A Credit Analysis of Coach, Inc.
Prepared by:
Sarah Wagner
FIN 467
April 10, 2015
TABLE OF CONTENTS
INTRODUCTION..........................................................................................................................1
LIQUIDITY ANALYSIS ..............................................................................................................1
Working Capital ...........................................................................................................................1
Operating Activities .....................................................................................................................2
Composition of Current Assets ....................................................................................................5
SOLVENCY ANALYSIS ..............................................................................................................6
Capital Structure ...........................................................................................................................6
Earnings Power ............................................................................................................................8
CONCLUSION ............................................................................................................................10
REFERENCES .............................................................................................................................11
APPENDIX – COACH, INC FINANCIAL STATEMENTS...................................................12
2012 Balance Sheet ....................................................................................................................12
2012 Income Statement ..............................................................................................................13
2013 Balance Sheet ....................................................................................................................14
2013 Income Statement ..............................................................................................................15
1
INTRODUCTION
The objective of this report is to perform a credit analysis of Coach, Inc. Coach is a
retailer in the luxury good industry, which sells handbags and accessories for men and women.
The purpose of the analysis in this report is to determine the likelihood that lenders would grant
credit to Coach and to measure the ability of Coach to be able to pay off its credit obligations.
This will be accomplished by performing an in-depth analysis of the liquidity and solvency of
the company by using various ratios based on Coach’s balance sheets and income statements
from 2012 and 2013.
LIQUIDITY ANALYSIS
Liquidity is the ability of a company to meet its short-term obligations. It is a way to
measure how easy it is for a company to generate cash from assets and operations. Lenders look
at liquidity to determine how easy it is for a company to convert its assets into cash in times of
financial hardship in order to determine a liquidity risk. The ratios used in this analysis of
liquidity will deal with the working capital, operating activities, and asset composition of Coach
(Subramanyam & Wild, 527-528).
Working Capital
Coach has sufficient working capital with $1,086,368,000 in 2012 and $1,348,437,000 in
2013. By using the cash to current assets ratio, which is calculated by dividing cash and cash
equivalents by current assets, it can be found that about fifty percent of Coach’s current assets
are made up of cash and cash equivalents in each year. Its current ratios for each year, found by
dividing current assets by current liabilities, indicate that Coach has the ability to pay current
liabilities. The current ratios for 2012 and 2013 were 2.51 and 2.87, respectively. This means that
2
Coach has between two-and-a-half and three times more assets than liabilities, suggesting that
the company is financially sound. However, the current ratio has some limitations and cannot
fully show the condition of a company by itself. The quality of current assets and liabilities must
also be inspected along with their respective turnover rates. To achieve this, the operating
activities of the company must be analyzed, which includes accounts receivable, inventory, and
current liabilities (Subramanyam & Wild 530-534).
Operating Activities
To analyze accounts receivable, the accounts receivable turnover and days’ sales in
receivables ratios must be calculated. The accounts receivable turnover ratio is used to measure
the liquidity of receivables and the likelihood of collecting on those receivables. In 2012, Coach
had an accounts receivable balance of $174,462,000 with an allowance of uncollectible accounts
of $9,813,000. In 2013, the accounts receivable balance increased to $174,462,000, but the
allowance of uncollectible accounts decreased to $1,138,000. Coach’s accounts receivable
turnover ratios for 2012 and 2013 were 30.02 and 29.01, respectively. These ratios are pretty
high, indicating that Coach either operates more on a cash basis or that their collection of
accounts receivable is efficient (“Receivables Turnover Ratio Definition”). The financial
statements do not specify the amount of sales that are on credit, so this is not a perfect analysis of
accounts receivable, but it does tell that Coach collects on its accounts receivable quite often,
making their receivables liquid. However, it appears that Coach’s accounts receivable ratio is
declining, but only by a slight amount (Subramanyam & Wild 537).
Next, the days’ sales in receivables is calculated by dividing the year’s accounts
receivable balance by the average daily sales. This ratio measures how quickly a company
collects on their accounts receivables. In 2012, the ratio was 13 days and in 2013, the ratio was
3
12 days. Coach is able to collect on their receivables quite quickly, but again, the ratio appears to
be declining. However, as stated above, Coach drastically reduced their allowance for
uncollectible accounts from $9,813,000 in 2012 to $1,138,000 in 2013. This could indicate that
Coach experienced an improved collectability of their accounts receivable and did not see the
need to have such a high allowance in 2013. The change in the allowance for uncollectible
accounts could be the reason behind the slight decline in Coach’s accounts receivable ratios.
