Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of Coach’s financial condition and results of operations should be read together with Coach’s consolidated financial statements and notes to those statements, included elsewhere in this document. When used herein, the terms “Coach,” “Company,” “we,” “us” and “our” refer to Coach, Inc., including consolidated subsidiaries.

EXECUTIVE OVERVIEW

Coach is a leading New York design house of modern luxury accessories and lifestyle collections. Our product offerings include fine accessories, gifts and certain seasonal lifestyle apparel collections for women and men.

Coach operates in two segments: North America and International. The North America segment includes sales to North American customers through Coach-operated stores (including the Internet) and sales to North American wholesale customers. The International segment includes sales to customers through Coach-operated stores (including the Internet) and concession shop-in-shops in Japan and mainland China, Coach-operated stores and concession shop-in-shops in Hong Kong, Macau, Singapore, Taiwan, Malaysia, South Korea, the United Kingdom, France, Ireland, Spain, Portugal, Germany and Italy, as well as sales to wholesale customers and distributors in approximately 35 countries. As Coach’s business model is based on multi-channel global distribution, our success does not depend solely on the performance of a single channel or geographic area.

In order to drive growth within our global business, we are focused on four key initiatives, which directly align with the Company's Transformation Plan, described below:

•	Grow our business in North America and worldwide, by transforming from a leading international accessories Company into a global lifestyle brand, anchored in luxury accessories.

•	Leverage the global opportunity for Coach by raising brand awareness and building market share in markets where Coach is under-penetrated, most notably in Asia and Europe. We are also developing the brand opportunity as we expand into South America and Central America.

•	Focus on the Men’s opportunity for the brand, by drawing on our long heritage in the category. We are capitalizing on this opportunity by opening new standalone and dual gender stores and broadening the men’s assortment in existing stores.

•

Harness the growing power of the digital world, accelerating the development of our digital programs and capabilities in North America and worldwide, reflecting the change in consumer shopping behavior globally. Our intent is to rapidly drive further innovation to engage with customers in this channel. Key elements include www.coach.com, our invitation-only outlet Internet site, our global e-commerce sites, marketing sites and social media.

In addition, during the fourth quarter of fiscal 2014, Coach announced a multi-year strategic plan with the objective of transforming the brand and reinvigorating growth, which will enable the Company to return to ‘best-in-class’ profitability. This multi-faceted, multi-year transformation plan (the "Transformation Plan") builds 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 are less developed, including footwear and outerwear. This will require an integrated holistic approach, across product, stores and marketing and promotional activities. It will also entail the roll-out of carefully crafted aspirational marketing campaigns to define our brand to deliver a fuller and more consistent brand expression.

Key operational and cost measures needed in order to fund and execute this plan include: (i) the investment of approximately $500 million in capital improvements in our stores and wholesale locations in fiscal 2015 and fiscal 2016; (ii) the optimization of our North American store fleet including the closure of approximately 70 underperforming locations in fiscal 2015; (iii) the realignment of inventory levels to reflect our elevated product strategy in fiscal 2014; (iv) the investment of approximately $50 million in incremental advertising costs to further promote our new strategy starting in fiscal 2015; and (v) the significant scale-back of our promotional cadence, particularly within our outlet Internet sales site starting in fiscal 2014. The Company believes that long-term growth can be realized through its transformational efforts over time. For further discussion of charges incurred in connection with the Transformation Plan, see "Items Affecting Comparability," herein.

Current Trends and Outlook

In addition to the risks surrounding the successful execution of our Transformation Plan initiatives, our outlook reflects a certain level of uncertainty despite signs of improvement in the global economy. The global economic environment continues to negatively impact consumer confidence, which in turn influences the level of spending on discretionary items. Consumer retail traffic remains relatively weak and inconsistent, which has led to a more promotional environment due to increased competition and a desire to offset traffic declines with increased levels of conversion. 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 trends in fiscal 2015.

We will continue to monitor these risks 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 brand.

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.

SUMMARY — FISCAL 2014

In fiscal 2014, we reported net sales of $4.81 billion, net income of $781.3 million and net income per diluted share of $2.79. This compares to net sales of $5.08 billion, net income of $1.03 billion, and net income per diluted share of $3.61 in fiscal 2013. In fiscal 2014, the comparability of our operating results has been affected by $131.5 million of pretax charges ($88.3 million after tax or $0.31 per diluted share) related to our Transformation Plan. In fiscal 2013, the comparability of our operating results was affected by $53.2 million of pretax charges ($32.6 million after tax or $0.11 per diluted share) related to restructuring and transformation-related charges.

Our operating performance for fiscal 2014 reflected a decline in revenue of 5.3%, primarily due to decreased revenues from our North America business partially offset by gains in our International businesses. Excluding the effects of foreign currency, net sales decreased 3.1%. Our gross profit decreased by 10.8% to $3.30 billion during fiscal 2014 which included the negative impact of charges under our Transformation Plan of $82.2 million. In fiscal 2013, restructuring and transformation-related charges negatively impacted gross profit by $4.8 million. Selling, general and administrative ("SG&A") expenses remained fairly consistent from fiscal 2013, however SG&A expense as a percentage of net sales increased by 250 basis points primarily due to higher selling expenses to support our International businesses as well as a decline in total Net sales. Excluding charges under our Transformation Plan in fiscal 2014 and restructuring and transformation-related charges in fiscal 2013, SG&A expenses remained fairly consistent.

Net income decreased in fiscal 2014 as compared to fiscal 2013, primarily due to a decrease in operating income of $404.4 million, partially offset by a $145.2 million decrease in our provision for income taxes. Net income per diluted share decreased due to lower net income. Excluding charges under our Transformation Plan in fiscal 2014 and restructuring and transformation-related charges in fiscal 2013, net income decreased 18.5% and net income per diluted share decreased 16.9%.

FISCAL 2014 COMPARED TO FISCAL 2013

The following table summarizes results of operations for fiscal 2014 compared to fiscal 2013. All percentages shown in the table below and the discussion that follows have been calculated using unrounded numbers.

	Fiscal Year Ended
	June 28, 2014							June 29, 2013							Variance
	(dollars in millions, except per share data)
	Amount				% of net sales			Amount				% of net sales			Amount				%
Net sales	$	4,806.2			100.0	%		$	5,075.4			100.0	%		$	(269.2	)		(5.3	)%
Gross profit	3,297.0				68.6			3,698.1				72.9			(401.1		)		(10.8	)
Selling, general and administrative expenses	2,176.9				45.3			2,173.6				42.8			3.3				0.2
Operating income	1,120.1				23.3			1,524.5				30.0			(404.4		)		(26.5	)
Interest income, net	2.2				—			2.4				—			(0.2		)		(8.3	)
Other expense	—				—			(6.4		)		(0.1	)		6.4				(100.0	)
Provision for income taxes	340.9				7.1			486.1				9.6			(145.2		)		(29.9	)
Net income	781.3				16.3			1,034.4				20.4			(253.1		)		(24.5	)
Net income per share:
Basic	$	2.81						$	3.66						$	(0.85	)		(23.2	)%
Diluted	2.79							3.61							(0.82		)		(22.7	)

Items Affecting Comparability

The Company’s reported results are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The reported gross profit, selling, general and administrative expenses, operating income, income before provision for income taxes, provision for income taxes, net income and earnings per diluted share in fiscal 2014 and 2013 reflect certain items which affect the comparability of our results, as noted in the following tables. Refer to page 39 for a discussion on the Non-GAAP Measures.

