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 thereto, included elsewhere in this document. When used herein, the terms “Company,” "Coach," “we,” “us” and “our” refer to Coach, Inc., including consolidated subsidiaries. Unless the context requires otherwise, references to the "Coach brand" do not include the Stuart Weitzman brand and references to the "Stuart Weitzman brand" do not include the Coach brand and references to the Company, Coach, we, our or us do not include Kate Spade & Company ("Kate Spade").

EXECUTIVE OVERVIEW

The fiscal year ended July 1, 2017 was a 52-week period, the fiscal year ended July 2, 2016 was a 53-week period and the fiscal year ended June 27, 2015 was a 52-week period.

Coach, Inc. is a leading New York-based house of modern luxury accessories and lifestyle brands. The Coach brand was established in New York City in 1941, and has a rich heritage of pairing exceptional leathers and materials with innovative design. Coach, Inc. acquired Stuart Weitzman, a leader in women's designer footwear, during the fourth quarter of fiscal 2015.

Coach, Inc. operates in three segments:

•	North America - The North America segment includes sales of Coach brand products to customers through Coach-operated stores, including the Internet, and sales to wholesale customers in North America.

•

International - The International segment includes sales of Coach brand products to customers through Coach-operated stores and concession shop-in-shops in Japan, mainland China, Hong Kong, Macau, Singapore, Taiwan, Malaysia, South Korea, the United Kingdom, France, Ireland, Spain, Portugal, Germany, Italy, Austria, Belgium, the Netherlands and Switzerland. Additionally, International includes sales to consumers through the Internet in Japan, mainland China, South Korea, the United Kingdom, France, Spain, Germany and Italy, as well as sales to wholesale customers and distributors in approximately 55 countries.

•	Stuart Weitzman - The Stuart Weitzman segment includes global sales generated by the Stuart Weitzman brand, primarily through department stores in North America and international locations, within numerous independent third party distributors and within Stuart Weitzman operated stores, including the Internet, in the United States, Canada and Europe.

Other, which is not a reportable segment, consists of sales and expenses generated by the Coach brand other ancillary channels, licensing and disposition.

As the Company's business model is based on multi-channel and brand global distribution, our success does not depend solely on the performance of a single channel or geographic area.

We are focused on driving long-term growth and profitability through the following key initiatives:

Build an infrastructure to support future growth initiatives

•	Through the acquisition of Kate Spade, we created the first New York-based house of modern luxury lifestyle brands, defined by authentic, distinctive products and fashion innovation.

•	Create an agile and scalable business model to support sustainable/future growth for a multi-brand Coach, Inc.

Drive brand relevance

•	Continue to evolve the Coach brand across the key consumer touchpoints of product, stores and marketing.

•	Reinvigorate growth and brand relevance through our differentiated positioning, which combines our history of heritage and craftsmanship with Stuart Vevers's modern creative vision.

•	Raise brand awareness and increase market share for the Stuart Weitzman brand globally, building upon the company's strong momentum and core brand equities of fusing fashion with fit.

Grow our business internationally

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

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

Harness the power of the digital world

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

Recent Developments

Kate Spade Acquisition

On July 11, 2017, the Company completed its acquisition of Kate Spade & Company for $18.50 per share in cash for a total of approximately $2.4 billion. The combination of Coach, Inc. and Kate Spade & Company creates a leading luxury lifestyle company with a more diverse multi-brand portfolio supported by significant expertise in handbag design, merchandising, supply chain and retail operations as well as solid financial acumen.

Strategic Repositioning of Coach Brand in North America Department Stores

In the beginning of fiscal 2017, the Company implemented a deliberate and strategic decision to elevate the Coach brand's positioning in the channel by limiting participation in promotional events and closing approximately 25% of its wholesale doors during fiscal 2017.

Operational Efficiency Plan

During the fourth quarter of fiscal 2016, the Company announced a series of operational efficiency initiatives focused on creating an agile and scalable business model (the "Operational Efficiency Plan"). The significant majority of the charges under this plan will be recorded within SG&A expenses, and was substantially completed by the end of fiscal 2017. These charges are associated with organizational efficiencies, primarily related to the reduction of corporate staffing levels globally, as well as accelerated depreciation, mainly associated with information systems retirement, technology infrastructure charges related to the initial costs of replacing and updating our core technology platforms, and international supply chain and office location optimization. The remaining charges under this plan approximate $10-15 million which will be incurred in fiscal 2018.

Refer to Note 3, "Restructuring Activities" and "GAAP to Non-GAAP Reconciliation" for further information.

Transformation Plan

During the fourth quarter of fiscal 2014, Coach, Inc. announced a multi-year strategic plan with the objective of transforming the Coach brand and reinvigorating growth (the "Transformation Plan"). Key operational and cost measures of the Transformation Plan included: (i) the investment in capital improvements in our stores and wholesale locations to drive comparable sales improvement; (ii) the optimization and streamlining of our organizational model as well as the closure of underperforming stores in North America, and select International stores; (iii) the realignment of inventory levels and mix to reflect our elevated product strategy and consumer preferences; (iv) the investment in incremental advertising costs to elevate consumer perception of the Coach brand, drive sales growth and promote our new strategy, which started in fiscal 2015; and (v) the significant scale-back of our promotional cadence in an increased global promotional environment, particularly within our outlet Internet sales site, which began in fiscal 2014. The Company's execution of these key operational and cost measures was concluded during fiscal 2016, and we believe that long-term growth will be realized through these transformational efforts over time.

Refer to Note 3, "Restructuring Activities" and "GAAP to Non-GAAP Reconciliation" for further information.

Current Trends and Outlook

Global consumer retail traffic remains relatively weak and inconsistent, which has led to a more promotional environment in the fragmented retail industry due to increased competition and a desire to offset traffic declines with increased levels of conversion. While certain developed geographic regions are withstanding these pressures better than others, the level of consumer travel and spending on discretionary items remains constrained due to the economic uncertainty. Declines in traffic could result in store impairment charges if expected future cash flows of the related asset group do not exceed the carrying value.

Political and economic instability or changing macroeconomic conditions that exist in our major markets have further contributed to this uncertainty, including the potential impact of (1) new policies that may be implemented by the U.S. presidential administration and government, particularly with respect to tax and trade policies or (2) the United Kingdom ("U.K.") voting to leave the European Union ("E.U."), commonly known as “Brexit.” On March 29, 2017, the U.K. triggered Article 50 of the Lisbon Treaty formally starting negotiations with the E.U. The U.K. has two years to complete these negotiations. Although the terms of the U.K.'s future relationship with the E.U. are still unknown, it is possible that there will be increased regulatory and legal complexities, including potentially divergent national laws and regulations between the U.K. and E.U. Brexit may also cause disruption and create uncertainty surrounding our business, including affecting our relationship with our existing and future customers, suppliers and employees.

Additional macroeconomic events including foreign exchange rate volatility in various parts of the world, recent and evolving impacts of economic and geopolitical events in Hong Kong, Macau and mainland China ("Greater China"), the impact of terrorist

acts (particularly in Europe), disease epidemics and a slowdown in emerging market growth (particularly in Asia) have contributed to this uncertainty. Our results have been impacted by foreign exchange rate fluctuations, and will continue to fluctuate with future volatility.

Certain limited and recent factors within the U.S., including an improvement in the labor and housing markets and modest growth in overall consumer spending, suggest a potential moderate strengthening in the U.S. economic outlook. It is still, however, too early to understand what kind of sustained impact this will have on consumer discretionary spending. If the global macroeconomic environment remains volatile or worsens, the constrained level of worldwide consumer spending and modified consumption behavior may continue to have a negative effect on our outlook. Several organizations that monitor the world's economy, including the International Monetary Fund, are projecting slightly accelerated economic strengthening with modest overall global growth for the remainder of calendar 2017 but caution that there is considerable uncertainty surrounding the underlying assumptions of the forecast.

We will continue to monitor these trends and evaluate and adjust our operating strategies and cost management opportunities to mitigate the related impact on our results of operations, while remaining focused on the long-term growth of our business and protecting the value of our brands.

Furthermore, refer to Part I, Item 1 - "Business" for additional discussion on our expected store openings and closures within each of our segments. For a detailed discussion of significant risk factors that have the potential to cause our actual results to differ materially from our expectations, see Part I, Item 1A - "Risk Factors" included in this Annual Report on Form 10-K.

FISCAL 2017 COMPARED TO FISCAL 2016

The following table summarizes results of operations for fiscal 2017 compared to fiscal 2016. All percentages shown in the table below and the discussion that follows have been calculated using unrounded numbers.

	Fiscal Year Ended
	July 1, 2017							July 2, 2016							Variance
	(millions, except per share data)
	Amount				% of net sales			Amount				% of net sales			Amount				%
Net sales	$	4,488.3			100.0	%		$	4,491.8			100.0	%		$	(3.5	)		(0.1	)%
Gross profit	3,081.1				68.6			3,051.3				67.9			29.8				1.0
SG&A expenses	2,293.7				51.1			2,397.8				53.4			(104.1		)		(4.3	)
Operating income	787.4				17.5			653.5				14.5			133.9				20.5
Interest expense, net	28.4				0.6			26.9				0.6			1.5				5.5
Income before provision for income taxes	759.0				16.9			626.6				14.0			132.4				21.1
Provision for income taxes	168.0				3.7			166.1				3.7			1.9				1.2
Net income	591.0				13.2			460.5				10.3			130.5				28.3
Net income per share:
Basic	$	2.11						$	1.66						$	0.45			27.0	%
Diluted	$	2.09						$	1.65						$	0.44			26.7	%

GAAP to Non-GAAP Reconciliation

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

COACH, INC.