Despite the decline, Coach appears very capable of collecting their receivables and turning them
into liquid assets (Subramanyam & Wild 538-539).
When assessing liquidity of a company, it is important to examine the liquidity of its
inventories. While inventories are usually considered the least liquid asset that a company
possesses, inventories make up a large percentage of current assets and are a large investment
that a company makes in order to bring in profits through sales. It is important that a company
has quality inventories that they can consistently turn into cash and working capital
(Subramanyam & Wild 539).
The inventory turnover ratio measures how quickly, on average, a company can move
inventory out to customers. Inventory turnover is calculated by dividing the cost of goods sold by
the average inventory for the year. Coach had inventory turnover ratios of 2.8 in 2012 and 2.68
in 2013. This means that, on average, Coach sold and replaced its inventory less than three times
in each fiscal year. This seems somewhat low, and could indicate that Coach may have too much
inventory on hand. Coach’s inventory makes up about a quarter of its total current assets, so it is
a pretty large contributor to current assets. To get a better look on Coach’s ability to push out
inventory, the days’ sales in inventory ratio must be calculated by dividing inventories by the
cost of goods sold multiplied by 360. In 2012, the ratio was 140 days and in 2013, the ratio was
4
137 days, meaning that this is how long it took Coach to sell its ending inventory. Another way
to look at this is to calculate the days to sell inventory ratio by dividing 360 by inventory
turnover. By computing this ratio, it can be seen that it took Coach 129 days in 2012 and 134
days in 2013 to sell its average inventory. Coach’s results for these ratios seem normal. To put
things into perspective a little more, the conversion period can be calculated, which will tell how
long it takes to sell the inventory and collect on the receivables resulting from the sales. This is
found by adding the days’ sales in receivables to the days’ sales in inventories. Coach’s
conversion periods for 2012 and 2013 were 153 days and 149 days, which are, again, normal and
no cause for concern. Even better for Coach, their conversion period improved between the two
years, indicating a better ability to sell and collect on their inventories (Subramanyam & Wild
539-541).
The quality of current liabilities must also be examined when analyzing operating
activities for liquidity. There are a couple reasons for this, such as determining if a company has
a sufficient margin of safety in case of unexpected expenses, and the fact that when calculating
working capital, current liabilities are subtracted from current assets. Quality of current liabilities
can be assessed by looking the accounts payable balance and calculating the average payable
days outstanding. This is calculated by dividing accounts payable by cost of goods sold divided
by 360. This ratio shows how many days, on average, a company takes to pay outstanding
balances to its suppliers. In 2012, Coach’s payment period was 43 days and in 2013, it was about
47 days. Another ratio that can be used is accounts payable turnover, which measures how
quickly a company pays for its purchases on account, and is calculated by dividing cost of goods
sold by average accounts payable. In 2012, Coach’s accounts payable turnover ratio was 9 days,
and in 2013, it was 8 days. This is interesting because it took Coach longer to pay its payables in
5
2013 than 2012, but its accounts payable turnover ratio was larger in 2012 than in 2013. One
reason for this is that Coach had a slightly larger accounts payable balance in 2013 than in 2012,
but had a larger increase in cost of goods sold, indicating that it owed suppliers more money for
inventories. With the higher balance owed to suppliers, it took Coach a little bit longer to pay the
suppliers what was owed. Overall, Coach appears able to pay its short-term obligations in a
timely manner and looks well equipped to handle unexpected expenses (Subramanyam & Wild
542).
Composition of Current Assets
The last step in evaluating the liquidity of a company is to look at the composition of
current assets. A look at Coach’s common-size percentages is below (figures in thousands):
Current assets
Cash
Accounts receivable
Inventories
Other current assets
Total current assets
2012
$917,215 51%
174,462 10
504,490 28
208,361 11
$1,804,528 100%
2013
$1,062,785 51%
175,477 9
524,706 25
307,979 15
$2,070,947 100%
According to these common-size percentages, Coach’s liquidity remained constant between the
two years. Use of the acid-test ratio (cash and cash equivalents plus accounts receivable divided
by current liabilities) can also test liquidity. Coach’s acid-test ratio in 2012 was 1.52 and in 2013
was 1.71, indicating that its current assets gained liquidity. This slight increase in liquidity is
likely due to the slight reduction in the percentage of current assets consumed by inventories. A
final ratio in relation to liquidity is the cash flow ratio, which is found by dividing operating cash
flow by current liabilities. Coach’s cash flow ratio for 2012 was 1.70 and 2013 was 1.96. This
ratio shows that Coach’s operating cash flow over the two years was, on average, 1.8 times more
6
than its current liabilities, meaning that Coach is bringing in sufficient cash to pay for its current
liabilities (Subramanyam & Wild 543).
