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4-Traders Homepage  >  Equities  >  Nyse  >  Coach Inc    COH

COACH INC (COH)
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COACH : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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05/10/2017 | 10:58pm CEST
The following discussion of the Company's financial condition and results of
operations should be read together with the Company's condensed consolidated
financial statements and notes to those statements, included elsewhere in this
document. When used herein, the terms "Company," "Coach," "we," "us" and "our"
refer to Coach, Inc., including consolidated subsidiaries. Unless the context
requires otherwise, references to the "Coach brand" do not include the Stuart
Weitzman brand, and references to the "Stuart Weitzman brand" do not include the
Coach brand.
EXECUTIVE OVERVIEW
Coach, Inc. is a leading New York design house of modern luxury accessories and
lifestyle brands. The Coach brand was established in New York City in 1941, and
has a rich heritage of pairing exceptional leathers and materials with
innovative design. Coach, Inc. acquired Stuart Weitzman, a leader in women's
designer footwear, during the fourth quarter of fiscal 2015.
Coach, Inc. operates in three segments: North America (Coach brand),
International (Coach brand), and Stuart Weitzman. The North America segment
includes sales of Coach brand products to North American customers through
Coach-operated stores (including the Internet) and sales to North American
wholesale customers. The International segment includes sales of Coach brand
products to customers through Coach-operated stores and concession shop-in-shops
in Japan, mainland China, Hong Kong, Macau, Singapore, Taiwan, Malaysia, South
Korea, the United Kingdom, France, Ireland, Spain, Portugal, Germany, Italy,
Austria, Belgium, the Netherlands and Switzerland. Additionally, International
includes sales to consumers through the Internet in Japan, mainland China, South
Korea, the United Kingdom, France, Spain, Germany and Italy, as well as sales to
wholesale customers and distributors in approximately 55 countries. The Stuart
Weitzman segment includes worldwide sales generated by the Stuart Weitzman
brand, primarily through department stores in North America and international
locations, 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 in licensing and disposition channels.
As the Company's business model is based on multi-channel and brand global
distribution, our success does not depend solely on the performance of a single
channel or geographic area.
We are focused on driving long-term growth and best in class profitability
through the following key initiatives:
Drive brand relevance
•      Transform the Coach brand into a modern luxury brand by continuing to
       evolve across the key consumer touchpoints of product, stores and
       marketing.


•      Reinvigorate growth and brand relevance through our differentiated

positioning, which combines our history of heritage and craftsmanship with

Stuart Vevers's modern creative vision.

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

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

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

notably in mainland China and Europe.

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


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

Build an infrastructure to support future growth initiatives • Create an agile and scalable business model to support sustainable/future

       growth for Coach, Inc.


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 will be
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. Refer to Note 4, "Restructuring Activities," and "GAAP to Non-GAAP
Reconciliation" for further information.

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Transformation Plan
During the fourth quarter of fiscal 2014, Coach, Inc. announced a multi-year
strategic plan with the objective of transforming the Coach brand and
reinvigorating growth, which we believe will enable the Company to return to
'best-in-class' profitability. This Transformation Plan was built on the core
brand equities of quality and craftsmanship with the aim of evolving our
competitive value proposition. We believe our strategy offers significant growth
opportunities in handbags and accessories, as well as in the broader set of
lifestyle categories that we have operated in for some time but have
historically been less developed, including footwear and ready-to-wear. This
strategy requires an integrated holistic approach, across product, stores and
marketing and promotional activities, and entails the roll-out of carefully
crafted aspirational marketing campaigns to define the Coach brand and to
deliver a fuller and more consistent brand expression.
Key operational and cost measures of the Transformation Plan included: (i) the
investment in capital improvements in our stores and wholesale locations to
drive comparable sales improvement; (ii) the optimization and streamlining of
our organizational model as well as the closure of underperforming stores in
North America, and select International stores; (iii) the realignment of
inventory levels and mix to reflect our elevated product strategy and consumer
preferences; (iv) the investment in incremental advertising costs to elevate
consumer perception of our Coach brand, 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. For further discussion of
charges incurred in connection with the Transformation Plan, see "GAAP to
Non-GAAP Reconciliation," herein.
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. Further 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.") in its referendum on June 23, 2016, commonly known
as "Brexit." 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. 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.
Additional macroeconomic events including foreign exchange rate volatility in
various parts of the world, recent and evolving impacts of economic and
geopolitical events in Hong Kong, Macau and mainland China ("Greater China"),
the impact of terrorist acts (particularly in Europe), disease epidemics and a
slowdown in emerging market growth (particularly in Asia) have contributed to
this uncertainty. Our results have been impacted by foreign exchange rate
fluctuations, and will continue to fluctuate with future volatility.
Certain of our wholesale customers, particularly those located in the U.S., have
become highly promotional and have aggressively marked down their merchandise.
Despite our planned reduction in markdown allowances during fiscal 2017 and our
strategic actions in the wholesale channel discussed below, such promotional
activity could negatively impact our brands, which could affect our business,
results of operations, and financial condition. Over the remainder of fiscal
2017, we expect to continue investing in the elevation of shop-in-shop
environments, and rationalizing the distribution footprint in the North America
wholesale channel by closing about 25% of doors from fiscal 2016 year-end
levels.
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 calendar 2017 but
caution that there is considerable uncertainty surrounding the underlying
assumptions of the forecast.

                                       22
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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.
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" disclosed in our Annual Report on Form 10-K for the
fiscal year ended July 2, 2016.

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THIRD QUARTER FISCAL 2017 COMPARED TO THIRD QUARTER FISCAL 2016
The following table summarizes results of operations for the third quarter of
fiscal 2017 compared to the third quarter of fiscal 2016. All percentages shown
in the table below and the discussion that follows have been calculated using
unrounded numbers.
                                                     Three Months Ended
                               April 1, 2017           March 26, 2016              Variance
                                             (millions, except per share data)

                                         % of                      % of
                            Amount    net sales      Amount     net sales     Amount        %
Net sales                  $ 995.2       100.0 %   $ 1,033.1       100.0 %   $ (37.9 )    (3.7 )%
Gross profit                 705.7        70.9         713.0        69.0        (7.3 )    (1.0 )
SG&A expenses                554.6        55.7         578.7        56.0       (24.1 )     4.2
Operating income             151.1        15.2         134.3        13.0        16.8      12.5
Interest expense, net          4.0         0.4           6.5         0.6        (2.5 )   (38.2 )
Provision for income taxes    24.9         2.5          15.3         1.5         9.6     (61.9 )
Net income                   122.2        12.3         112.5        10.9         9.7       8.7
Net income per share:
   Basic                   $  0.44$    0.40$  0.04       7.5  %
   Diluted                 $  0.43$    0.40$  0.03       7.4  %





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 the third quarter of fiscal 2017 and fiscal 2016 reflect
the impact of the Operational Efficiency Plan, Acquisition-Related Costs and the
Transformation Plan, as noted in the following tables. Refer to page 36 for
further discussion on the Non-GAAP Measures.
Third Quarter Fiscal 2017 Items
                                                                 Three 

Months Ended April 1, 2017

                                                                                                                             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          $      705.7     $               -     $                 -             $                 -             $       705.7
SG&A expenses                554.6                     -                     6.4                             4.5                     543.7
Operating income             151.1                     -                    (6.4 )                          (4.5 )                   162.0
Provision for income
taxes                         24.9                     -                    (1.6 )                          (1.2 )                    27.7
Net income                   122.2                     -                    (4.8 )                          (3.3 )                   130.3
Diluted net income
per share                     0.43                     -                   (0.02 )                         (0.01 )                    0.46


In the third quarter of fiscal 2017, the Company incurred pre-tax charges, as
follows:
•      Operational Efficiency Plan - $6.4 million primarily related to
       organizational efficiency costs and technology infrastructure; and


•      Acquisition-Related Costs - $4.5 million total charges related to the
       acquisition of Stuart Weitzman Holdings LLC related to charges

attributable to integration-related activities and contingent payments (of

which $2.8 million of charges are recorded within unallocated corporate

expenses within the Coach brand and $1.7 million of charges are recorded

within the Stuart Weitzman segment).