COACH, INC.

GAAP TO NON-GAAP RECONCILIATION

For the Years Ended June 28, 2014 and June 29, 2013

(in millions, except per share data)

	June 28, 2014
	GAAP Basis (As Reported)				Transformation and Other Related Actions				Non-GAAP Basis (Excluding Items)
Gross profit	$	3,297.0			$	(82.2	)		$	3,379.2
Selling, general and administrative expenses	$	2,176.9			$	49.3			$	2,127.6
Operating income	$	1,120.1			$	(131.5	)		$	1,251.6
Income before provision for income taxes	$	1,122.3			$	(131.5	)		$	1,253.8
Provision for income taxes	$	340.9			$	(43.2	)		$	384.1
Net income	$	781.3			$	(88.3	)		$	869.6
Diluted net income per share	$	2.79			$	(0.31	)		$	3.10

	June 29, 2013
	GAAP Basis (As Reported)				Restructuring and Transformation-Related Charges				Non-GAAP Basis (Excluding Items)
Gross profit	$	3,698.1			$	(4.8	)		$	3,702.9
Selling, general and administrative expenses	$	2,173.6			$	48.4			$	2,125.2
Operating income	$	1,524.5			$	(53.2	)		$	1,577.7
Income before provision for income taxes	$	1,520.5			$	(53.2	)		$	1,573.7
Provision for income taxes	$	486.1			$	(20.6	)		$	506.7
Net income	$	1,034.4			$	(32.6	)		$	1,067.0
Diluted net income per share	$	3.61			$	(0.11	)		$	3.73

Items Affecting Comparability

Fiscal 2014 Items

Transformation and Other Related Actions

In fiscal 2014, the Company incurred restructuring and transformation related charges of $131.5 million under its multi-year Transformation Plan as announced in the fourth quarter of fiscal 2014. The charges recorded in cost of sales and SG&A expenses were $82.2 million and $49.3 million, respectively. These charges, which are primarily associated with our North America business, relate to inventory and fleet related costs, including impairment, accelerated depreciation and severance related to store closures. Refer to the "Executive Overview" herein and Note 3, "Transformation, Restructuring and Other Related Actions," for further information regarding the Transformation Plan.

Additional actions will continue into fiscal 2015.

Fiscal 2013 Items

Restructuring and Transformation-Related Charges

In fiscal 2013, the Company incurred restructuring and transformation related charges of $53.2 million. The charges recorded in selling, general and administrative expenses and cost of sales were $48.4 million and $4.8 million, respectively. The charges include the strategic reassessment of the Reed Krakoff business, streamlining our organizational model and reassessing the fleet of our retail stores and inventories.

Currency Fluctuation Effects

The change in net sales in fiscal 2014 has been presented both including and excluding currency fluctuation effects (primarily attributable to Coach Japan).

Net Sales

Net sales decreased 5.3% or $269.2 million to $4.81 billion. Excluding the effects of foreign currency, net sales decreased 3.1% or $155.9 million. The decrease was driven by lower sales in the North America business partially offset by gains in the International business. The following table presents net sales by reportable segment for fiscal 2014 compared to fiscal 2013:

	Fiscal Year Ended
	Total Net Sales								Rate of Change				Percentage of Total Net Sales
	June 28, 2014				June 29, 2013(1)					June 28, 2014				June 29, 2013(1)
	(dollars in millions)
North America	$	3,100.5			$	3,478.2			(10.9	)	%		64.5		%		68.5		%
International	1,644.2				1,558.1				5.5				34.2				30.7
Other(2)	61.5				39.1				57.5				1.3				0.8
Total net sales	$	4,806.2			$	5,075.4			(5.3	)	%		100.0		%		100.0		%

(1)

In connection with the acquisition of the retail business in Europe, the Company evaluated the composition of its reportable segments and concluded that sales in this region should be included in the International segment. Accordingly, prior year comparable sales have been reclassified to conform to the current year presentation. See Note 7, "Acquisitions" and Note 16, "Segment Information" for more information.

(2)	Net sales in the Other category, which is not a reportable segment, consists of sales generated in ancillary channels, including licensing and disposition.

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 given our planned capital investments in connection with the Transformation Plan.

North America Net Sales decreased 10.9% or $377.7 million to $3.10 billion. This decrease was primarily driven by lower comparable store sales of $460.5 million or 15% largely due to lower traffic, and lower wholesale sales of $26.1 million due to lower shipments. The Internet business had a negative impact, of over 1%, on comparable store sales which is attributable to the Company's decision to eliminate third-party Internet events and to limit access to our outlet Internet sales site. This decrease was partially offset by an increase of $143.5 million related to net new stores. Since the end of fiscal 2013, Coach opened a net 14 outlet stores, including one Men’s outlet store, and closed a net 19 retail stores.

International Net Sales increased 5.5% or $86.1 million to $1.64 billion. Excluding the unfavorable impact of foreign currency, primarily due to the Japanese yen, net sales increased $191.0 million or 12.3%. The increase in net sales was primarily due to double digit growth in China and Asia, excluding Japan, reflecting an increase of $152.4 million due to net new stores and positive comparable store sales, as well as a $40.5 million increase related to the acquisition of the Europe joint venture in the first quarter of fiscal 2014. Since fiscal 2013, excluding the impact of acquisitions, we opened 39 net new stores, with 34 net new stores in mainland China, Hong Kong and Macau and Japan, and five net new stores in the other regions. The acquisition of the European joint venture resulted in a transfer of an additional 18 stores to the Company’s direct control. Since the acquisition on July 1, 2013, Coach has also opened seven new stores and transitioned two stores from wholesale to direct control.

Gross Profit

Gross profit decreased 10.8% or $401.1 million to $3.30 billion in fiscal 2014 from $3.70 billion in fiscal 2013. Gross margin for fiscal 2014 was 68.6% as compared to 72.9% in fiscal 2013. Excluding items affecting comparability of $82.2 million in fiscal 2014 and $4.8 million in fiscal 2013, gross profit decreased 8.7% or $323.7 million to $3.38 billion from $3.70 billion in fiscal 2013, and gross margin was 70.3% in fiscal 2014 as compared to 73.0% in fiscal 2013.

