2002 and March 31, 2001
(dollars and shares in thousands, except per share data)
(unaudited)

             In order to provide funding for working capital, the acquisition of distributors and general corporate purposes, Coach Japan, Inc. (“CJI”), a 50% owned subsidiary, has entered into credit facilities with several Japanese financial institutions. These facilities allow a maximum borrowing of 6.7 billion yen or approximately $50,500. Interest is based on the Tokyo Interbank rate plus a margin of up to 50 basis points.

             These facilities contain various covenants and customary events of default. CJI has been in compliance with all covenants since their inception. Coach, Inc. is not a guarantor on any of these facilities.

             During the first nine months of fiscal 2002 the peak borrowings under the Japanese credit facilities were $35,426. As of March 30, 2002, the outstanding borrowings under the Japanese facilities were $35,386.

4.   Coach Japan, Inc. and the Acquisition of Distributors

             In order to expand its presence in the Japanese market and to exercise greater control over its brand in that country, Coach has formed CJI and has undertaken a program to acquire the existing distributors.

             On July 31, 2001, CJI completed the purchase of 100% of the capital stock of PDC from the Mitsukoshi Department Store Group (“Mitsukoshi”) for a total purchase price of $9,018. Mitsukoshi established PDC in 1991 to expand Coach distribution to select department stores throughout Japan. At the time of acquisition PDC operated 63 retail and department store locations in Japan. The strength of the going concern and the established locations supported a premium above the fair value of the individual assets. The fair value of assets acquired was $24,154 and liabilities assumed were $20,732. Excess purchase price over fair market value is reported as unallocated purchase price, based on preliminary estimates and is subject to adjustment. Results of the acquired business are included in the consolidated financial statements from August 1, 2001, onward. Unaudited pro forma information related to this acquisition are not included, as the impact of this transaction is not material to the consolidated results of the Company.

             On January 1, 2002, CJI completed the buyout of the distribution rights and assets, related to the Coach business, from J. Osawa and Company, Ltd. for $5,791. At the time of the acquisition, J. Osawa operated 13 retail and department store locations in Japan. The strength of the going concern and the established locations supported a premium above the fair value of the individual assets. The fair value of the assets acquired was $5,550. Excess purchase price over fair market value of the acquired assets is reported as unallocated purchase price based on preliminary estimates and is subject to adjustment. Results of the acquired business are included in the consolidated financial statements from January 1, 2002, onward. Unaudited pro forma information related to this acquisition are not included, as the impact of this transaction is not material to the consolidated results of the Company.

             There are currently a total of 81 Coach locations in Japan, including 65 department stores and 14 retail stores managed by CJI and two airport locations operated by a distributor. CJI plans to open additional locations within existing major retailers, enter new department store relationships and open freestanding retail locations.

5.   Reorganization Costs

             On January 23, 2002, management of Coach announced a plan to cease production at the Lares, Puerto Rico manufacturing facility. This reorganization involves the termination of 393 manufacturing, warehousing and management employees at the Lares, Puerto Rico facility. These actions will reduce costs by the resulting transfer of production to lower cost third-party manufacturers. Coach recorded reorganization costs of $4,467 in the third quarter. The reorganization costs include $2,318 for worker separation costs, $998 for lease termination costs and $1,151 for the write down of long-lived assets to estimated net realizable value.

             The composition of the reorganization reserve is set forth in the table below. During the third quarter, Coach curtailed production and terminated 285 employees. Coach expects that by the end of the fiscal year the disposal of fixed assets and the termination of the remaining employees will be completed.

9

COACH, INC.

Notes to Condensed Consolidated Financial Statements
Thirteen and Thirty-Nine Weeks Ended March 30, 2002 and March 31, 2001
(dollars and shares in thousands, except per share data)
(unaudited)

Reorganization
Reserves		 Write-down of
Long-lived Assets
to Net Realizable
Value		 Cash
Payments		 Reorganization
Reserves as of
March 30, 2002
Workers’ separation costs   $2,318   $—   $(979 ) $1,339  
Lease termination costs    998    —    (210 )  788  
Losses on disposal of fixed assets    1,151    —    —    1,151  
Total reorganization reserve   $4,467   $—   $(1,189 ) $3,278  

6.   Earnings Per Share

             Prior to October 2, 2000, Coach operated as a division of Sara Lee and did not have any shares outstanding. The initial capitalization of Coach, Inc. was one share. On October 2, 2000, a stock dividend was declared resulting in 35,026 shares held by Sara Lee. The number of shares outstanding has been restated to reflect the effect of this stock dividend for all periods presented prior to October 2, 2000.

             During October 2000, the initial public offering of the Company’s common stock was accomplished resulting in the issuance of an additional 8,487 shares. Following the offering, 43,513 shares were outstanding. Dilutive securities include share equivalents held in employee benefit programs and the impact of stock option programs.

             The following is a reconciliation of the weighted-average shares outstanding:

Thirteen Weeks Ended
March 30,
2002		 March 31,
2001
Total basic shares    44,212    43,513  
           
Dilutive securities            
Employee benefit and stock award plans    149    160  
Stock option programs    1,462    1,712  
Total diluted shares    45,823    45,385  

Thirty-Nine Weeks Ended
March 30,
2002		 March 31,
2001
Total basic shares    43,853    40,684  
           
Dilutive securities            
Employee benefit and stock award plans    170    108  
Stock option programs    1,187    849  
Total diluted shares    45,210    41,641  

             Diluted net income per share was $1.52 in the first nine months of fiscal 2002. Net income per share would have been $1.58 after adding back the impact of the reorganization charges. This reflects a weighted-average of the shares outstanding during the first nine months of fiscal 2002. Comparable net income per share for the first nine months of fiscal 2001 was $1.32. Comparable net income per share would have been $1.30 after adding back the impact of the reorganization charge and if the common shares sold in the October 2000 initial public offering had been outstanding during the first nine months of fiscal 2001.