Total Operational Efficiency Plan and Acquisition-Related Costs taken together
increased the Company's SG&A expenses by $10.9 million, negatively impacting net
income by $8.1 million, or $0.03 per diluted share.

                                       24
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Actions under our Operational Efficiency Plan will be substantially completed by
the end of fiscal 2017, with expected incremental charges estimated in the range
of $20 million (which primarily relate to the costs of replacing and updating
the Company's core technology platforms, organizational efficiency costs, and
network optimization). Refer to the "Executive Overview" herein and Note 4,
"Restructuring Activities," for further information regarding this plan.
Furthermore, the Company expects to incur aggregate Stuart Weitzman pre-tax
Acquisition-Related Costs of around $20 million in fiscal 2017, which primarily
include the impact of contingent earnout payments, and to a lesser extent,
integration-related activities. However, Acquisition-Related Costs could be
significantly lower if contingent earnout payments related to the achievement of
revenue targets will not be paid, as described in Note 10, "Fair Value
Measurements."
Third Quarter Fiscal 2016 Items
                                                               Three Months Ended March 26, 2016
                                                                                                                           Non-GAAP Basis
                        GAAP Basis       Transformation and      Operational Efficiency                                      (Excluding
                      (As Reported)         Other Actions                 Plan               Acquisition-Related Costs         Items)
                                                               (millions, except per share data)
Gross profit          $      713.0     $               -         $                   -     $                 -             $       713.0
SG&A expenses                578.7                   9.4                             -                     8.1                     561.2
Operating income             134.3                  (9.4 )                           -                    (8.1 )                   151.8
Provision for income
taxes                         15.3                  (3.0 )                           -                    (2.9 )                    21.2
Net income                   112.5                  (6.4 )                           -                    (5.2 )                   124.1
Diluted net income
per share                     0.40                 (0.02 )                           -                   (0.02 )                    0.44


In the third quarter of fiscal 2016, the Company incurred charges as follows:
•Transformation and Other Actions - $9.4 million under our Coach brand
Transformation Plan primarily due to organizational efficiency costs and
accelerated depreciation as a result of store renovations, within North America
and select International stores;
•Acquisition-Related Costs - $8.1 million total acquisition-related costs, of
which $7.8 million primarily related to charges attributable to
integration-related activities and contingent payments (of which $5.4 million is
recorded within unallocated corporate expenses within the Coach brand, and $2.4
million is recorded within the Stuart Weitzman segment), and $0.3 million
related to the limited life impact of purchase accounting, recorded within the
Stuart Weitzman segment.
Total Transformation Plan and Acquisition-Related Costs taken together increased
the Company's SG&A expenses by $17.5 million, negatively impacting net income by
$11.6 million, or $0.04 per diluted share.
Summary - Third Quarter of Fiscal 2017
Net sales in the third quarter of fiscal 2017 decreased 3.7% to $995.2 million,
due to decreased revenues from the Coach brand business. Excluding the effects
of foreign currency, net sales decreased 3.4% or $35.2 million. Our gross profit
decreased by 1.0% to $705.7 million during the third quarter of fiscal 2017.
SG&A expenses decreased by 4.2% to $554.6 million in the third quarter of fiscal
2017. Excluding non-GAAP adjustments as described in the "GAAP to non-GAAP
Reconciliation" herein, SG&A expenses decreased by 3.1% to $543.7 million.
Net income increased 8.7% in the third quarter of fiscal 2017 as compared to the
third quarter of fiscal 2016, primarily due to an increase in operating income
of $16.8 million, partially offset by an increase of $9.6 million in our
provision for income taxes. Net income per diluted share increased 7.4%
primarily due to higher net income. Excluding non-GAAP adjustments, net income
and net income per diluted share increased 5.1% and 3.8%, respectively.
Currency Fluctuation Effects
The change in net sales for the third quarter of fiscal 2017 compared to fiscal
2016 has been presented both including and excluding currency fluctuation
effects.

                                       25
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Net Sales The following table presents net sales by reportable segment for the third quarter of fiscal 2017 compared to the third quarter of fiscal 2016:

                                      Three Months Ended
                      Total Net Sales                        Percentage of
                                                            Total Net Sales
                  April 1,       March 26,    Rate of    April 1,    March 26,
                    2017           2016        Change      2017         2016
                   (dollars in millions)
  North America $      474.2$    498.9     (5.0 )%     47.6 %        48.3 %
  International        429.5         448.2     (4.2 )      43.2          43.4
  Other(1)              11.6           6.8     70.6         1.2           0.6
Coach brand     $      915.3$    953.9     (4.1 )      92.0 %        92.3 %
Stuart Weitzman         79.9          79.2      1.1         8.0           7.7
Total net sales $      995.2$  1,033.1     (3.7 )     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 4.1% or $38.6 million to $915.3 million.
Excluding the unfavorable impact of foreign currency, net sales decreased 3.9%.
North America Net Sales decreased 5.0% or $24.7 million to $474.2 million in the
third quarter of fiscal 2017, which was not materially impacted by changes in
foreign currency. This decrease was driven by lower sales to wholesale customers
of $16.4 million, which was due to the Company's 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 by the end of fiscal 2017. Non-comparable store sales decreased
by $23.3 million primarily due to the negative impact of the calendar shift that
resulted from the 53rd week of fiscal 2016. These decreases were partially
offset by higher comparable store sales, which increased by $13.6 million or
3.4%, due to higher conversion and transaction size. Our bricks and mortar
comparable stores sales increased 3.3% despite the negative impact of the Easter
holiday calendar shift. Comparable store sales measure sales performance at
stores that have been open for at least 12 months, and includes 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. 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. North America comparable store sales are presented for the 13-weeks
ending April 1, 2017 versus the analogous 13-weeks ended April 2, 2016 for
comparability. Since the end of the third quarter of fiscal 2016, Coach closed a
net 22 retail stores in North America.
International Net Sales decreased 4.2% or $18.7 million to $429.5 million in the
third quarter of fiscal 2017. Excluding the favorable impact of foreign
currency, net sales decreased 3.5% or $15.8 million. This constant currency
change is primarily due to a decrease in the International and European
Wholesale channels of $14.5 million due to timing of shipments and a decrease in
Asia, primarily in South Korea, of $6.9 million due to the impact of lower
comparable store sales. These decreases were partially offset by a net increase
in Greater China of $4.0 million due to the impact of 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 tourist traffic. Since the
end of the third quarter of fiscal 2016, we opened 12 net new stores, with four
net new stores in mainland China, Hong Kong, Macau and Japan, and 8 net new
stores in the other regions.
Stuart Weitzman Net Sales increased 1.1% or $0.7 million to $79.9 million in the
third quarter of fiscal 2017, which was not materially impacted by changes in
foreign currency. Stuart Weitzman had a $5.6 million increase in net retail
sales due to the acquisition of the Stuart Weitzman Canadian distributor in the
fourth quarter of fiscal 2016 and net store openings, partially offset by lower
comparable store sales. This net increase was partially offset by a decrease in
wholesale net sales of $3.2 million due to timing of shipments, as well as a
decrease of $1.5 million due to the negative impact of the calendar shift that
resulted from the 53rd week of fiscal 2016. Prior year wholesale net sales
included shipments into the Canadian distributor. Since the end of the third
quarter of fiscal 2016, Stuart Weitzman opened a net 7 new stores and acquired
14 stores associated with the acquisition of the Canadian distributor.