North America Gross Profit decreased 15.1% or $353.1 million to $1.99 billion in fiscal 2014. Gross margin decreased 310 basis points from 67.4% in fiscal 2013 to 64.3% in fiscal 2014. The decrease in gross margin is due to a 210 basis point decline as a result of increased promotional activity, primarily in our outlet channel, and a 70 basis point decline as a result of selling products with a higher average unit cost as well as increased penetration of our broadened lifestyle categories.

International Gross Profit increased 3.2% or $40.0 million to $1.30 billion in fiscal 2014. Gross margin decreased 180 basis points from 80.6% in fiscal 2013 to 78.8% in fiscal 2014. The decrease in gross margin is primarily due to the negative translation effect of changes in foreign currency, primarily associated with fluctuations in the Japanese Yen. Other factors negatively impacting gross margin were increased promotions, selling products with a higher average unit cost, as well as increased penetration of our broadened lifestyle categories which were partially offset by the lower step-up of inventory as part of the purchase accounting related to our acquisitions.

Corporate Unallocated Gross Profit decreased $92.6 million from $64.7 million in fiscal 2013 to a loss of $27.9 million in fiscal 2014. Excluding items affecting comparability of $82.2 million in fiscal 2014 and $4.8 million in fiscal 2013, gross profit decreased by $15.2 million from $69.5 million to $54.3 million in fiscal 2014, primarily due to less favorable production variances.

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 and supply costs, wholesale and retail account administration compensation globally and Coach international operating expenses. These expenses are affected by the number of Coach-operated 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 (primarily to support North America), new product design costs, public relations and market research expenses. Distribution and customer service expenses include warehousing, order fulfillment, shipping and handling, customer service 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 and software expenses. Administrative expenses also include global equity compensation expense.

Coach includes inbound product-related transportation costs from our service providers within cost of sales. Coach, similar to some companies, includes certain transportation-related costs related to our distribution network in selling, general and administrative 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 increased 0.2% or $3.3 million to $2.18 billion in fiscal 2014 as compared to $2.17 billion in fiscal 2013, primarily driven by an increase in selling expenses. As a percentage of net sales, SG&A expenses increased to 45.3% during fiscal 2014 as compared to 42.8% during fiscal 2013. Excluding items affecting comparability of $49.3 million in fiscal 2014 and $48.4 million in fiscal 2013, SG&A expenses increased $2.4 million from fiscal 2013; and SG&A expenses as a percentage of net sales increased, primarily due to the increase in selling expenses as a percentage of net sales, to 44.3% in fiscal 2014 from 41.9% in fiscal 2013.

Selling expenses were $1.55 billion, or 32.2% of net sales, in fiscal 2014 compared to $1.51 billion, or 29.8% of net sales, in fiscal 2013. The dollar increase in selling expenses reflected increases in new store openings in our International business including the impact of acquiring our former partner Hackett’s 50% interest in our European joint venture. These expenses were mostly offset by a favorable impact of foreign currency exchange rates primarily related to Coach Japan and lower expenses in North America due to the divestiture of the Reed Krakoff business.

Advertising, marketing, and design costs were $242.3 million, or 5.0% of net sales, in fiscal 2014, compared to $265.4 million, or 5.2% of net sales, during fiscal 2013. The decrease was primarily due to the divestiture of the Reed Krakoff business. This decrease was partially offset by increased advertising, marketing, and design costs related to the Company’s transformation efforts.

Distribution and consumer service expenses of $87.2 million, or 1.8% of net sales, in fiscal 2014, were fairly consistent with fiscal 2013 expenses of $86.1 million, or 1.7% of net sales.

Administrative expenses were $300.5 million, or 6.3% of net sales, in fiscal 2014 compared to $307.1 million, or 6.1% of net sales, during fiscal 2013. Excluding items affecting comparability of $49.3 million in fiscal 2014 and $48.4 million in fiscal 2013, administrative expenses were $251.2 million, or 5.2% of net sales, in fiscal 2014 and $258.7 million, or 5.1% of net sales, in fiscal 2013. Lower compensation expense was mostly offset by additional costs incurred as part of investments made in the business, particularly related to increased depreciation expense.

Operating Income

Operating income decreased 26.5% or $404.4 million to $1.12 billion during fiscal 2014 as compared to $1.52 billion in fiscal 2013. Operating margin decreased to 23.3% as compared to 30.0% in fiscal 2013. Excluding items affecting comparability of $131.5 million in fiscal 2014 and $53.2 million in fiscal 2013, operating income decreased 20.7% or $326.1 million to $1.25 billion from $1.58 billion in fiscal 2013; and operating margin was 26.0%, in fiscal 2014 as compared to 31.1% in fiscal 2013.

The following table presents operating income by reportable segment for fiscal 2014 compared to fiscal 2013:

		(dollars in millions)
		June 28, 2014				June 29, 2013(1)				Variance
				Amount				%
North America		$	1,164.1			$	1,460.0			$	(295.9	)		(20.3	)%
International		555.7				582.2				(26.5		)		(4.6	)
Other(2)		34.2				30.0				4.2				14.0
Corporate unallocated		(633.9		)		(547.7		)		(86.2		)		15.7
Total operating income		$	1,120.1			$	1,524.5			$	(404.4	)		(26.5	)%

(1)

In connection with the acquisition of the retail business in Europe, the Company evaluated the composition of its reportable segments and concluded that the operating income associated with this region should be included in the International segment. Accordingly, prior year comparable amounts have been reclassified to conform to the current year presentation. See Note 7, "Acquisitions" and Note 16, "Segment Information" for more information.

(2)	Operating income in the Other category, which is not a reportable segment, consists of sales and expenses generated in ancillary channels, including licensing and disposition.

North America Operating Income decreased 20.3% or $295.9 million to $1.16 billion in fiscal 2014 reflecting the decrease in gross profit of $353.1 million which was partially offset by lower SG&A expenses of $57.2 million. The decrease in SG&A expenses was related to the absence of costs in fiscal 2014 related to the divestiture of the Reed Krakoff business and lower variable selling costs as a result of lower sales. Operating margin decreased 450 basis points to 37.5% in fiscal 2014 from 42.0% during the same period in the prior year due to lower gross margin of 310 basis points and higher SG&A expense as a percentage of net sales of 140 basis points.

International Operating Income decreased 4.6% or $26.5 million to $555.7 million primarily reflecting higher SG&A expenses of $66.5 million partially offset by higher gross profit of $40.0 million. The increase in SG&A expenses is related to a $53.7 million increase in China and Asia, excluding Japan, related to higher occupancy and employee costs associated with new store openings and a $45.8 million increase as a result of the recently acquired Europe business. The increase in SG&A costs was offset by foreign currency effects in Japan of $42.6 million. Operating margin decreased 360 basis points to 33.8% in fiscal 2014 from 37.4% during the same period in the prior year primarily due to lower gross margin of 180 basis points and higher overall selling expenses as a percentage of net sales which increased by 180 basis points.

