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COACH INC (COH)
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COACH : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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08/18/2017 | 10:34pm CET
The following discussion of Coach's financial condition and results of
operations should be read together with Coach's consolidated financial
statements and notes thereto, included elsewhere in this document. When used
herein, the terms "Company," "Coach," "we," "us" and "our" refer to Coach, Inc.,
including consolidated subsidiaries. Unless the context requires otherwise,
references to the "Coach brand" do not include the Stuart Weitzman brand and
references to the "Stuart Weitzman brand" do not include the Coach brand and
references to the Company, Coach, we, our or us do not include Kate Spade &
Company ("Kate Spade").
EXECUTIVE OVERVIEW
The fiscal year ended July 1, 2017 was a 52-week period, the fiscal year ended
July 2, 2016 was a 53-week period and the fiscal year ended June 27, 2015 was a
52-week period.
Coach, Inc. is a leading New York-based house of modern luxury accessories and
lifestyle brands. The Coach brand was established in New York City in 1941, and
has a rich heritage of pairing exceptional leathers and materials with
innovative design. Coach, Inc. acquired Stuart Weitzman, a leader in women's
designer footwear, during the fourth quarter of fiscal 2015.
Coach, Inc. operates in three segments:
•     North America - The North America segment includes sales of Coach brand
      products to customers through Coach-operated stores, including the
      Internet, and sales to wholesale customers in North America.

• International - The International segment includes sales of Coach brand

products to customers through Coach-operated stores and concession

shop-in-shops in Japan, mainland China, Hong Kong, Macau, Singapore,

Taiwan, Malaysia, South Korea, the United Kingdom, France, Ireland, Spain,

Portugal, Germany, Italy, Austria, Belgium, the Netherlands and

Switzerland. Additionally, International includes sales to consumers

through the Internet in Japan, mainland China, South Korea, the United

Kingdom, France, Spain, Germany and Italy, as well as sales to wholesale

      customers and distributors in approximately 55 countries.


•     Stuart Weitzman - The Stuart Weitzman segment includes global sales

generated by the Stuart Weitzman brand, primarily through department stores

in North America and international locations, within numerous independent

third party distributors and within Stuart Weitzman operated stores,

including the Internet, in the United States, Canada and Europe.


Other, which is not a reportable segment, consists of sales and expenses
generated by the Coach brand other ancillary channels, licensing and
disposition.
As the Company's business model is based on multi-channel and brand global
distribution, our success does not depend solely on the performance of a single
channel or geographic area.
We are focused on driving long-term growth and profitability through the
following key initiatives:
Build an infrastructure to support future growth initiatives
•      Through the acquisition of Kate Spade, we created the first New York-based

house of modern luxury lifestyle brands, defined by authentic, distinctive

products and fashion innovation.

• Create an agile and scalable business model to support sustainable/future

growth for a multi-brand Coach, Inc.

Drive brand relevance • Continue to evolve the Coach brand across the key consumer touchpoints of

       product, stores and marketing.


•      Reinvigorate growth and brand relevance through our differentiated

positioning, which combines our history of heritage and craftsmanship with

Stuart Vevers's modern creative vision.

• Raise brand awareness and increase market share for the Stuart Weitzman

       brand globally, building upon the company's strong momentum and core brand
       equities of fusing fashion with fit.


Grow our business internationally
• Continue to increase the Coach brand's penetration internationally.


• Support the development of the Stuart Weitzman brand, particularly in Asia.



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Harness the power of the digital world
•      Continue to accelerate the development of our digital programs and
       capabilities world-wide, reflecting the change in consumer shopping
       behavior globally.


Recent Developments
Kate Spade Acquisition
On July 11, 2017, the Company completed its acquisition of Kate Spade & Company
for $18.50 per share in cash for a total of approximately $2.4 billion. The
combination of Coach, Inc. and Kate Spade & Company creates a leading luxury
lifestyle company with a more diverse multi-brand portfolio supported by
significant expertise in handbag design, merchandising, supply chain and retail
operations as well as solid financial acumen.
Strategic Repositioning of Coach Brand in North America Department Stores
In the beginning of fiscal 2017, the Company implemented a deliberate and
strategic decision to elevate the Coach brand's positioning in the channel by
limiting participation in promotional events and closing approximately 25% of
its wholesale doors during fiscal 2017.
Operational Efficiency Plan
During the fourth quarter of fiscal 2016, the Company announced a series of
operational efficiency initiatives focused on creating an agile and scalable
business model (the "Operational Efficiency Plan"). The significant majority of
the charges under this plan will be recorded within SG&A expenses, and was
substantially completed by the end of fiscal 2017. These charges are associated
with organizational efficiencies, primarily related to the reduction of
corporate staffing levels globally, as well as accelerated depreciation, mainly
associated with information systems retirement, technology infrastructure
charges related to the initial costs of replacing and updating our core
technology platforms, and international supply chain and office location
optimization. The remaining charges under this plan approximate $10-15 million
which will be incurred in fiscal 2018.
Refer to Note 3, "Restructuring Activities" and "GAAP to Non-GAAP
Reconciliation" for further information.
Transformation Plan
During the fourth quarter of fiscal 2014, Coach, Inc. announced a multi-year
strategic plan with the objective of transforming the Coach brand and
reinvigorating growth (the "Transformation Plan"). Key operational and cost
measures of the Transformation Plan included: (i) the investment in capital
improvements in our stores and wholesale locations to drive comparable sales
improvement; (ii) the optimization and streamlining of our organizational model
as well as the closure of underperforming stores in North America, and select
International stores; (iii) the realignment of inventory levels and mix to
reflect our elevated product strategy and consumer preferences; (iv) the
investment in incremental advertising costs to elevate consumer perception of
the Coach brand, drive sales growth and promote our new strategy, which started
in fiscal 2015; and (v) the significant scale-back of our promotional cadence in
an increased global promotional environment, particularly within our outlet
Internet sales site, which began in fiscal 2014. The Company's execution of
these key operational and cost measures was concluded during fiscal 2016, and we
believe that long-term growth will be realized through these transformational
efforts over time.
Refer to Note 3, "Restructuring Activities" and "GAAP to Non-GAAP
Reconciliation" for further information.
Current Trends and Outlook
Global consumer retail traffic remains relatively weak and inconsistent, which
has led to a more promotional environment in the fragmented retail industry due
to increased competition and a desire to offset traffic declines with increased
levels of conversion. While certain developed geographic regions are
withstanding these pressures better than others, the level of consumer travel
and spending on discretionary items remains constrained due to the economic
uncertainty. Declines in traffic could result in store impairment charges if
expected future cash flows of the related asset group do not exceed the carrying
value.
Political and economic instability or changing macroeconomic conditions that
exist in our major markets have further contributed to this uncertainty,
including the potential impact of (1) new policies that may be implemented by
the U.S. presidential administration and government, particularly with respect
to tax and trade policies or (2) the United Kingdom ("U.K.") voting to leave the
European Union ("E.U."), commonly known as "Brexit." On March 29, 2017, the U.K.
triggered Article 50 of the Lisbon Treaty formally starting negotiations with
the E.U. The U.K. has two years to complete these negotiations. Although the
terms of the U.K.'s future relationship with the E.U. are still unknown, it is
possible that there will be increased regulatory and legal complexities,
including potentially divergent national laws and regulations between the U.K.
and E.U. Brexit may also cause disruption and create uncertainty surrounding our
business, including affecting our relationship with our existing and future
customers, suppliers and employees.
Additional macroeconomic events including foreign exchange rate volatility in
various parts of the world, recent and evolving impacts of economic and
geopolitical events in Hong Kong, Macau and mainland China ("Greater China"),
the impact of terrorist

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acts (particularly in Europe), disease epidemics and a slowdown in emerging
market growth (particularly in Asia) have contributed to this uncertainty. Our
results have been impacted by foreign exchange rate fluctuations, and will
continue to fluctuate with future volatility.
Certain limited and recent factors within the U.S., including an improvement in
the labor and housing markets and modest growth in overall consumer spending,
suggest a potential moderate strengthening in the U.S. economic outlook. It is
still, however, too early to understand what kind of sustained impact this will
have on consumer discretionary spending. If the global macroeconomic environment
remains volatile or worsens, the constrained level of worldwide consumer
spending and modified consumption behavior may continue to have a negative
effect on our outlook. Several organizations that monitor the world's economy,
including the International Monetary Fund, are projecting slightly accelerated
economic strengthening with modest overall global growth for the remainder of
calendar 2017 but caution that there is considerable uncertainty surrounding the
underlying assumptions of the forecast.
We will continue to monitor these trends and evaluate and adjust our operating
strategies and cost management opportunities to mitigate the related impact on
our results of operations, while remaining focused on the long-term growth of
our business and protecting the value of our brands.
Furthermore, refer to Part I, Item 1 - "Business" for additional discussion on
our expected store openings and closures within each of our segments. For a
detailed discussion of significant risk factors that have the potential to cause
our actual results to differ materially from our expectations, see Part I,
Item 1A - "Risk Factors" included in this Annual Report on Form 10-K.

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FISCAL 2017 COMPARED TO FISCAL 2016
The following table summarizes results of operations for fiscal 2017 compared to
fiscal 2016. All percentages shown in the table below and the discussion that
follows have been calculated using unrounded numbers.
                                                           Fiscal Year Ended
                                   July 1, 2017               July 2, 2016                 Variance
                                                   (millions, except per share data)
                                              % of                       % of
                               Amount      net sales      Amount      net sales      Amount          %
Net sales                    $ 4,488.3        100.0 %   $ 4,491.8        100.0 %   $    (3.5 )      (0.1 )%
Gross profit                   3,081.1         68.6       3,051.3         67.9          29.8         1.0
SG&A expenses                  2,293.7         51.1       2,397.8         53.4        (104.1 )      (4.3 )
Operating income                 787.4         17.5         653.5         14.5         133.9        20.5
Interest expense, net             28.4          0.6          26.9          0.6           1.5         5.5
Income before provision for
income taxes                     759.0         16.9         626.6         14.0         132.4        21.1
Provision for income taxes       168.0          3.7         166.1          3.7           1.9         1.2
Net income                       591.0         13.2         460.5         10.3         130.5        28.3
Net income per share:
   Basic                     $    2.11$    1.66$    0.45        27.0  %
   Diluted                   $    2.09$    1.65$    0.44        26.7  %



GAAP to Non-GAAP Reconciliation
The Company's reported results are presented in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
reported results during fiscal 2017 and 2016 reflect the impact of the
Operational Efficiency Plan, Stuart Weitzman and Kate Spade Acquisition-Related
Costs and the Transformation Plan, as noted in the following tables. Refer to
page 44 for further discussion on the Non-GAAP Measures.