                                       26
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Gross Profit
Gross profit decreased 1.0% or $7.3 million to $705.7 million in the third
quarter of fiscal 2017 from $713.0 million in the third quarter of fiscal 2016.
Gross margin for the third quarter of fiscal 2017 was 70.9% as compared to 69.0%
in the third quarter of fiscal 2016.
Gross profit for the Coach brand decreased 1.6% or $10.8 million to $656.0
million in the third quarter of fiscal 2017. Furthermore, gross margin for the
Coach brand increased 180 basis points to 71.7% in the third quarter of fiscal
2017 from 69.9% in the third quarter of fiscal 2016. The year over year change
in gross margin was favorably impacted by 20 basis points as a result of foreign
currency rates.
North America Gross Profit decreased 4.6% or $14.3 million to $294.8 million in
the third quarter of fiscal 2017. Gross margin increased 20 basis points to
62.2% in the third quarter of fiscal 2017 from 62.0% in the third quarter of
fiscal 2016. Gross margin increased 20 basis points as a result of costing and
product mix which was partially offset by promotional activity, particularly in
the outlet channel. Gross margin was also favorably impacted by 10 basis points
as a result of channel mix, directly attributable to the strategic decision to
close select doors in the wholesale channel. These were increases partially
offset by foreign currency-related impacts of 10 basis points.
International Gross Profit decreased 1.4% or $4.8 million to $333.2 million in
the third quarter of fiscal 2017. Gross margin increased 220 basis points to
77.6% in the third quarter of fiscal 2017 from 75.4% in the third quarter of
fiscal 2016. The year over year change in gross margin as a result of foreign
currency rates was favorable by 50 basis points, primarily due to the Japanese
Yen. Excluding the impact of foreign currency in each period, International
gross margin increased 170 basis points. The increase in gross margin is due to
a 70 basis point increase as a result of costing and product mix which was
partially offset by promotional activity and the favorable effects of decreased
duty costs which positively impacted gross margin by 60 basis points.
Corporate Unallocated Gross Profit increased $2.5 million to $16.5 million in
the third quarter of fiscal 2017, primarily due to the impact of more favorable
production variances when compared to the same period in the prior year.
Stuart Weitzman Gross Profit increased 7.7% or $3.5 million to $49.6 million
during the third quarter of fiscal 2017. Gross margin increased 390 basis points
to 62.1% in the third quarter of fiscal 2017 from 58.2% in the third quarter of
fiscal 2016. The year over year change in gross margin as a result of foreign
currency rates was favorable by 100 basis points, primarily due to the Euro.
Excluding the impact of foreign currency, the increase in gross margin due to a
shift in channel mix which favorably impacted gross margin by 120 basis points.
The remaining increase is attributable to the impact of product mix and lower
promotional activity.
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 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 4.2% or $24.1 million to $554.6 million in the third
quarter of fiscal 2017 as compared to $578.7 million in the third quarter of
fiscal 2016. As a percentage of net sales, SG&A expenses decreased to 55.7%
during the third quarter of fiscal 2017 as compared to 56.0% during the third
quarter of fiscal 2016. Excluding non-GAAP adjustments of $10.9 million and
$17.5 million in the third quarter of fiscal 2017 and fiscal 2016, respectively,
as discussed in the "GAAP to Non-GAAP Reconciliation" herein, SG&A expenses
decreased $17.5 million from the third quarter of fiscal 2016; and SG&A expenses
as a percentage of net sales increased, to 54.6% in the third quarter of fiscal
2017 from 54.3% in the third quarter of fiscal 2016. The $17.5 million decrease
is primarily due to reduced employee-related costs, offset by increased
occupancy costs and increased SG&A expenses within the Stuart Weitzman segment
to support the growth of the business.
Selling expenses were $380.4 million, or 38.2% of net sales, in the third
quarter of fiscal 2017 compared to $375.1 million, or 36.3% of net sales, in the
third quarter of fiscal 2016. The $5.3 million increase is primarily due to
higher store-related costs

                                       27
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in North America associated with the new Fifth Avenue flagship store and other
modern luxury store renovation costs, and increases in Stuart Weitzman and
Europe to support growth in the business, partially offset by decreases in
Greater China primarily due to favorable foreign currency effects.
Advertising, marketing, and design costs were $63.2 million, or 6.4% of net
sales, in the third quarter of fiscal 2017, compared to $70.5 million, or 6.8%
of net sales, during the third quarter of fiscal 2016. The decrease was
primarily due to lower costs for Coach brand marketing and advertising-related
events.
Distribution and customer service expenses were $14.3 million, or 1.4% of net
sales, in the third quarter of fiscal 2017, relatively in-line with third
quarter fiscal 2016 expenses of $15.9 million, or 1.5% of net sales.
Administrative expenses were $96.7 million, or 9.7% of net sales, in the third
quarter of fiscal 2017 compared to $117.2 million, or 11.3% of net sales, in the
third quarter of fiscal 2016. Excluding non-GAAP adjustments of $10.9 million in
the third quarter of fiscal 2017 and $17.5 million in the third quarter of
fiscal 2016, administrative expenses were $85.8 million and $99.7 million,
respectively, or 8.6% and 9.7% of net sales. The decrease is primarily due to
reduced employee related costs, partially offset by higher corporate occupancy
costs.
Operating Income
Operating income increased 12.5% or $16.8 million to $151.1 million in the third
quarter of fiscal 2017 as compared to $134.3 million in the third quarter of
fiscal 2016. Operating margin was 15.2% in the third quarter of fiscal 2017 as
compared to 13.0% in the third quarter of fiscal 2016. Excluding non-GAAP
adjustments of $10.9 million in the third quarter of fiscal 2017 and $17.5
million in the third quarter of fiscal 2016, as discussed in the "GAAP to
Non-GAAP Reconciliation" herein, operating income increased 6.7% or $10.2
million to $162.0 million from $151.8 million in the third quarter of fiscal
2016; and operating margin was 16.3% in the third quarter of fiscal 2017 as
compared to 14.7% in the third quarter of fiscal 2016.
The following table presents operating income by reportable segment for the
third quarter of fiscal 2017 compared to the third quarter of fiscal 2016:
                                         Three Months Ended
                              Operating Income              Variance
                           April 1,     March 26,
                             2017          2016        Amount         %
                                       (millions)

  North America           $  115.5$    135.5$ (20.0 )   (14.7 )%
  International              152.2          151.7         0.5       0.2
  Other(1)                     9.0            4.0         5.0     125.0
  Corporate unallocated     (129.4 )       (161.6 )      32.2     (19.9 )
Coach brand               $  147.3$    129.6$  17.7      13.7  %
Stuart Weitzman                3.8            4.7        (0.9 )   (19.5 )
Total operating income    $  151.1$    134.3$  16.8      12.5  %




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

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

licensing and disposition.