Corporate Unallocated Operating Expense increased $86.2 million to $633.9 million, an increase of 15.7%. This increase was primarily attributable higher charges incurred by the Company in fiscal 2014 as part its Transformation Plan. Excluding items affecting comparability, unallocated operating expenses increased by 1.6% or $7.9 million to $502.4 million from $494.5 million.

Provision for Income Taxes

The effective tax rate was 30.4% in fiscal 2014, as compared to 32.0% in fiscal 2013. Excluding the items affecting comparability, the effective tax rate was 30.6% and 32.2% in fiscal 2014 and fiscal 2013, respectively. Both fiscal 2014 and fiscal 2013 benefited from one-time discrete items. In fiscal 2014, the Company recognized a net benefit related to refinements of its various tax accounts which were partially offset by the loss of deductions related to changes in key executives. During fiscal 2013, the Company recognized a favorable tax settlement and the benefit of certain permanent adjustments related to executive compensation. These one-time discrete items favorably impacted our effective tax rate by approximately 220 basis points and 40 basis points in fiscal 2014 and fiscal 2013, respectively.

Net Income

Net income decreased 24.5% or $253.1 million to $781.3 million in fiscal 2014 as compared to $1.03 billion in fiscal 2013. Excluding items of comparability, net income decreased 18.5% or $197.4 million to $869.6 million in fiscal 2014 from $1.07 billion in fiscal 2013. This decrease was primarily due to lower operating income partially offset by lower provision for income taxes.

Earnings per Share

Net income per diluted share decreased 22.7% to $2.79 in fiscal 2014 as compared to $3.61 in fiscal 2013. Excluding items of comparability, net income per diluted share decreased 16.9% or $0.63 to $3.10 in fiscal 2014 from $3.73 in fiscal 2013, due to lower net income.

FISCAL 2013 COMPARED TO FISCAL 2012

The following table summarizes results of operations for fiscal 2013 compared to fiscal 2012. All percentages shown in the table below and the discussion that follows have been calculated using unrounded numbers.

	Fiscal Year Ended
	June 29, 2013							June 30, 2012							Variance
	(dollars in millions, except per share data)
	Amount				% of net sales			Amount				% of net sales			Amount				%
Net sales	$	5,075.4			100.0	%		$	4,763.2			100.0	%		$	312.2			6.6	%
Gross profit	3,698.1				72.9			3,466.1				72.8			232.0				6.7
Selling, general and administrative expenses	2,173.6				42.8			1,954.1				41.0			219.5				11.2
Operating income	1,524.5				30.0			1,512.0				31.7			12.5				0.8
Provision for income taxes	486.1				9.6			466.8				9.8			19.3				4.1
Net income	1,034.4				20.4			1,038.9				21.8			(4.5		)		(0.4	)
Net Income per share:
Basic	$	3.66						$	3.60						$	0.06			1.6	%
Diluted	3.61							3.53							0.08				2.3

Items Affecting Comparability

The Company’s reported results are presented in accordance with GAAP. The reported gross profit, selling, general and administrative expenses, operating income, income before provision for income taxes, provision for income taxes, net income and earnings per diluted share in fiscal 2013 and 2012 reflect certain items which affect the comparability of our results, as noted in the following tables. Refer to page 39 for a discussion on the Non-GAAP Measures.

COACH, INC.

GAAP TO NON-GAAP RECONCILIATION

For the Years Ended June 29, 2013 and June 30, 2012

(in millions, except per share data)

	June 29, 2013
	GAAP Basis (As Reported)				Restructuring and Transformation-Related Charges				Non-GAAP Basis (Excluding Items)
Gross profit	$	3,698.1			$	(4.8	)		$	3,702.9
Selling, general and administrative expenses	$	2,173.6			$	48.4			$	2,125.2
Operating income	$	1,524.5			$	(53.2	)		$	1,577.7
Income before provision for income taxes	$	1,520.5			$	(53.2	)		$	1,573.7
Provision for income taxes	$	486.1			$	(20.6	)		$	506.7
Net income	$	1,034.4			$	(32.6	)		$	1,067.0
Diluted net income per share	$	3.61			$	(0.11	)		$	3.73

	June 30, 2012
	GAAP Basis (As Reported)				Tax Adjustment				Charitable Contribution				Non-GAAP Basis (Excluding Items)
Selling, general and administrative expenses	$	1,954.1			$	—			$	39.2			$	1,914.9
Operating income	$	1,512.0			$	—			$	(39.2	)		$	1,551.2
Income before provision for income taxes	$	1,505.7			$	—			$	(39.2	)		$	1,544.9
Provision for income taxes	$	466.8			$	(23.9	)		$	(15.3	)		$	506.0
Net income	$	1,038.9			$	23.9			$	(23.9	)		$	1,038.9
Diluted net income per share	$	3.53			$	0.08			$	(0.08	)		$	3.53

Items Affecting Comparability

Fiscal 2013 Items

Restructuring and Transformation-Related Charges

During fiscal 2013, the Company incurred restructuring and transformation-related charges of $53.2 million. The charges recorded in selling, general and administrative expenses and cost of sales were $48.4 million and $4.8 million, respectively. The charges include the strategic reassessment of the Reed Krakoff business, streamlining our organizational model and reassessing the fleet of our retail stores and inventories.

Fiscal 2012 Items

Charitable Contributions and Tax Adjustments

During fiscal 2012, the Company decreased the provision for income taxes by $23.9 million, primarily as a result of recording the effect of a revaluation of certain deferred tax asset balances due to a change in Japan’s corporate tax laws and the favorable settlement of a multi-year transfer pricing agreement with Japan. The Company used the net income favorability to contribute an aggregate $39.2 million to the Coach Foundation.

Currency Fluctuation Effects

The change in net sales in fiscal 2013 has been presented both including and excluding currency fluctuation effects (primarily attributable to Coach Japan).

Net Sales

Net sales increased 6.6% or $312.2 million to $5.08 billion. The increase was driven by gains in both the North American and International businesses.

The following table presents net sales by reportable segment for fiscal 2013 compared to fiscal 2012:

	Fiscal Year Ended
	Total Net Sales								Rate of Change		Percentage of Total Net Sales
	June 29, 2013(1)				June 30, 2012(1)				June 29, 2013(1)			June 30, 2012(1)
	(dollars in millions)
North America	$	3,478.2			$	3,316.9			4.9%		68.5	%		69.7	%
International(1)	1,558.1				1,413.0				10.3		30.7			29.6
Other(1)(2)	39.1				33.3				17.4		0.8			0.7
Total net sales	$	5,075.4			$	4,763.2			6.6%		100.0	%		100.0	%

(1)

In connection with the acquisition of the retail business in Europe, the Company evaluated the composition of its reportable segments and concluded that sales in this region should be included in the International segment. Accordingly, fiscal 2013 and fiscal 2012 comparable sales have been reclassified to conform to the fiscal 2014 presentation. See Note 7, "Acquisitions" and Note 16, "Segment Information" for more information.