A summary of Coach’s ratios related to liquidity is shown in the table below:
Ratio
Current
2012
2.51
2013
2.87
Ratio
Cash to
current
liabilities
Accounts
receivable
turnover
Days’
sales in
receivables
2012
1.28
2013
1.47
Acid-test
1.52
1.71
30.02
29.01
13.19
days
12.45
days
128.55 134.51
days
days
Inventory
turnover
2.8
2.68
0.51
Days’
140.02
sales in
days
inventories
Collection 11.99
Period
days
Days to
sell
inventory
Cash to
current
assets
12.41
days
0.51
137.15
days
Ratio
Days to
sell
inventories
Conversion
period
2012
129
days
2013
134
days
153
days
149
days
Average
payable
days
outstanding
Accounts
payable
turnover
Cash flow
43.13
days
46.75
days
9.47
8.24
1.70
1.96
By analyzing these ratios related to working capital, accounts receivable, inventories, current
liabilities, and current asset composition, it can be concluded that Coach has sufficient ability to
pay its short-term debt. It has adequate liquid assets, ability to collect on receivables, ability to
turn inventory into liquid assets, and ability to pay current obligations. Based on this analysis, a
creditor would most likely see Coach as a low risk for lending purposes.
SOLVENCY ANALYSIS
Solvency refers to a company’s ability to meet its long-term debt obligations. The
components of solvency are capital structure, or the company’s sources of financing, and
earnings power, which is the company’s ability to earn cash from its operations on a year-to-year
7
basis. Measuring these components gives lenders an idea of a company’s ability to pay back
long-term debt, even in the event of financial distress (Subramanyam & Wild, 547).
Capital Structure
A look at Coach’s common-size statement shows that the company is primarily financed
by additional paid-in capital, which makes up most of its stockholder’s equity. They did not issue
any preferred stock and the balance of common stock barely made a dent in the stockholder’s
equity section. On average, between 2012 and 2013, stockholder’s equity made up about 66
percent of the total liabilities and equity. Coach’s common-size analysis is below (all figures in
thousands):
Current liabilities
Long-term debt
Other liabilities
Equity capital:
Preferred stock
Common stock
Paid-in capital
Retained earnings
Other comp. income
Total liabilities and equity
2012
$718,160
985
392,245
---2,851
2,327,055
(387,450)
50,475
$3,104,321
23%
0
13
2013
$722,510
485
399,744
21%
0
11
-0
75
(12)
1
100%
---2,819
2,520,469
(101,884)
(12,246)
$3,531,897
-0
71
(3)
0
100%
To get a better idea of Coach’s capital structure, a ratio analysis needs to be completed.
One ratio that can be used is the total debt to total capital ratio (or total debt to total assets).
Coach has very little debt compared to capital and its ratio was 0.17 in 2012 and 0.14 in 2013.
The reason for the decrease is that Coach’s debt decreased in 2013 while capital increased.
Another ratio is the total debt to equity capital ratio, which compares debt to only the
stockholder’s equity section of the balance sheet. Coach’s ratios for this are just as low as the
total debt to total capital ratio, with 0.21 in 2012 and 0.17 in 2013. A final ratio is the long-term
debt to equity capital ratio, which measures only the long-term debt against stockholder’s equity.
8
Coach’s ratios were, again, very low; in 2012 it was 0.0005 and in 2013 it was 0.0002
(Subramanyam & Wild 553-554).
These ratios show that Coach does not use very much debt to finance its operations and
that Coach’s capital structure is very low risk. A high proportion of debt is associated with the
risk of insolvency and inability to pay back the debt and the associated interest expense in times
of loss or hardship. A rule of thumb is that if the debt to stockholder’s equity ratio is ten percent
or less, there is no risk associated with a company’s financial structure. Coach’s ratios were
around the twenty percent mark, and although they fell above ten percent, there is not much
reason to believe that the company would be unable to pay their debt (Subramanyam & Wild
555).
Earnings Power
Earnings power is defined as the ability of a company to bring in cash as a result of
operations on a year-to-year basis. It is important to analyze long-term earnings during a
solvency analysis because earnings is one of the most reliable indicators of a company’s
financial strength or weakness. Measuring a company’s ability to generate cash is a good way to
determine how that company would perform during financial distress. Lenders look at earnings
power as a way to judge how likely it is that they would be able to collect on the loan if a
company was to experience financial hardship (Subramanyam & Wild 547).