GAAP TO NON-GAAP RECONCILIATION

For the Years Ended July 1, 2017 and July 2, 2016

	July 1, 2017
	GAAP Basis (As Reported)				Operational Efficiency Plan				Stuart Weitzman Acquisition-Related Costs				Kate Spade Acquisition-Related Costs				Non-GAAP Basis (Excluding Items)
	(millions, except per share data)
Gross profit	$	3,081.1			$	—			$	(2.9	)		$	—			$	3,084.0
SG&A expenses	2,293.7				24.0				(9.1		)		7.4				2,271.4
Operating income	787.4				(24.0		)		6.2				(7.4		)		812.6
Income before provision for income taxes	759.0				(24.0		)		6.2				(16.9		)		793.7
Provision for income taxes	168.0				(8.3		)		(1.5		)		(6.6		)		184.4
Net income	591.0				(15.7		)		7.7				(10.3		)		609.3
Diluted net income per share	2.09				(0.05		)		0.03				(0.04		)		2.15

	July 2, 2016
	GAAP Basis (As Reported)				Transformation and Other Actions				Operational Efficiency Plan				Stuart Weitzman Acquisition-Related Costs				Non-GAAP Basis (Excluding Items)
	(millions, except per share data)
Gross profit	$	3,051.3			$	—			$	—			$	(1.1	)		$	3,052.4
SG&A expenses	2,397.8				44.1				43.9				34.0				2,275.8
Operating income	653.5				(44.1		)		(43.9		)		(35.1		)		776.6
Income before provision for income taxes	626.6				(44.1		)		(43.9		)		(35.1		)		749.7
Provision for income taxes	166.1				(10.7		)		(10.3		)		(10.9		)		198.0
Net income	460.5				(33.4		)		(33.6		)		(24.2		)		551.7
Diluted net income per share	1.65				(0.12		)		(0.12		)		(0.09		)		1.98

Fiscal 2017 Items

In fiscal 2017 the Company recorded pre-tax adjustments as follows:

•

Operational Efficiency Plan - Total charges of $24.0 million primarily related to organizational efficiency costs, technology infrastructure costs and, to a lesser extent, network optimization costs. The Company expects that the remaining charges under this plan will approximate $10-15 million and will be incurred in fiscal 2018. Refer to the "Executive Overview" herein and Note 3, "Restructuring Activities," for further information regarding this plan.

•	Stuart Weitzman Acquisition-Related Costs - Total income of $6.2 million, primarily related to:

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

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

•	Kate Spade Acquisition-Related Costs - Total charges of $16.9 million, of which $9.5 million is related to bridge financing fees and recorded in interest expense and $7.4 million is related to professional fees, all of which were recorded in corporate unallocated expenses within the Coach brand.

These actions taken together increased the Company's SG&A expenses by $22.3 million and cost of sales by $2.9 million, negatively impacting net income by $18.3 million, or $0.06 per diluted share.

Fiscal 2016 Items

In fiscal 2016 the Company incurred pre-tax charges as follows:

•	Transformation and Other Actions - $44.1 million under our Coach brand Transformation Plan primarily due to organizational efficiency costs, lease termination charges and accelerated depreciation as a result of store renovations within North America and select International stores.

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

•

Acquisition-Related Costs - $35.1 million total charges related to the acquisition of Stuart Weitzman Holdings LLC, of which $27.6 million is primarily related to charges attributable to contingent payments and integration-related activities (of which $19.4 million is recorded within unallocated corporate expenses within the Coach brand and $8.2 million is recorded within the Stuart Weitzman segment, resulting in a decrease in operating income of $19.4 million and $8.2 million, respectively), and $7.5 million is related to the limited life impact of purchase accounting, primarily due to the amortization of the fair value of the order backlog asset, distributor relationships and inventory step-up, all recorded within the Stuart Weitzman segment resulting in a $7.5 million decrease in operating income.

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

Summary - Fiscal 2017

Net sales in fiscal 2017 decreased slightly by 0.1% to $4.49 billion, with no material impact from foreign currency. Net sales in fiscal 2016 includes the favorable impact of the 53rd week in fiscal 2016, which resulted in incremental net sales of $84.4 million. Excluding the impact of the 53rd week in fiscal 2016, net sales increased by $80.9 million or 1.8%. Gross profit increased by 1.0% to $3.08 billion during fiscal 2017 as compared to $3.05 billion in fiscal 2016. SG&A expenses decreased by 4.3% to $2.29 billion in fiscal 2017. Excluding non-GAAP charges, SG&A expenses decreased by 0.2% to $2.27 billion.

Net income increased 28.3% in fiscal 2017 as compared to fiscal 2016, primarily due to an increase in operating income of $133.9 million. Net income per diluted share increased 26.7% to $2.09, primarily due to higher net income. Excluding non-GAAP charges, net income and net income per diluted share increased 10.4% and 9.1%, respectively. The impact of the 53rd week in fiscal 2016 contributed approximately $0.07 to net income per diluted share.

Currency Fluctuation Effects

The change in net sales in fiscal 2017 has been presented both including and excluding currency fluctuation effects.

Net Sales

The following table presents net sales by reportable segment for fiscal 2017 compared to fiscal 2016:

	Fiscal Year Ended
	Total Net Sales								Rate of Change				Percentage of Total Net Sales
	July 1, 2017				July 2, 2016					July 1, 2017				July 2, 2016
	(millions)
North America	$	2,349.5			$	2,397.1			(2.0	)	%		52.3		%		53.4		%
International	1,715.2				1,704.0				0.7				38.2				37.9
Other(1)	50.0				46.0				8.7				1.2				1.0
Coach brand	$	4,114.7			$	4,147.1			(0.8	)			91.7		%		92.3		%
Stuart Weitzman	373.6				344.7				8.4				8.3				7.7
Total net sales	$	4,488.3			$	4,491.8			(0.1	)			100.0		%		100.0		%

(1)	Net sales in the Other category, which is not a reportable segment, consists of sales generated by the Coach brand other ancillary channels, licensing and disposition.

Net sales for the Coach brand decreased 0.8% or $32.4 million in fiscal 2017 as compared to fiscal 2016, as described below. Net sales for the Coach brand was not materially impacted by foreign currency. Excluding the impact of the 53rd week in fiscal 2016, net sales increased 1.1%.

North America Net Sales decreased 2.0% or $47.6 million to $2.35 billion in fiscal 2017, which was not materially impacted by changes in foreign currency. Excluding the impact of the 53rd week of $43.7 million in fiscal 2016, net sales decreased by $3.9 million. This decrease was primarily driven by lower sales to wholesale customers of $56.3 million due to the Company's strategic decision to elevate the Coach's brand positioning in the channel by limiting participation in promotional events and closing approximately 25% of its wholesale doors by the end of fiscal 2017 and a decrease in non-comparable store sales of $9.1 million primarily due to the impact of net store closures. These decreases were offset by higher comparable store sales, which increased by $64.2 million or 3.1% primarily due to higher conversion. Our bricks and mortar comparable store sales increased 3.8%. Comparable store sales measure sales performance at stores that have been opened for at least 12 months and include sales from the Internet. In certain instances, orders placed via the Internet may be fulfilled by a physical store; such sales are recorded by the physical store. Comparable store sales have not been adjusted for store expansions. North America comparable store sales are presented for the 52-weeks ending July 1, 2017 versus the analogous 52-weeks ended July 2, 2016 for comparability. Since the end of fiscal 2016, North America closed a net 13 stores.

International Net Sales increased 0.7% or $11.2 million to $1.72 billion in fiscal 2017. Excluding the favorable impact of foreign currency, primarily within Japan, net sales increased $5.7 million or 0.3%. Fiscal 2016 included net sales of $32.1 million as a result of the 53rd week. This $5.7 million increase is primarily due to an increase in net sales in Europe of $23.3 million due to positive comparable store sales as well as an expanded store distribution network and an increase in Greater China of $20.8 million due to the impact of net new stores and positive comparable store sales in mainland China. These increases were partially

offset by a decrease in Japan of $23.7 million and in South Korea of $11.5 million primarily due to decreased store traffic in these regions. Since the end of fiscal 2016, we opened a net 21 stores, primarily in Europe and mainland China.

Stuart Weitzman Net Sales increased $28.9 million to $373.6 million in fiscal 2017, which was not materially impacted by changes in foreign currency. Fiscal 2016 included net sales of $7.4 million as a result of the 53rd week. This increase was primarily due to $35.2 million in the retail channel due to the acquisition of the Stuart Weitzman Canadian distributor in the fourth quarter of fiscal 2016, positive comparable store sales and net store openings. This was partially offset by lower wholesale net sales of $7.0 million. Prior year wholesale net sales included shipments into the Canadian distributor. Since the end of the fiscal 2016, Stuart Weitzman opened a net 6 new stores.

Gross Profit

Gross profit increased 1.0% or $29.8 million to $3.08 billion in fiscal 2017 from $3.05 billion in fiscal 2016. Gross margin for fiscal 2017 was 68.6% as compared to 67.9% in fiscal 2016. Excluding Non-GAAP charges of $2.9 million in fiscal 2017 and $1.1 million in fiscal 2016, as discussed in the "GAAP to Non-GAAP Reconciliation" herein, gross profit increased 1.0% or $31.6 million to $3.08 billion from $3.05 billion in fiscal 2016, and gross margin was 68.7% in fiscal 2017 as compared to 68.0% in fiscal 2016, an increase of 70 basis points.