(2)	Net sales in the Other category, which is not a reportable segment, consists of sales generated in ancillary channels including licensing and disposition.

North America

Net sales increased 4.9% to $3.48 billion during fiscal 2013 from $3.32 billion during fiscal 2012, primarily driven by sales from new and expanded stores. In fiscal 2013, North America comparable store sales increased $7.8 million or 0.3%, of which the North America Internet business contributed 9 points to comparable store sales growth. Since the end of fiscal 2012, Coach opened a net 24 factory stores, including 10 Men’s, closed three net retail stores, and expanded six factory and one retail store in North America.

International

Net sales increased 10.3% to $1.56 billion during fiscal 2013 from $1.41 billion during fiscal 2012, primarily driven by sales from new and acquisition-related stores. Strong comparable store sales performance in Asia, led by double-digit percentage growth in China, and increased shipments to international wholesale customers, driven by expanded distribution, were substantially offset by weak sales performance in Japan and by the negative foreign exchange impact of the Yen, which decreased net sales by $82.2 million. Since the end of fiscal 2012, International opened a net 42 new stores (excluding those acquired as a result of the acquisitions), with 30 net new stores in mainland China, Hong Kong and Macau, 11 net new stores in Japan and one net new store in the other regions. Fiscal 2013 results include net sales of the Company-operated Malaysia and South Korean businesses, which were acquired in the first quarter of 2013 as well as the benefit of a full year of net sales from Taiwan, which was purchased in the second quarter of fiscal 2012

Gross Profit

Gross profit increased 6.7% to $3.70 billion in fiscal 2013 from $3.47 billion during fiscal 2012. Gross margin in fiscal 2013 was 72.9% as compared to 72.8% during fiscal 2012. Excluding items affecting comparability of $4.8 million due to restructuring activities in 2013, gross profit increased 6.8% to $3.70 billion, or gross margin was 73.0%, in fiscal 2013.

North America Gross Profit increased 3.7% or $82.7 million to $2.35 billion in fiscal 2013. Gross margin decreased 80 basis points from 68.2% in fiscal 2012 to 67.4% in fiscal 2013, primarily due to increased promotional activity.

International Gross Profit increased 10.2% or $116.1 million to $1.26 billion in fiscal 2013. Gross margin remained consistent at 80.6% both in fiscal 2013 and fiscal 2012.

Selling, General and Administrative Expenses

SG&A expenses increased 11.2% to $2.17 billion in fiscal 2013 as compared to $1.95 billion in fiscal 2012, driven by an increase in selling expenses. As a percentage of net sales, SG&A expenses increased to 42.8% during fiscal 2013 as compared to 41.0% during fiscal 2012. Excluding items affecting comparability of $48.4 million in fiscal 2013, SG&A expenses were 41.9% as a percentage of net sales, in fiscal 2013. Excluding items affecting comparability of $39.2 million in fiscal 2012, SG&A expenses were 40.2% as a percentage of net sales, in fiscal 2012.

Selling expenses were $1.51 billion, or 29.8% of net sales, in fiscal 2013 compared to $1.36 billion, or 28.5% of net sales, in fiscal 2012. The dollar increase in selling expenses was due to International stores reflecting higher sales and new store openings, and higher North American Internet expenses reflecting higher sales. International selling expenses overall increased as a percentage of sales, due to the acquisitions of the South Korea and Malaysia businesses and infrastructure investments to support Asia. China store expenses as a percentage of sales decreased primarily due to operating efficiencies and sales leverage.

Advertising, marketing, and design costs were $265.4 million, or 5.2% of net sales, in fiscal 2013, compared to $245.2 million, or 5.1% of net sales, during fiscal 2012. The dollar increase was primarily due to creative and design expenditures and marketing expenses related to digital media and consumer communications, which includes our digital strategy through www.coach.com, the launch of our Legacy line, marketing sites and social networking. The Company utilizes and continues to explore implementing new technologies such as our global web presence, social networking and blogs as cost-effective consumer communication opportunities to increase online and store sales and build brand awareness.

Distribution and consumer service expenses were $86.1 million, or 1.7% of net sales, in fiscal 2013, compared to $68.9 million, or 1.4% of net sales, in fiscal 2012. The increase in distribution and consumer service expenses is primarily the result of the change in sales mix to Internet purchases, resulting in increased packaging and shipping expense per dollar of sales.

Administrative expenses were $307.1 million, or 6.1% of net sales, in fiscal 2013 compared to $282.2 million, or 5.9% of net sales, during fiscal 2012. The dollar increase is due to the restructuring and transformation-related charges, increased equity compensation and systems investment to support international expansion. These increases were partially offset by the absence of a charitable contribution in fiscal 2013. Excluding items affecting comparability of $48.4 million in fiscal 2013, administrative expenses were $258.7 million, or 5.1% as a percentage of net sales, in fiscal 2013. Excluding items affecting comparability of $39.2 million in fiscal 2012, administrative expenses were $243.0 million, or 5.1% as a percentage of net sales, in fiscal 2012.

Operating Income

Operating income increased 0.8% or $12.5 million to $1.52 billion during fiscal 2013 as compared to $1.51 billion in fiscal 2012. Operating margin decreased to 30.0% as compared to 31.7% in fiscal 2012. Excluding items affecting comparability, operating income increased 1.7% or $26.5 million to $1.58 billion, and operating margin was 31.1%, in fiscal 2013. Excluding items affecting comparability, operating income was $1.55 billion, or operating margin was 32.6%, in fiscal 2012.

The following table presents operating income by reportable segment for fiscal 2013 compared to fiscal 2012:

		(dollars in millions)
		June 29, 2013(1)				June 30, 2012(1)				Variance
				Amount				%
North America		$	1,460.0			$	1,448.0			$	12.0			0.8	%
International		582.2				557.7				24.5				4.4
Other(2)		30.0				26.5				3.5				13.2
Corporate unallocated		(547.7		)		(520.2		)		(27.5		)		5.3
Total operating income		$	1,524.5			$	1,512.0			$	12.5			0.8	%

(1)

In connection with the acquisition of the retail business in Europe, the Company evaluated the composition of its reportable segments and concluded that the operating income associated with this region should be included in the International segment. Accordingly, fiscal 2013 and fiscal 2012 comparable amounts have been reclassified to conform to the fiscal 2014 presentation. See Note 7, "Acquisitions" and Note 16, "Segment Information" for more information.

(2)	Operating income in the Other category, which is not a reportable segment, consists of sales and expenses generated in ancillary channels, including licensing and disposition.

North America Operating Income increased 0.8% or $12.0 million to $1.46 billion in fiscal 2013 reflecting the increase in gross profit of $82.7 million which was offset by higher SG&A expenses of $70.7 million. The increase in SG&A expenses was related to transformation-related store investments, distribution costs associated with higher internet sales, and higher overall selling expenses. Operating margin decreased 170 basis points to 42.0% in fiscal 2013 from 43.7% in fiscal 2012 primarily due to higher overall selling expenses as a percentage of revenues.