Operating income for the Coach brand increased 13.7% or $17.7 million to $147.3
million in the third quarter of fiscal 2017. Furthermore, operating margin for
the Coach brand increased 250 basis points to 16.1% in the third quarter of
fiscal 2017 from 13.6% in the third quarter of fiscal 2016, as described below.
Excluding non-GAAP adjustments, Coach brand operating income totaled $156.5
million in the third quarter of fiscal 2017, resulting in an operating margin of
17.1%. This compared to Coach brand operating income of $144.4 million in the
third quarter of fiscal 2016, or an operating margin of 15.1%.
North America Operating Income decreased 14.7% or $20.0 million to $115.5
million in the third quarter of fiscal 2017 reflecting the decrease in gross
profit of $14.3 million, as well as higher SG&A expenses of $5.7 million. The
increase in SG&A expenses was due to higher store-related costs for the new
Fifth Avenue flagship store and depreciation costs as a result of stores that
have been renovated since the third quarter of fiscal 2016. Operating margin
decreased 270 basis points to 24.4% in the third quarter of fiscal 2017 from
27.1% during the same period in the prior year due to higher SG&A expense as a
percentage of net sales of 290 basis points, partially offset by higher gross
margin of 20 basis points.

                                       28
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International Operating Income increased 0.2% or $0.5 million to $152.2 million
in the third quarter of fiscal 2017 primarily reflecting lower SG&A expenses of
$5.3 million, partially offset by lower gross profit of $4.8 million. The
decrease in SG&A expenses is primarily related to favorable foreign currency
effects and reduced occupancy costs in Greater China, as well as lower employee
related costs in international wholesale. Operating margin increased 150 basis
points to 35.4% in fiscal 2017 from 33.9% during the same period in the prior
year primarily due to higher gross margin of 220 basis points, and lower SG&A
expenses, particularly selling expenses, as a percentage of net sales, which
decreased by 60 basis points.
Corporate Unallocated Operating Loss decreased 19.9% or $32.2 million to $129.4
million in the third quarter of fiscal 2017 from $161.6 million in the third
quarter of fiscal 2016. Excluding non-GAAP adjustments, unallocated operating
loss decreased by $26.6 million to $120.2 million in the third quarter of fiscal
2017. This decrease is primarily related to reduced employee related costs,
partially offset by higher corporate occupancy costs.
Stuart Weitzman Operating Income decreased 19.5% or $0.9 million to $3.8 million
in the third quarter of fiscal 2017, resulting in an operating margin of 4.7%,
compared to $4.7 million and 5.9%, respectively, in fiscal 2016. Excluding
non-GAAP adjustments, Stuart Weitzman operating income totaled $5.5 million in
the third quarter of fiscal 2017, resulting in an operating margin of 6.9%,
compared to $7.4 million and 9.3%, respectively, in fiscal 2016. The decrease in
operating margin is primarily due to higher SG&A expenses as a percentage of net
sales, which increased to 55.2% in fiscal 2017 from 48.9% in fiscal 2016 due to
increased investments in the growth of the business, particularly store-related
costs for new store additions.
Provision for Income Taxes
The effective tax rate was 16.9% in the third quarter of fiscal 2017, as
compared to 12.0% in the third quarter of fiscal 2016. Excluding non-GAAP
adjustments, the effective tax rate was 17.5% in the third quarter of 2017,
compared to 14.6% in the third quarter of fiscal 2016. The increase in our
effective tax rate was primarily attributable to lower benefits received in the
third quarter of fiscal 2017 from the expiration of certain statutes compared to
the third quarter of fiscal 2016, partially offset by the geographic mix of
earnings and the ongoing benefit of available foreign tax credits.
Net Income
Net income increased 8.7% or $9.7 million to $122.2 million in the third quarter
of fiscal 2017 as compared to $112.5 million in the third quarter of fiscal
2016. Excluding non-GAAP adjustments, net income increased 5.1% or $6.2 million
to $130.3 million in the third quarter of fiscal 2017. This increase was
primarily due to higher operating income, partially offset by an increase in
provision for income taxes.
Earnings per Share
Net income per diluted share increased 7.4% to $0.43 in the third quarter of
fiscal 2017 as compared to $0.40 in the third quarter of fiscal 2016. Excluding
non-GAAP adjustments, net income per diluted share increased 3.8% to $0.46 in
the third quarter of fiscal 2017 from $0.44 in the third quarter of fiscal 2016,
primarily due to higher net income.


                                       29
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FIRST NINE MONTHS FISCAL 2017 COMPARED TO FIRST NINE MONTHS FISCAL 2016
The following table summarizes results of operations for the first nine months
of fiscal 2017 compared to the first nine months of fiscal 2016. All percentages
shown in the table below and the discussion that follows have been calculated
using unrounded numbers.
                                                      Nine Months Ended
                                April 1, 2017            March 26, 2016             Variance
                                              (millions, except per share data)

                                           % of                      % of
                             Amount     net sales      Amount     net sales     Amount       %
Net sales                  $ 3,354.5       100.0 %   $ 3,337.2       100.0 %   $ 17.3       0.5  %
Gross profit                 2,326.6        69.4       2,268.6        68.0       58.0       2.6
SG&A expenses                1,732.2        51.6       1,731.9        51.9        0.3         -
Operating income               594.4        17.7         536.7        16.1       57.7      10.8
Interest expense, net           14.8         0.4          19.5         0.6       (4.7 )   (24.0 )
Provision for income taxes     140.3         4.2         138.2         4.1        2.1       1.5
Net income                     439.3        13.1         379.0        11.4       60.3      15.9
Net income per share:
   Basic                   $    1.57$    1.37$ 0.20      14.8  %
   Diluted                 $    1.56$    1.36$ 0.20      14.5  %





GAAP to Non-GAAP Reconciliation
The Company's reported results are presented in accordance with GAAP. The
reported results during the first nine months of fiscal 2017 and fiscal 2016
reflect the impact of the Operational Efficiency Plan, Acquisition-Related Costs
and the Transformation Plan, as noted in the following tables. Refer to page 36
for further discussion on the Non-GAAP Measures.
First Nine Months of Fiscal 2017 Items
                                                                  Nine 

Months Ended April 1, 2017

                                                                                                                               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         $       2,326.6     $               -     $                 -             $                  (0.6 )       $     2,327.2
SG&A expenses                1,732.2                     -                    17.2                                20.9               1,694.1
Operating income               594.4                     -                   (17.2 )                             (21.5 )               633.1
Provision for income
taxes                          140.3                     -                    (4.3 )                              (6.2 )               150.8
Net income                     439.3                     -                   (12.9 )                             (15.3 )               467.5
Diluted net income
per share                       1.56                     -                   (0.05 )                             (0.05 )                1.66


In the first nine months of fiscal 2017, the Company incurred pre-tax charges,
as follows:
•      Operational Efficiency Plan - $17.2 million primarily related to

organizational efficiency costs, technology infrastructure costs and, to a

lesser extent, network optimization costs; and

• Acquisition-Related Costs - $21.5 million total charges related to the

acquisition of Stuart Weitzman Holdings LLC, of which $20.7 million is

primarily related to charges attributable to integration-related

activities and contingent payments(of which $8.2 million of income is

recorded within unallocated corporate expenses within the Coach brand and

$12.5 million of charges is recorded within the Stuart Weitzman segment),

and $0.8 million is related to the limited life impact of purchase

accounting, primarily due to the amortization of the inventory step-up and

       distributor relationships, all recorded within the Stuart Weitzman
       segment.