The two ratios that are commonly used to measure earnings power are the return on
assets and return on equity ratios. The return on assets ratio is a percentage ratio that measures
how much earnings a company generates off of its assets. It is found by dividing the current
year’s net income by average total assets (“Earnings Power Drives Stocks”). Coach’s return on
9
assets ratio for 2012 was 36.2 percent and for 2013 was 31.2 percent. Coach experienced a
decline in its return on assets ratio mainly because net income decreased from 2012 to 2013.
However, based on the ratios, Coach does generate a good amount of earnings off of its asset
base.
Return on equity is calculated by dividing net income by average stockholder’s equity,
but a good way to understand this ratio is to break it down into its components. The DuPont
identity theory breaks down the return on equity ratio into four components:
The numerators and denominators cancel each other out, until the actual formula for return on
equity is remaining, however, each component of the formula gives an indication of earnings
power (“Earnings Power Drives Stocks”).
The first component, EAT/EBIT, measures the burden of interest and tax on net income, where
EAT is net income and EBIT is operating income. In 2012, Coach’s net income made up 68.7
percent of its operating income while in 2013, 67.8 percent of operating income was made up of
net income. This means that interest and tax is not too much of a burden for Coach.
The second component, EBIT/Sales, measures the operating margin, or revenues minus
operating expenses. In 2012, operating income made up 31.7 of the amount of sales, meaning
that Coach’s operating expenses took up about 68 percent of its revenue from sales. In 2013, the
ratio was 30 percent. It is a good indication that Coach was able to retain about 30 percent of its
sales revenues after operating expenses were paid.
The third component, Sales/Average Assets, measures asset turnover, which is a company’s
ability to generate revenue from its assets. Coach’s sales were greater than its total assets in both
10
2012 and 2013, so asset turnover was greater than 100 percent for both years.
The fourth component, Average Assets/Average Equity, measures financial leverage. This ratio
is generally higher for companies that have a lot of debt and lower for those that are more
conservatively financed. Coach’s financial leverage in 2012 was 1.59 times and in 2013, it was
1.51 times. This is not surprising because Coach does not have a lot of debt.
Finally, return on equity can be calculated by dividing net income by average equity. In 2012,
the return on equity for Coach was 58 percent and in 2013, it was 47 percent. This is the amount
of Coach’s net income that was available for shareholders. Breaking up the return on equity ratio
is a good way to see exactly where the strengths and weaknesses of a company are. Coach
appears to be strong in every component (“Earnings Power Drives Stocks”).
After analyzing Coach’s capital structure and earnings power, it appears that Coach’s
solvency is acceptable. Coach’s capital structure is made up of very little debt, making the
company low risk to lenders. It has the ability to generate cash from operations, which was
determined by measuring return on assets and return on equity. Coach seems to be well prepared
to handle any financial hardship or distress.
CONCLUSION
After performing an in-depth ratio analysis of the liquidity and solvency of Coach, Inc., it
can be concluded that creditors would view this company as low risk for lending and would grant
the company a loan. Coach appears to be well equipped to pay its short- and long-term
obligations. Coach keeps a good amount of liquid assets on hand, and is able to generate cash
and convert its non-liquid assets into cash, while financing itself on operations rather than debt.
It is these characteristics that make the company appear attractive and low-risk to lenders.
11
REFERENCES
"Earnings Power Drives Stocks." Investopedia. 25 Feb. 2007. Web. 09 Apr. 2015.
<http://www.investopedia.com/articles/basics/07/earnings-power.asp>.
"Receivables Turnover Ratio Definition." Investopedia. 25 Nov. 2003. Web. 09 Apr. 2015.
<http://www.investopedia.com/terms/r/receivableturnoverratio.asp>.
"SEC Filings." COACH. Web. 09 Apr. 2015. <http://www.coach.com/sec-filings.html>.
Subramanyam, K. R., and John J. Wild. Financial Statement Analysis. Boston: McGraw Hill
Irwin, 2009. Print.