                                  COACH, INC.

                        GAAP TO NON-GAAP RECONCILIATION
               For the Years Ended July 1, 2017 and July 2, 2016
                                                                                            July 1, 2017
                                                                                                                                                         Non-GAAP Basis
                               GAAP Basis                                              Stuart Weitzman                                                     (Excluding
                              (As Reported)      Operational Efficiency 

Plan Acquisition-Related Costs Kate Spade Acquisition-Related Costs Items)

                                                                                 (millions, except per share data)
Gross profit                $       3,081.1     $                 -             $                (2.9 )         $                       -                $     3,084.0
SG&A expenses                       2,293.7                    24.0                              (9.1 )                               7.4                      2,271.4
Operating income                      787.4                   (24.0 )                             6.2                                (7.4 )                      812.6
Income before provision for
income taxes                          759.0                   (24.0 )                             6.2                               (16.9 )                      793.7
Provision for income taxes            168.0                    (8.3 )                            (1.5 )                              (6.6 )                      184.4
Net income                            591.0                   (15.7 )                             7.7                               (10.3 )                      609.3
Diluted net income per
share                                  2.09                   (0.05 )                            0.03                               (0.04 )                       2.15



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                                                                                 July 2, 2016
                                                                                                                                       Non-GAAP Basis
                            GAAP Basis         Transformation and                                             Stuart Weitzman            (Excluding
                           (As Reported)          Other Actions        

Operational Efficiency Plan Acquisition-Related Costs Items)

                                                                       (millions, except per share data)
Gross profit             $       3,051.3     $               -         $                 -             $                (1.1 )         $     3,052.4
SG&A expenses                    2,397.8                  44.1                        43.9                              34.0                 2,275.8
Operating income                   653.5                 (44.1 )                     (43.9 )                           (35.1 )                 776.6
Income before provision
for income taxes                   626.6                 (44.1 )                     (43.9 )                           (35.1 )                 749.7
Provision for income
taxes                              166.1                 (10.7 )                     (10.3 )                           (10.9 )                 198.0
Net income                         460.5                 (33.4 )                     (33.6 )                           (24.2 )                 551.7
Diluted net income per
share                               1.65                 (0.12 )                     (0.12 )                           (0.09 )                  1.98

Fiscal 2017 Items In fiscal 2017 the Company recorded pre-tax adjustments as follows: • Operational Efficiency Plan - Total charges of $24.0 million primarily

related to organizational efficiency costs, technology infrastructure costs

and, to a lesser extent, network optimization costs. The Company expects

that the remaining charges under this plan will approximate $10-15 million

and will be incurred in fiscal 2018. Refer to the "Executive Overview"

herein and Note 3, "Restructuring Activities," for further information

regarding this plan.

• Stuart Weitzman Acquisition-Related Costs - Total income of $6.2 million,

      primarily related to:


•           Income of $26.8 million was recorded within the Coach brand as
            corporate unallocated expense in SG&A expenses. This includes the
            reversal of an accrual of $35.2 million related to estimated
            contingent purchase price payments which are not expected to be paid,
            partially offset by integration-related costs of $8.4 million.


•           Integration charges of $17.7 million were recorded in SG&A expenses
            and $2.9 million was recorded to cost of sales within the Stuart
            Weitzman brand.

• Kate Spade Acquisition-Related Costs - Total charges of $16.9 million, of

which $9.5 million is related to bridge financing fees and recorded in

interest expense and $7.4 million is related to professional fees, all of

which were recorded in corporate unallocated expenses within the Coach

brand.


These actions taken together increased the Company's SG&A expenses by $22.3
million and cost of sales by $2.9 million, negatively impacting net income by
$18.3 million, or $0.06 per diluted share.
Fiscal 2016 Items
In fiscal 2016 the Company incurred pre-tax charges as follows:
•     Transformation and Other Actions - $44.1 million under our Coach brand

Transformation Plan primarily due to organizational efficiency costs, lease

      termination charges and accelerated depreciation as a result of store
      renovations within North America and select International stores.


•     Operational Efficiency Plan - $43.9 million primarily related to
      organizational efficiency costs and, to a lesser extent, network
      optimization costs.


•     Acquisition-Related Costs - $35.1 million total charges related to the
      acquisition of Stuart Weitzman Holdings LLC, of which $27.6 million is
      primarily related to charges attributable to contingent payments and

integration-related activities (of which $19.4 million is recorded within

unallocated corporate expenses within the Coach brand and $8.2 million is

recorded within the Stuart Weitzman segment, resulting in a decrease in

operating income of $19.4 million and $8.2 million, respectively), and $7.5

million is related to the limited life impact of purchase accounting,

primarily due to the amortization of the fair value of the order backlog

asset, distributor relationships and inventory step-up, all recorded within

the Stuart Weitzman segment resulting in a $7.5 million decrease in

operating income.


Total Transformation Plan, Operational Efficiency Plan and Acquisition-Related
Costs taken together increased the Company's SG&A expenses by $122.0 million and
cost of sales by $1.1 million, negatively impacting net income by $91.2 million,
or $0.33 per diluted share.

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Summary - Fiscal 2017
Net sales in fiscal 2017 decreased slightly by 0.1% to $4.49 billion, with no
material impact from foreign currency. Net sales in fiscal 2016 includes the
favorable impact of the 53rd week in fiscal 2016, which resulted in incremental
net sales of $84.4 million. Excluding the impact of the 53rd week in fiscal
2016, net sales increased by $80.9 million or 1.8%. Gross profit increased by
1.0% to $3.08 billion during fiscal 2017 as compared to $3.05 billion in fiscal
2016. SG&A expenses decreased by 4.3% to $2.29 billion in fiscal 2017. Excluding
non-GAAP charges, SG&A expenses decreased by 0.2% to $2.27 billion.
Net income increased 28.3% in fiscal 2017 as compared to fiscal 2016, primarily
due to an increase in operating income of $133.9 million. Net income per diluted
share increased 26.7% to $2.09, primarily due to higher net income. Excluding
non-GAAP charges, net income and net income per diluted share increased 10.4%
and 9.1%, respectively. The impact of the 53rd week in fiscal 2016 contributed
approximately $0.07 to net income per diluted share.
Currency Fluctuation Effects
The change in net sales in fiscal 2017 has been presented both including and
excluding currency fluctuation effects.
Net Sales
The following table presents net sales by reportable segment for fiscal 2017
compared to fiscal 2016:
                                      Fiscal Year Ended
                    Total Net Sales                         Percentage of
                                                           Total Net Sales
                 July 1,      July 2,     Rate of       July 1,      July 2,
                   2017         2016       Change        2017          2016
                      (millions)
North America   $ 2,349.5$ 2,397.1      (2.0 ) %     52.3    %      53.4  %
International     1,715.2      1,704.0       0.7         38.2           37.9
Other(1)             50.0         46.0       8.7          1.2            1.0
Coach brand     $ 4,114.7$ 4,147.1      (0.8 )       91.7    %      92.3  %
Stuart Weitzman     373.6        344.7       8.4          8.3            7.7
Total net sales $ 4,488.3$ 4,491.8      (0.1 )      100.0    %     100.0  %




(1) Net sales in the Other category, which is not a reportable segment, consists

of sales generated by the Coach brand other ancillary channels, licensing

and disposition.


Net sales for the Coach brand decreased 0.8% or $32.4 million in fiscal 2017 as
compared to fiscal 2016, as described below. Net sales for the Coach brand was
not materially impacted by foreign currency. Excluding the impact of the 53rd
week in fiscal 2016, net sales increased 1.1%.
North America Net Sales decreased 2.0% or $47.6 million to $2.35 billion in
fiscal 2017, which was not materially impacted by changes in foreign currency.
Excluding the impact of the 53rd week of $43.7 million in fiscal 2016, net sales
decreased by $3.9 million. This decrease was primarily driven by lower sales to
wholesale customers of $56.3 million due to the Company's strategic decision to
elevate the Coach's brand positioning in the channel by limiting participation
in promotional events and closing approximately 25% of its wholesale doors by
the end of fiscal 2017 and a decrease in non-comparable store sales of $9.1
million primarily due to the impact of net store closures. These decreases were
offset by higher comparable store sales, which increased by $64.2 million or
3.1% primarily due to higher conversion. Our bricks and mortar comparable store
sales increased 3.8%. Comparable store sales measure sales performance at stores
that have been opened for at least 12 months and include sales from the
Internet. In certain instances, orders placed via the Internet may be fulfilled
by a physical store; such sales are recorded by the physical store. Comparable
store sales have not been adjusted for store expansions. North America
comparable store sales are presented for the 52-weeks ending July 1, 2017 versus
the analogous 52-weeks ended July 2, 2016 for comparability. Since the end of
fiscal 2016, North America closed a net 13 stores.
International Net Sales increased 0.7% or $11.2 million to $1.72 billion in
fiscal 2017. Excluding the favorable impact of foreign currency, primarily
within Japan, net sales increased $5.7 million or 0.3%. Fiscal 2016 included net
sales of $32.1 million as a result of the 53rd week. This $5.7 million increase
is primarily due to an increase in net sales in Europe of $23.3 million due to
positive comparable store sales as well as an expanded store distribution
network and an increase in Greater China of $20.8 million due to the impact of
net new stores and positive comparable store sales in mainland China. These
increases were partially