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Total Operational Efficiency Plan and Acquisition-Related Costs taken together
increased the Company's SG&A expenses by $38.1 million and increased cost of
sales by $0.6 million, negatively impacting net income by $28.2 million, or
$0.10 per diluted share.
First Nine Months of Fiscal 2016 Items
                                                                 Nine 

Months Ended March 26, 2016

                                                                                                                              Non-GAAP Basis
                         GAAP Basis         Transformation and      Operational Efficiency                                      (Excluding
                        (As Reported)          Other Actions                 Plan               Acquisition-Related Costs         Items)
                                                                 (millions, except per share data)
Gross profit          $       2,268.6     $               -         $                   -     $                  (0.9 )       $     2,269.5
SG&A expenses                 1,731.9                  35.9                             -                        28.3               1,667.7
Operating income                536.7                 (35.9 )                           -                       (29.2 )               601.8
Provision for income
taxes                           138.2                  (9.0 )                           -                        (9.5 )               156.7
Net income                      379.0                 (26.9 )                           -                       (19.7 )               425.6
Diluted net income
per share                        1.36                 (0.10 )                           -                       (0.07 )                1.53


In the first nine months of fiscal 2016, the Company incurred charges as
follows:
•Transformation and Other Actions - $35.9 million under our Coach brand
Transformation Plan primarily due to organizational efficiency costs and
accelerated depreciation as a result of store renovations, within North America
and select International stores;
•Acquisition-Related Costs - $29.2 million total acquisition-related costs, of
which $22.2 million primarily related to charges attributable to
integration-related activities and contingent payments (of which $15.2 million
is recorded within unallocated corporate expenses within the Coach brand, and
$7.0 million is recorded within the Stuart Weitzman segment), and $7.0 million
related to the limited life impact of purchase accounting, primarily due to the
amortization of the fair value of the order backlog asset and inventory step-up,
all recorded within the Stuart Weitzman segment.
Total Transformation Plan and Acquisition-Related Costs taken together increased
the Company's SG&A expenses by $64.2 million and cost of sales by $0.9 million,
negatively impacting net income by $46.6 million, or $0.17 per diluted share.
Summary - First Nine Months of Fiscal 2017
Net sales in the first nine months of fiscal 2017 increased 0.5% to $3.35
billion, primarily due to increased revenues from the Coach brand International
and Stuart Weitzman businesses. There were no material effects from foreign
currency. Our gross profit increased by 2.6% to $2.33 billion during the first
nine months of fiscal 2017. SG&A expenses remained fairly consistent at $1.73
billion in the first nine months of fiscal 2017 when compared to prior year.
Excluding non-GAAP adjustments as described in the "GAAP to non-GAAP
Reconciliation" herein, SG&A expenses increased by 1.6% to $1.69 billion.
Net income increased 15.9% in the first nine months of fiscal 2017 as compared
to the first nine months of fiscal 2016, primarily due to an increase in
operating income of $57.7 million, partially offset by an increase of $2.1
million in our provision for income taxes. Net income per diluted share
increased 14.5% primarily due to higher net income. Excluding non-GAAP
adjustments, net income and net income per diluted share increased 9.9% and
8.5%, respectively.
Currency Fluctuation Effects
The change in net sales for the first nine months of fiscal 2017 compared to
fiscal 2016 has been presented both including and excluding currency fluctuation
effects.

                                       31
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Net Sales
The following table presents net sales by reportable segment for the first nine
months of fiscal 2017 compared to the first nine months of fiscal 2016:
                                       Nine Months Ended
                      Total Net Sales                        Percentage of
                                                            Total Net Sales
                  April 1,       March 26,    Rate of    April 1,    March 26,
                    2017           2016        Change      2017         2016
                   (dollars in millions)
  North America $    1,763.6$  1,790.9     (1.5 )%     52.6 %        53.7 %
  International      1,273.3       1,254.5      1.5        38.0          37.6
  Other(1)              31.9          31.1      2.6         0.9           0.9
Coach brand     $    3,068.8$  3,076.5     (0.3 )      91.5 %        92.2 %
Stuart Weitzman        285.7         260.7      9.6         8.5           7.8
Total net sales $    3,354.5$  3,337.2      0.5       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 0.3% or $7.7 million to $3.07 billion.
Excluding the favorable impact of foreign currency, net sales decreased 0.8%.
North America Net Sales decreased 1.5% or $27.3 million to $1.76 billion in the
first nine months of fiscal 2017, which was not materially impacted by changes
in foreign currency. This decrease was primarily driven by lower sales to
wholesale customers of $50.6 million due to the Company's 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 by the end of fiscal 2017. Non-comparable store sales
decreased by $19.9 million primarily due to the negative impact of the calendar
shift that resulted from the 53rd week of fiscal 2016 and the net impact of
store openings and closures. These decreases were partially offset by higher
comparable store sales, which increased by $42.1 million or 2.7% primarily due
to higher conversion and increased transaction size in stores. Our bricks and
mortar comparable stores sales increased 3.5%. Comparable store sales for the
Internet business were impacted by an increase in Internet orders fulfilled by
bricks and mortar locations in the second quarter of fiscal 2017. Since the end
of the third quarter of fiscal 2016, Coach closed a net 22 retail stores in
North America.
International Net Sales increased 1.5% or $18.8 million to $1.27 billion in the
first nine months of fiscal 2017. Excluding the favorable impact of foreign
currency, net sales increased 0.2% or $2.1 million. This constant currency
change is primarily due to a net increase in Greater China of $19.2 million due
to the impact of 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 tourist traffic, and an increase in net sales in Europe of $11.4
million due to an expanded store distribution network as well as positive
comparable store sales. These increases were partially offset by a decrease in
Japan of $12.7 million primarily due to decreased traffic, a decrease in the
International and European Wholesale channels of $7.8 million due to timing of
shipments and a decrease in Asia of $8.5 million primarily due to decreased
comparable store sales in South Korea. Since the end of the third quarter of
fiscal 2016, we opened 12 net new stores, with four net new stores in mainland
China, Hong Kong, Macau and Japan, and 8 net new stores in the other regions.
Stuart Weitzman Net Sales increased 9.6% or $25.0 million to $285.7 million in
the first nine months of fiscal 2017, which was not materially impacted by
changes in foreign currency. Stuart Weitzman had a $33.2 million increase in net
retail sales due to the acquisition of the Stuart Weitzman Canadian distributor
in the fourth quarter of fiscal 2016, net store openings and positive comparable
store sales. Wholesale net sales decreased by $6.7 million. Prior year wholesale
net sales included shipments into the Canadian distributor. Since the end of the
third quarter of fiscal 2016, Stuart Weitzman opened a net 7 new stores and
acquired 14 stores associated with the acquisition of the Canadian distributor.
Gross Profit
Gross profit increased 2.6% or $58.0 million to $2.33 billion in the first nine
months of fiscal 2017 from $2.27 billion in the first nine months of fiscal
2016. Gross margin for the first nine months of fiscal 2017 was 69.4% as
compared to 68.0% in the first nine months of fiscal 2016.