Gross profit for the Coach brand increased slightly by 0.2% or $6.1 million to $2.86 billion in fiscal 2017. Excluding the 53rd week in fiscal 2016, gross profit increased by $55.1 million. Gross margin for the Coach brand increased 70 basis points to 69.4% in fiscal 2017 from 68.7% in fiscal 2016, which was not materially impacted by the year over year change in foreign currency rates.

North America Gross Profit decreased 1.7% or $25.0 million to $1.45 billion in fiscal 2017. Gross margin increased 20 basis points to 61.9% in fiscal 2017 from 61.7% in fiscal 2016. Fiscal 2016 gross profit included $26.1 million attributable to the 53rd week. The increase in gross margin is due to favorable channel mix as a result of wholesale door closures and to a lesser extent, improved costing and product mix which was offset by promotional activity.

International Gross Profit increased 1.4% or $17.7 million to $1.30 billion in fiscal 2017. Excluding the impact of the 53rd week in fiscal 2016, gross profit increased $40.8 million. Gross margin increased 50 basis points to 76.0% in fiscal 2017 from 75.5% in fiscal 2016. Foreign currency positively impacted gross margin by 10 basis points, primarily due to the Japanese Yen offset by the Chinese Renminbi. Excluding the impact of foreign currency, International gross margin increased 40 basis points. This increase was due to favorable effects of decreased duty costs.

Corporate Unallocated Gross Profit increased $7.8 million to $59.8 million in fiscal 2017 from $52.0 million in fiscal 2016, primarily due to the impact of favorable inventory production variances partially offset by higher inventory reserves and royalty payments.

Stuart Weitzman Gross Profit increased 11.7% or $23.7 million to $226.1 million in fiscal 2017. Gross profit in the 53rd week of fiscal 2016 was $4.0 million. Gross margin increased 180 basis points to 60.5% in fiscal 2017 from 58.7% in fiscal 2016. The increase in gross margin is primarily attributable to a shift in channel mix.

Selling, General and Administrative Expenses

SG&A expenses are comprised of four categories: (i) selling; (ii) advertising, marketing and design; (iii) distribution and customer service; and (iv) administrative. Selling expenses include store employee compensation, occupancy costs, supply costs, wholesale and retail account administration compensation globally and Coach international operating expenses. These expenses are affected by the number of stores open during any fiscal period and store performance, as compensation and rent expenses vary with sales. Advertising, marketing and design expenses include employee compensation, media space and production, advertising agency fees, new product design costs, public relations, special events and market research expenses. Distribution and customer service expenses include warehousing, order fulfillment, shipping and handling, customer service, employee compensation and bag repair costs. Administrative expenses include compensation costs for “corporate” functions including: executive, finance, human resources, legal and information systems departments, as well as corporate headquarters occupancy costs, consulting fees and software expenses. Administrative expenses also include global equity compensation expense.

The Company includes inbound product-related transportation costs from our service providers within cost of sales. The Company, similar to some companies, includes certain transportation-related costs related to our distribution network in SG&A expenses rather than in cost of sales; for this reason, our gross margins may not be comparable to that of entities that include all costs related to their distribution network in cost of sales.

SG&A expenses decreased 4.3% or $104.1 million to $2.29 billion in fiscal 2017 as compared to $2.40 billion in fiscal 2016. As a percentage of net sales, SG&A expenses decreased to 51.1% during fiscal 2017 as compared to 53.4% during fiscal 2016. Excluding non-GAAP adjustments of $22.3 million in fiscal 2017 and $122.0 million in fiscal 2016, as discussed in the "GAAP to Non-GAAP Reconciliation" herein, SG&A expenses decreased 0.2% or $4.4 million from fiscal 2016; and SG&A expenses as a percentage of net sales remained relatively consistent at 50.6% in fiscal 2017 compared to 50.7% in fiscal 2016.

Selling expenses were $1.60 billion, or 35.7% of net sales, in fiscal 2017 compared to $1.57 billion, or 35.1% of net sales, in fiscal 2016. This $29.6 million increase is primarily due to a $24.6 million increase attributable to the Stuart Weitzman segment, primarily due to increased store investments.

Advertising, marketing, and design costs were $261.6 million, or 5.8% of net sales, in fiscal 2017, compared to $285.7 million, or 6.4% of net sales, during fiscal 2016. This was primarily due to a decrease of $26.8 million attributable to lower costs for Coach brand advertising related events, including lower costs associated with promotional events and New York fashion week, partially offset by higher Stuart Weitzman marketing costs.

Distribution and customer service expenses were $60.2 million, or 1.3% of net sales in fiscal 2017, consistent with fiscal 2016 expenses of $67.7 million, or 1.5% of net sales.

Administrative expenses were $367.9 million, or 8.2% of net sales, in fiscal 2017 compared to $469.9 million, or 10.5% of net sales, during fiscal 2016. Excluding non-GAAP adjustments of $22.3 million in fiscal 2017 and $122.0 million in fiscal 2016, administrative expenses were $345.6 million, or 7.7% of net sales, in fiscal 2017 and $347.9 million, or 7.7% of net sales, in fiscal 2016. The decrease was primarily due to lower employee related costs and litigation costs.

Operating Income

Operating income increased 20.5% or $133.9 million to $787.4 million during fiscal 2017 as compared to $653.5 million in fiscal 2016. Operating margin increased to 17.5% as compared to 14.5% in fiscal 2016. Excluding non-GAAP adjustments of $25.2 million in fiscal 2017 and $123.1 million in fiscal 2016, as discussed in the "GAAP to Non-GAAP Reconciliation" herein, operating income increased 4.6% or $36.0 million to $812.6 million from $776.6 million in fiscal 2016; and operating margin was 18.1% in fiscal 2017 as compared to 17.3% in fiscal 2016.

The following table presents operating income by reportable segment for fiscal 2017 compared to fiscal 2016:

		Fiscal Year Ended
		Operating Income								Variance
		July 1, 2017				July 2, 2016				Amount				%
		(millions)
North America		$	697.0			$	737.3			$	(40.3	)		(5.5	)	%
International		535.9				512.7				23.2				4.5
Other(1)		31.4				22.9				8.5				37.1
Corporate unallocated		(497.5		)		(651.9		)		154.4				23.7
Coach brand		$	766.8			$	621.0			$	145.8			23.5		%
Stuart Weitzman		20.6				32.5				(11.9		)		(36.6	)
Total operating income		$	787.4			$	653.5			$	133.9			20.5		%

(1)	Operating income in the Other category, which is not a reportable segment, consists of Coach brand sales generated in other ancillary channels, licensing and disposition.

Operating income for the Coach brand increased 23.5% or $145.8 million to $766.8 million in fiscal 2017. Furthermore, operating margin for the Coach brand increased 360 basis points to 18.6% in fiscal 2017 when compared to fiscal 2016. Excluding non-GAAP adjustments, Coach brand operating income totaled $771.4 million in fiscal 2017, resulting in an operating margin of 18.7%, compared to Coach brand operating income of $728.4 million in fiscal 2016, or an operating margin of 17.6%.

North America Operating Income decreased 5.5% or $40.3 million to $697.0 million in fiscal 2017, reflecting the decrease in gross profit of $25.0 million and higher SG&A expenses of $15.3 million. The increase in SG&A expenses was due to higher occupancy costs, primarily due to the 5th Avenue store, as well as higher depreciation expense. Operating margin decreased 110 basis points to 29.7% in fiscal 2017 from 30.8% during the same period in the prior year due to higher SG&A expense as a percentage of net sales of 130 basis points, partially offset by higher gross margin of 20 basis points.

International Operating Income increased 4.5% or $23.2 million to $535.9 million in fiscal 2017, primarily reflecting an increase in gross profit of $17.7 million and lower SG&A expenses of $5.5 million. The decrease in SG&A expenses is primarily related to reduced marketing and occupancy costs in Greater China, as well as lower employee related costs in international wholesale, partially offset by unfavorable foreign currency effects in Japan and increased occupancy costs in Europe to support the growth of the business. Operating margin increased 110 basis points to 31.2% in fiscal 2017 from 30.1% during the same

period in the prior year primarily due to lower overall SG&A as a percentage of net sales of 60 basis points and increased gross margin of 50 basis points.

Corporate Unallocated Operating Expense decreased $154.4 million to $497.5 million in fiscal 2017, a decrease of 23.7% from $651.9 million in fiscal 2016. This decrease was primarily attributable to lower non-GAAP charges incurred by the Company in fiscal 2017 as compared to fiscal 2016, as discussed in the "GAAP to Non-GAAP Reconciliation" herein. Excluding non-GAAP adjustments, unallocated operating expenses decreased by $51.7 million to $492.8 million. This decrease is primarily due to lower employee costs related to headcount and litigation costs, partially offset by higher occupancy costs.

Stuart Weitzman Operating Income decreased $11.9 million to $20.6 million in fiscal 2017, resulting in an operating margin of 5.5%, compared to an operating income of $32.5 million in fiscal 2016. Excluding non-GAAP adjustments as discussed in the "GAAP to Non-GAAP Reconciliation" herein, which reflect acquisition and integration-related costs, Stuart Weitzman operating income totaled $41.2 million in fiscal 2017, resulting in an operating margin of 11.0%. This compared to Stuart Weitzman operating income of $48.2 million in fiscal 2016, resulting in an operating margin of 14.0%.