10

COACH, INC.

Notes to Condensed Consolidated Financial Statements
Thirteen and Thirty-Nine Weeks Ended March 30, 2002 and March 31, 2001
(dollars and shares in thousands, except per share data)
(unaudited)

7.   Segment Information

             The Company operates its business in two reportable segments: Direct to Consumer and Indirect. The Company’s reportable segments represent channels of distribution that offer similar merchandise, service and marketing strategies. Sales of Coach products through Company operated retail and factory stores, the Coach catalog and the Internet constitute the Direct to Consumer segment. Indirect refers to sales of Coach products to other retailers and includes sales through the joint venture in Japan. In deciding how to allocate resources and assess performance, Coach’s executive officers regularly evaluate the sales and operating income of these segments.

             Operating income is the gross profit of the segment at standard cost less direct expenses of the segment. Unallocated corporate expenses include manufacturing variances, general marketing, administration and information systems, as well as, distribution and customer service expenses.

Thirteen Weeks Ended March 30, 2002 Direct to Consumer Indirect Corporate
Unallocated		 Total
         
Net sales   $93,894   $67,677   $—   $161,571  
Operating income    21,821    29,579    (32,140 )  19,260  
Interest income, net    —    —    (129 )  (129 )
Income (loss) before provision for income taxes and minority
   interest		    21,821    29,579    (32,011 )  19,389  
Provision for income taxes    —    —    6,883    6,883  
Minority interest, net of tax    —    —    689    689  
Depreciation and amortization    4,093    861    1,421    6,375  
Total assets    148,359    113,533    136,728    398,620  
Additions to long-lived assets    4,607    831    4,581    10,019  

Thirteen Weeks Ended March 31, 2001 Direct to Consumer Indirect Corporate Unallocated Total
         
Net sales   $76,967   $48,747   $—   $125,714  
Operating income    16,300    21,917    (25,491 )  12,726  
Interest expense, net    —    —    430    430  
Income (loss) before provision for income taxes and minority
   interest		    16,300    21,917    (25,921 )  12,296  
Provision for income taxes    —    —    4,303    4,303  
Minority interest, net of tax    —    —    —    —  
Depreciation and amortization    3,478    241    1,826    5,545  
Total assets    133,412    59,948    58,349    251,709  
Additions to long-lived assets    4,374    153    1,717    6,244  
11

COACH, INC.

Notes to Condensed Consolidated Financial Statements
Thirteen and Thirty-Nine Weeks Ended March 30, 2002 and March 31, 2001
(dollars and shares in thousands, except per share data)
(unaudited)

Thirty-Nine Weeks Ended March 30, 2002 Direct to
Consumer		 Indirect Corporate
Unallocated		 Total
         
Net sales   $340,569   $207,454   $—   $548,023  
Operating income    105,196    90,234    (86,757 )  108,671  
Interest expense, net    —    —    539    539  
Income (loss) before provision for income taxes and minority
   interest		    105,196    90,234    (87,298 )  108,132  
Provision for income taxes    —    —    38,388    38,388  
Minority interest, net of tax    —    —    1,223    1,223  
Depreciation and amortization    12,031    1,539    5,102    18,672  
Total assets    148,359    113,533    136,728    398,620  
Additions to long-lived assets    22,019    2,351    16,790    41,160  

Thirty-Nine Weeks Ended March 31, 2001 Direct to
Consumer		 Indirect Corporate
Unallocated		 Total
         
Net sales   $303,207   $165,030   $—   $468,237  
Operating income    95,568    73,911    (83,249 )  86,230  
Interest expense, net    —    —    1,942    1,942  
Income (loss) before provision for income taxes and minority
   interest		    95,568    73,911    (85,191 )  84,288  
Provision for income taxes    —    —    29,500    29,500  
Minority interest, net of tax    —    —    —    —  
Depreciation and amortization    9,988    1,011    5,993    16,992  
Total assets    133,412    59,948    58,349    251,709  
Additions to long-lived assets    18,325    1,735    3,187    23,247  

             The following is a summary of the common costs not allocated in the determination of segment performance.

Thirteen Weeks Ended
March 30,
2002		 March 31,
2001
     
Manufacturing variances   $1,473   $1,251  
Advertising, marketing and design    (10,242 )  (10,238 )
Administration and information systems    (12,944 )  (11,294 )
Distribution and customer service    (5,960 )  (5,573 )
Reorganization costs    (4,467 )  363  
Total corporate unallocated   $(32,140 ) $(25,491 )

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COACH, INC.

Notes to Condensed Consolidated Financial Statements
Thirteen and Thirty-Nine Weeks Ended March 30, 2002 and March 31, 2001
(dollars and shares in thousands, except per share data)
(unaudited)

  Thirty-Nine Weeks Ended  
  March 30,
2002		   March 31,
2001		  
     
Manufacturing variances   $1,523   $(602 )
Advertising, marketing and design    (33,909 )  (33,014 )
Administration and information systems    (31,340 )  (26,978 )
Distribution and customer service    (18,564 )  (18,068 )
Reorganization costs    (4,467 )  (4,587 )
Total corporate unallocated   $(86,757 ) $(83,249 )

Geographic Area Information

             As of March 30, 2002, Coach operates 132 retail stores and 73 factory stores in the United States, two retail locations in the United Kingdom, and five manufacturing, distribution, product development and quality control locations in the United States, Puerto Rico, Italy and China. Geographic revenue information is based on the location of the customer. Geographic long-lived asset information is based on the physical location of the assets at the end of each period. Indirectly, through CJI, Coach operates 79 retail and department store locations in Japan.