                                       35
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offset by a decrease in Japan of $23.7 million and in South Korea of $11.5
million primarily due to decreased store traffic in these regions. Since the end
of fiscal 2016, we opened a net 21 stores, primarily in Europe and mainland
China.
Stuart Weitzman Net Sales increased $28.9 million to $373.6 million in fiscal
2017, which was not materially impacted by changes in foreign currency. Fiscal
2016 included net sales of $7.4 million as a result of the 53rd week. This
increase was primarily due to $35.2 million in the retail channel due to the
acquisition of the Stuart Weitzman Canadian distributor in the fourth quarter of
fiscal 2016, positive comparable store sales and net store openings. This was
partially offset by lower wholesale net sales of $7.0 million. Prior year
wholesale net sales included shipments into the Canadian distributor. Since the
end of the fiscal 2016, Stuart Weitzman opened a net 6 new stores.
Gross Profit
Gross profit increased 1.0% or $29.8 million to $3.08 billion in fiscal 2017
from $3.05 billion in fiscal 2016. Gross margin for fiscal 2017 was 68.6% as
compared to 67.9% in fiscal 2016. Excluding Non-GAAP charges of $2.9 million in
fiscal 2017 and $1.1 million in fiscal 2016, as discussed in the "GAAP to
Non-GAAP Reconciliation" herein, gross profit increased 1.0% or $31.6 million to
$3.08 billion from $3.05 billion in fiscal 2016, and gross margin was 68.7% in
fiscal 2017 as compared to 68.0% in fiscal 2016, an increase of 70 basis points.
Gross profit for the Coach brand increased slightly by 0.2% or $6.1 million to
$2.86 billion in fiscal 2017. Excluding the 53rd week in fiscal 2016, gross
profit increased by $55.1 million. Gross margin for the Coach brand increased 70
basis points to 69.4% in fiscal 2017 from 68.7% in fiscal 2016, which was not
materially impacted by the year over year change in foreign currency rates.
North America Gross Profit decreased 1.7% or $25.0 million to $1.45 billion in
fiscal 2017. Gross margin increased 20 basis points to 61.9% in fiscal 2017 from
61.7% in fiscal 2016. Fiscal 2016 gross profit included $26.1 million
attributable to the 53rd week. The increase in gross margin is due to favorable
channel mix as a result of wholesale door closures and to a lesser extent,
improved costing and product mix which was offset by promotional activity.
International Gross Profit increased 1.4% or $17.7 million to $1.30 billion in
fiscal 2017. Excluding the impact of the 53rd week in fiscal 2016, gross profit
increased $40.8 million. Gross margin increased 50 basis points to 76.0% in
fiscal 2017 from 75.5% in fiscal 2016. Foreign currency positively impacted
gross margin by 10 basis points, primarily due to the Japanese Yen offset by the
Chinese Renminbi. Excluding the impact of foreign currency, International gross
margin increased 40 basis points. This increase was due to favorable effects of
decreased duty costs.
Corporate Unallocated Gross Profit increased $7.8 million to $59.8 million in
fiscal 2017 from $52.0 million in fiscal 2016, primarily due to the impact of
favorable inventory production variances partially offset by higher inventory
reserves and royalty payments.
Stuart Weitzman Gross Profit increased 11.7% or $23.7 million to $226.1 million
in fiscal 2017. Gross profit in the 53rd week of fiscal 2016 was $4.0 million.
Gross margin increased 180 basis points to 60.5% in fiscal 2017 from 58.7% in
fiscal 2016. The increase in gross margin is primarily attributable to a shift
in channel mix.
Selling, General and Administrative Expenses
SG&A expenses are comprised of four categories: (i) selling; (ii) advertising,
marketing and design; (iii) distribution and customer service; and (iv)
administrative. Selling expenses include store employee compensation, occupancy
costs, supply costs, wholesale and retail account administration compensation
globally and Coach international operating expenses. These expenses are affected
by the number of stores open during any fiscal period and store performance, as
compensation and rent expenses vary with sales. Advertising, marketing and
design expenses include employee compensation, media space and production,
advertising agency fees, new product design costs, public relations, special
events and market research expenses. Distribution and customer service expenses
include warehousing, order fulfillment, shipping and handling, customer service,
employee compensation and bag repair costs. Administrative expenses include
compensation costs for "corporate" functions including: executive, finance,
human resources, legal and information systems departments, as well as corporate
headquarters occupancy costs, consulting fees and software expenses.
Administrative expenses also include global equity compensation expense.
The Company includes inbound product-related transportation costs from our
service providers within cost of sales. The Company, similar to some companies,
includes certain transportation-related costs related to our distribution
network in SG&A expenses rather than in cost of sales; for this reason, our
gross margins may not be comparable to that of entities that include all costs
related to their distribution network in cost of sales.
SG&A expenses decreased 4.3% or $104.1 million to $2.29 billion in fiscal 2017
as compared to $2.40 billion in fiscal 2016. As a percentage of net sales, SG&A
expenses decreased to 51.1% during fiscal 2017 as compared to 53.4% during
fiscal 2016. Excluding non-GAAP adjustments of $22.3 million in fiscal 2017 and
$122.0 million in fiscal 2016, as discussed in the "GAAP to Non-GAAP
Reconciliation" herein, SG&A expenses decreased 0.2% or $4.4 million from fiscal
2016; and SG&A expenses as a percentage of net sales remained relatively
consistent at 50.6% in fiscal 2017 compared to 50.7% in fiscal 2016.

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Selling expenses were $1.60 billion, or 35.7% of net sales, in fiscal 2017
compared to $1.57 billion, or 35.1% of net sales, in fiscal 2016. This $29.6
million increase is primarily due to a $24.6 million increase attributable to
the Stuart Weitzman segment, primarily due to increased store investments.
Advertising, marketing, and design costs were $261.6 million, or 5.8% of net
sales, in fiscal 2017, compared to $285.7 million, or 6.4% of net sales, during
fiscal 2016. This was primarily due to a decrease of $26.8 million attributable
to lower costs for Coach brand advertising related events, including lower costs
associated with promotional events and New York fashion week, partially offset
by higher Stuart Weitzman marketing costs.
Distribution and customer service expenses were $60.2 million, or 1.3% of net
sales in fiscal 2017, consistent with fiscal 2016 expenses of $67.7 million, or
1.5% of net sales.
Administrative expenses were $367.9 million, or 8.2% of net sales, in fiscal
2017 compared to $469.9 million, or 10.5% of net sales, during fiscal 2016.
Excluding non-GAAP adjustments of $22.3 million in fiscal 2017 and $122.0
million in fiscal 2016, administrative expenses were $345.6 million, or 7.7% of
net sales, in fiscal 2017 and $347.9 million, or 7.7% of net sales, in fiscal
2016. The decrease was primarily due to lower employee related costs and
litigation costs.
Operating Income
Operating income increased 20.5% or $133.9 million to $787.4 million during
fiscal 2017 as compared to $653.5 million in fiscal 2016. Operating margin
increased to 17.5% as compared to 14.5% in fiscal 2016. Excluding non-GAAP
adjustments of $25.2 million in fiscal 2017 and $123.1 million in fiscal 2016,
as discussed in the "GAAP to Non-GAAP Reconciliation" herein, operating income
increased 4.6% or $36.0 million to $812.6 million from $776.6 million in fiscal
2016; and operating margin was 18.1% in fiscal 2017 as compared to 17.3% in
fiscal 2016.
The following table presents operating income by reportable segment for fiscal
2017 compared to fiscal 2016:
                                            Fiscal Year Ended
                                 Operating Income                Variance
                           July 1, 2017     July 2, 2016     Amount        %
                                          (millions)

  North America           $      697.0$      737.3$ (40.3 )    (5.5 ) %
  International                  535.9            512.7        23.2       4.5
  Other(1)                        31.4             22.9         8.5      37.1
  Corporate unallocated         (497.5 )         (651.9 )     154.4      23.7
Coach brand               $      766.8$      621.0$ 145.8      23.5   %
Stuart Weitzman                   20.6             32.5       (11.9 )   (36.6 )
Total operating income    $      787.4$      653.5$ 133.9      20.5   %




(1) Operating income in the Other category, which is not a reportable segment,

consists of Coach brand sales generated in other ancillary channels,

licensing and disposition.


Operating income for the Coach brand increased 23.5% or $145.8 million to $766.8
million in fiscal 2017. Furthermore, operating margin for the Coach brand
increased 360 basis points to 18.6% in fiscal 2017 when compared to fiscal 2016.
Excluding non-GAAP adjustments, Coach brand operating income totaled $771.4
million in fiscal 2017, resulting in an operating margin of 18.7%, compared to
Coach brand operating income of $728.4 million in fiscal 2016, or an operating
margin of 17.6%.
North America Operating Income decreased 5.5% or $40.3 million to $697.0 million
in fiscal 2017, reflecting the decrease in gross profit of $25.0 million and
higher SG&A expenses of $15.3 million. The increase in SG&A expenses was due to
higher occupancy costs, primarily due to the 5th Avenue store, as well as higher
depreciation expense. Operating margin decreased 110 basis points to 29.7% in
fiscal 2017 from 30.8% during the same period in the prior year due to higher
SG&A expense as a percentage of net sales of 130 basis points, partially offset
by higher gross margin of 20 basis points.
International Operating Income increased 4.5% or $23.2 million to $535.9 million
in fiscal 2017, primarily reflecting an increase in gross profit of $17.7
million and lower SG&A expenses of $5.5 million. The decrease in SG&A expenses
is primarily related to reduced marketing and occupancy costs in Greater China,
as well as lower employee related costs in international wholesale, partially
offset by unfavorable foreign currency effects in Japan and increased occupancy
costs in Europe to support the growth of the business. Operating margin
increased 110 basis points to 31.2% in fiscal 2017 from 30.1% during the same