Provision for Income Taxes

The effective tax rate was 22.1% in fiscal 2017, as compared to 26.5% in fiscal 2016. Excluding non-GAAP charges as discussed in the "GAAP to Non-GAAP Reconciliation" herein, the effective tax rate was 23.2% in fiscal 2017, as compared to 26.4% in fiscal 2016. The decrease in our effective tax rate was primarily attributable to the geographical mix of earnings and the U.S. income earned on foreign investments.

Net Income

Net income increased 28.3% or $130.5 to $591.0 million in fiscal 2017 as compared to $460.5 million in fiscal 2016. Excluding non-GAAP charges as discussed in the "GAAP to Non-GAAP Reconciliation" herein, net income increased 10.4% or $57.5 million to $609.3 million in fiscal 2017 from $551.7 million in fiscal 2016. This increase was primarily due to higher operating income.

Earnings per Share

Net income per diluted share increased 26.7% to $2.09 in fiscal 2017 as compared to $1.65 in fiscal 2016. Excluding non-GAAP charges as discussed in the "GAAP to Non-GAAP Reconciliation" herein, net income per diluted share increased 9.1% or $0.17 to $2.15 in fiscal 2017 from $1.98 in fiscal 2016, due to higher net income. The impact of the 53rd week in fiscal 2016 contributed approximately $0.07 to net income per diluted share.

FISCAL 2016 COMPARED TO FISCAL 2015

The following table summarizes results of operations for fiscal 2016 compared to fiscal 2015. All percentages shown in the table below and the discussion that follows have been calculated using unrounded numbers.

	Fiscal Year Ended
	July 2, 2016							June 27, 2015							Variance
	(millions, except per share data)
	Amount				% of net sales			Amount				% of net sales			Amount				%
Net sales	$	4,491.8			100.0	%		$	4,191.6			100.0	%		$	300.2			7.2	%
Gross profit	3,051.3				67.9			2,908.6				69.4			142.7				4.9
SG&A expenses	2,397.8				53.4			2,290.6				54.6			107.2				4.7
Operating income	653.5				14.5			618.0				14.7			35.5				5.7
Interest expense, net	26.9				0.6			6.4				0.2			20.5				NM
Income before provision for income taxes	626.6				14.0			611.6				14.6			15.0				2.5
Provision for income taxes	166.1				3.7			209.2				5.0			(43.1		)		(20.6	)
Net income	460.5				10.3			402.4				9.6			58.1				14.4
Net Income per share:
Basic	$	1.66						$	1.46						$	0.20			13.7	%
Diluted	$	1.65						$	1.45						$	0.20			13.6	%

NM - Not meaningful

GAAP to Non-GAAP Reconciliation

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

COACH, INC.

GAAP TO NON-GAAP RECONCILIATION

For the Years Ended July 2, 2016 and June 27, 2015

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

	June 27, 2015
	GAAP Basis (As Reported)			Transformation and Other Actions			Operational Efficiency Plan			Acquisition-Related Costs			Non-GAAP Basis (Excluding Items)
	(millions, except per share data)
Gross profit	$	2,908.6		$	(5.0	)	$	—		$	(4.7	)	$	2,918.3
SG&A expenses	2,290.6			140.9			—			19.9			2,129.8
Operating income	618.0			(145.9		)	—			(24.6		)	788.5
Provision for income taxes	209.2			(38.1		)	—			(3.6		)	250.9
Net income	402.4			(107.8		)	—			(21.0		)	531.2
Diluted net income per share	1.45			(0.39		)	—			(0.08		)	1.92

Fiscal 2016 Items

In fiscal 2016, the Company incurred pre-tax charges as follows:

•	Transformation and Other Actions - $44.1 million under our Coach brand Transformation Plan primarily due to organizational efficiency costs, lease termination charges and accelerated depreciation as a result of store renovations within North America and select International stores;

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

•

Acquisition-Related Costs - $35.1 million total charges related to the acquisition of Stuart Weitzman Holdings LLC, of which $27.6 million is primarily related to charges attributable to contingent payments and integration-related activities (of which $19.4 million is recorded within unallocated corporate expenses within the Coach brand and $8.2 million is recorded within the Stuart Weitzman segment, resulting in a decrease in operating income of $19.4 million and $8.2 million, respectively), and $7.5 million is related to the limited life impact of purchase accounting, primarily due to the amortization of the fair value of the order backlog asset, distributor relationships and inventory step-up, all recorded within the Stuart Weitzman segment resulting in a $7.5 million decrease in operating income.

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

Fiscal 2015 Items

In fiscal 2015, the Company incurred charges as follows:

•	Transformation and Other Actions - $145.9 million under our Coach brand Transformation Plan due to accelerated depreciation and lease termination charges as a result of store updates and closures within North America and select International stores, organizational efficiency charges, and charges related to the destruction of inventory;

•

Acquisition-Related Costs - $24.6 million total acquisition-related costs, of which $17.1 million primarily related to consulting and legal costs related to the acquisition of Stuart Weitzman Holdings LLC, as well as costs attributable to contingent payments related to the acquisition (of which $15.8 million was recorded within unallocated corporate expenses within the Coach brand and $1.3 million was recorded within the Stuart Weitzman segment, resulting in a decrease in operating income of $15.8 million and $1.3 million, respectively), and $7.5 million was related to the limited life impact of purchase accounting, primarily due to the amortization of the fair value of the inventory step-up and order backlog asset, all recorded within the Stuart Weitzman segment resulting in a $7.5 million decrease in operating income.

These fiscal 2015 actions taken together increased the Company's SG&A expenses by $160.8 million and cost of sales by $9.7 million, negatively impacting net income by $128.8 million, or $0.47 per diluted share.

Currency Fluctuation Effects

The change in net sales in fiscal 2016 has been presented both including and excluding currency fluctuation effects.

Net Sales

Net sales increased 7.2% or $300.2 million to $4.49 billion in fiscal 2016, inclusive of the favorable impact of the 53rd week in fiscal 2016, which resulted in incremental net revenues of $84.4 million. Excluding the effects of foreign currency, net sales increased 9.1% or $382.1 million. This increase was primarily due to the inclusion of a full year impact of the Stuart Weitzman brand and gains in the International business, partially offset by lower sales in North America. The following table presents net sales by reportable segment for fiscal 2016 compared to fiscal 2015:

	Fiscal Year Ended
	Total Net Sales								Rate of Change			Percentage of Total Net Sales
	July 2, 2016				June 27, 2015				July 2, 2016		June 27, 2015
	(millions)
North America	$	2,397.1			$	2,467.5			(2.9	)	%	53.4	%	58.9		%
International	1,704.0				1,622.0				5.1			37.9		38.7
Other(1)	46.0				59.1				(22.2	)		1.0		1.4
Coach brand	$	4,147.1			$	4,148.6			—			92.3	%	99.0		%
Stuart Weitzman	344.7				43.0				NM			7.7		1.0
Total net sales	$	4,491.8			$	4,191.6			7.2			100.0	%	100.0		%

NM - Not meaningful

(1)	Net sales in the Other category, which is not a reportable segment, consists of Coach brand sales generated in licensing and disposition channels.

Net sales for the Coach brand, which includes the North America and International segments, as well as sales in the Other category, remained relatively flat in fiscal 2016 as compared to fiscal 2015, as described below. Excluding the unfavorable impact of foreign currency, net sales increased 1.8%.

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

million due to the net impact of store closures and openings. Since the end of fiscal 2015, North America closed a net 30 retail stores. North America sales were also negatively impacted by lower wholesale sales of approximately $10.1 million, due to lower volume of shipments.

International Net Sales increased 5.1% or $82.0 million to $1.70 billion in fiscal 2016. Excluding the unfavorable impact of foreign currency, primarily within Asia, net sales increased $139.9 million or 8.6%. The following discussion is presented excluding the favorable impact of the 53rd week to net sales of $32.1 million and the impact of foreign currency. This increase was primarily due to an increase of $53.8 million in Europe due to an expanded wholesale and store distribution network and higher comparable store sales, an increase in Greater China (which includes Hong Kong and Macau) of $30.7 million due to net new stores and positive comparable store sales in mainland China, partially offset by declines in Hong Kong and Macau due to a continued slowdown in inbound tourist traffic, an increase in Asia (excluding Greater China and Japan) of $14.7 million due to the impact of net new store openings and an increase in Japan of $11.9 million due to overall higher transaction size and improved levels of customer conversion (particularly in retail) contributing to higher comparable store sales. Since the end of fiscal 2015, we opened 19 net new stores, with 13 net new stores in mainland China, Hong Kong and Macau and Japan, and 6 net new stores in the other regions.

Stuart Weitzman Net Sales increased $301.7 million to $344.7 million in fiscal 2016, including the favorable impact of the 53rd week in fiscal 2016, which resulted in incremental net revenues of $7.4 million. This increase was due to the inclusion of a full fiscal year impact of the Stuart Weitzman brand, compared to approximately two months in the prior fiscal year.

Gross Profit

Gross profit increased 4.9% or $142.7 million to $3.05 billion in fiscal 2016 from $2.91 billion in fiscal 2015. Gross margin for fiscal 2016 was 67.9% as compared to 69.4% in fiscal 2015. Excluding Non-GAAP charges of $1.1 million in fiscal 2016 and $9.7 million in fiscal 2015, as discussed in the "GAAP to Non-GAAP Reconciliation" herein, gross profit increased 4.6% or $134.1 million to $3.05 billion from $2.92 billion in fiscal 2015, and gross margin was 68.0% in fiscal 2016 as compared to 69.6% in fiscal 2015. The gross margin decline of 150 basis points (or 160 basis points excluding non-GAAP items) was primarily due to the unfavorable effects of foreign currency on the Coach brand, and the inclusion of the Stuart Weitzman business in our full year fiscal 2016 results (which contains lower gross margins compared to the Coach brand).