United States Japan Other
International(1)		 Total
Thirteen Weeks Ended March 30, 2002                      
Net sales    $129,161    $24,572    $7,838    $161,571  
Long-lived assets    91,023    17,250    246    108,519  

United States Japan Other
International(1)		 Total
Thirteen Weeks Ended March 31, 2001                      
Net sales    $106,989    $6,460    $12,265    $125,714  
Long-lived assets    85,240    —    438    85,678  

United States Japan Other
International(1)		 Total
Thirty-Nine Weeks Ended March 30, 2002                      
Net sales    $450,836    $68,258    $28,929    $548,023  
Long-lived assets    91,023    17,250    246    108,519  

United States Japan Other
International(1)		 Total
Thirty-Nine Weeks Ended March 31, 2001                      
Net sales    $410,280    $30,831    $27,126    $468,237  
Long-lived assets    85,240    —    438    85,678  

Note (1) - Other International sales reflect shipments to third-party distributors primarily in East Asia and sales from Coach-operated retail stores in the United Kingdom.

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COACH, INC.

Notes to Condensed Consolidated Financial Statements
Thirteen and Thirty-Nine Weeks Ended March 30, 2002 and March 31, 2001
(dollars and shares in thousands, except per share data)
(unaudited)

8.   Derivative Instruments and Hedging Activities

             Effective July 2, 2000, the company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The cumulative effect of adoption of SFAS 133 did not result in a material impact on the Company’s financial position, results of operations or cash flows. The Company had not used foreign exchange instruments prior to the formation of CJI.

             The Company is exposed to market risk from foreign currency exchange rate fluctuations with respect to CJI. The Company enters into certain foreign currency derivative instruments that economically hedge certain of its risks but do not qualify for hedge accounting. These transactions are in accordance with Company risk management policies. The Company does not enter into derivative transactions for trading purposes. The fair value of these instruments at March 30, 2002 was $549 and is included as a component of other current assets in the accompanying condensed consolidated balance sheets.

9.   Recent Accounting Pronouncements

             In April 2001, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) reached a final consensus on Issue 00-25 “Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor’s Products.” This issue addresses the recognition, measurement and income statement classification of consideration provided to distributors or retailers. Previously, the Company had recorded these activities within selling, general and administrative expenses. The Company adopted this consensus in the first quarter of fiscal 2002. In connection with this adoption, prior period amounts have been reclassified to conform with the current year’s presentation. The effect of the adoption resulted in a reclassification of $11,071 from selling, general and administrative expense to a reduction in net sales for t he nine months ended March 31, 2001.

             In July 2001, the FASB issued SFAS No. 141, “Business Combinations” (“SFAS 141”) and No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The Company has adopted this consensus in the first quarter of fiscal 2002 resulting in no goodwill amortization expense in fiscal 2002. Goodwill amortization of $240 was recorded in the nine months ended March 31, 2001.

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             Coach initially applied SFAS 142 in the fiscal year ended June 29, 2002. If the guidance of the statement had been applied retroactively, prior year results would have been different than previously reported. A reconciliation of net income as reported to net income after adjustment for the exclusion of goodwill amortization is as follows:

Thirteen
Weeks Ended		 Thirty-Nine
Weeks Ended
March 31, 2001 March 31, 2001
Net income as reported    $7,993    $54,788  
Add back: goodwill amortization, net of tax    53    156  
Net income after restatement    $8,046    $54,944  
  
  
Net income per share as reported            
   Basic    $0.18    $1.35  
   Diluted    $0.18    $1.32  
  
  
Net income per share after restatement            
   Basic    $0.18    $1.35  
   Diluted    $0.18    $1.32  
           
Shares used in computing net income per share            
   Basic    43,513    40,684  
   Diluted    45,385    41,641  

             In November 2001, the EITF reached consensus on Issue 01-10 “Accounting for the Impact of the Terrorist Attacks of September 11, 2001”. Related to their discussion of this topic, the EITF also reached consensus on Issue 01-13 “Income Statement Display of Business Interruption Insurance Recoveries”. These issues primarily relate to supplemental disclosure of the impact of the terrorist attacks and the recognition of business interruption insurance recoveries. Refer to Note 10 “Terrorist Attacks”, for discussion of the relevant impact on the Coach business and financial statements.

10.   Terrorist Attacks

             Coach operated a retail store in the World Trade Center since 1995. During fiscal 2001, the store generated sales of $4,382. As a result of the September 11th attack, the store has been closed. Inventory of $180 and fixed assets of $353 have been removed from those accounts and Coach has received preliminary payments under its property insurance coverage.

             Preliminary losses relating to the Company’s business interruption coverage have been filed with the insurers. Coach has held preliminary discussions with its insurance carriers and expects to fully recover these losses. In the third quarter Coach received a preliminary payment and has recorded a gain of $411 under the Company’s business interruption coverage. This amount was included as a reduction of selling, general and administrative expenses.

11.   Stock Repurchase Program

             On September 17, 2001 the Coach Board of Directors authorized the establishment of a common stock repurchase program. Under this program, up to $80,000 may be utilized to repurchase common stock through September 2004. 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 will 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 nine months of fiscal 2002, the Company repurchased 430 shares at an average cost of $22.90 per share.

             As of March 31, 2002, the Company has approximately $70,000 remaining in stock repurchase authorization.

15

COACH, INC.