                                       37
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period in the prior year primarily due to lower overall SG&A as a percentage of
net sales of 60 basis points and increased gross margin of 50 basis points.
Corporate Unallocated Operating Expense decreased $154.4 million to $497.5
million in fiscal 2017, a decrease of 23.7% from $651.9 million in fiscal 2016.
This decrease was primarily attributable to lower non-GAAP charges incurred by
the Company in fiscal 2017 as compared to fiscal 2016, as discussed in the "GAAP
to Non-GAAP Reconciliation" herein. Excluding non-GAAP adjustments, unallocated
operating expenses decreased by $51.7 million to $492.8 million. This decrease
is primarily due to lower employee costs related to headcount and litigation
costs, partially offset by higher occupancy costs.
Stuart Weitzman Operating Income decreased $11.9 million to $20.6 million in
fiscal 2017, resulting in an operating margin of 5.5%, compared to an operating
income of $32.5 million in fiscal 2016. Excluding non-GAAP adjustments as
discussed in the "GAAP to Non-GAAP Reconciliation" herein, which reflect
acquisition and integration-related costs, Stuart Weitzman operating income
totaled $41.2 million in fiscal 2017, resulting in an operating margin of 11.0%.
This compared to Stuart Weitzman operating income of $48.2 million in fiscal
2016, resulting in an operating margin of 14.0%.
Provision for Income Taxes
The effective tax rate was 22.1% in fiscal 2017, as compared to 26.5% in fiscal
2016. Excluding non-GAAP charges as discussed in the "GAAP to Non-GAAP
Reconciliation" herein, the effective tax rate was 23.2% in fiscal 2017, as
compared to 26.4% in fiscal 2016. The decrease in our effective tax rate was
primarily attributable to the geographical mix of earnings and the U.S. income
earned on foreign investments.
Net Income
Net income increased 28.3% or $130.5 to $591.0 million in fiscal 2017 as
compared to $460.5 million in fiscal 2016. Excluding non-GAAP charges as
discussed in the "GAAP to Non-GAAP Reconciliation" herein, net income increased
10.4% or $57.5 million to $609.3 million in fiscal 2017 from $551.7 million in
fiscal 2016. This increase was primarily due to higher operating income.
Earnings per Share
Net income per diluted share increased 26.7% to $2.09 in fiscal 2017 as compared
to $1.65 in fiscal 2016. Excluding non-GAAP charges as discussed in the "GAAP to
Non-GAAP Reconciliation" herein, net income per diluted share increased 9.1% or
$0.17 to $2.15 in fiscal 2017 from $1.98 in fiscal 2016, due to higher net
income. The impact of the 53rd week in fiscal 2016 contributed approximately
$0.07 to net income per diluted share.
FISCAL 2016 COMPARED TO FISCAL 2015
The following table summarizes results of operations for fiscal 2016 compared to
fiscal 2015. All percentages shown in the table below and the discussion that
follows have been calculated using unrounded numbers.
                                                           Fiscal Year Ended
                                   July 2, 2016              June 27, 2015                Variance
                                                   (millions, except per share data)
                                              % of                       % of
                               Amount      net sales      Amount      net sales      Amount         %
Net sales                    $ 4,491.8        100.0 %   $ 4,191.6        100.0 %   $  300.2         7.2  %
Gross profit                   3,051.3         67.9       2,908.6         69.4        142.7         4.9
SG&A expenses                  2,397.8         53.4       2,290.6         54.6        107.2         4.7
Operating income                 653.5         14.5         618.0         14.7         35.5         5.7
Interest expense, net             26.9          0.6           6.4          0.2         20.5          NM
Income before provision for
income taxes                     626.6         14.0         611.6         14.6         15.0         2.5
Provision for income taxes       166.1          3.7         209.2          5.0        (43.1 )     (20.6 )
Net income                       460.5         10.3         402.4          9.6         58.1        14.4
Net Income per share:
Basic                        $    1.66$    1.46$   0.20        13.7  %
Diluted                      $    1.65$    1.45$   0.20        13.6  %


NM - Not meaningful


                                       38
--------------------------------------------------------------------------------

GAAP to Non-GAAP Reconciliation
The Company's reported results are presented in accordance with GAAP. The
reported results during fiscal 2016 and 2015 reflect certain items, including
the impact of the Transformation Plan, the Operational Efficiency Plan and
Acquisition-Related Costs, as noted in the following tables. Refer to page 44
for a discussion on the Non-GAAP Measures.

                                  COACH, INC.

                        GAAP TO NON-GAAP RECONCILIATION
               For the Years Ended July 2, 2016 and June 27, 2015
                                                                                     July 2, 2016
                                                                                                                                           Non-GAAP Basis
                                GAAP Basis         Transformation and                                                                        (Excluding
                               (As Reported)          Other Actions         Operational Efficiency Plan      Acquisition-Related Costs         Items)
                                                                           (millions, except per share data)
Gross profit                 $       3,051.3     $               -         $                 -             $                  (1.1 )       $     3,052.4
SG&A expenses                        2,397.8                  44.1                        43.9                                34.0               2,275.8
Operating income                       653.5                 (44.1 )                     (43.9 )                             (35.1 )               776.6
Provision for income taxes             166.1                 (10.7 )                     (10.3 )                             (10.9 )               198.0
Net income                             460.5                 (33.4 )                     (33.6 )                             (24.2 )               551.7
Diluted net income per share            1.65                 (0.12 )                     (0.12 )                             (0.09 )                1.98


                                                                           June 27, 2015
                                                                                                                        Non-GAAP Basis
                                GAAP Basis     Transformation and Other    Operational                                    (Excluding
                               (As Reported)           Actions          

Efficiency Plan Acquisition-Related Costs Items)

                                                                 (millions, except per share data)
Gross profit                 $       2,908.6   $            (5.0 )      $             -   $                  (4.7 )     $     2,918.3
SG&A expenses                        2,290.6               140.9                      -                      19.9             2,129.8
Operating income                       618.0              (145.9 )                    -                     (24.6 )             788.5
Provision for income taxes             209.2               (38.1 )                    -                      (3.6 )             250.9
Net income                             402.4              (107.8 )                    -                     (21.0 )             531.2
Diluted net income per share            1.45               (0.39 )                    -                     (0.08 )              1.92


Fiscal 2016 Items In fiscal 2016, the Company incurred pre-tax charges as follows: • Transformation and Other Actions - $44.1 million under our Coach brand

Transformation Plan primarily due to organizational efficiency costs, lease

      termination charges and accelerated depreciation as a result of store
      renovations within North America and select International stores;


•     Operational Efficiency Plan - $43.9 million primarily related to
      organizational efficiency costs and, to a lesser extent, network
      optimization costs; and


•     Acquisition-Related Costs - $35.1 million total charges related to the
      acquisition of Stuart Weitzman Holdings LLC, of which $27.6 million is
      primarily related to charges attributable to contingent payments and

integration-related activities (of which $19.4 million is recorded within

unallocated corporate expenses within the Coach brand and $8.2 million is

recorded within the Stuart Weitzman segment, resulting in a decrease in

operating income of $19.4 million and $8.2 million, respectively), and $7.5

million is related to the limited life impact of purchase accounting,

primarily due to the amortization of the fair value of the order backlog

asset, distributor relationships and inventory step-up, all recorded within

the Stuart Weitzman segment resulting in a $7.5 million decrease in

operating income.


Total Transformation Plan, Operational Efficiency Plan and Acquisition-Related
Costs taken together increased the Company's SG&A expenses by $122.0 million and
cost of sales by $1.1 million, negatively impacting net income by $91.2 million,
or $0.33 per diluted share.

                                       39
--------------------------------------------------------------------------------

Fiscal 2015 Items In fiscal 2015, the Company incurred charges as follows: • Transformation and Other Actions - $145.9 million under our Coach brand

Transformation Plan due to accelerated depreciation and lease termination

charges as a result of store updates and closures within North America and

select International stores, organizational efficiency charges, and charges

related to the destruction of inventory;

• Acquisition-Related Costs - $24.6 million total acquisition-related costs,

of which $17.1 million primarily related to consulting and legal costs

      related to the acquisition of Stuart Weitzman Holdings LLC, as well as
      costs attributable to contingent payments related to the acquisition (of

which $15.8 million was recorded within unallocated corporate expenses

within the Coach brand and $1.3 million was recorded within the Stuart

Weitzman segment, resulting in a decrease in operating income of $15.8

million and $1.3 million, respectively), and $7.5 million was related to

the limited life impact of purchase accounting, primarily due to the

amortization of the fair value of the inventory step-up and order backlog

asset, all recorded within the Stuart Weitzman segment resulting in a $7.5

million decrease in operating income.


These fiscal 2015 actions taken together increased the Company's SG&A expenses
by $160.8 million and cost of sales by $9.7 million, negatively impacting net
income by $128.8 million, or $0.47 per diluted share.
Currency Fluctuation Effects
The change in net sales in fiscal 2016 has been presented both including and
excluding currency fluctuation effects.
Net Sales
Net sales increased 7.2% or $300.2 million to $4.49 billion in fiscal 2016,
inclusive of the favorable impact of the 53rd week in fiscal 2016, which
resulted in incremental net revenues of $84.4 million. Excluding the effects of
foreign currency, net sales increased 9.1% or $382.1 million. This increase was
primarily due to the inclusion of a full year impact of the Stuart Weitzman
brand and gains in the International business, partially offset by lower sales
in North America. The following table presents net sales by reportable segment
for fiscal 2016 compared to fiscal 2015:
                                          Fiscal Year Ended
                    Total Net Sales                    Percentage of Total Net Sales
                 July 2,      June 27,    Rate of        July 2,           June 27,
                   2016         2015       Change         2016               2015
                      (millions)
North America   $ 2,397.1$ 2,467.5      (2.9 ) %            53.4   %        58.9  %
International     1,704.0      1,622.0       5.1                37.9            38.7
Other(1)             46.0         59.1     (22.2 )               1.0             1.4
Coach brand     $ 4,147.1$ 4,148.6         -                92.3   %        99.0  %
Stuart Weitzman     344.7         43.0        NM                 7.7             1.0
Total net sales $ 4,491.8$ 4,191.6       7.2               100.0   %       100.0  %


NM - Not meaningful


(1) Net sales in the Other category, which is not a reportable segment, consists

of Coach brand sales generated in licensing and disposition channels.


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

                                       40
--------------------------------------------------------------------------------