                                       32
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Gross profit for the Coach brand increased 1.8% or $37.6 million to $2.15
billion in the first nine months of fiscal 2017. Furthermore, gross margin for
the Coach brand increased 140 basis points to 70.1% in the first nine months of
fiscal 2017 from 68.7% in the first nine months of fiscal 2016 with no material
impact from changes in foreign currency.
North America Gross Profit decreased 0.6% or $6.3 million to $1.10 billion in
the first nine months of fiscal 2017. Gross margin increased 60 basis points to
62.3% in the first nine months of fiscal 2017 from 61.7% in the first nine
months of fiscal 2016. The increase in gross margin is due to a 30 basis point
increase due to costing and product mix which was partially offset by
promotional activity. The strategic decision to close select doors in the
wholesale channel resulted in a 30 basis point favorable impact to gross margin
due to a more favorable channel mix.
International Gross Profit increased 2.7% or $26.0 million to $973.6 million in
the first nine months of fiscal 2017. Gross margin increased 100 basis points to
76.5% in the first nine months of fiscal 2017 from 75.5% in the first nine
months of fiscal 2016. The year over year change in gross margin as a result of
foreign currency rates was unfavorable by 10 basis points, primarily due to the
Chinese Renminbi and Japanese Yen. Excluding the impact of foreign currency in
each period, International gross margin increased 110 basis points. The increase
in gross margin is primarily attributable to the favorable effects of decreased
duty costs which positively impacted gross margin by 90 basis points, as well as
a 20 basis point increase due to costing and product mix which was partially
offset by promotional activity.
Corporate Unallocated Gross Profit increased $12.6 million to $48.2 million in
the first nine months of fiscal 2017, primarily due to the impact of more
favorable production variances when compared to the same period in the prior
year.
Stuart Weitzman Gross Profit increased 13.0% or $20.4 million to $176.7 million
during the first nine months of fiscal 2017. Gross margin increased 180 basis
points to 61.8% in the first nine months of fiscal 2017 from 60.0% in the first
nine months of fiscal 2016. Excluding the short-term impact of purchase
accounting, Stuart Weitzman gross profit totaled $177.3 million and $157.2
million in the first nine months of fiscal 2017 and fiscal 2016, respectively,
resulting in a gross margin of 62.0% and 60.3%, respectively. The increase in
gross margin is primarily attributable to a shift in channel mix which favorably
impacted gross margin by 180 basis points.
Selling, General and Administrative Expenses
SG&A expenses were $1.73 billion in the first nine months of fiscal 2017 and
fiscal 2016. As a percentage of net sales, SG&A expenses decreased to 51.6%
during the first nine months of fiscal 2017 as compared to 51.9% during the
first nine months of fiscal 2016. Excluding non-GAAP adjustments of $38.1
million and $64.2 million in the first nine months of fiscal 2017 and fiscal
2016, respectively, as discussed in the "GAAP to Non-GAAP Reconciliation"
herein, SG&A expenses increased $26.4 million from the first nine months of
fiscal 2016; and SG&A expenses as a percentage of net sales increased, to 50.5%
in the first nine months of fiscal 2017 from 50.0% in the first nine months of
fiscal 2016, primarily due to the increased occupancy costs related to the Coach
brand and increased SG&A and occupancy costs within the Stuart Weitzman segment
to support the growth of the business.
Selling expenses were $1.19 billion, or 35.5% of net sales, in the first nine
months of fiscal 2017 compared to $1.15 billion, or 34.6% of net sales, in the
first nine months of fiscal 2016. The $40.0 million increase is primarily due to
increases in Stuart Weitzman and Europe to support growth in the business,
unfavorable foreign currency effects in Japan and higher store-related costs in
North America associated with the new flagship store, partially offset by
decreases in Greater China primarily due to favorable foreign currency effects.
Advertising, marketing, and design costs were $201.7 million, or 6.0% of net
sales, in the first nine months of fiscal 2017, compared to $207.4 million, or
6.2% of net sales, during the first nine months of fiscal 2016. The slight
decrease was primarily due to lower Coach brand advertising-related events,
including lower costs associated with New York fashion week, partially offset by
higher costs for Stuart Weitzman marketing.
Distribution and customer service expenses were $45.0 million, or 1.3% of net
sales, in the first nine months of fiscal 2017, relatively in-line with first
nine months fiscal 2016 expenses of $50.9 million, or 1.5% of net sales.
Administrative expenses were $293.5 million, or 8.7% of net sales, in the first
nine months of fiscal 2017 compared to $318.7 million, or 9.5% of net sales, in
the first nine months of fiscal 2016. Excluding non-GAAP adjustments of $38.1
million in the first nine months of fiscal 2017 and $64.2 million in the first
nine months of fiscal 2016, administrative expenses were $255.4 million, or 7.6%
of net sales, which is relatively in-line with the first nine months fiscal 2016
expenses of $254.5 million.
Operating Income
Operating income increased 10.8% or $57.7 million to $594.4 million in the first
nine months of fiscal 2017 as compared to $536.7 million in the first nine
months of fiscal 2016. Operating margin was 17.7% in the first nine months of
fiscal 2017 as compared to 16.1% in the first nine months of fiscal 2016.
Excluding non-GAAP adjustments of $38.7 million in the first nine months of
fiscal 2017 and $65.1 million in the first nine months of fiscal 2016, as
discussed in the "GAAP to Non-GAAP Reconciliation" herein, operating income
increased 5.2% or $31.3 million to $633.1 million from $601.8 million in the
first nine

                                       33
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months of fiscal 2016; and operating margin was 18.9% in the first nine months
of fiscal 2017 as compared to 18.0% in the first nine months of fiscal 2016.
The following table presents operating income by reportable segment for the
first nine months of fiscal 2017 compared to the first nine months of fiscal
2016:
                                         Nine Months Ended
                              Operating Income              Variance
                           April 1,     March 26,
                             2017          2016        Amount         %
                                       (millions)

  North America           $  537.9$    555.4$ (17.5 )    (3.1 )%
  International              401.7          389.5        12.2       3.3
  Other(1)                    24.5           16.5         8.0      48.5
  Corporate unallocated     (391.9 )       (455.4 )      63.5     (13.9 )
Coach brand               $  572.2$    506.0$  66.2      13.1  %
Stuart Weitzman               22.2           30.7        (8.5 )   (27.8 )
Total operating income    $  594.4$    536.7$  57.7      10.8  %




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

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

licensing and disposition.