Notes to Condensed Consolidated Financial Statements
Thirteen and Thirty-Nine Weeks Ended March 30, 2002 and March 31, 2001
(dollars and shares in thousands, except per share data)
(unaudited)

12.   Related Party Transaction

             On July 26, 2001, Coach made a loan to Reed Krakoff, its President, Executive Creative Director, in the principal amount of $2,000. The loan bears interest at a rate of 5.12% per annum, compounded annually. This loan amount and the applicable accrued interest is recorded as a component of other current assets in the accompanying balance sheet. Repayments of $400 principal must be made on or before each of July 26, 2003, 2004, 2005; the remaining $800 of principal, together with all accrued interest under the loan, must be paid on or before July 26, 2006. Mr. Krakoff may repay these amounts at any time. As collateral for the loan, Mr. Krakoff pledged to Coach his options to purchase 150 shares of Coach common stock at a price of $16.00 per share, including the shares of stock and any cash or other property he receives upon exercise of or in exchange for those options. Mr. Krakoff would be obligated to repay the loan in full immediately following certain events of default, including his failure to make payments under the loan as scheduled, his bankruptcy or the termination of his employment with Coach for any reason.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

             The following is a discussion of the results of operations for the third quarter and first nine months of fiscal 2002 compared to the third quarter and first nine months of fiscal 2001 and a discussion of the changes in financial condition during the first nine months of fiscal 2002.

Third Quarter Fiscal 2002 Compared to Third Quarter Fiscal 2001

             Net sales by business segment in the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001 are as follows:

Thirteen Weeks Ended
Net Sales Percentage of
Total Net Sales
(unaudited) (unaudited)
March 30,
2002		 March 31,
2001		 Rate of Increase March 30,
2002		 March 31,
2001
(dollars in millions)
Direct to consumer   $93.9   $77.0    21.9 %  58.1 %  61.3 %
Indirect    67.7    48.7    39.1 %  41.9    38.7  
Total net sales   $161.6   $125.7    28.6 %  100.0 %  100.0 %
 

             Consolidated statements of income for the third quarter of fiscal 2002 compared to the third quarter of fiscal 2001 are as follows:

Thirteen Weeks Ended
(dollars in millions *, except for earnings per share)
March 30, 2002 March 31, 2001
(unaudited) (unaudited)
$ % of total
net sales		 $ % of total
net sales
Net sales   $160.8    99.5 % $125.0    99.4 %
Licensing revenue    0.7    0.5    0.7    0.6  
Total net sales    161.6    100.0    125.7    100.0  
Gross profit    111.1    68.8    80.4    64.0  
                     
Selling, general and administrative expenses    87.4    54.1    68.1    54.2  
Operating income before reorganization costs    23.7    14.7    12.4    9.8  
Reorganization costs    4.5    2.8    (0.4 )  (0.3 )
Operating income    19.3    11.9    12.7    10.1  
Net interest (income)/expense    (0.1 )  (0.1 )  0.4    0.3  
                     
Income before provision for income taxes and
   minority interest		    19.4    12.0    12.3    9.8  
Provision for income taxes    6.9    4.3    4.3    3.4  
Minority interest, net of tax    0.7    0.4    —    —  
Net income   $11.8    7.3 % $8.0    6.4 %

*   Components may not add to total due to rounding.


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Thirteen Weeks Ended
March 30,
2002		 March 31,
2001
Net income per share:            
   Basic    $0.27 (1) $0.18 (3)
   Diluted    $0.26 (2) $0.18 (4)
           
Weighted-average number of common shares:            
   Basic    44,212    43,513  
   Diluted    45,823    45,385  

(1)   $0.33 per share after adding back the impact of the reorganization charge.
(2)   $0.32 per share after adding back the impact of the reorganization charge.
(3)   $0.18 per share after adding back the impact of the reorganization charge.
(4)   $0.17 per share after adding back the impact of the reorganization charge.


Net Sales

             Net sales increased by 28.5% to $161.6 million in the third quarter of fiscal 2002, from $125.7 million during the same period in fiscal 2001. These results reflect increased volume in both the direct to consumer and the indirect segments.

             Direct to Consumer. Net sales increased 21.9% to $93.9 million during the third quarter of fiscal 2002, from $77.0 million during the same period for fiscal 2001. This increase was primarily due to new store openings, comparable store sales growth and store renovations and expansions. Since the end of the third quarter of fiscal 2001, Coach has opened 21 new retail stores and seven new factory stores. In addition, 19 retail stores and five factory stores were remodeled while two retail stores and one factory store was expanded. Coach also lost the store in the World Trade Center and closed two retail stores since the end of the third quarter of fiscal 2001.

             Indirect. Net sales increased 39.1% to $67.7 million in the third quarter of fiscal 2002 from $48.7 million during the same period of fiscal 2001. This increase was a result of the consolidation of Coach Japan, Inc. (“CJI”), market share gains in U.S. department stores and comparable store sales growth in Japan. CJI sales to consumers are recorded at retail, versus sales to the former distributors, which were recorded at wholesale value.

Gross Profit

             Gross profit increased 38.2% to $111.1 million in the third quarter of fiscal 2002 from $80.4 million during the same period in fiscal 2001. Gross margin increased 480 basis points to 68.8% in the third quarter of fiscal 2002 from 64.0% during the same in period in fiscal 2001. This improvement was primarily driven by CJI’s acquisition of the former distributors, a shift in product mix reflecting the continued diversification into new and successful fabric and leather collections and sourcing cost initiatives.

             The following chart illustrates the gross margin performance the Company has experienced over the last seven quarters.