million due to the net impact of store closures and openings. Since the end of
fiscal 2015, North America closed a net 30 retail stores. North America sales
were also negatively impacted by lower wholesale sales of approximately $10.1
million, due to lower volume of shipments.
International Net Sales increased 5.1% or $82.0 million to $1.70 billion in
fiscal 2016. Excluding the unfavorable impact of foreign currency, primarily
within Asia, net sales increased $139.9 million or 8.6%. The following
discussion is presented excluding the favorable impact of the 53rd week to net
sales of $32.1 million and the impact of foreign currency. This increase was
primarily due to an increase of $53.8 million in Europe due to an expanded
wholesale and store distribution network and higher comparable store sales, an
increase in Greater China (which includes Hong Kong and Macau) of $30.7 million
due to net new stores and positive comparable store sales in mainland China,
partially offset by declines in Hong Kong and Macau due to a continued slowdown
in inbound tourist traffic, an increase in Asia (excluding Greater China and
Japan) of $14.7 million due to the impact of net new store openings and an
increase in Japan of $11.9 million due to overall higher transaction size and
improved levels of customer conversion (particularly in retail) contributing to
higher comparable store sales. Since the end of fiscal 2015, we opened 19 net
new stores, with 13 net new stores in mainland China, Hong Kong and Macau and
Japan, and 6 net new stores in the other regions.
Stuart Weitzman Net Sales increased $301.7 million to $344.7 million in fiscal
2016, including the favorable impact of the 53rd week in fiscal 2016, which
resulted in incremental net revenues of $7.4 million. This increase was due to
the inclusion of a full fiscal year impact of the Stuart Weitzman brand,
compared to approximately two months in the prior fiscal year.
Gross Profit
Gross profit increased 4.9% or $142.7 million to $3.05 billion in fiscal 2016
from $2.91 billion in fiscal 2015. Gross margin for fiscal 2016 was 67.9% as
compared to 69.4% in fiscal 2015. Excluding Non-GAAP charges of $1.1 million in
fiscal 2016 and $9.7 million in fiscal 2015, as discussed in the "GAAP to
Non-GAAP Reconciliation" herein, gross profit increased 4.6% or $134.1 million
to $3.05 billion from $2.92 billion in fiscal 2015, and gross margin was 68.0%
in fiscal 2016 as compared to 69.6% in fiscal 2015. The gross margin decline of
150 basis points (or 160 basis points excluding non-GAAP items) was primarily
due to the unfavorable effects of foreign currency on the Coach brand, and the
inclusion of the Stuart Weitzman business in our full year fiscal 2016 results
(which contains lower gross margins compared to the Coach brand).
Gross profit for the Coach brand, which includes the North America and
International segments, as well as Other and Corporate Unallocated results,
decreased 1.4% or $39.8 million to $2.85 billion in fiscal 2016. Furthermore,
gross margin for the Coach brand decreased 90 basis points from 69.6% in fiscal
2015 to 68.7% in the fiscal 2016, inclusive of an unfavorable 100 basis point
foreign currency impact, as described below.
North America Gross Profit decreased 6.1% or $96.2 million to $1.48 billion in
fiscal 2016. Gross margin decreased 210 basis points from 63.8% in fiscal 2015
to 61.7% in fiscal 2016. The decrease in gross margin is primarily attributable
to increased promotional activity, primarily in our outlet and wholesale
channels, negatively impacting gross margin by 240 basis points, partially
offset by the impact of an improved mix of elevated product sales and higher
initial mark-ups, primarily in our outlet stores, favorably impacting gross
margin by 40 basis points.
International Gross Profit increased 3.0% or $37.4 million to $1.29 billion in
fiscal 2016. Gross margin decreased 150 basis points from 77.0% in fiscal 2015
to 75.5% in fiscal 2016. Foreign currency negatively impacted gross margin by
210 basis points, primarily due to the Japanese Yen. Excluding the impact of
foreign currency, International gross margin increased 60 basis points,
primarily due to the favorable effects of decreased duty costs, positively
impacting gross margin by 70 basis points. Furthermore, an improved mix of
elevated product sales, particularly in Greater China and Japan, positively
impacted gross margin by 50 basis points. These increases were partially offset
by a less favorable geographic mix of our sales, negatively impacting gross
margin by 40 basis points, particularly as a result of the growth of our Europe
and international wholesale businesses.
Corporate Unallocated Gross Profit increased $24.8 million from $27.2 million in
fiscal 2015 to $52.0 million in fiscal 2016, primarily due to the impact of
favorable inventory production variances, decreased transformation-related
charges and decreased inventory reserve charges.
Stuart Weitzman Gross Profit was $202.4 million in fiscal 2016, and $19.9 in
fiscal 2015, due to the inclusion of a full fiscal year impact of the Stuart
Weitzman brand, compared to approximately two months in the prior fiscal year.
Furthermore, gross margin was 58.7% in fiscal 2016, compared to 46.4% in the
short acquisition year of fiscal 2015 (which included the short-term impact of
the amortization of the fair value of the inventory step-up).
Selling, General and Administrative Expenses
SG&A expenses increased 4.7% or $107.2 million to $2.40 billion in fiscal 2016
as compared to $2.29 billion in fiscal 2015. As a percentage of net sales, SG&A
expenses decreased to 53.4% during fiscal 2016 as compared to 54.6% during
fiscal 2015. Excluding Non-GAAP adjustments of $122.0 million in fiscal 2016 and
$160.8 million in fiscal 2015, as discussed in the "GAAP

                                       41
--------------------------------------------------------------------------------

to Non-GAAP Reconciliation" herein, SG&A expenses increased 6.9% or $146.0
million from fiscal 2015; and SG&A expenses as a percentage of net sales
remained relatively flat at 50.7% in fiscal 2016 compared to 50.8% in fiscal
2015.
Selling expenses were $1.57 billion, or 35.1% of net sales, in fiscal 2016
compared to $1.53 billion, or 36.6% of net sales, in fiscal 2015. This $41.8
million increase is primarily due to a $47.3 million increase attributable to
the Stuart Weitzman segment as well as increases in Europe and mainland China to
support growth in the business, partially offset by lower store-related costs in
Japan, Asia (excluding Greater China) and North America including decreased
employee compensation costs and occupancy costs, as well as the impact of
favorable foreign currency. Excluding Non-GAAP charges of $4.1 million in fiscal
2015, selling expenses were 36.5% of net sales.
Advertising, marketing, and design costs were $285.7 million, or 6.4% of net
sales, in fiscal 2016, compared to $246.8 million, or 5.9% of net sales, during
fiscal 2015. This was primarily due to an increase of $25.4 million attributable
to Stuart Weitzman, as well as higher costs for Coach brand marketing and
advertising-related events, including our first true New York fashion week show
in the first quarter of fiscal 2016, which increased by $17.9 million as
compared to the same period prior year, partially offset by decreased
employee-related costs.
Distribution and customer service expenses were $67.7 million, or 1.5% of net
sales in fiscal 2016, relatively in-line with fiscal 2015 expenses of $69.6
million, or 1.7% of net sales.
Administrative expenses were $469.9 million, or 10.5% of net sales, in fiscal
2016 compared to $441.5 million, or 10.5% of net sales, during fiscal 2015.
Excluding non-GAAP adjustments of $122.0 million in fiscal 2016 and $156.7
million in fiscal 2015, administrative expenses were $347.9 million, or 7.7% of
net sales, in fiscal 2016 and $284.8 million, or 6.8% of net sales, in fiscal
2015. The increase is primarily due to the impact of Stuart Weitzman,
contributing to $55.5 million of this increase, as well as increased Coach brand
information system costs and litigation costs, partially offset by lower Coach
brand occupancy costs.
Operating Income
Operating income increased 5.7% or $35.5 million to $653.5 million during fiscal
2016 as compared to $618.0 million in fiscal 2015. Operating margin decreased to
14.5% as compared to 14.7% in fiscal 2015. Excluding non-GAAP adjustments of
$123.1 million in fiscal 2016 and $170.5 million in fiscal 2015, as discussed in
the "GAAP to Non-GAAP Reconciliation" herein, operating income decreased 1.5% or
$11.9 million to $776.6 million from $788.5 million in fiscal 2015; and
operating margin was 17.3%, in fiscal 2016 as compared to 18.8% in fiscal 2015.
The following table presents operating income by reportable segment for fiscal
2016 compared to fiscal 2015:
                           July 2,     June 27,         Variance
                            2016         2015       Amount        %
                                      (millions)
  North America           $ 737.3$  820.5$ (83.2 )   (10.1 ) %
  International             512.7        480.6        32.1       6.7
  Other(1)                   22.9         30.1        (7.2 )   (23.9 )
  Corporate unallocated    (651.9 )     (708.6 )      56.7      (8.0 )
Coach brand               $ 621.0$  622.6$  (1.6 )    (0.3 ) %
Stuart Weitzman              32.5         (4.6 )      37.1        NM
Total operating income    $ 653.5$  618.0$  35.5       5.7   %


NM - Not meaningful


(1) Operating income in the Other category, which is not a reportable segment,

consists of Coach brand sales generated in licensing and disposition

channels.


Operating income for the Coach brand decreased 0.3% or $1.6 million to $621.0
million in fiscal 2016. Furthermore, operating margin for the Coach brand
remained flat at 15.0% in fiscal 2016 when compared to fiscal 2015. Excluding
non-GAAP adjustments, Coach brand operating income totaled $728.4 million in
fiscal 2016, resulting in an operating margin of 17.6%. This compared to Coach
brand operating income of $784.3 million in fiscal 2015, or an operating margin
of 18.9%.
North America Operating Income decreased 10.1% or $83.2 million to $737.3
million in fiscal 2016, reflecting the decrease in gross profit of $96.2 million
which was partially offset by lower SG&A expenses of $13.0 million. The decrease
in SG&A expenses was due to lower store-related costs, largely driven by net
store closures, as well as decreased variable selling costs as a result of lower
sales in North America stores, the Internet business and the wholesale channel.
Operating margin decreased 250

                                       42
--------------------------------------------------------------------------------

basis points to 30.8% in fiscal 2016 from 33.3% during the same period in the
prior year due to lower gross margin of 210 basis points and higher SG&A expense
as a percentage of net sales of 40 basis points.
International Operating Income increased 6.7% or $32.1 million to $512.7 million
in fiscal 2016, primarily reflecting an increase in gross profit of $37.4
million partially offset by higher SG&A expenses of $5.3 million. The increase
in SG&A expenses is primarily related to an increase in employee compensation,
depreciation expense related to our new modern luxury investments and increased
occupancy costs in Europe and Greater China to support the growth of the
business, partially offset by lower expenses in Japan and Asia (excluding
Greater China) primarily due to decreased occupancy and employee compensation
costs, as well as favorable foreign currency effects. Operating margin increased
50 basis points to 30.1% in fiscal 2016 from 29.6% during the same period in the
prior year primarily due to lower overall SG&A as a percentage of net sales
which increased operating margin by 200 basis points, partially offset by lower
gross margin of 150 basis points.
Corporate Unallocated Operating Expense decreased $56.7 million to $651.9
million in fiscal 2016, a decrease of 8.0% from $708.6 million in fiscal 2015.
This decrease was primarily attributable to lower non-GAAP charges incurred by
the Company in fiscal 2016 as compared to fiscal 2015, as discussed in the "GAAP
to Non-GAAP Reconciliation" herein. Excluding non-GAAP adjustments, unallocated
operating expenses decreased by $2.5 million to $544.5 million. This decrease is
primarily due to more favorable inventory production variances, lower Coach
brand occupancy costs and lower inventory reserve charges, partially offset by
increased information system and legal costs.
Stuart Weitzman Operating Income increased $37.1 million to $32.5 million in
fiscal 2016, resulting in an operating margin of 9.4%, compared to an operating
loss of $4.6 million in fiscal 2015, including the impact of non-GAAP charges as
discussed in the "GAAP to Non-GAAP Reconciliation" herein. Excluding non-GAAP
adjustments, including acquisition and integration-related costs as well as the
short-term impact of purchase accounting, Stuart Weitzman operating income
totaled $48.2 million in fiscal 2016, resulting in an operating margin of 14.0%.
This compared to Stuart Weitzman operating income of approximately $4 million in
fiscal 2015.
Provision for Income Taxes
The effective tax rate was 26.5% in fiscal 2016, as compared to 34.2% in fiscal
2015. Excluding non-GAAP charges as discussed in the "GAAP to Non-GAAP
Reconciliation" herein, the effective tax rate was 26.4% in fiscal 2016, as
compared to 32.1% in fiscal 2015. The decrease in our effective tax rate was
primarily attributable to the expiration of certain statutes partially offset by
the impact of certain ongoing audits, the benefit of available foreign tax
credits, and the geographic mix of earnings.
Net Income
Net income increased 14.4% or $58.1 million to $460.5 million in fiscal 2016 as
compared to $402.4 million in fiscal 2015. Excluding non-GAAP charges as
discussed in the "GAAP to Non-GAAP Reconciliation" herein, net income increased
3.8% or $20.5 million to $551.7 million in fiscal 2016 from $531.2 million in
fiscal 2015. This increase was primarily due to lower provision for income
taxes, partially offset by the impact of increased interest expense attributable
to our debt as well as lower operating income.
Earnings per Share
Net income per diluted share increased 13.6% to $1.65 in fiscal 2016 as compared
to $1.45 in fiscal 2015. Excluding non-GAAP charges as discussed in the "GAAP to
Non-GAAP Reconciliation" herein, net income per diluted share increased 3.1% or
$0.06 to $1.98 in fiscal 2016 from $1.92 in fiscal 2015, due to higher net
income. The impact of the 53rd week contributed approximately $0.07 to net
income per diluted share.