International Operating Income increased 4.4% or $24.5 million to $582.2 million in fiscal 2013 primarily reflecting the increase in gross profit of $116.1 million which was partially offset by higher SG&A expenses of $91.6 million. SG&A expenses increased due to the acquisition of our distributor businesses in Asia and additional costs incurred related to increased sales. Operating margin decreased 210 basis points to 37.4% in fiscal 2013 from 39.5% in fiscal 2012 primarily due to investments made in the region.

Corporate Unallocated Operating Loss increased $27.5 million to $547.7 million in fiscal 2013, an increase of 5.3%. Excluding items affecting comparability, net expenses related to Corporate Unallocated increased $13.5 million to $494.5 million, an increase of 2.8%. The increase in Corporate Unallocated loss was attributable to (i) higher administrative and information costs (ii) advertising, marketing and design costs and (iii) distribution and customer services expenses. These expenses were substantially offset by favorable production variances, particularly for labor.

Provision for Income Taxes

The effective tax rate was 32.0% in fiscal 2013, as compared to the 31.0% effective tax rate in fiscal 2012. During fiscal 2013, the Company recognized a favorable tax settlement and the benefit of certain permanent adjustments related to executive compensation. During fiscal 2012, the Company recorded the effect of a revaluation of certain deferred tax asset balances due to a change in Japan’s corporate tax laws, the favorable completion of a multi-year transfer pricing agreement with Japan and a favorable tax settlement. Excluding the items affecting comparability, the effective tax rate was 32.2% and 32.8% in fiscal 2013 and 2012, respectively. The decline reflects the favorable tax settlement and the benefit of certain permanent adjustments related to executive compensation, as well as the Company earning a higher proportion of its profits in lower tax rate jurisdictions.

Net Income

Net income decreased 0.4% to $1.03 billion in fiscal 2013 as compared to $1.04 billion in fiscal 2012. Excluding items affecting comparability, net income increased 2.7% to $1.07 billion in fiscal 2013, reflecting a 1.9% increase in income before provision for income taxes and the lower effective tax rate.

Earnings per Share

Diluted earnings per share grew 2.3% to $3.61 in fiscal 2013 as compared to $3.53 in fiscal 2012. Excluding items of comparability, net income per diluted share grew 5.5% to $3.73 in fiscal 2013, reflecting share leverage due to repurchases of Coach’s common stock and the higher net income.

FISCAL 2014, FISCAL 2013 AND FISCAL 2012 ITEMS AFFECTING COMPARABILITY OF OUR FINANCIAL RESULTS

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 2014, fiscal 2013 and fiscal 2012 reflect certain items which affect the comparability of our results, including the impact of the fiscal 2014 Transformation Plan and fiscal 2013 restructuring and transformation-related charges. These metrics are also reported on a non-GAAP basis for these fiscal years to exclude the impact of these items.

These non-GAAP performance measures were used by management to conduct and evaluate its business during its regular review of operating results for the periods affected. Management and the Company’s Board utilized these non-GAAP measures to make decisions about the uses of Company resources, analyze performance between periods, develop internal projections and measure management performance. The Company’s primary internal financial reporting excluded these items affecting comparability. In addition, the compensation committee of the Company’s Board used these non-GAAP measures when setting and assessing achievement of incentive compensation goals.

Additionally, certain increases and decreases in operating results for the Company and its International segment (including Coach Japan) 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.

We believe these non-GAAP measures are useful to investors in evaluating the Company’s ongoing operating and financial results and understanding how such results compare with the Company’s historical performance. Additionally, we believe presenting certain increases and decreases that include and exclude the effect of foreign currency fluctuations helps investors and analysts understand the effect of significant year-over-year currency fluctuations. We believe excluding the items affecting comparability assists investors 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 the Results of Operations section within Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations."

The comparisons of our financial results are affected by the following items included in our reported results:

	Fiscal Year Ended
	(dollars in millions, except per share data)
	June 28, 2014(1)				June 29, 2013(1)				June 30, 2012(2)
Gross profit
Transformation and other related charges	$	(82.2	)		$	(4.8	)		$	—
Total Gross profit impact	$	(82.2	)		$	(4.8	)		$	—
SG&A
Transformation and other related charges	$	49.3			$	48.4			$	—
Charitable foundation contribution	—				—				39.2
Total Operating income impact	$	49.3			$	48.4			$	39.2
Operating income
Transformation and other related charges	$	(131.5	)		$	(53.2	)		$	—
Charitable foundation contribution	—				—				(39.2		)
Total Operating income impact	$	(131.5	)		$	(53.2	)		$	(39.2	)
Provision for income taxes
Transformation and other related charges	$	(43.2	)		$	(20.6	)		$	—
Charitable foundation contribution	—				—				(15.3		)
Tax adjustments	—				—				(23.9		)
Total Provision for income taxes impact	$	(43.2	)		$	(20.6	)		$	(39.2	)
Net income
Transformation and other related charges	$	(88.3	)		$	(32.6	)		$	—
Charitable foundation contribution	—				—				(23.9		)
Tax adjustments	—				—				23.9
Total Net income impact	$	(88.3	)		$	(32.6	)		$	—
Diluted earnings per share
Transformation and other related charges	$	(0.31	)		$	(0.11	)		$	—
Charitable foundation contribution	—				—				(0.08		)
Tax adjustments	—				—				0.08
Total Diluted earnings per share impact	$	(0.31	)		$	(0.11	)		$	—

(1)	Fiscal 2014 charges relate to costs incurred under the Company's Transformation Plan. Fiscal 2013 charges primarily related to corporate restructuring-related expenses and impairment charges related to retail stores and inventory. See Note 3, "Transformation, Restructuring and Other Related Actions," for further information.

(2)	Charitable contributions precisely offset the benefit of tax settlements in fiscal 2012, representing a revaluation of certain Japan related deferred tax asset balances due to a change in Japan's corporate tax laws.

FINANCIAL CONDITION

Cash Flows

		Fiscal Year Ended
(dollars in millions)		June 28, 2014				June 29, 2013				Change
Net cash provided by operating activities		$	985,410			$	1,413,974			$	(428,564	)
Net cash used in investing activities		(707,708		)		(570,500		)		(137,208		)
Net cash used in financing activities		(748,049		)		(689,106		)		(58,943		)
Effect of exchange rate changes on cash and cash equivalents		(515		)		(8,798		)		8,283
Net (decrease)/increase in cash and cash equivalents		$	(470,862	)		$	145,570			$	(616,432	)

The Company’s cash and cash equivalents decreased $470.9 million in fiscal 2014 compared to an increase of $145.6 million in fiscal 2013. The year-over-year change is primarily driven by declines in net cash provided by operations as well as an increase in net investments purchased during fiscal 2014.