Fiscal Year Ended June 30, 2001 Fiscal Year Ending June 29, 2002
Q1 Q2 Q3 Q4 Q1 Q2 Q3
(unaudited) (unaudited)
Gross Margin    62.3%    64.9%    64.0%    62.6%    64.1%    68.6%    68.8%  

Selling, General and Administrative Expenses

             Selling, general and administrative expenses increased 28.3% to $87.4 million in the third quarter of fiscal 2002 from $68.1 million during the same period in fiscal 2001. As a percentage of net sales, selling, general and administrative expenses during the third quarter of fiscal 2002 were 54.1% compared to 54.2% during the same

18

period in fiscal 2001. The increase, in absolute dollars was caused primarily by the inclusion of CJI selling, general and administrative expenses. In the prior year these costs were borne by the former distributors.

             Selling expenses increased by 44.0% to $56.3 million, or 34.9% of net sales, in the third quarter of fiscal 2002 from $39.1 million, or 31.1% of net sales, during the same period in fiscal 2001. The increase was primarily due to operating costs associated with CJI and operating costs associated with U.S. stores that were not open until after the third quarter of fiscal 2001. Twenty-one new retail stores and seven new factory stores that were operating during the third quarter of fiscal 2002 were not open in the third quarter of fiscal 2001. Additionally, three stores were permanently closed since the end of the third quarter of fiscal 2001.

             Advertising, marketing, and design costs of $11.5 million, in the third quarter of fiscal 2002, were flat versus the same period in fiscal 2001. As a percentage of sales, advertising, marketing and design costs declined to 7.2% in the third quarter of fiscal 2002 versus 9.2% in the third quarter of fiscal 2001. The percentage decrease was primarily due the leveraging of cost, through focused media placements.

             Distribution and customer service increased by 6.4% to $6.5 million, or 4.1% of net sales, in the third quarter of fiscal 2002 from $6.2 million, or 4.9% of net sales, during the same period in fiscal 2001. The dollar increase in these expenses was due to higher sales volumes. The percentage decrease, in relation to sales, reflected continued efficiency gains at the distribution and customer service facility.

             Administrative expenses increased by 14.6% to $12.9 million, or 8.0% of net sales, in the third quarter of fiscal 2002 from $11.3 million, or 9.0% of net sales, during the same period in fiscal 2001. The absolute dollar increase in these expenses was primarily due to increased staffing costs related to Coach becoming a stand-alone company.

Reorganization Costs

             On January 23, 2002, management of Coach announced a plan to cease production at the Lares, Puerto Rico manufacturing facility. This reorganization involves the termination of 393 manufacturing, warehousing and management employees at the Lares, Puerto Rico facility. These actions will reduce costs by the resulting transfer of production to lower cost third-party manufacturers. Coach recorded reorganization costs of $4.5 million in the third quarter. The reorganization costs include $2.3 million for worker separation costs, $1.0 million for lease termination costs and $1.2 million for the write down of long-lived assets to estimated net realizable value.

             During the third quarter, Coach curtailed production and terminated 285 employees. Coach expects that by the end of the fiscal year the disposal of fixed assets and termination of the remaining employees will be completed.

Operating Income

             Operating income increased 51.3% to $19.3 million, or 11.9% of net sales, in the third quarter of fiscal 2002 from $12.7 million, or 10.1% of net sales, during the same period in fiscal 2001. Before the impact of reorganization costs in the third quarter of fiscal 2002, operating income increased 91.9% to $23.7 million, or 14.7% of net sales, from $12.4 million, or 9.8% of net sales, during the same period in fiscal 2001. This increase resulted from higher sales and improved gross margins, partially offset by an increase in selling, general and administrative expenses.

Interest Income and Expense

             Net interest income was $0.1 million, or 0.1% of net sales, in the third quarter of fiscal 2002 as compared to an expense of $0.4 million or 0.3% of net sales, in the third quarter of fiscal 2001. The dollar change was due to reduced borrowings and positive cash balances during the third quarter in fiscal 2002.

Income Taxes

             The effective tax rate increased to 35.5% in the third quarter of fiscal 2002 from 35.0% during the same period in fiscal 2001. This increase was caused by a lower percentage of income in fiscal 2002 attributable to company-owned offshore manufacturing, which is taxed at lower rates.

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Minority Interest

             Minority interest, net of tax, was $0.7 million in the third quarter of fiscal 2002. There was no minority interest in the third quarter of fiscal 2001. Included in minority interest was the joint venture partner’s portion of the net income generated from the operations of CJI.

Net Income

             Net income increased 47.8% to $11.8 million, or 7.3% of net sales, in the third quarter of fiscal 2002 from $8.0 million, or 6.4% of net sales, during the same period in fiscal 2001. Before the impact of reorganization costs in the third quarter of fiscal 2002, net income increased 89.5% to $14.7 million, or 9.1% of net sales, from $7.8 million, or 6.2% of net sales, during the same period in fiscal 2001. This increase was the result of increased operating income partially offset by a higher provision for taxes and minority interest.