Gross profit for the Coach brand, which includes the North America and International segments, as well as Other and Corporate Unallocated results, decreased 1.4% or $39.8 million to $2.85 billion in fiscal 2016. Furthermore, gross margin for the Coach brand decreased 90 basis points from 69.6% in fiscal 2015 to 68.7% in the fiscal 2016, inclusive of an unfavorable 100 basis point foreign currency impact, as described below.

North America Gross Profit decreased 6.1% or $96.2 million to $1.48 billion in fiscal 2016. Gross margin decreased 210 basis points from 63.8% in fiscal 2015 to 61.7% in fiscal 2016. The decrease in gross margin is primarily attributable to increased promotional activity, primarily in our outlet and wholesale channels, negatively impacting gross margin by 240 basis points, partially offset by the impact of an improved mix of elevated product sales and higher initial mark-ups, primarily in our outlet stores, favorably impacting gross margin by 40 basis points.

International Gross Profit increased 3.0% or $37.4 million to $1.29 billion in fiscal 2016. Gross margin decreased 150 basis points from 77.0% in fiscal 2015 to 75.5% in fiscal 2016. Foreign currency negatively impacted gross margin by 210 basis points, primarily due to the Japanese Yen. Excluding the impact of foreign currency, International gross margin increased 60 basis points, primarily due to the favorable effects of decreased duty costs, positively impacting gross margin by 70 basis points. Furthermore, an improved mix of elevated product sales, particularly in Greater China and Japan, positively impacted gross margin by 50 basis points. These increases were partially offset by a less favorable geographic mix of our sales, negatively impacting gross margin by 40 basis points, particularly as a result of the growth of our Europe and international wholesale businesses.

Corporate Unallocated Gross Profit increased $24.8 million from $27.2 million in fiscal 2015 to $52.0 million in fiscal 2016, primarily due to the impact of favorable inventory production variances, decreased transformation-related charges and decreased inventory reserve charges.

Stuart Weitzman Gross Profit was $202.4 million in fiscal 2016, and $19.9 in fiscal 2015, due to the inclusion of a full fiscal year impact of the Stuart Weitzman brand, compared to approximately two months in the prior fiscal year. Furthermore, gross margin was 58.7% in fiscal 2016, compared to 46.4% in the short acquisition year of fiscal 2015 (which included the short-term impact of the amortization of the fair value of the inventory step-up).

Selling, General and Administrative Expenses

SG&A expenses increased 4.7% or $107.2 million to $2.40 billion in fiscal 2016 as compared to $2.29 billion in fiscal 2015. As a percentage of net sales, SG&A expenses decreased to 53.4% during fiscal 2016 as compared to 54.6% during fiscal 2015. Excluding Non-GAAP adjustments of $122.0 million in fiscal 2016 and $160.8 million in fiscal 2015, as discussed in the "GAAP

to Non-GAAP Reconciliation" herein, SG&A expenses increased 6.9% or $146.0 million from fiscal 2015; and SG&A expenses as a percentage of net sales remained relatively flat at 50.7% in fiscal 2016 compared to 50.8% in fiscal 2015.

Selling expenses were $1.57 billion, or 35.1% of net sales, in fiscal 2016 compared to $1.53 billion, or 36.6% of net sales, in fiscal 2015. This $41.8 million increase is primarily due to a $47.3 million increase attributable to the Stuart Weitzman segment as well as increases in Europe and mainland China to support growth in the business, partially offset by lower store-related costs in Japan, Asia (excluding Greater China) and North America including decreased employee compensation costs and occupancy costs, as well as the impact of favorable foreign currency. Excluding Non-GAAP charges of $4.1 million in fiscal 2015, selling expenses were 36.5% of net sales.

Advertising, marketing, and design costs were $285.7 million, or 6.4% of net sales, in fiscal 2016, compared to $246.8 million, or 5.9% of net sales, during fiscal 2015. This was primarily due to an increase of $25.4 million attributable to Stuart Weitzman, as well as higher costs for Coach brand marketing and advertising-related events, including our first true New York fashion week show in the first quarter of fiscal 2016, which increased by $17.9 million as compared to the same period prior year, partially offset by decreased employee-related costs.

Distribution and customer service expenses were $67.7 million, or 1.5% of net sales in fiscal 2016, relatively in-line with fiscal 2015 expenses of $69.6 million, or 1.7% of net sales.

Administrative expenses were $469.9 million, or 10.5% of net sales, in fiscal 2016 compared to $441.5 million, or 10.5% of net sales, during fiscal 2015. Excluding non-GAAP adjustments of $122.0 million in fiscal 2016 and $156.7 million in fiscal 2015, administrative expenses were $347.9 million, or 7.7% of net sales, in fiscal 2016 and $284.8 million, or 6.8% of net sales, in fiscal 2015. The increase is primarily due to the impact of Stuart Weitzman, contributing to $55.5 million of this increase, as well as increased Coach brand information system costs and litigation costs, partially offset by lower Coach brand occupancy costs.

Operating Income

Operating income increased 5.7% or $35.5 million to $653.5 million during fiscal 2016 as compared to $618.0 million in fiscal 2015. Operating margin decreased to 14.5% as compared to 14.7% in fiscal 2015. Excluding non-GAAP adjustments of $123.1 million in fiscal 2016 and $170.5 million in fiscal 2015, as discussed in the "GAAP to Non-GAAP Reconciliation" herein, operating income decreased 1.5% or $11.9 million to $776.6 million from $788.5 million in fiscal 2015; and operating margin was 17.3%, in fiscal 2016 as compared to 18.8% in fiscal 2015.

The following table presents operating income by reportable segment for fiscal 2016 compared to fiscal 2015:

		July 2, 2016				June 27, 2015				Variance
				Amount				%
		(millions)
North America		$	737.3			$	820.5			$	(83.2	)		(10.1	)	%
International		512.7				480.6				32.1				6.7
Other(1)		22.9				30.1				(7.2		)		(23.9	)
Corporate unallocated		(651.9		)		(708.6		)		56.7				(8.0	)
Coach brand		$	621.0			$	622.6			$	(1.6	)		(0.3	)	%
Stuart Weitzman		32.5				(4.6		)		37.1				NM
Total operating income		$	653.5			$	618.0			$	35.5			5.7		%

NM - Not meaningful

(1)	Operating income in the Other category, which is not a reportable segment, consists of Coach brand sales generated in licensing and disposition channels.

Operating income for the Coach brand decreased 0.3% or $1.6 million to $621.0 million in fiscal 2016. Furthermore, operating margin for the Coach brand remained flat at 15.0% in fiscal 2016 when compared to fiscal 2015. Excluding non-GAAP adjustments, Coach brand operating income totaled $728.4 million in fiscal 2016, resulting in an operating margin of 17.6%. This compared to Coach brand operating income of $784.3 million in fiscal 2015, or an operating margin of 18.9%.

North America Operating Income decreased 10.1% or $83.2 million to $737.3 million in fiscal 2016, reflecting the decrease in gross profit of $96.2 million which was partially offset by lower SG&A expenses of $13.0 million. The decrease in SG&A expenses was due to lower store-related costs, largely driven by net store closures, as well as decreased variable selling costs as a result of lower sales in North America stores, the Internet business and the wholesale channel. Operating margin decreased 250

basis points to 30.8% in fiscal 2016 from 33.3% during the same period in the prior year due to lower gross margin of 210 basis points and higher SG&A expense as a percentage of net sales of 40 basis points.

International Operating Income increased 6.7% or $32.1 million to $512.7 million in fiscal 2016, primarily reflecting an increase in gross profit of $37.4 million partially offset by higher SG&A expenses of $5.3 million. The increase in SG&A expenses is primarily related to an increase in employee compensation, depreciation expense related to our new modern luxury investments and increased occupancy costs in Europe and Greater China to support the growth of the business, partially offset by lower expenses in Japan and Asia (excluding Greater China) primarily due to decreased occupancy and employee compensation costs, as well as favorable foreign currency effects. Operating margin increased 50 basis points to 30.1% in fiscal 2016 from 29.6% during the same period in the prior year primarily due to lower overall SG&A as a percentage of net sales which increased operating margin by 200 basis points, partially offset by lower gross margin of 150 basis points.

Corporate Unallocated Operating Expense decreased $56.7 million to $651.9 million in fiscal 2016, a decrease of 8.0% from $708.6 million in fiscal 2015. This decrease was primarily attributable to lower non-GAAP charges incurred by the Company in fiscal 2016 as compared to fiscal 2015, as discussed in the "GAAP to Non-GAAP Reconciliation" herein. Excluding non-GAAP adjustments, unallocated operating expenses decreased by $2.5 million to $544.5 million. This decrease is primarily due to more favorable inventory production variances, lower Coach brand occupancy costs and lower inventory reserve charges, partially offset by increased information system and legal costs.

Stuart Weitzman Operating Income increased $37.1 million to $32.5 million in fiscal 2016, resulting in an operating margin of 9.4%, compared to an operating loss of $4.6 million in fiscal 2015, including the impact of non-GAAP charges as discussed in the "GAAP to Non-GAAP Reconciliation" herein. Excluding non-GAAP adjustments, including acquisition and integration-related costs as well as the short-term impact of purchase accounting, Stuart Weitzman operating income totaled $48.2 million in fiscal 2016, resulting in an operating margin of 14.0%. This compared to Stuart Weitzman operating income of approximately $4 million in fiscal 2015.