Net cash provided by operating activities

Net cash provided by operating activities decreased $428.6 million primarily due to changes in our operating asset and liability balances and lower net income partially offset by higher non-cash expenses. Other balance sheet changes, which primarily relate to other assets, were a use of cash of $64.2 million in fiscal 2014 due to an increase in tax receivables. This compares to a $39.7 million source of cash in fiscal 2013. Accrued liabilities were a lower source of cash in fiscal 2014 of $14.1 million as compared to a source of cash of $98.9 million in fiscal 2013. This was primarily driven by lower compensation-related accruals at the end of fiscal 2014. Accounts payable were a use of cash in fiscal 2014 of $30.2 million as compared to a source of cash of $30.4 million in fiscal 2013, driven by the timing of payments related to inventory purchases. The increase in non-cash expenses reflected higher transformation and restructuring charges and higher depreciation and amortization expenses partially offset by lower share-based compensation expense and the year-over-year change in the deferred income tax provision.

Net cash used in investing activities

Net cash used in investing activities was $707.7 million in fiscal 2014 compared to $570.5 million in fiscal 2013, with the increase of $137.2 million primarily due to a net increase in our investment portfolio of $226.3 million, partially offset by a decline in cash used for acquisitions and related advances to distributors of $49.6 million.

Net cash used in financing activities

Net cash used in financing activities was $748.0 million in fiscal 2014, or an increase of $58.9 million as compared to the prior fiscal year. This net increase was primarily attributable to higher cash used of $124.9 million related to common stock repurchases, higher dividend payments of $36.8 million as result of an increased dividend rate per share and $31.8 million due to lower net proceeds from share-based awards. These increases were partially offset by net borrowings of $140.0 million under the Company's revolving credit facility.

Revolving Credit Facilities

On June 18, 2012, the Company established a $400 million revolving credit facility with certain lenders and JP Morgan Chase Bank, N.A. as the primary lender and administrative agent (the “JP Morgan facility”) with a maturity date of June 2017. On March 26, 2013, the Company amended the JP Morgan facility to expand available aggregate revolving commitments to $700 million and to extend the maturity date to March 26, 2018. The JP Morgan facility is available to finance the seasonal working capital requirements and general corporate purposes of the Company and its subsidiaries. At Coach’s request and lenders’ consent, revolving commitments of the JP Morgan facility may be increased to $1 billion. At June 28, 2014 there was $140.0 million outstanding under the JP Morgan facility. Our average borrowings outstanding for fiscal 2014 was $93.9 million. We had no revolving credit borrowings outstanding in fiscal 2013.

Borrowings under the JP Morgan Facility bear interest at a rate per annum equal to, at Coach’s option, either (a) a rate based on the rates applicable for deposits in the interbank market for U.S. dollars or the applicable currency in which the loans are made plus an applicable margin or (b) 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%). Additionally, Coach pays a commitment fee on the average daily unused amount of the JP Morgan Facility. At June 28, 2014, the commitment fee was 9 basis points.

The JP Morgan facility contains various covenants and customary events of default. As of June 28, 2014, no known events of default have occurred under the JP Morgan facility.

Coach Japan maintains credit facilities with several Japanese financial institutions to provide funding for working capital and general corporate purposes, with maximum borrowing capacity of 5.3 billion yen, or approximately $52 million at June 28, 2014. Interest is based on the Tokyo Interbank rate plus a margin of 25 to 30 basis points. At June 28, 2014 and during fiscal 2014, there were no outstanding borrowings under these facilities.

Coach Shanghai Limited maintains a credit facility to provide funding for working capital and general corporate purposes, with a maximum borrowing capacity of 63.0 million Chinese renminbi, or approximately $10 million at June 28, 2014. Interest is based on the People's Bank of China rate. At June 28, 2014 and during fiscal 2014, there were no outstanding borrowings under this facility.

Both the Coach Japan and Coach Shanghai Limited credit facilities can be terminated at any time by either party, and there is no guarantee that they will be available to the Company in future periods.

Common Stock Repurchase Program

In October 2012, the Company’s Board of Directors approved a common stock repurchase program to acquire up to $1.5 billion of Coach’s outstanding common stock through June 2015.

Purchases of Coach common stock are made subject to market conditions and at prevailing market prices, through open market purchases. Under Maryland law, Coach’s state of incorporation, treasury shares are not allowed. As a result, all repurchased shares are retired when acquired. The Company may terminate or limit the stock repurchase program at any time.

During fiscal 2014 and fiscal 2013, the Company repurchased and retired 10.2 million and 7.1 million shares, respectively, or $524.9 million and $400.0 million of common stock, respectively, at an average cost of $51.27 and $56.61, respectively. As of June 28, 2014, Coach had $836.7 million remaining in the stock repurchase program.

Liquidity and Capital Resources

Our sources of liquidity are the cash flows generated from our operations, our available cash and cash equivalents and short-term investments, our non-current investments, the $700 million available under our JP Morgan facility, the availability under our Japan and Shanghai credit facilities, and other potential fixed-financing options available to us in the credit and capital markets. Substantially all of our cash and short-term investments are 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. We believe that our existing sources of liquidity, including our ability to access credit and capital markets when needed, will be sufficient to support our operating, capital, and debt service requirements for the foreseeable future, our plans for further business expansion and transformation-related initiatives.

We had $140 million in revolving credit borrowings outstanding under our credit facilities as of June 28, 2014. We will continue to draw on our credit facilities or access other sources of financing for, among other things, funding our investment in the Hudson Yards joint venture, our transformation-related initiatives, a material acquisition, settlement of a material contingency (including uncertain tax positions), or a material adverse business or macroeconomic development, as well as for other general corporate business purposes. This is expected to lead to increased outstanding debt during fiscal 2015.

We believe that our JP Morgan facility is adequately diversified with no undue concentrations in any one financial institution. As of June 28, 2014, there were nine financial institutions participating in the facility, with no one participant maintaining a maximum commitment percentage in excess of 16%. 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.

For the fiscal year ending June 27, 2015, excluding expected capital expenditures related to the Hudson Yards joint venture of approximately $90 to $125 million, which are in addition to our joint venture contributions, the Company expects total capital expenditures to be approximately $300 to $350 million. Capital expenditures will be primarily for capital investments in stores in North America and new stores in Asia and Europe to support our transformation-related initiatives. We will also continue to invest in department store and distributor locations and corporate infrastructure, primarily technology.

Because Coach products are frequently given as gifts, Coach experiences seasonal variations in its net sales, operating cash flows and working capital requirements, primarily related to seasonal holiday shopping. During the first fiscal quarter, Coach builds inventory for the holiday selling season. In the second fiscal quarter, its working capital requirements are reduced substantially as Coach generates 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 in any fiscal quarter may be affected by other events affecting retail sales, such as adverse weather conditions.