12
COACH, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
For the Year Ended June 30, 2012
2012
2011
June 30,
2012
ASSETS
July 2,
2011
Current Assets:
Cash and cash equivalents
$
917,215
$
699,782
—
2,256
Trade accounts receivable, less allowances of $9,813 and $9,544, respectively
174,462
142,898
Inventories
504,490
421,831
Deferred income taxes
95,419
93,902
Prepaid expenses
39,365
38,203
Other current assets
73,577
53,516
1,804,528
1,452,388
Property and equipment, net
644,449
582,348
Goodwill
376,035
331,004
9,788
9,788
95,223
103,657
174,298
155,931
Short-term investments
Total current assets
Intangible assets
Deferred income taxes
Other assets
Total assets
$
3,104,321
$
2,635,116
$
155,387
$
118,612
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
Accrued liabilities
540,398
473,610
22,375
795
718,160
593,017
Long-term debt
985
23,360
Other liabilities
392,245
406,170
1,111,390
1,022,547
—
—
2,851
2,886
2,327,055
2,000,426
Current portion of long-term debt
Total current liabilities
Total liabilities
See note on commitments and contingencies
Stockholders' Equity:
Preferred stock: (authorized 25,000,000 shares; $0.01 par value) none issued
Common stock: (authorized 1,000,000,000 shares; $0.01 par value) issued and
outstanding – 285,118,488 and 288,514,529, respectively
Additional paid-in-capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
$
(387,450)
(445,654)
50,475
54,911
1,992,931
1,612,569
3,104,321
$
2,635,116
13
COACH, INC.
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
For the Year Ended June 30, 2012
2012
2011
Net sales
$
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Interest income, net
Other expense
$
Income before provision for income taxes
July 2,
4,158,507
2011
$
July 3,
3,607,636
2010
1,297,102
1,134,966
973,945
3,466,078
3,023,541
2,633,691
1,954,089
1,718,617
1,483,520
1,511,989
1,304,924
1,150,171
720
1,031
7,961
(7,046)
Provision for income taxes
Net income
June 30,
4,763,180
2012
2010
—
(4,736)
1,505,663
1,301,219
1,158,132
466,753
420,419
423,192
$
1,038,910
$
880,800
$
734,940
Basic
$
3.60
$
2.99
$
2.36
Diluted
$
3.53
$
2.92
$
2.33
Net income per share
Shares used in computing net income per share
Basic
288,284
294,877
311,413
Diluted
294,129
301,558
315,848
14
COACH, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
For the Year Ended June 30, 2013
2013
2012
June 29,
2013
ASSETS
June 30,
2012
Current Assets:
Cash and cash equivalents
$
1,062,785
$
917,215
72,106
—
Trade accounts receivable, less allowances of $1,138 and $9,813,
respectively
175,477
174,462
Inventories
524,706
504,490
Deferred income taxes
111,118
95,419
Prepaid expenses
37,956
39,365
Other current assets
86,799
73,577
Total current assets
2,070,947
1,804,528
Property and equipment, net
694,771
644,449
Long-term investments
197,340
6,000
Goodwill
345,039
376,035
9,788
9,788
84,845
95,223
129,167
168,298
Short-term investments
Intangible assets
Deferred income taxes
Other assets
Total assets
$
3,531,897
$
3,104,321
$
178,857
$
155,387
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
Accrued liabilities
543,153
540,398
500
22,375
722,510
718,160
Long-term debt
485
985
Other liabilities
399,744
392,245
1,122,739
1,111,390
—
—
2,819
2,851
2,520,469
2,327,055
Current portion of long-term debt
Total current liabilities
Total liabilities
See note on commitments and contingencies
Stockholders’ Equity:
Preferred stock: (authorized 25,000 shares; $0.01 par value)
none issued
Common stock: (authorized 1,000,000 shares; $0.01 par value) issued and
outstanding – 281,902 and 285,118, respectively
Additional paid-in-capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
(101,884)
(387,450)
(12,246)
50,475
1,992,931
2,409,158
$
3,531,897
$
3,104,321
15
COACH, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
For the Year Ended June 30, 2013
2013
Net sales
$
Cost of sales
2012
June 29,
5,075,390
2013
$
2011
June 30,
4,763,180
2012
$
July 2,
4,158,507
2011
1,377,242
1,297,102
1,134,966
3,698,148
3,466,078
3,023,541
2,173,607
1,954,089
1,718,617
1,524,541
1,511,989
1,304,924
Interest income
2,369
720
1,031
Other expense
(6,384)
Gross profit
Selling, general and administrative expenses
Operating income
Income before provision for income taxes
Provision for income taxes
(7,046)
(4,736)
1,520,526
1,505,663
1,301,219
486,106
466,753
420,419
$
1,034,420
$
1,038,910
$
880,800
Basic
$
3.66
$
3.60
$
2.99
Diluted
$
3.61
$
3.53
$
2.92
Net income
Net income per share
Shares used in computing net income per share
Basic
282,494
288,284
294,877
Diluted
286,307
294,129
301,558
Cash dividends declared per common share
$
1.24
$
0.98
$
0.68