First Nine Months Fiscal 2002 Compared to First Nine Months Fiscal 2001

             Net sales by business segment in the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001 are as follows:

Thirty-Nine Weeks Ended
Net Sales Percentage of
Total Net Sales
(unaudited) (unaudited)
March 30,
2002		 March 31,
2001		 Rate of Increase March 30,
2002		 March 31,
2001
(dollars in millions)
Direct to consumer   $340.6   $303.2    12.3%    62.2 %  64.8 %
Indirect    207.4    165.0    25.8%    37.8    35.2  
Total net sales   $548.0   $468.2    17.0%    100.0 %  100.0 %

             Consolidated statements of income for the first nine months of fiscal 2002 compared to the first nine months of fiscal 2001 are as follows:

Thirty-Nine Weeks Ended
(dollars in millions *, except for earnings per share)
March 30,
2002		 March 31,
2001
(unaudited) (unaudited)
$ % of total
net sales		 $ % of total
net sales
Net sales   $545.7    99.6 % $466.4    99.6 %
Licensing revenue    2.3    0.4    1.8    0.4  
Total net sales    548.0    100.0    468.2    100.0  
Gross profit    369.3    67.4    299.3    63.9  
Selling, general and administrative expenses    256.2    46.7    208.4    44.5  
Operating income before reorganization costs    113.1    20.6    90.8    19.4  
Reorganization costs    4.5    0.8    4.6    1.0  
Operating income    108.7    19.8    86.2    18.4  
Net interest expense    0.5    0.1    1.9    0.4  
Income before provision for income taxes and
   minority interest		    108.1    19.7    84.3    18.0  
Provision for income taxes    38.4    7.0    29.5    6.3  
Minority interest, net of tax    1.2    0.2    —    —  
Net income   $68.5    12.5 % $54.8    11.7 %

*   Components may not add to total due to rounding.


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Thirty-Nine Weeks Ended
March 30,
2002		 March 31,
2001
Net income per share:            
   Basic    $1.56 (5)  $1.35 (7)
   Diluted    $1.52 (6)  $1.32 (8)
           
Weighted-average number of common shares:            
   Basic    43,853    40,684  
   Diluted    45,210    41,641  

(5)   $1.63 per share after adding back the impact of the reorganization charge.
(6)   $1.58 per share after adding back the impact of the reorganization charge.
(7)   $1.33 per share after adding back the impact of the reorganization charge and if the common shares sold in the October 2000 initial public offering had been outstanding during the first nine months of fiscal 2001.
(8)   $1.30 per share after adding back the impact of the reorganization charge and if the common shares sold in the October 2000 initial public offering had been outstanding during the first nine months of fiscal 2001.

Net Sales

             Net sales increased by 17.0% to $548.0 million in the first nine months of fiscal 2002, from $468.2 million during the same period in fiscal 2001. These results reflect increased volume in both the direct to consumer and the indirect segments.

             Direct to Consumer. Net sales increased 12.3% to $340.6 million during the first nine months of fiscal 2002, from $303.2 million during the same period for fiscal 2001. This increase was primarily due to new store openings, comparable store sales growth and store renovations. Since the end of the first nine months of fiscal 2001, Coach has opened 21 new retail stores and seven new factory stores. In addition, 19 retail stores and five factory stores were remodeled while two retail stores and one factory store were expanded. Coach closed three retail stores since the end of the first nine months of fiscal 2001.

             Indirect. Net sales increased 25.8% to $207.4 million in the first nine months of fiscal 2002 from $165.0 million during the same period of fiscal 2001. This increase was driven by the consolidation of Coach Japan, Inc. (“CJI”) and comparable store sales growth in Japan. CJI sales to consumers are recorded at retail, versus sales to the former distributors which were recorded at wholesale value.

Gross Profit

             Gross profit increased 23.4% to $369.3 million in the first nine months of fiscal 2002 from $299.3 million during the same period in fiscal 2001. Gross margin increased 350 basis points to 67.4% in the first nine months of fiscal 2002 from 63.9% during the same in period in fiscal 2001. This improvement was primarily driven by CJI’s acquisition of the former distributors, a shift in product mix reflecting the continued diversification into new and successful fabric and leather collections and sourcing cost initiatives.

Selling, General and Administrative Expenses

             Selling, general and administrative expenses increased 22.9% to $256.2 million in the first nine months of fiscal 2002 from $208.4 million during the same period in fiscal 2001. As a percentage of net sales, selling, general and administrative expenses during the first nine months of fiscal 2002 were 46.7% compared to 44.5% during the same period in fiscal 2001. The increase, in absolute dollars and as a percentage of sales, was caused primarily by the inclusion of CJI selling, general and administrative expenses. In the prior year these costs were borne by the former distributors.

             Selling expenses increased by 34.4% to $165.3 million, or 30.2% of net sales, in the first nine months of fiscal 2002 from $123.0 million, or 26.3% of net sales, during the same period in fiscal 2001. The increase was primarily due to operating costs associated with CJI and operating costs associated with U.S. stores that were not open until after the first nine months of fiscal 2001. Twenty-one new retail stores and seven new factory stores that were operating during the first nine months of fiscal 2002 were not open in the first nine months of fiscal 2001. Additionally, three stores were permanently closed since the end of the first nine months of fiscal 2001.

21

             Advertising, marketing, and design costs increased by 1.7% to $39.3 million, or 7.2% of net sales, in the first nine months of fiscal 2002, from $38.7 million, or 8.3% of net sales, during the same period in fiscal 2001. The dollar increase was primarily due to increased staffing costs, partially offset by the leveraging of cost, through focused media placements.

             Distribution and customer service costs increased by 1.9% to $20.2 million, or 3.7% of net sales, in the first nine months of fiscal 2002, from $19.8 million, or 4.2% of net sales, during the same period in fiscal 2001. The percentage decrease, in relation to sales, reflected continued efficiency gains at the distribution and customer service facility.

             Administrative expenses increased by 16.2% to $31.3 million, or 5.7% of net sales, in the first nine months of fiscal 2002 from $27.0 million, or 5.8% of net sales, during the same period in fiscal 2001. The absolute dollar increase in these expenses was primarily due to increased staffing costs and consulting services related to Coach becoming a stand-alone company.