In April 2013, the Company entered into a joint venture agreement with the Related Companies, L.P. to develop a new office tower in Manhattan in the Hudson Yards district. The formation of the joint venture serves as a financing vehicle for the project, with the Company owning less than 43% of the joint venture. Upon completion of the office tower in fiscal 2016, the Company

will retain a condominium interest serving as its new corporate headquarters. During fiscal 2014, the Company invested $87.2 million in the joint venture. The Company expects to invest approximately $350 million over the next two years, of which and depending on construction progress, the Company’s latest estimate contemplates an investment of approximately $240 million in fiscal 2015. Outside of the joint venture, Coach is directly investing in aspects of the new corporate headquarters. In fiscal 2014, $2.1 million was included in capital expenditures and we expect an additional $188 million over the period of construction. The joint venture investments and capital expenditures will be financed by the Company with cash on hand, debt and approximately $130 million of proceeds from the sale of its current headquarters buildings expected in fiscal 2016.

Management believes that cash flow 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 for the foreseeable working capital needs, planned capital expenditures and dividend payments. Any future 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 Coach on acceptable terms or at all. Coach’s ability to fund its working capital needs, planned capital expenditures, dividend payments and scheduled debt payments, as well as to comply with all of the financial covenants under its debt agreements, depends on its future operating performance and cash flow, which in turn are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond Coach’s control.

Contractual and Other Obligations

Firm Commitments

As of June 28, 2014, Coach’s contractual obligations are as follows:

(dollars in millions)		Total				Fiscal 2015				Fiscal 2016 – 2017				Fiscal 2018 – 2019				Fiscal 2020 and Beyond
Capital expenditure commitments		$	15.9			$	15.9			$	—			$	—			$	—
Inventory purchase obligations		533.5				533.5				—				—				—
New corporate headquarters joint venture(1)		350.0				240.0				110.0				—				—
Operating leases		1,210.9				208.5				353.1				243.4				405.9
Other		9.1				1.1				6.2				1.8				—
Total		$	2,119.4			$	999.0			$	469.3			$	245.2			$	405.9

(1)	Payments are estimated and may vary based on construction progress.

Excluded from the above contractual obligations table is the non-current liability for unrecognized tax benefits of $188.7 million as of June 28, 2014, 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 June 28, 2014 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 plans.

Off-Balance Sheet Arrangements

In addition to the commitments included in the table above, we have outstanding letters of credit $5.6 million as of June 28, 2014, primarily serving to collateralize our obligation to third parties for insurance claims and value-added tax refunds. These letters of credit expire at various dates through 2015.

As discussed earlier, the Company entered into a joint venture agreement with the Related Companies, L.P. to develop a new office tower in Manhattan in the Hudson Yards district, in April 2013. The formation of the Hudson Yards joint venture serves as a financing vehicle for the project. Construction of the new building has commenced and upon completion of the office tower in fiscal 2016, Coach will retain a condominium interest serving as its new corporate headquarters. The Hudson Yards joint venture is determined to be a variable interest entity primarily due to the fact that it has insufficient equity to finance its activities without additional subordinated financial support from its two joint venture partners. Coach is not considered the primary beneficiary of the entity primarily because we do not have the power to direct the activities that most significantly impact the entity’s economic performance. The Company’s maximum loss exposure is limited to the committed capital.

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 12, "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 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 Coach’s accounting policies, please refer to the Notes to Consolidated Financial Statements.

Inventories

The Company’s inventories are reported at the lower of cost or market. Inventory costs include material, conversion costs, freight and duties and are determined by the first-in, first-out method. The Company reserves for slow-moving and aged inventory based on historical experience, current product demand and expected future demand. A decrease in product demand due to changing customer tastes, buying patterns or increased competition could impact Coach’s evaluation of its slow-moving and aged 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 June 28, 2014, a 10% change in the reserve for slow-moving and aged inventory, excluding amounts associated with the Transformation Plan, would have resulted in an insignificant change in inventory and cost of sales. In fiscal 2014, the Company made a strategic decision to donate and destroy certain inventory items resulting in a charge to cost of sales of $82.2 million. Refer to Note 3, "Transformation, Restructuring and Other Related Actions," for charges related to inventory under the Company's Transformation Plan.

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. These revenues are recognized net of estimated returns at the time of sale to consumers. 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. Internet revenue is also reduced by an estimate for returns.

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 returns, discounts, and markdown allowances. Returns and allowances require pre-approval from management and discounts are based on trade terms. 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. The Company reviews and refines these estimates on at least a quarterly basis. The Company’s historical estimates of these costs have not differed materially from actual results.

At June 28, 2014, a 10% change in the allowances for estimated uncollectible accounts, markdowns and returns would have resulted in an insignificant change in accounts receivable and net sales.

Gift cards issued by the Company are recorded as a liability until they are redeemed, at which point revenue is recognized. The Company recognizes income for unredeemed gift cards when the likelihood of a gift card being redeemed by a customer is remote, which is approximately two years after the gift card is issued, and the Company determines that it does not have a legal obligation to remit the value of the unredeemed gift card to the relevant jurisdiction as unclaimed or abandoned property. Revenue associated with gift card breakage is not material to the Company’s net operating results.

Goodwill and Other Intangible Assets

Goodwill and certain other intangible assets deemed to have indefinite useful lives are not amortized, but are assessed for impairment at least annually. The Company has no finite-lived intangible assets.

The Company uses a quantitative goodwill impairment test, which is a two-step process. The first step is to identify the existence of potential impairment by comparing the fair value of each reporting unit with its net book 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 and performance of the second step of the quantitative goodwill impairment test is unnecessary.

If the carrying value of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying value of that goodwill. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill that would be recognized in a business combination. In other words, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value was the purchase price paid to acquire the reporting unit.

Determination of the fair value of a reporting unit and the fair value of individual assets and liabilities of a reporting unit is judgmental in nature and often involves the use of significant estimates and assumptions. 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. Estimates of fair value are primarily determined using discounted cash flows, market comparisons, and recent transactions. These approaches use significant estimates and assumptions, including projected future cash flows, discount rates, growth rates, and determination of appropriate market comparables.

The Company performs its annual impairment assessment of goodwill during the fourth quarter of each fiscal year. The Company determined that there was no impairment in fiscal 2014, fiscal 2013 or fiscal 2012.

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. The evaluation is based on a review of forecasted operating cash flows and the profitability of the related asset group. An impairment loss is recognized if the forecasted cash flows are less than the carrying amount of the asset. Similar to prior fiscal years, when assessing store assets for impairment in fiscal 2014, the Company analyzed the cash flows at an individual store-by-store level, which is the lowest level of identifiable cash flows.

In determining future cash flows, we take various factors into account, including changes in merchandising strategy, the emphasis on retail store cost controls, the effects of macroeconomic trends such as consumer spending, the impacts of the experienced level of retail store managers, the level of advertising, promotional cadence and in-store capital investments. 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 Coach’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 have affected our fiscal 2014 net income by approximately $7 million.

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 Coach 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 scheduled

reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent 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.

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 issued or proposed accounting standards which may impact our consolidated financial statements in future reporting periods.