Operating income for the Coach brand increased 13.1% or $66.2 million to $572.2
million in the first nine months of fiscal 2017. Furthermore, operating margin
for the Coach brand increased 220 basis points to 18.6% in the first nine months
of fiscal 2017 from 16.4% in the first nine months of fiscal 2016, as described
below. Excluding non-GAAP adjustments, Coach brand operating income totaled
$597.6 million in the first nine months of fiscal 2017, resulting in an
operating margin of 19.5%. This compared to Coach brand operating income of
$557.1 million in the first nine months of fiscal 2016, or an operating margin
of 18.1%.
North America Operating Income decreased 3.1% or $17.5 million to $537.9 million
in the first nine months of fiscal 2017 reflecting higher SG&A expenses of $11.2
million and the decrease in gross profit of $6.3 million. The increase in SG&A
expenses was primarily due to higher store related costs for the new Fifth
Avenue flagship store and higher depreciation costs as a result of stores that
have been renovated since the third quarter of fiscal 2016. This increase was
partially offset by favorable employee related costs. Operating margin decreased
50 basis points to 30.5% in the first nine months of fiscal 2017 from 31.0%
during the same period in the prior year due to higher SG&A expenses as a
percentage of net sales of 110 basis points, partially offset by higher gross
margin of 60 basis points.
International Operating Income increased 3.3% or $12.2 million to $401.7 million
in the first nine months of fiscal 2017 primarily reflecting higher gross profit
of $26.0 million, partially offset by higher SG&A expenses of $13.8 million. The
increase in SG&A expenses is primarily related to unfavorable foreign currency
effects in Japan, as well as increases in Europe to support growth in business,
partially offset by decreases in Greater China primarily due to favorable
foreign currency effects. Operating margin increased 40 basis points to 31.5% in
fiscal 2017 from 31.1% during the same period in the prior year primarily due to
higher gross margin of 100 basis points, partially offset by higher SG&A
expenses, particularly selling expenses, as a percentage of net sales, which
increased by 60 basis points.
Corporate Unallocated Operating Loss decreased 13.9% or $63.5 million to $391.9
million in the first nine months of fiscal 2017 from $455.4 million in the first
nine months of fiscal 2016. Excluding non-GAAP adjustments, unallocated
operating loss decreased by $37.8 million to $366.5 million in the first nine
months of fiscal 2017. This decrease is primarily related to lower
employee-related costs and timing of expenses, partially offset by higher
occupancy costs.
Stuart Weitzman Operating Income decreased 27.8% or $8.5 million to $22.2
million in the first nine months of fiscal 2017, resulting in an operating
margin of 7.8%, compared to $30.7 million and 11.8%, respectively in fiscal
2016. Excluding non-GAAP adjustments, Stuart Weitzman operating income totaled
$35.5 million in the first nine months of fiscal 2017, resulting in an operating
margin of 12.4%, compared to $44.7 million and 17.1%, respectively, in fiscal
2016. The decrease in operating margin is primarily due to higher SG&A expenses,
particularly selling expenses, as a percentage of net sales, which increased to
49.6% in the first nine months of fiscal 2017 from 43.2% in the first nine
months of fiscal 2016, due to increased investments in the growth of the
business, particularly store-related and occupancy costs for two new flagship
stores.

                                       34
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Provision for Income Taxes
The effective tax rate was 24.2% in the first nine months of fiscal 2017, as
compared to 26.7% in the first nine months of fiscal 2016. Excluding non-GAAP
adjustments, the effective tax rate was 24.4% in the first nine months of 2017,
compared to 26.9% in the first nine months of fiscal 2016. The decrease in our
effective tax rate was primarily attributable to the geographic mix of earnings,
the favorable impact related to foreign equity compensation and the ongoing
benefit of available foreign tax credits, partially offset by lower benefits
from the expiration of certain statutes.
Net Income
Net income increased 15.9% or $60.3 million to $439.3 million in the first nine
months of fiscal 2017 as compared to $379.0 million in the first nine months of
fiscal 2016. Excluding non-GAAP adjustments, net income increased 9.9% or $41.9
million to $467.5 million in the first nine months of fiscal 2017. This increase
was primarily due to higher operating income, a lower provision for income
taxes, and decreased interest expense.
Earnings per Share
Net income per diluted share increased 14.5% to $1.56 in the first nine months
of fiscal 2017 as compared to $1.36 in the first nine months of fiscal 2016.
Excluding non-GAAP adjustments, net income per diluted share increased 8.5% to
$1.66 in the first nine months of fiscal 2017 from $1.53 in the first nine
months of fiscal 2016, primarily due to higher net income.

                                       35
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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 the third quarter and first
nine months of fiscal 2017 and fiscal 2016 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.
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 2. "Management's
Discussion and Analysis of Financial Condition and Results of Operations."


                                       36
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
                                                               Nine Months Ended
                                                    April 1,        March 26,
                                                      2017            2016           Change
                                                                   (millions)

Net cash provided by operating activities         $     530.0$     509.2$     20.8
Net cash provided by (used in) investing
activities                                              562.5          (674.9 )      1,237.4
Net cash used in financing activities                  (550.2 )        (304.6 )       (245.6 )
Effect of exchange rate changes on cash and
cash equivalents                                         (6.8 )           0.1           (6.9 )
Net increase (decrease) in cash and cash
equivalents                                       $     535.5     $    

(470.2 ) $ 1,005.7


The Company's cash and cash equivalents increased by $535.5 million in the first
nine months of fiscal 2017 as compared to a decrease of $470.2 million in the
first nine months of fiscal 2016, as discussed below.
Net cash provided by operating activities
Net cash provided by operating activities increased $20.8 million due to higher
net income of $60.3 million and higher non-cash charges of $35.5 million,
partially offset by changes in operating assets and liabilities of $75.0
million.
The $75.0 million decline in changes in operating asset and liability balances
was primarily driven by changes in accrued liabilities, inventories and other
assets, partially offset by changes in accounts receivable. Accrued liabilities
were a use of cash of $101.7 million in the first nine months of fiscal 2017 as
compared to a use of cash of $38.3 million in the first nine months of fiscal
2016, primarily driven by changes in derivative positions due to foreign
currency fluctuations, the timing of bond interest payments in conjunction with
the term loan repayment and timing of payroll related payments. Inventories were
a use of cash of $31.1 million in the first nine months of fiscal 2017 as
compared to a source of cash of $21.1 million in the first nine months of fiscal
2016, primarily driven by increased inventory purchases. Other assets were a use
of cash of $24.9 million in the first nine months of fiscal 2017 compared to a
source of cash of $12.4 million in the first nine months of fiscal 2016,
primarily related to higher estimated tax payments in fiscal 2017, partially
offset by higher prepayments and tenant allowances in the prior year. Accounts
receivable was a source of cash of $35.9 million in the first nine months of
fiscal 2017 as compared to a use of cash of $47.2 million in the first nine
months of fiscal 2016, primarily driven by a smaller build in receivables
compared to prior year within North America wholesale due to the strategic
actions.
Net cash provided by (used in) investing activities
Net cash provided by investing activities was $562.5 million in the first nine
months of fiscal 2017 and a use of cash during the first nine months of fiscal
2016 of $674.9 million. The $1.24 billion increase in net cash provided by
investing activities is primarily due to proceeds from the sale of the Company's
investments in Hudson Yards of $680.6 million in the first nine months of fiscal
2017, the impact of net purchases of investments of $47.5 million in the first
nine months of fiscal 2017, compared to net purchases of investments of $272.1
million in the first nine months of fiscal 2016 and net proceeds from the sale
of our prior headquarters of $126.0 million in the first nine months of fiscal
2017. This increase is also due to the absence of an equity method investment in
the first nine months of fiscal 2017 as compared to a $118.1 million investment
in the first nine months of fiscal 2016, as well as decreased capital
expenditures in the first nine months of fiscal 2017.
Net cash used in financing activities
Net cash used in financing activities was $550.2 million and $304.6 million in
the first nine months of fiscal 2017 and fiscal 2016, respectively. The $245.6
million increase was primarily due to the repayment of long-term debt of $285.0
million during the first nine months of fiscal 2017, partially offset by
proceeds from share-based awards of $40.7 million in the first nine months of
fiscal 2017 as compared to $8.8 million in the first nine months of fiscal 2016.