Reorganization Costs

             On January 23, 2002, management of Coach announced a plan to cease production at the Lares, Puerto Rico manufacturing facility. This reorganization involves the termination of 393 manufacturing, warehousing and management employees at the Lares, Puerto Rico facility. These actions will reduce costs by the resulting transfer of production to lower cost third-party manufacturers. Coach recorded reorganization costs of $4.5 million in the third quarter. The reorganization costs include $2.3 million for worker separation costs, $1.0 million for lease termination costs and $1.2 million for the write down of long-lived assets to estimated net realizable value.

             During the third quarter, Coach curtailed production and terminated 285 employees. Coach expects that by the end of the fiscal year the disposal of fixed assets and termination of the remaining employees will be completed.

             In the first fiscal quarter of 2001, management of Coach committed to and announced a plan to cease production at the Medley, Florida manufacturing facility in October 2000. This reorganization involved the termination of 362 manufacturing, warehousing and management employees at that facility. These actions reduced costs by the resulting transfer of production to lower cost third-party manufacturers. Coach recorded a reorganization cost of $5.0 million in the first quarter of fiscal year 2001. In the third quarter of fiscal year 2001, this charge was reduced to $4.6 million. This was due to the complete disposition of the fixed assets. The net proceeds from the disposition were greater than the estimate. The reorganization costs included $3.2 million for worker separation costs, $0.8 million for lease termination costs and $0.6 million for the write down of long-lived assets to net realizable value. By t he end of fiscal 2001, production ceased at the Medley facility, disposition of the fixed assets had been accomplished and the termination of the 362 employees had been completed.

Operating Income

             Operating income increased 26.0% to $108.7 million, or 19.8% of net sales, in the first nine months of fiscal 2002, from $86.2 million, or 18.4% of net sales, in the first nine months of fiscal 2001. Before the impact of reorganization costs operating income increased 24.6% to $113.1 million, or 20.6% of net sales from $90.8 million, or 19.4% of net sales, during the same period in fiscal 2001. This increase resulted from higher sales and improved gross margins, partially offset by an increase in selling, general and administrative expenses.

Interest Expense

             Net interest expense decreased to $0.5 million, or 0.1% of net sales, in the first nine months of fiscal 2002 from $1.9 million or 0.4% of net sales, during the same period in fiscal 2001. The dollar decrease was due to reduced borrowings and positive cash balances on hand in fiscal 2002.

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Income Taxes

             The effective tax rate increased to 35.5% in the first nine months of fiscal 2002 from 35.0% during the same period in fiscal 2001. This increase was caused by a lower percentage of income in fiscal 2002 attributable to company-owned offshore manufacturing, which is taxed at lower rates.

Minority Interest

             Minority interest, net of tax was $1.2 million in the first nine months of fiscal 2002. There was no minority interest in the first nine months of fiscal 2001. Included in minority interest was the joint venture partner’s portion of the net income generated from the operations of CJI.

Net Income

             Net income increased 25.1% to $68.5 million, or 12.5% of net sales, in the first nine months of fiscal 2002 from $54.8 million, or 11.7% of net sales, during the same period in fiscal 2001. Before the impact of reorganization costs net income increased 23.6% to $71.4 million, or 13.0% of net sales, from $57.8 million, or 12.3% of net sales during the same period in fiscal 2001. This increase was the result of increased operating income partially offset by a higher provision for taxes and minority interest.

FINANCIAL CONDITION

Liquidity and Capital Resources

             Net cash provided from operating and investing activities was $37.9 million for the first nine months of fiscal 2002. Net cash provided from operating and investing activities was $87.6 million in the same period of fiscal 2001, a period not fully comparable since it represented the Company as a subsidiary of Sara Lee. The year-on-year decrease was the result of increased working capital requirements for the joint venture in Japan, its acquisition of PDC and its buyout of distribution rights and assets from J. Osawa, partially offset by earnings in the first nine months.

             Capital expenditures amounted to $29.1 million in the first nine months of fiscal 2002, compared to $23.2 million in the first nine months of fiscal 2001 and in both periods related primarily to new and renovated retail stores. The Company’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 provided from financing activities was $34.7 million for the first nine months of fiscal 2002 as compared to a use of cash of $80.5 million in the comparable period of fiscal 2001. The year-to-year increase resulted from proceeds received from its joint venture partner and net proceeds from the exercise of stock options, offset by the repurchase of common stock. During the first nine months of fiscal 2001 the Company repaid long-term debt that was assumed as part of the equity restructuring related to the initial public offering.

             To provide funding for working capital for operations and general corporate purposes, on February 27, 2001, Coach, certain lenders and Fleet National Bank, as primary lender and administrative agent, entered into a $100 million senior unsecured revolving credit facility. Indebtedness under this revolving credit facility bears interest calculated, at Coach’s option, at either a rate of LIBOR plus a margin or the prime rate announced by Fleet.

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

             The initial LIBOR margin under the facility was 125 basis points. For the quarter ended March 30, 2002, the LIBOR margin was 100 basis points reflecting an improvement in our fixed-charge coverage ratio. Under this revolving credit facility, Coach pays a commitment fee of 20 to 35 basis points based on any unused amounts. The initial commitment fee was 30 basis points. For the quarter ended March 30, 2002 the commitment fee was 25 basis points. During the first nine months of fiscal 2002 the peak borrowings under the Fleet facility were $46.9 million. In the first nine months of fiscal 2001 the peak borrowings under the Sara Lee credit facility were $37.7 million. As of March 30, 2002 the borrowings under the Fleet facility were fully repaid from operating cash flow. The facility remains available for seasonal working capital requirements or general corporate purposes.

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             In order to provide funding for working capital, the acquisition of distributors and general corporate purposes, CJI has entered into credit facilities with several Japanese financial institutions. These facilities allow a maximum borrowing of 6.7 billion yen or approximately $50 million. Interest is based on the Tokyo Interbank rate plus a margin of up to 50 basis points.