                                       43
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NON-GAAP MEASURES
The Company's reported results are presented in accordance with GAAP. The
reported gross profit, SG&A expenses, operating income, provision for income
taxes, net income and earnings per diluted share in fiscal 2017, fiscal 2016 and
fiscal 2015 reflect certain items, including the impact of the Transformation
Plan, the Operational Efficiency Plan and Acquisition-Related Charges. As a
supplement to the Company's reported results, these metrics are also reported on
a non-GAAP basis to exclude the impact of these items, along with a
reconciliation to the most directly comparable GAAP measures.
Furthermore, the Company's sales and earnings per diluted share results are
presented both including and excluding the impact of the 53rd week in fiscal
year 2016.
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 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. In addition, the compensation committee of the Company's Board will use
these non-GAAP measures when setting and assessing achievement of incentive
compensation goals.
The Company operates on a global basis and reports financial results in U.S.
dollars in accordance with GAAP. Fluctuations in foreign currency exchange rates
can affect the amounts reported by the Company in U.S. dollars with respect to
its foreign revenues and profit. Accordingly, certain increases and decreases in
operating results for the Company, the Coach brand and the Company's North
America and International segment have been presented both including and
excluding currency fluctuation effects from translating foreign-denominated
amounts into U.S. dollars and compared to the same period in the prior fiscal
year. Constant currency information compares results between periods as if
exchange rates had remained constant period-over-period. The Company calculates
constant currency revenue results by translating current period revenue in local
currency using the prior year period's monthly average currency conversion rate.
We believe these non-GAAP measures are useful to investors and others in
evaluating the Company's ongoing operating and financial results in a manner
that is consistent with management's evaluation of business performance and
understanding how such results compare with the Company's historical
performance. Additionally, we believe presenting certain increases and decreases
in constant currency provides a framework for assessing the performance of the
Company's business outside the United States and helps investors and analysts
understand the effect of significant year-over-year currency fluctuations. We
believe excluding these items assists investors and others in developing
expectations of future performance. 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.
For a detailed discussion on these non-GAAP measures, see Item 6. "Selected
Financial Data," and the Results of Operations section within Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FINANCIAL CONDITION
Cash Flows - Fiscal 2017 Compared to Fiscal 2016
                                                         Fiscal Year Ended
                                                       July 1,       July 2,
                                                        2017          2016         Change
                                                                   (millions)
Net cash provided by operating activities            $   853.8$   758.6$    95.2
Net cash provided by (used in) investing
activities                                               593.0        (810.0 )     1,403.0
Net cash provided by (used in) financing
activities                                               369.5        (384.9 )       754.4
Effect of exchange rate changes on cash and cash
equivalents                                               (2.4 )         3.5          (5.9 )
Net increase (decrease) in cash and cash
equivalents                                          $ 1,813.9     $  

(432.8 ) $ 2,246.7


The Company's cash and cash equivalents increased by $1.81 billion in fiscal
2017 compared to a decrease of $432.8 million in fiscal 2016, as discussed
below.
Net cash provided by operating activities
Net cash provided by operating activities increased $95.2 million primarily due
to higher net income of $130.5 million and higher non-cash charges of $98.5
million, partially offset by changes in operating assets and liabilities of
$133.8 million.

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The $133.8 million decline in changes in our operating asset and liability
balances was primarily driven by changes in other liabilities, accrued
liabilities and inventories, partially offset by changes in accounts payable and
other assets. Other liabilities were a use of cash of $53.4 million in fiscal
2017 compared to a source of cash of $49.5 million in fiscal 2016, primarily
driven by changes in tax liabilities (including the expiration of statutes
during the quarter), partially offset by higher store-related liabilities in
fiscal 2016. Accrued liabilities were a use of cash of $50.1 million in fiscal
2017 as compared to a source of cash of $30.1 million in fiscal 2016, primarily
driven by changes in derivative positions due to foreign currency fluctuations
and timing of other operating payments. Inventories were a use of cash of $20.0
million in fiscal 2017 as compared to a source of cash of $40.7 million in
fiscal 2016, primarily driven by increased inventory purchases. Accounts payable
were a source of cash of $8.4 million in fiscal 2017 as compared to a use of
cash in fiscal 2016 of $48.4 million, primarily driven by timing of inventory
payments and other expenses. Other assets were a source of cash of $48.0 million
in fiscal 2017 as compared to a use of cash of $6.3 million in fiscal 2016,
primarily driven by lower prepaid assets when compared to prior year.
Net cash provided by (used in) investing activities
Net cash provided by investing activities was $593.0 million in fiscal 2017
compared to a use of cash of $810.0 million in fiscal 2016. The $1.40 billion
increase in net cash was primarily due to proceeds from the sale of the
Company's equity method investment in Hudson Yards of $680.6 million in fiscal
2017, the impact of net cash proceeds from maturities and sales of investments
of $67.7 million in fiscal 2017, compared to net purchases of investments of
$238.8 million in fiscal 2016. This increase is also due to the absence of an
equity method investment in fiscal 2017 as compared to a $140.3 million
investment in fiscal 2016. Furthermore, in fiscal 2017, the Company received
proceeds from the sale of its prior headquarters of $126.0 million. The Company
spent $283.1 million on capital expenditures in fiscal 2017 as compared to
$396.4 million in fiscal 2016.
Net cash provided by (used in) financing activities
Net cash provided by financing activities was $369.5 million in fiscal 2017 as
compared to a use of cash of $384.9 million in fiscal 2016. This net increase of
$754.4 million was primarily due to the net proceeds of the issuance of Senior
Notes in fiscal 2017 of $997.2 million, partially offset by the repayment of
long-term debt of $285.0 million.
Cash Flows - Fiscal 2016 Compared to Fiscal 2015
                                                          Fiscal Year Ended
                                                       July 2,        June 27,
                                                         2016           2015          Change
                                                                     (millions)
Net cash provided by operating activities            $    758.6$    937.4$   (178.8 )
Net cash used in investing activities                    (810.0 )       (612.9 )       (197.1 )
Net cash (used in) provided by financing
activities                                               (384.9 )        389.3         (774.2 )
Effect of exchange rate changes on cash and cash
equivalents                                                 3.5          (13.9 )         17.4
Net (decrease) increase in cash and cash
equivalents                                          $   (432.8 )   $    

699.9 $ (1,132.7 )


The Company's cash and cash equivalents decreased $432.8 million in fiscal 2016
compared to an increase of $699.9 million in fiscal 2015, as discussed below.
Net cash provided by operating activities
Net cash provided by operating activities decreased $178.8 million primarily due
to the year-over-year declines in cash sources from operating assets and
liabilities (decrease of $131.7 million) and noncash charges (decrease of $105.2
million), partially offset by higher net income of $58.1 million.
The overall decline in changes in our operating asset and liability balances
were primarily driven by changes in accounts payable, other liabilities, accrued
liabilities, accounts receivable and other balance sheet changes. Accounts
payable were a use of cash of $48.4 million in fiscal 2016 as compared to a
source of cash in fiscal 2015 of $64.4 million, driven by an overall decrease in
inventory purchases (as well as timing of inventory payments), the timing of
transformation-related payments and a decrease in payables due to timing of
payments. Other liabilities were a source of cash of $49.5 million in fiscal
2016 compared to a use of cash of $5.9 million in fiscal 2015, primarily driven
by additional store-related liabilities, largely due to the execution of two new
store leases in the third quarter of fiscal 2016 on Fifth Avenue in New York
City and Regent Street in London. Accrued liabilities was a source of cash of
$30.1 million in fiscal 2016 as compared to a source of cash of $63.2 million in
fiscal 2015. This decrease is primarily driven by higher bonus payments in the
first quarter of fiscal 2016 compared to fiscal 2015, partially offset by an
increase in accrued duties. Accounts receivable was a use of cash of $28.3
million in fiscal 2016 compared to a source of cash of $0.3 million in fiscal
2015, primarily driven by increased wholesale shipments for Coach brand and an
increase in credit card receivables in fiscal 2016 as compared to fiscal 2015
driven by the timing of sales in the last week of fiscal 2016. Other

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balance sheet changes, net, were a use of cash of $6.3 million in fiscal 2016 as
compared to a source of cash of $17.8 million in fiscal 2015, primarily due to
increased store-related related receivables during fiscal 2016 as compared to
fiscal 2015 as a result of select new store openings, including our Fifth Avenue
and Regent Street stores, described above.
Net cash used in investing activities
Net cash used in investing activities was $810.0 million in fiscal 2016 compared
to a use of cash of $612.9 million in fiscal 2015. The increase in net cash used
of $197.1 million was primarily due to the impact of net cash used for purchase
of investments of $238.8 million in fiscal 2016, compared to net proceeds from
investments of $255.6 million in fiscal 2015, as well as increased capital
expenditures in fiscal 2016, partially offset by a $494.0 million decrease in
cash used for acquisitions, primarily related to the Stuart Weitzman acquisition
that occurred in the fourth quarter of fiscal 2015.
Net cash (used in) provided by financing activities
Net cash used in financing activities was $384.9 million in fiscal 2016 as
compared to a source of cash of $389.3 million in fiscal 2015. This increase in
cash used of $774.2 million was primarily due to the absence of proceeds in
fiscal 2016 from the issuance of long-term debt in fiscal 2015. In fiscal 2015,
the Company had proceeds from the issuance of long-term debt of $896.7 million,
partially offset by net repayments of $140.0 million under the Company's Amended
and Restated Credit Agreement.
Working Capital and Capital Expenditures
As of July 1, 2017, in addition to our cash flows from operations, our sources
of liquidity and capital resources were comprised of the following:
                                              Sources of         Outstanding       Total Available
                                               Liquidity        Indebtedness         Liquidity(1)
                                                                   (millions)
Cash and cash equivalents(2)                $     2,672.9     $             -     $        2,672.9
Short-term investments(2)                           410.7                   -                410.7
Non-current investments                              75.1                   -                 75.1
Revolving Credit Facility(1)(3)                     900.0                   -                900.0
Term Loans(1)                                     1,100.0                   -              1,100.0
3.000% Senior Notes due 2022(4)                     400.0               400.0                    -
4.250% Senior Notes due 2025(4)                     600.0               600.0                    -
4.125% Senior Notes due 2027(4)                     600.0               600.0                    -
Total                                       $     6,758.7$       1,600.0$        5,158.7