                                       37
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Working Capital and Capital Expenditures
As of April 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
                                                                  (millions)
Cash and cash equivalents(1)                $     1,394.5     $             -     $      1,394.5
Short-term investments(1)                           497.4                   -              497.4
Non-current investments                             104.4                   -              104.4
Amended and Restated Credit Agreement(2)            700.0                   -              700.0
4.250% Senior Notes(3)                              600.0               600.0                  -
International credit facilities                      47.0                   -               47.0
Total                                       $     3,343.3     $         600.0     $      2,743.3





(1)  As of April 1, 2017, approximately 56% 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., we would be
     subject to applicable U.S. and foreign taxes.

(2) In March 2015, the Company amended and restated its existing $700.0 million

revolving credit facility (the "Revolving Facility") with certain lenders

and JP Morgan Chase Bank, N.A. as the administrative agent, to provide for a

five-year senior unsecured $300.0 million term loan (the "Term Loan") and to

extend the maturity date to March 18, 2020 (the "Amended and Restated Credit

Agreement"). On August 3, 2016, the Company prepaid its outstanding

borrowings under the Term Loan facility. There were no debt borrowings under

the Revolving Facility for the first nine months of fiscal 2017 and fiscal

2016. The Amended and Restated Credit Agreement contains various covenants

     and customary events of default, including the requirement to maintain a
     maximum ratio of adjusted debt to consolidated EBITDAR, as defined in the
     agreement, of no greater than 4.0 as of the date of measurement. As of
     April 1, 2017, no known events of default have occurred. Refer to Note 9,
     "Debt," for further information on our existing debt instruments.


We believe that our Amended and Restated Credit Agreement is adequately
diversified with no undue concentrations in any one financial institution. As of
April 1, 2017, there were 11 financial institutions participating in the
facility, with no one participant maintaining a maximum commitment percentage in
excess of 14%. We have no reason at this time to believe 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.
(3) 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
"4.250% Senior Notes"). Furthermore, the indenture for the 4.250% Senior Notes
contains 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 April 1, 2017, no known events of default have occurred.
Refer to Note 9, "Debt," for further information on our existing debt
instruments.
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.
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.
Reference should be made to our most recent Annual Report on Form 10-K for
additional information regarding liquidity and capital resources. The Company
expects total fiscal 2017 capital expenditures to be approximately $300 million.

                                       38
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Stuart Weitzman Acquisition
On May 4, 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 customary purchase price adjustments, as well
as a potential earnout of up to $44.0 million based on the achievement of
certain revenue targets. The agreement contains a catch-up provision that
provides that if the revenue targets are missed in any one year but are
surpassed in succeeding years then amounts for past years become due upon
surpassing targets in succeeding years. The revenue targets were not achieved in
calendar year 2015 or 2016. The total amount payable under the earnout will not
exceed $44.0 million, and will be paid out in fiscal 2018 if targets are
achieved. As previously disclosed, the revenue target for calendar 2017 is $425
million. Refer to Note 10, "Fair Value Measurements," for additional information
about the contingent earnout agreement.
Kate Spade & Company Acquisition
On May 7, 2017, the Company entered into an Agreement and Plan of Merger with
Kate Spade & Company and Chelsea Merger Sub Inc., a wholly owned subsidiary of
Coach. Refer to Note 15, "Subsequent Event," herein for further information.
The Company intends to fund the acquisition through a combination of cash and
cash equivalents, short-term investments as well as accessing financing options
available to us in the credit and capital markets. Furthermore, on May 7, 2017,
the Company entered into a bridge facility commitment letter pursuant to which
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bank of America, N.A.
committed to provide up to $2.1 billion under a 364-day senior unsecured bridge
term loan credit facility to finance the merger in the event that Coach has not
issued senior unsecured notes and obtained term loans prior to the consummation
of the merger.
Seasonality
Seasonality primarily impacts the Coach brand. Because Coach brand's products
are frequently given as gifts, we experience seasonal variations in its net
sales, operating cash flows and working capital requirements, primarily related
to seasonal holiday shopping. During the first fiscal quarter, we build
inventory for the holiday selling season.  In the second fiscal quarter, working
capital requirements are reduced substantially as we generate higher net sales
and operating income, especially during the holiday months of November and
December.  Accordingly, the Company's net sales, operating income and operating
cash flows for the three months ended April 1, 2017 are not necessarily
indicative of that expected for the full fiscal 2017.  However, 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 2 to the audited
consolidated financial statements in our fiscal 2016 10-K. Our discussion of
results of operations and financial condition relies on our condensed
consolidated financial statements that are prepared based on certain critical
accounting policies that require management to make judgments and estimates
which are subject to varying degrees of uncertainty. While we believe that these
accounting policies are based on sound measurement criteria, actual future
events can and often do result in outcomes that can be materially different from
these estimates or forecasts.
For a complete discussion of our critical accounting policies and estimates, see
the "Critical Accounting Policies and Estimates" section of the MD&A in our
fiscal 2016 10-K. As of April 1, 2017, there have been no material changes to
any of the critical accounting policies.
As disclosed in our fiscal 2016 10-K, the Company performs its annual impairment
assessment of goodwill, including trademarks and trade names, during the fourth
quarter of each fiscal year. Furthermore, as previously disclosed, the fair
value of the Stuart Weitzman brand reporting unit exceeded its carrying value by
less than 20%, valued using the discounted cash flow method. Additionally, the
percentage by which the fair value of the Stuart Weitzman brand indefinite-lived
trademarks and trade names exceeded its carrying value was less than 5%, valued
using the relief from royalty method. Several factors could impact the brand's
ability to achieve future cash flows, including 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 certain higher performing categories of the business. While
there was no impairment recorded in the three-month and nine-month periods ended
April 1, 2017, given the small excess of fair value over the carrying value as
noted above, if the net sales and profitability trends or market multiples
further decline during the remainder of fiscal 2017 from those that were
expected, it is possible that our annual impairment test could result in an
impairment of these assets.

                                       39

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