Provision for Income Taxes

The effective tax rate was 26.5% in fiscal 2016, as compared to 34.2% in fiscal 2015. Excluding non-GAAP charges as discussed in the "GAAP to Non-GAAP Reconciliation" herein, the effective tax rate was 26.4% in fiscal 2016, as compared to 32.1% in fiscal 2015. The decrease in our effective tax rate was primarily attributable to the expiration of certain statutes partially offset by the impact of certain ongoing audits, the benefit of available foreign tax credits, and the geographic mix of earnings.

Net Income

Net income increased 14.4% or $58.1 million to $460.5 million in fiscal 2016 as compared to $402.4 million in fiscal 2015. Excluding non-GAAP charges as discussed in the "GAAP to Non-GAAP Reconciliation" herein, net income increased 3.8% or $20.5 million to $551.7 million in fiscal 2016 from $531.2 million in fiscal 2015. This increase was primarily due to lower provision for income taxes, partially offset by the impact of increased interest expense attributable to our debt as well as lower operating income.

Earnings per Share

Net income per diluted share increased 13.6% to $1.65 in fiscal 2016 as compared to $1.45 in fiscal 2015. Excluding non-GAAP charges as discussed in the "GAAP to Non-GAAP Reconciliation" herein, net income per diluted share increased 3.1% or $0.06 to $1.98 in fiscal 2016 from $1.92 in fiscal 2015, due to higher net income. The impact of the 53rd week contributed approximately $0.07 to net income per diluted share.

NON-GAAP MEASURES

The Company’s reported results are presented in accordance with GAAP. The reported gross profit, SG&A expenses, operating income, provision for income taxes, net income and earnings per diluted share in fiscal 2017, fiscal 2016 and fiscal 2015 reflect certain items, including the impact of the Transformation Plan, the Operational Efficiency Plan and Acquisition-Related Charges. As a supplement to the Company's reported results, these metrics are also reported on a non-GAAP basis to exclude the impact of these items, along with a reconciliation to the most directly comparable GAAP measures.

Furthermore, the Company’s sales and earnings per diluted share results are presented both including and excluding the impact of the 53rd week in fiscal year 2016.

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

The Company operates on a global basis and reports financial results in U.S. dollars in accordance with GAAP. Fluctuations in foreign currency exchange rates can affect the amounts reported by the Company in U.S. dollars with respect to its foreign revenues and profit. Accordingly, certain increases and decreases in operating results for the Company, the Coach brand and the Company's North America and International segment have been presented both including and excluding currency fluctuation effects from translating foreign-denominated amounts into U.S. dollars and compared to the same period in the prior fiscal year. Constant currency information compares results between periods as if exchange rates had remained constant period-over-period. The Company calculates constant currency revenue results by translating current period revenue in local currency using the prior year period's monthly average currency conversion rate.

We believe these non-GAAP measures are useful to investors and others in evaluating the Company’s ongoing operating and financial results in a manner that is consistent with management’s evaluation of business performance and understanding how such results compare with the Company’s historical performance. Additionally, we believe presenting certain increases and decreases in constant currency provides a framework for assessing the performance of the Company’s business outside the United States and helps investors and analysts understand the effect of significant year-over-year currency fluctuations. We believe excluding these items assists investors and others in developing expectations of future performance. By providing the non-GAAP measures, as a supplement to GAAP information, we believe we are enhancing investors’ understanding of our business and our results of operations. The non-GAAP financial measures are limited in their usefulness and should be considered in addition to, and not in lieu of, U.S. GAAP financial measures. Further, these non-GAAP measures may be unique to the Company, as they may be different from non-GAAP measures used by other companies.

For a detailed discussion on these non-GAAP measures, see Item 6. "Selected Financial Data," and the Results of Operations section within Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations."

FINANCIAL CONDITION

Cash Flows - Fiscal 2017 Compared to Fiscal 2016

		Fiscal Year Ended
		July 1, 2017				July 2, 2016				Change
		(millions)
Net cash provided by operating activities		$	853.8			$	758.6			$	95.2
Net cash provided by (used in) investing activities		593.0				(810.0		)		1,403.0
Net cash provided by (used in) financing activities		369.5				(384.9		)		754.4
Effect of exchange rate changes on cash and cash equivalents		(2.4		)		3.5				(5.9		)
Net increase (decrease) in cash and cash equivalents		$	1,813.9			$	(432.8	)		$	2,246.7

The Company’s cash and cash equivalents increased by $1.81 billion in fiscal 2017 compared to a decrease of $432.8 million in fiscal 2016, as discussed below.

Net cash provided by operating activities

Net cash provided by operating activities increased $95.2 million primarily due to higher net income of $130.5 million and higher non-cash charges of $98.5 million, partially offset by changes in operating assets and liabilities of $133.8 million.

The $133.8 million decline in changes in our operating asset and liability balances was primarily driven by changes in other liabilities, accrued liabilities and inventories, partially offset by changes in accounts payable and other assets. Other liabilities were a use of cash of $53.4 million in fiscal 2017 compared to a source of cash of $49.5 million in fiscal 2016, primarily driven by changes in tax liabilities (including the expiration of statutes during the quarter), partially offset by higher store-related liabilities in fiscal 2016. Accrued liabilities were a use of cash of $50.1 million in fiscal 2017 as compared to a source of cash of $30.1 million in fiscal 2016, primarily driven by changes in derivative positions due to foreign currency fluctuations and timing of other operating payments. Inventories were a use of cash of $20.0 million in fiscal 2017 as compared to a source of cash of $40.7 million in fiscal 2016, primarily driven by increased inventory purchases. Accounts payable were a source of cash of $8.4 million in fiscal 2017 as compared to a use of cash in fiscal 2016 of $48.4 million, primarily driven by timing of inventory payments and other expenses. Other assets were a source of cash of $48.0 million in fiscal 2017 as compared to a use of cash of $6.3 million in fiscal 2016, primarily driven by lower prepaid assets when compared to prior year.

Net cash provided by (used in) investing activities

Net cash provided by investing activities was $593.0 million in fiscal 2017 compared to a use of cash of $810.0 million in fiscal 2016. The $1.40 billion increase in net cash was primarily due to proceeds from the sale of the Company's equity method investment in Hudson Yards of $680.6 million in fiscal 2017, the impact of net cash proceeds from maturities and sales of investments of $67.7 million in fiscal 2017, compared to net purchases of investments of $238.8 million in fiscal 2016. This increase is also due to the absence of an equity method investment in fiscal 2017 as compared to a $140.3 million investment in fiscal 2016. Furthermore, in fiscal 2017, the Company received proceeds from the sale of its prior headquarters of $126.0 million. The Company spent $283.1 million on capital expenditures in fiscal 2017 as compared to $396.4 million in fiscal 2016.

Net cash provided by (used in) financing activities

Net cash provided by financing activities was $369.5 million in fiscal 2017 as compared to a use of cash of $384.9 million in fiscal 2016. This net increase of $754.4 million was primarily due to the net proceeds of the issuance of Senior Notes in fiscal 2017 of $997.2 million, partially offset by the repayment of long-term debt of $285.0 million.

Cash Flows - Fiscal 2016 Compared to Fiscal 2015

		Fiscal Year Ended
		July 2, 2016				June 27, 2015				Change
		(millions)
Net cash provided by operating activities		$	758.6			$	937.4			$	(178.8	)
Net cash used in investing activities		(810.0		)		(612.9		)		(197.1		)
Net cash (used in) provided by financing activities		(384.9		)		389.3				(774.2		)
Effect of exchange rate changes on cash and cash equivalents		3.5				(13.9		)		17.4
Net (decrease) increase in cash and cash equivalents		$	(432.8	)		$	699.9			$	(1,132.7	)

The Company’s cash and cash equivalents decreased $432.8 million in fiscal 2016 compared to an increase of $699.9 million in fiscal 2015, as discussed below.

Net cash provided by operating activities

Net cash provided by operating activities decreased $178.8 million primarily due to the year-over-year declines in cash sources from operating assets and liabilities (decrease of $131.7 million) and noncash charges (decrease of $105.2 million), partially offset by higher net income of $58.1 million.

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

balance sheet changes, net, were a use of cash of $6.3 million in fiscal 2016 as compared to a source of cash of $17.8 million in fiscal 2015, primarily due to increased store-related related receivables during fiscal 2016 as compared to fiscal 2015 as a result of select new store openings, including our Fifth Avenue and Regent Street stores, described above.

Net cash used in investing activities

Net cash used in investing activities was $810.0 million in fiscal 2016 compared to a use of cash of $612.9 million in fiscal 2015. The increase in net cash used of $197.1 million was primarily due to the impact of net cash used for purchase of investments of $238.8 million in fiscal 2016, compared to net proceeds from investments of $255.6 million in fiscal 2015, as well as increased capital expenditures in fiscal 2016, partially offset by a $494.0 million decrease in cash used for acquisitions, primarily related to the Stuart Weitzman acquisition that occurred in the fourth quarter of fiscal 2015.

Net cash (used in) provided by financing activities

Net cash used in financing activities was $384.9 million in fiscal 2016 as compared to a source of cash of $389.3 million in fiscal 2015. This increase in cash used of $774.2 million was primarily due to the absence of proceeds in fiscal 2016 from the issuance of long-term debt in fiscal 2015. In fiscal 2015, the Company had proceeds from the issuance of long-term debt of $896.7 million, partially offset by net repayments of $140.0 million under the Company's Amended and Restated Credit Agreement.