(1) On May 30, 2017, the Company entered into a definitive credit agreement

whereby Bank of America, N.A., as administrative agent, the other agents

party thereto, and a syndicate of banks and financial institutions have (i)

committed to lend to the Company, subject to the satisfaction or waiver of

the conditions set forth in the agreement, an $800.0 million term loan

facility maturing six months after the term loans thereunder are borrowed

(the "Six-Month Term Loan Facility"), and a $300.0 million term loan

facility maturing three years after the term loans thereunder are borrowed

(collectively with the Six-Month Term Loan Facility, the "Term Loan

Facilities") and (ii) made available to the Company a $900.0 million

revolving credit facility, including sub-facilities for letters of credit,

with a maturity date of May 30, 2022 (the "Revolving Credit Facility" and

collectively with the Term Loan Facilities, the "Facility"). Subsequent to

fiscal 2017 year end, in connection with the acquisition of Kate Spade, the

Company borrowed $800.0 million under the six-month term loan credit

facility and $300.0 million under the three-year term loan credit facility

     for a total of $1.1 billion. Refer to Note 20, "Subsequent Events" for
     further information.

(2) As of July 1, 2017, approximately 39% of our cash and short-term investments

were held outside the U.S. in jurisdictions where we intend to permanently

reinvest our undistributed earnings to support our continued growth. We are

not dependent on foreign cash to fund our domestic operations. If we choose

     to repatriate any funds to the U.S. in the future, we would be subject to
     applicable U.S. and foreign taxes.


(3)  On May 30, 2017, the Revolving Credit Facility replaced the Company's

previously existing revolving credit facility agreement under the Amendment

and Restatement Agreement, dated as of March 18, 2015, by and between the

Company, certain lenders and JPMorgan Chase Bank, N.A., as administrative

agent. Borrowings under the Facility bear interest at a rate per annum equal

to, at the Borrowers' option, either (a) an alternate base rate (which is a

rate equal to the greatest of (i) the Prime Rate in effect on such day, (ii)

the Federal Funds Effective Rate in effect on such day plus ½ of 1% or (iii)

the Adjusted LIBO Rate for a one month Interest Period on such day plus 1%)

or (b) a rate based on the rates applicable for deposits in the interbank



                                       46
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market for U.S. Dollars or the applicable currency in which the loans are made
plus, in each case, an applicable margin. The applicable margin will be
determined by reference to a grid, defined in the Credit Agreement, based on the
ratio of (a) consolidated debt plus 600% of consolidated lease expense to (b)
consolidated EBITDAR. Additionally, the Company pays a commitment fee at a rate
determined by the reference to the aforementioned pricing grid. The Company had
no outstanding borrowings under the Revolving Credit Facility at fiscal year
end. Refer to Note 10, "Debt" for further information on our existing debt
instruments.
(4)  In March 2015, the Company issued $600.0 million aggregate principal amount

of 4.250% senior unsecured notes due April 1, 2025 at 99.445% of par (the

"2025 Senior Notes"). Furthermore, on June 20, 2017, the Company issued

$400.0 million aggregate principal amount of 3.000% senior unsecured notes

due July 15, 2022 at 99.505% of par (the "2022 Senior Notes"), and $600.0

million aggregate principal amount of 4.125% senior unsecured notes due

April 15, 2027 at 99.858% of par (the "2027 Senior Notes"). Furthermore, the

indentures for the 2025 Senior Notes, 2022 Senior Notes and 2027 Senior

Notes contain certain covenants limiting the Company's ability to: (i)

create certain liens, (ii) enter into certain sale and leaseback

transactions and (iii) merge, or consolidate or transfer, sell or lease all

or substantially all of the Company's assets. As of July 1, 2017, no known

events of default have occurred. Refer to Note 10, "Debt" for further

information on our existing debt instruments.


We believe that our Revolving Credit Facility and Term Loans are adequately
diversified with no undue concentrations in any one financial institution. As of
July 1, 2017, there were 13 financial institutions participating in the
Revolving Credit Facility and Term Loans, with no one participant maintaining a
combined maximum commitment percentage in excess of 13%. We have no reason to
believe at this time that the participating institutions will be unable to
fulfill their obligations to provide financing in accordance with the terms of
the facility in the event we elect to draw funds in the foreseeable future.
We have the ability to draw on our credit facilities or access other sources of
financing options available to us in the credit and capital markets for, among
other things, our restructuring initiatives, acquisition or integration-related
costs, settlement of a material contingency, or a material adverse business or
macroeconomic development, as well as for other general corporate business
purposes.
Management believes that cash flows from operations, access to the credit and
capital markets and our credit lines, on-hand cash and cash equivalents and our
investments will provide adequate funds to support our operating, capital, and
debt service requirements for the foreseeable future, our plans for
acquisitions, further business expansion and restructuring-related initiatives.
We expect total capital expenditures to be in the area of $325 million in fiscal
2018. Future events, such as acquisitions or joint ventures, and other similar
transactions may require additional capital. There can be no assurance that any
such capital will be available to the Company on acceptable terms or at all. Our
ability to fund working capital needs, planned capital expenditures, dividend
payments and scheduled debt payments, as well as to comply with all of the
financial covenants under our debt agreements, depends on 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 the Company's control.
Kate Spade Acquisition
On July 11, 2017, the Company completed its acquisition of Kate Spade & Company
for $18.50 per share in cash for a total of approximately $2.4 billion. As a
result, Kate Spade has become a wholly owned subsidiary of Coach, Inc. The
combination of Coach, Inc. and Kate Spade & Company creates a leading luxury
lifestyle company with a more diverse multi-brand portfolio supported by
significant expertise in handbag design, merchandising, supply chain and retail
operations as well as solid financial acumen.
Stuart Weitzman Acquisition
On May 4, 2015, pursuant to the terms of the purchase agreement dated January 5,
2015, the Company acquired all of the equity interests of Stuart Weitzman
Intermediate LLC, a luxury footwear company and the parent of Stuart Weitzman
Holdings, LLC, from Topco for an aggregate payment of approximately $531.1
million in cash, subject to a potential earnout of up to $44.1 million of cash
based on achievement of certain revenue targets. The company does not expect to
achieve these revenue targets. As of July 1, 2017, the Company recorded a
reversal of $35.2 million as there is no payout expected.
Seasonality
The Company's results are typically affected by seasonal trends. During the
first fiscal quarter, we build inventory for the holiday selling season. In the
second fiscal quarter, working capital requirements are reduced substantially as
we generate higher net sales and operating income, especially during the holiday
months of November and December.
Fluctuations in net sales, operating income and operating cash flows of the
Company in any fiscal quarter may be affected by the timing of wholesale
shipments and other events affecting retail sales, including adverse weather
conditions or other macroeconomic events.

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Contractual and Other Obligations
Firm Commitments
As of July 1, 2017, the Company's contractual obligations are as follows:
                                                    Fiscal          Fiscal            Fiscal          Fiscal 2023
                                     Total           2018         2019 - 2020       2021 - 2022       and Beyond
                                                                     (millions)

Capital expenditure commitments $ 78.0$ 47.7$ 22.7 $ 7.6 $

           -
Inventory purchase obligations         167.5          167.5                 -                 -                 -
Operating leases                     2,458.7          295.4             512.4             400.0           1,250.9
Debt repayment                       1,600.0              -                 -             400.0           1,200.0
Interest on outstanding debt           514.0           46.4             124.5             124.5             218.6
Other                                    6.0            2.6               3.4                 -                 -
Total                             $  4,824.2$    559.6$       663.0$       932.1$     2,669.5


Excluded from the above contractual obligations table is the non-current
liability for unrecognized tax benefits of $118.2 million as of July 1, 2017, as
we cannot make a reliable estimate of the period in which the liability will be
settled, if ever. The above table also excludes amounts included in current
liabilities in the Consolidated Balance Sheet at July 1, 2017 as these items
will be paid within one year, certain long-term liabilities not requiring cash
payments and cash contributions for the Company's pension plan.
On May 7, 2017, the Company entered into an Agreement and Plan of Merger (the
"Merger Agreement") with Kate Spade & Company and Chelsea Merger Sub Inc., a
Delaware corporation and direct wholly owned subsidiary of Coach (the "Merger
Sub"). Pursuant to the Merger Agreement, on May 26, 2017, Merger Sub commenced
an all-cash tender offer to acquire all of Kate Spade's outstanding shares of
common stock, par value $1.00 per share, at a purchase price of $18.50 per
share. The Company completed its acquisition on July 11, 2017. The purchase
price was approximately $2.4 billion, which was funded by a combination of
Senior Notes, Term Loan Facilities and cash on hand. The purchase price and Term
Loan Facilities are excluded from the above table, as they occurred subsequent
to July 1, 2017. Refer to the Working Capital and Capital Expenditures table
above for more information on the Term Loan Facilities and Senior Notes.
The Company currently estimates that it will incur costs in the range of $150 -
$200 million related to Kate Spade integration in fiscal 2018, which include
severance, store closure costs and inventory realignment. The Company continues
to fully develop its integration plan. Of these costs, the Company expects to
incur approximately $60 million of severance and other costs related to
agreements with certain Kate Spade executives. This amount is excluded from the
above table, as these contractual obligations were created subsequent to July 1,
2017.
The Company also expects to incur costs of approximately $45 million of
acquisition-related expenses, which is excluded from the above table, as these
contractual obligations were created subsequent to July 1, 2017.
Refer to Note 7, "Acquisitions" and Note 20, "Subsequent Events" for further
information.
Off-Balance Sheet Arrangements
In addition to the commitments included in the table above, we have outstanding
letters of credit and bank guarantees of $9.0 million as of July 1, 2017,
primarily serving to collateralize our obligation to third parties for insurance
claims, leases and material used in product manufacturing. These letters of
credit expire at various dates through 2039.
We do not maintain any other off-balance sheet arrangements, transactions,
obligations, or other relationships with unconsolidated entities that would be
expected to have a material current or future effect on our consolidated
financial statements. Refer to Note 11, "Commitments and Contingencies," to the
accompanying audited consolidated financial statements for further information.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect our results of operations, financial
condition and cash flows as well as the disclosure of contingent assets and
liabilities as of the date of the Company's financial statements. Actual results
could differ from estimates in amounts that may be material to the financial
statements. Predicting future events is inherently an imprecise activity and, as
such, requires the use of judgment. Actual results could differ from estimates
in amounts that may