             These Japanese facilities contain various covenants and customary events of default. CJI has been compliance with all covenants since their inception. Coach, Inc. is not a guarantor on these facilities.

             During the first nine months of fiscal 2002 the peak borrowings under the Japanese credit facilities were $35.4 million. As of March 30, 2002, borrowings under the Japanese revolving credit facility agreements were $35.4 million.

             The Company plans to open at least 20 new U.S. retail stores in fiscal year 2002, of which 14 were opened at the end of the first nine months. The Company also expects to complete its store renovations program by the end of fiscal 2002. The Company expects that fiscal 2002 capital expenditures will be approximately $40 million. Included in the projection is new U.S. retail stores of approximately $14 million and U.S. retail store renovations of approximately $10 million. Coach intends to finance these investments from internally generated cash flow or by using funds from our revolving credit facility. Historically, new store opening costs are expensed as incurred and have not been significant to its results.

             The Company 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 its working capital requirements are reduced substantially as the Company generates consumer sales and collects wholesale accounts receivable. In the first nine months of fiscal 2002, the Company purchased approximately $191 million of inventory, which was funded by operating cash flow and by borrowings under its revolving credit facility. Coach believes that its operating cash flow, together with its revolving credit facility, will provide sufficient capital to fund its operations for the foreseeable future.

             Currently, Sara Lee is a guarantor or a party to many of the Company’s store leases. The Company has agreed to make efforts to remove Sara Lee from all of its existing leases and Sara Lee is not a guarantor or a party to any new or renewed leases. The Company has obtained a letter of credit for the benefit of Sara Lee in an amount approximately equal to the annual minimum rental payments under leases transferred to Coach by Sara Lee but for which Sara Lee retains contingent liability. The initial letter of credit has a face amount of $20.6 million and the Company expects this amount to decrease annually as the guaranteed obligations are reduced. The Company is required to maintain the letter of credit until the annual minimum rental payments under the relevant leases are less than $2.0 million. The Company expects that it will be required to maintain this letter of credit for at least 10 years.

Seasonality

             Because its 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. The Company has sometimes experienced, and may continue to experience, reduced income or net losses in any or all of its first, third or fourth quarters. The higher sales in the second quarter typically result in higher operating profits and margins. This is due to higher gross profits, with no substantial corresponding increase in fixed costs related to operating retail stores and other administrative and selling costs which remain fairly constant throughout the year. During the holiday season these fixed costs are spread over higher sales, resulting in greater operating income expressed in both dollars and as a percentage of sales in the second quarter compared to the other three quarters. The Company anticipates that its sales and operating profit will continue to be seasonal in nature.

Risk Factors

             This Form 10-Q contains certain “forward-looking statements”, based on current expectations, that involve risks and uncertainties that could cause our actual results to differ materially from management’s current expectations. These forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “will”, “should,” “expect,” “intend”, “estimate”, or “continue”, or the negative thereof or comparable terminology. Future results will vary from historical results and historical growth is not indicative of future trends which will depend upon a number of factors, including but not limited to: (i) the successful implementation of our growth strategies and initiatives, including our store expansion and renovation program; (ii) the effect of existing

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and new competition in the marketplace; (iii) our ability to successfully anticipate consumer preferences for accessories and fashion trends; (iv) our ability to control costs; (v) the effect of seasonal and quarterly fluctuations in our sales on our operating results; (vi) our exposure to international risks, including currency fluctuations; (vii) changes in economic or political conditions in the markets where we sell or source our products; (viii) our ability to protect against infringement of our trademarks and other proprietary rights; and such other risk factors as set forth in the Company’s Form 10-K for the fiscal year ended June 30, 2001. Coach, Inc. assumes no obligation to update or revise any such forward-looking statements, which speak only as of their date, even if experience or future events or changes make it clear that any projected financial or operating results will not be realized.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

             As of March 30, 2002 the Company projects that approximately 92% of its fiscal year 2002 non-licensed product needs were purchased from independent manufacturers in countries other than the United States. These countries include China, Costa Rica, Italy, India, Spain, Turkey, Thailand, Taiwan, Korea, Hungary, Singapore, Great Britain and the Dominican Republic. Additionally, sales are made through international channels to third party distributors. Substantially all purchases and sales involving international parties are denominated in U.S. dollars and, therefore, are not hedged by the Company using any derivative instruments. The Company has not historically used foreign exchange instruments.

             The Company is exposed to market risk from foreign currency exchange rate fluctuations with respect to CJI. The Company enters into certain foreign currency derivative instruments that economically hedge certain of its risks but do not qualify for hedge accounting. These transactions are in accordance with Company risk management policies. The Company does not enter into derivative transactions for trading purposes. The fair value of these instruments at March 30, 2002 was $0.5 million and is included as a component of other current assets in the condensed consolidated balance sheets.

Interest Rate

             The Company has a fixed rate long-term debt related to the Jacksonville distribution center, in the amount of $3.7 million as of March 30, 2002, and uses a sensitivity analysis technique to evaluate the change in fair value of this debt instrument. At March 30, 2002, the effect on the fair value of this debt of a 10% change in market interest rates would be approximately $0.2 million. The Company does not expect its operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates.

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PART II

Item 4. Submission of Matters to a Vote of Security-Holders

             None

Item 5. Exhibits and Reports on Form 8-K

             None

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned.




   COACH, INC.
(Registrant)


    By:   /s/ Michael F. Devine III
   
      Name: Michael F. Devine, III
Title:   Senior Vice President,
            Chief Financial Officer and
            Chief Accounting Officer

Dated: April 30, 2002

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