Working Capital and Capital Expenditures

As of July 1, 2017, in addition to our cash flows from operations, our sources of liquidity and capital resources were comprised of the following:

	Sources of Liquidity				Outstanding Indebtedness				Total Available Liquidity(1)
	(millions)
Cash and cash equivalents(2)	$	2,672.9			$	—			$	2,672.9
Short-term investments(2)	410.7				—				410.7
Non-current investments	75.1				—				75.1
Revolving Credit Facility(1)(3)	900.0				—				900.0
Term Loans(1)	1,100.0				—				1,100.0
3.000% Senior Notes due 2022(4)	400.0				400.0				—
4.250% Senior Notes due 2025(4)	600.0				600.0				—
4.125% Senior Notes due 2027(4)	600.0				600.0				—
Total	$	6,758.7			$	1,600.0			$	5,158.7

(1)

On May 30, 2017, the Company entered into a definitive credit agreement whereby Bank of America, N.A., as administrative agent, the other agents party thereto, and a syndicate of banks and financial institutions have (i) committed to lend to the Company, subject to the satisfaction or waiver of the conditions set forth in the agreement, an $800.0 million term loan facility maturing six months after the term loans thereunder are borrowed (the “Six-Month Term Loan Facility”), and a $300.0 million term loan facility maturing three years after the term loans thereunder are borrowed (collectively with the Six-Month Term Loan Facility, the “Term Loan Facilities”) and (ii) made available to the Company a $900.0 million revolving credit facility, including sub-facilities for letters of credit, with a maturity date of May 30, 2022 (the "Revolving Credit Facility" and collectively with the Term Loan Facilities, the "Facility"). Subsequent to fiscal 2017 year end, in connection with the acquisition of Kate Spade, the Company borrowed $800.0 million under the six-month term loan credit facility and $300.0 million under the three-year term loan credit facility for a total of $1.1 billion. Refer to Note 20, "Subsequent Events" for further information.

(2)

As of July 1, 2017, approximately 39% of our cash and short-term investments were held outside the U.S. in jurisdictions where we intend to permanently reinvest our undistributed earnings to support our continued growth. We are not dependent on foreign cash to fund our domestic operations. If we choose to repatriate any funds to the U.S. in the future, we would be subject to applicable U.S. and foreign taxes.

(3)

On May 30, 2017, the Revolving Credit Facility replaced the Company's previously existing revolving credit facility agreement under the Amendment and Restatement Agreement, dated as of March 18, 2015, by and between the Company, certain lenders and JPMorgan Chase Bank, N.A., as administrative agent. Borrowings under the Facility bear interest at a rate per annum equal to, at the Borrowers’ option, either (a) an alternate base rate (which is a rate equal to the greatest of (i) the Prime Rate in effect on such day, (ii) the Federal Funds Effective Rate in effect on such day plus ½ of 1% or (iii) the Adjusted LIBO Rate for a one month Interest Period on such day plus 1%) or (b) a rate based on the rates applicable for deposits in the interbank

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

(4)

In March 2015, the Company issued $600.0 million aggregate principal amount of 4.250% senior unsecured notes due April 1, 2025 at 99.445% of par (the "2025 Senior Notes"). Furthermore, on June 20, 2017, the Company issued $400.0 million aggregate principal amount of 3.000% senior unsecured notes due July 15, 2022 at 99.505% of par (the "2022 Senior Notes"), and $600.0 million aggregate principal amount of 4.125% senior unsecured notes due April 15, 2027 at 99.858% of par (the "2027 Senior Notes"). Furthermore, the indentures for the 2025 Senior Notes, 2022 Senior Notes and 2027 Senior Notes contain certain covenants limiting the Company's ability to: (i) create certain liens, (ii) enter into certain sale and leaseback transactions and (iii) merge, or consolidate or transfer, sell or lease all or substantially all of the Company's assets. As of July 1, 2017, no known events of default have occurred. Refer to Note 10, "Debt" for further information on our existing debt instruments.

We believe that our Revolving Credit Facility and Term Loans are adequately diversified with no undue concentrations in any one financial institution. As of July 1, 2017, there were 13 financial institutions participating in the Revolving Credit Facility and Term Loans, with no one participant maintaining a combined maximum commitment percentage in excess of 13%. We have no reason to believe at this time that the participating institutions will be unable to fulfill their obligations to provide financing in accordance with the terms of the facility in the event we elect to draw funds in the foreseeable future.

We have the ability to draw on our credit facilities or access other sources of financing options available to us in the credit and capital markets for, among other things, our restructuring initiatives, acquisition or integration-related costs, settlement of a material contingency, or a material adverse business or macroeconomic development, as well as for other general corporate business purposes.

Management believes that cash flows from operations, access to the credit and capital markets and our credit lines, on-hand cash and cash equivalents and our investments will provide adequate funds to support our operating, capital, and debt service requirements for the foreseeable future, our plans for acquisitions, further business expansion and restructuring-related initiatives. We expect total capital expenditures to be in the area of $325 million in fiscal 2018. Future events, such as acquisitions or joint ventures, and other similar transactions may require additional capital. There can be no assurance that any such capital will be available to the Company on acceptable terms or at all. Our ability to fund working capital needs, planned capital expenditures, dividend payments and scheduled debt payments, as well as to comply with all of the financial covenants under our debt agreements, depends on future operating performance and cash flow, which in turn are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond the Company's control.

Kate Spade Acquisition

On July 11, 2017, the Company completed its acquisition of Kate Spade & Company for $18.50 per share in cash for a total of approximately $2.4 billion. As a result, Kate Spade has become a wholly owned subsidiary of Coach, Inc. The combination of Coach, Inc. and Kate Spade & Company creates a leading luxury lifestyle company with a more diverse multi-brand portfolio supported by significant expertise in handbag design, merchandising, supply chain and retail operations as well as solid financial acumen.

Stuart Weitzman Acquisition

On May 4, 2015, pursuant to the terms of the purchase agreement dated January 5, 2015, the Company acquired all of the equity interests of Stuart Weitzman Intermediate LLC, a luxury footwear company and the parent of Stuart Weitzman Holdings, LLC, from Topco for an aggregate payment of approximately $531.1 million in cash, subject to a potential earnout of up to $44.1 million of cash based on achievement of certain revenue targets. The company does not expect to achieve these revenue targets. As of July 1, 2017, the Company recorded a reversal of $35.2 million as there is no payout expected.

Seasonality

The Company's results are typically affected by seasonal trends. During the first fiscal quarter, we build inventory for the holiday selling season. In the second fiscal quarter, working capital requirements are reduced substantially as we generate higher net sales and operating income, especially during the holiday months of November and December.

Fluctuations in net sales, operating income and operating cash flows of the Company in any fiscal quarter may be affected by the timing of wholesale shipments and other events affecting retail sales, including adverse weather conditions or other macroeconomic events.

Contractual and Other Obligations

Firm Commitments

As of July 1, 2017, the Company's contractual obligations are as follows:

		Total				Fiscal 2018				Fiscal 2019 – 2020				Fiscal 2021 – 2022				Fiscal 2023 and Beyond
		(millions)
Capital expenditure commitments		$	78.0			$	47.7			$	22.7			$	7.6			$	—
Inventory purchase obligations		167.5				167.5				—				—				—
Operating leases		2,458.7				295.4				512.4				400.0				1,250.9
Debt repayment		1,600.0				—				—				400.0				1,200.0
Interest on outstanding debt		514.0				46.4				124.5				124.5				218.6
Other		6.0				2.6				3.4				—				—
Total		$	4,824.2			$	559.6			$	663.0			$	932.1			$	2,669.5

Excluded from the above contractual obligations table is the non-current liability for unrecognized tax benefits of $118.2 million as of July 1, 2017, as we cannot make a reliable estimate of the period in which the liability will be settled, if ever. The above table also excludes amounts included in current liabilities in the Consolidated Balance Sheet at July 1, 2017 as these items will be paid within one year, certain long-term liabilities not requiring cash payments and cash contributions for the Company’s pension plan.

On May 7, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Kate Spade & Company and Chelsea Merger Sub Inc., a Delaware corporation and direct wholly owned subsidiary of Coach (the “Merger Sub”). Pursuant to the Merger Agreement, on May 26, 2017, Merger Sub commenced an all-cash tender offer to acquire all of Kate Spade's outstanding shares of common stock, par value $1.00 per share, at a purchase price of $18.50 per share. The Company completed its acquisition on July 11, 2017. The purchase price was approximately $2.4 billion, which was funded by a combination of Senior Notes, Term Loan Facilities and cash on hand. The purchase price and Term Loan Facilities are excluded from the above table, as they occurred subsequent to July 1, 2017. Refer to the Working Capital and Capital Expenditures table above for more information on the Term Loan Facilities and Senior Notes.

The Company currently estimates that it will incur costs in the range of $150 - $200 million related to Kate Spade integration in fiscal 2018, which include severance, store closure costs and inventory realignment. The Company continues to fully develop its integration plan. Of these costs, the Company expects to incur approximately $60 million of severance and other costs related to agreements with certain Kate Spade executives. This amount is excluded from the above table, as these contractual obligations were created subsequent to July 1, 2017.

The Company also expects to incur costs of approximately $45 million of acquisition-related expenses, which is excluded from the above table, as these contractual obligations were created subsequent to July 1, 2017.

Refer to Note 7, "Acquisitions" and Note 20, "Subsequent Events" for further information.