                                       48
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be material to the financial statements. The development and selection of the
Company's critical accounting policies and estimates are periodically reviewed
with the Audit Committee of the Board.
The accounting policies discussed below are considered critical because changes
to certain judgments and assumptions inherent in these policies could affect the
financial statements. For more information on the Company's accounting policies,
please refer to the Notes to Consolidated Financial Statements.
Revenue Recognition
Revenue is recognized by the Company when there is persuasive evidence of an
arrangement, delivery has occurred (and risks and rewards of ownership have been
transferred to the buyer), price has been fixed or is determinable, and
collectability is reasonably assured.
Retail store and concession-based shop-in-shop revenues are recognized at the
point of sale, which occurs when merchandise is sold in an over-the-counter
consumer transaction. Internet revenue from sales of products ordered through
the Company's e-commerce sites is recognized upon delivery and receipt of the
shipment by its customers and includes shipping and handling charges paid by
customers. Retail and internet revenues are also reduced by an estimate for
returns at the time of sale.
Wholesale revenue is recognized at the time title passes and risk of loss is
transferred to customers. Wholesale revenue is recorded net of estimates of
markdown allowances, returns and discounts. Estimates for markdown reserves are
based on historical trends, actual and forecasted seasonal results, an
evaluation of current economic and market conditions, retailer performance, and,
in certain cases, contractual terms. Returns and allowances require pre-approval
from management and discounts are based on trade terms. The Company reviews and
refines these estimates on a quarterly basis. The Company's historical estimates
of these costs have not differed materially from actual results.
At July 1, 2017, a 10% change in the allowances for estimated uncollectible
accounts, markdowns and returns would not have resulted in a material change in
the Company's reserves and net sales.
Inventories
Substantially all of the Company's inventories are comprised of finished goods,
and are reported at the lower of cost or market. Inventory costs include
material, conversion costs, freight and duties and are primarily determined by
the first-in, first-out method. The Company reserves for inventory, including
slow-moving and aged inventory, based on current product demand, expected future
demand and historical experience. A decrease in product demand due to changing
customer tastes, buying patterns or increased competition could impact the
Company's evaluation of its inventory and additional reserves might be required.
Estimates may differ from actual results due to the quantity, quality and mix of
products in inventory, consumer and retailer preferences and market conditions.
At July 1, 2017, a 10% change in the inventory reserve, would not have resulted
in material change in inventory and cost of sales.
Business Combinations
In connection with an acquisition, the Company records all assets acquired and
liabilities assumed of the acquired business at their acquisition date fair
value, including the recognition of contingent consideration at fair value on
the acquisition date. These fair value determinations require judgment and may
involve the use of significant estimates and assumptions, including assumptions
with respect to future cash inflows and outflows, discount rates, asset lives,
and market multiples, among other items. We may utilize independent third-party
valuation firms to assist in making these fair value determinations. Refer to
Note 7, "Acquisitions," for detailed disclosures related to our acquisitions.
Goodwill and Other Intangible Assets
Goodwill and certain other intangible assets deemed to have indefinite useful
lives, including trademarks and trade names, are not amortized, but are assessed
for impairment at least annually. Finite-lived intangible assets are amortized
over their respective estimated useful lives and, and along with other
long-lived assets as noted above, are evaluated for impairment periodically
whenever events or changes in circumstances indicate that their related carrying
values may not be fully recoverable. Estimates of fair value for finite-lived
and indefinite-lived intangible assets are primarily determined using discounted
cash flows and the relief from royalty method, respectively, with consideration
of market comparisons and recent transactions. This approach uses significant
estimates and assumptions, including projected future cash flows, discount
rates, royalty rates and growth rates.
The Company generally performs its annual goodwill and indefinite-lived
intangible assets impairment analysis using a quantitative approach. The
quantitative goodwill impairment test identifies the existence of potential
impairment by comparing the fair value of each reporting unit with its carrying
value, including goodwill. If the fair value of a reporting unit exceeds its
carrying value, the reporting unit's goodwill is considered not to be impaired.
If the carrying value of a reporting unit exceeds its fair value, an impairment
charge is recognized in an amount equal to that excess. The impairment charge
recognized is limited to the amount of goodwill allocated to that reporting
unit.

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Determination of the fair value of a reporting unit and intangible asset is
based on management's assessment, considering independent third-party appraisals
when necessary. Furthermore, this determination is judgmental in nature and
often involves the use of significant estimates and assumptions, which may
include projected future cash flows, discount rates, royalty rates, growth
rates, and determination of appropriate market comparables and recent
transactions. These estimates and assumptions could have a significant impact on
whether or not an impairment charge is recognized and the amount of any such
charge.
The Company performs its annual impairment assessment of goodwill, including
trademarks and trade names, during the fourth quarter of each fiscal year. The
Company determined that there was no impairment in fiscal 2017, fiscal 2016 or
fiscal 2015 as the fair values of our Coach brand reporting units significantly
exceeded their respective carrying values. Furthermore, given the recency of our
Stuart Weitzman acquisition, the fair values of the Stuart Weitzman brand
reporting unit and indefinite-lived trademarks and trade names exceeded their
respective carrying values of $267.0 million and $156.0 million respectively, by
approximately 20%. Several factors could impact the Stuart Weitzman brand's
ability to achieve future cash flows, including the optimization of the store
fleet productivity, the impact of promotional activity in department stores, the
consolidation or take-back of certain distributor relationships, the
simplification of certain corporate overhead structures and other initiatives
aimed at expanding higher performing categories of the business. Given the
relatively small excess of fair value over carrying value as noted above, if
profitability trends decline during fiscal 2018 from those that are expected, it
is possible that an interim test, or our annual impairment test, could result in
an impairment of these assets.
Valuation of Long-Lived Assets
Long-lived assets, such as property and equipment, are evaluated for impairment
whenever events or circumstances indicate that the carrying value of the assets
may not be recoverable. In evaluating long-lived assets for recoverability, the
Company uses its best estimate of future cash flows expected to result from the
use of the asset and its eventual disposition. To the extent that estimated
future undiscounted net cash flows attributable to the asset are less than its
carrying value, an impairment loss is recognized equal to the difference between
the carrying value of such asset and its fair value, considering external market
participant assumptions.
In determining future cash flows, the Company takes various factors into
account, including the effects of macroeconomic trends such as consumer
spending, in-store capital investments, promotional cadence, the level of
advertising and changes in merchandising strategy. Since the determination of
future cash flows is an estimate of future performance, there may be future
impairments in the event that future cash flows do not meet expectations.
Share-Based Compensation
The Company recognizes the cost of equity awards to employees and the
non-employee Directors based on the grant-date fair value of those awards. The
grant-date fair values of share unit awards are based on the fair value of the
Company's common stock on the date of grant. The grant-date fair value of stock
option awards is determined using the Black-Scholes option pricing model and
involves several assumptions, including the expected term of the option,
expected volatility and dividend yield. The expected term of options represents
the period of time that the options granted are expected to be outstanding and
is based on historical experience. Expected volatility is based on historical
volatility of the Company's stock as well as the implied volatility from
publicly traded options on the Company's stock. Dividend yield is based on the
current expected annual dividend per share and the Company's stock price.
Changes in the assumptions used to determine the Black-Scholes value could
result in significant changes in the Black-Scholes value.
For stock options and share unit awards, the Company recognizes share-based
compensation net of estimated forfeitures and revises the estimates in
subsequent periods if actual forfeitures differ from the estimates. We estimate
the forfeiture rate based on historical experience as well as expected future
behavior.
The Company grants performance-based share awards to certain key executives, the
vesting of which is subject to the executive's continuing employment and the
Company's achievement of certain performance goals. On a quarterly basis, the
Company assesses actual performance versus the predetermined performance goals,
and adjusts the share-based compensation expense to reflect the relative
performance achievement. Actual distributed shares are calculated upon
conclusion of the service and performance periods, and include dividend
equivalent shares. If the performance-based award incorporates a market
condition, the grant-date fair value of such award is determined using a pricing
model, such as a Monte Carlo Simulation.
A hypothetical 10% change in our stock-based compensation expense would not have
a material impact to our fiscal 2017 net income.
Income Taxes
The Company's effective tax rate is based on pre-tax income, statutory tax
rates, tax laws and regulations, and tax planning strategies available in the
various jurisdictions in which the Company operates. The Company classifies
interest and penalties on uncertain tax positions in the provision for income
taxes. We record net deferred tax assets to the extent we believe that it is
more likely than not that these assets will be realized. In making such
determination, we consider all available evidence, including

                                       50
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scheduled reversals of deferred tax liabilities, projected future taxable
income, tax planning strategies and recent and expected future results of
operation. We reduce our deferred tax assets by a valuation allowance if, based
upon the weight of available evidence, it is more likely than not that some
amount of deferred tax assets is not expected to be realized. Deferred taxes are
not provided on the undistributed earnings of subsidiaries as such amounts are
considered to be permanently invested.
The Company recognizes the impact of tax positions in the financial statements
if those positions will more likely than not be sustained on audit, based on the
technical merits of the position. Although we believe that the estimates and
assumptions we use are reasonable and legally supportable, the final
determination of tax audits could be different than that which is reflected in
historical tax provisions and recorded assets and liabilities. Tax authorities
periodically audit the Company's income tax returns, and in specific cases, the
tax authorities may take a contrary position that could result in a significant
impact on our results of operations. Significant management judgment is required
in determining the effective tax rate, in evaluating our tax positions and in
determining the net realizable value of deferred tax assets.
Recent Accounting Pronouncements
See Note 2, "Significant Accounting Policies," to the accompanying audited
consolidated financial statements for a description of certain recently adopted,
issued or proposed accounting standards which may impact our consolidated
financial statements in future reporting periods.

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