Off-Balance Sheet Arrangements

In addition to the commitments included in the table above, we have outstanding letters of credit and bank guarantees of $9.0 million as of July 1, 2017, primarily serving to collateralize our obligation to third parties for insurance claims, leases and material used in product manufacturing. These letters of credit expire at various dates through 2039.

We do not maintain any other off-balance sheet arrangements, transactions, obligations, or other relationships with unconsolidated entities that would be expected to have a material current or future effect on our consolidated financial statements. Refer to Note 11, "Commitments and Contingencies," to the accompanying audited consolidated financial statements for further information.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect our results of operations, financial condition and cash flows as well as the disclosure of contingent assets and liabilities as of the date of the Company's financial statements. Actual results could differ from estimates in amounts that may be material to the financial statements. Predicting future events is inherently an imprecise activity and, as such, requires the use of judgment. Actual results could differ from estimates in amounts that may

be material to the financial statements. The development and selection of the Company’s critical accounting policies and estimates are periodically reviewed with the Audit Committee of the Board.

The accounting policies discussed below are considered critical because changes to certain judgments and assumptions inherent in these policies could affect the financial statements. For more information on the Company's accounting policies, please refer to the Notes to Consolidated Financial Statements.

Revenue Recognition

Revenue is recognized by the Company when there is persuasive evidence of an arrangement, delivery has occurred (and risks and rewards of ownership have been transferred to the buyer), price has been fixed or is determinable, and collectability is reasonably assured.

Retail store and concession-based shop-in-shop revenues are recognized at the point of sale, which occurs when merchandise is sold in an over-the-counter consumer transaction. Internet revenue from sales of products ordered through the Company’s e-commerce sites is recognized upon delivery and receipt of the shipment by its customers and includes shipping and handling charges paid by customers. Retail and internet revenues are also reduced by an estimate for returns at the time of sale.

Wholesale revenue is recognized at the time title passes and risk of loss is transferred to customers. Wholesale revenue is recorded net of estimates of markdown allowances, returns and discounts. Estimates for markdown reserves are based on historical trends, actual and forecasted seasonal results, an evaluation of current economic and market conditions, retailer performance, and, in certain cases, contractual terms. Returns and allowances require pre-approval from management and discounts are based on trade terms. The Company reviews and refines these estimates on a quarterly basis. The Company’s historical estimates of these costs have not differed materially from actual results.

At July 1, 2017, a 10% change in the allowances for estimated uncollectible accounts, markdowns and returns would not have resulted in a material change in the Company's reserves and net sales.

Inventories

Substantially all of the Company's inventories are comprised of finished goods, and are reported at the lower of cost or market. Inventory costs include material, conversion costs, freight and duties and are primarily determined by the first-in, first-out method. The Company reserves for inventory, including slow-moving and aged inventory, based on current product demand, expected future demand and historical experience. A decrease in product demand due to changing customer tastes, buying patterns or increased competition could impact the Company's evaluation of its inventory and additional reserves might be required. Estimates may differ from actual results due to the quantity, quality and mix of products in inventory, consumer and retailer preferences and market conditions. At July 1, 2017, a 10% change in the inventory reserve, would not have resulted in material change in inventory and cost of sales.

Business Combinations

In connection with an acquisition, the Company records all assets acquired and liabilities assumed of the acquired business at their acquisition date fair value, including the recognition of contingent consideration at fair value on the acquisition date. These fair value determinations require judgment and may involve the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives, and market multiples, among other items. We may utilize independent third-party valuation firms to assist in making these fair value determinations. Refer to Note 7, "Acquisitions," for detailed disclosures related to our acquisitions.

Goodwill and Other Intangible Assets

Goodwill and certain other intangible assets deemed to have indefinite useful lives, including trademarks and trade names, are not amortized, but are assessed for impairment at least annually. Finite-lived intangible assets are amortized over their respective estimated useful lives and, and along with other long-lived assets as noted above, are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable. Estimates of fair value for finite-lived and indefinite-lived intangible assets are primarily determined using discounted cash flows and the relief from royalty method, respectively, with consideration of market comparisons and recent transactions. This approach uses significant estimates and assumptions, including projected future cash flows, discount rates, royalty rates and growth rates.

The Company generally performs its annual goodwill and indefinite-lived intangible assets impairment analysis using a quantitative approach. The quantitative goodwill impairment test identifies the existence of potential impairment by comparing the fair value of each reporting unit with its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit's goodwill is considered not to be impaired. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recognized in an amount equal to that excess. The impairment charge recognized is limited to the amount of goodwill allocated to that reporting unit.

Determination of the fair value of a reporting unit and intangible asset is based on management's assessment, considering independent third-party appraisals when necessary. Furthermore, this determination is judgmental in nature and often involves the use of significant estimates and assumptions, which may include projected future cash flows, discount rates, royalty rates, growth rates, and determination of appropriate market comparables and recent transactions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the amount of any such charge.

The Company performs its annual impairment assessment of goodwill, including trademarks and trade names, during the fourth quarter of each fiscal year. The Company determined that there was no impairment in fiscal 2017, fiscal 2016 or fiscal 2015 as the fair values of our Coach brand reporting units significantly exceeded their respective carrying values. Furthermore, given the recency of our Stuart Weitzman acquisition, the fair values of the Stuart Weitzman brand reporting unit and indefinite-lived trademarks and trade names exceeded their respective carrying values of $267.0 million and $156.0 million respectively, by approximately 20%. Several factors could impact the Stuart Weitzman brand's ability to achieve future cash flows, including the optimization of the store fleet productivity, the impact of promotional activity in department stores, the consolidation or take-back of certain distributor relationships, the simplification of certain corporate overhead structures and other initiatives aimed at expanding higher performing categories of the business. Given the relatively small excess of fair value over carrying value as noted above, if profitability trends decline during fiscal 2018 from those that are expected, it is possible that an interim test, or our annual impairment test, could result in an impairment of these assets.

Valuation of Long-Lived Assets

Long-lived assets, such as property and equipment, are evaluated for impairment whenever events or circumstances indicate that the carrying value of the assets may not be recoverable. In evaluating long-lived assets for recoverability, the Company uses its best estimate of future cash flows expected to result from the use of the asset and its eventual disposition. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than its carrying value, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value, considering external market participant assumptions.

In determining future cash flows, the Company takes various factors into account, including the effects of macroeconomic trends such as consumer spending, in-store capital investments, promotional cadence, the level of advertising and changes in merchandising strategy. Since the determination of future cash flows is an estimate of future performance, there may be future impairments in the event that future cash flows do not meet expectations.

Share-Based Compensation

The Company recognizes the cost of equity awards to employees and the non-employee Directors based on the grant-date fair value of those awards. The grant-date fair values of share unit awards are based on the fair value of the Company's common stock on the date of grant. The grant-date fair value of stock option awards is determined using the Black-Scholes option pricing model and involves several assumptions, including the expected term of the option, expected volatility and dividend yield. The expected term of options represents the period of time that the options granted are expected to be outstanding and is based on historical experience. Expected volatility is based on historical volatility of the Company’s stock as well as the implied volatility from publicly traded options on the Company's stock. Dividend yield is based on the current expected annual dividend per share and the Company’s stock price. Changes in the assumptions used to determine the Black-Scholes value could result in significant changes in the Black-Scholes value.

For stock options and share unit awards, the Company recognizes share-based compensation net of estimated forfeitures and revises the estimates in subsequent periods if actual forfeitures differ from the estimates. We estimate the forfeiture rate based on historical experience as well as expected future behavior.

The Company grants performance-based share awards to certain key executives, the vesting of which is subject to the executive’s continuing employment and the Company's achievement of certain performance goals. On a quarterly basis, the Company assesses actual performance versus the predetermined performance goals, and adjusts the share-based compensation expense to reflect the relative performance achievement. Actual distributed shares are calculated upon conclusion of the service and performance periods, and include dividend equivalent shares. If the performance-based award incorporates a market condition, the grant-date fair value of such award is determined using a pricing model, such as a Monte Carlo Simulation.

A hypothetical 10% change in our stock-based compensation expense would not have a material impact to our fiscal 2017 net income.

Income Taxes

The Company’s effective tax rate is based on pre-tax income, statutory tax rates, tax laws and regulations, and tax planning strategies available in the various jurisdictions in which the Company operates. The Company classifies interest and penalties on uncertain tax positions in the provision for income taxes. We record net deferred tax assets to the extent we believe that it is more likely than not that these assets will be realized. In making such determination, we consider all available evidence, including

scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent and expected future results of operation. We reduce our deferred tax assets by a valuation allowance if, based upon the weight of available evidence, it is more likely than not that some amount of deferred tax assets is not expected to be realized. Deferred taxes are not provided on the undistributed earnings of subsidiaries as such amounts are considered to be permanently invested.

The Company recognizes the impact of tax positions in the financial statements if those positions will more likely than not be sustained on audit, based on the technical merits of the position. Although we believe that the estimates and assumptions we use are reasonable and legally supportable, the final determination of tax audits could be different than that which is reflected in historical tax provisions and recorded assets and liabilities. Tax authorities periodically audit the Company’s income tax returns, and in specific cases, the tax authorities may take a contrary position that could result in a significant impact on our results of operations. Significant management judgment is required in determining the effective tax rate, in evaluating our tax positions and in determining the net realizable value of deferred tax assets.

Recent Accounting Pronouncements

See Note 2, "Significant Accounting Policies," to the accompanying audited consolidated financial statements for a description of certain recently adopted, issued or proposed accounting standards which may impact our consolidated financial statements in future reporting periods.