Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 30, 2006

or

[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-16153

COACH, INC.

(Exact name of registrant as specified in its charter)


Maryland   52-2242751
(State or other jurisdiction of
incorporation or organization)		   (I.R.S. Employer
Identification No.)

516 West 34th Street, New York, NY 10001

(Address of principal executive offices); (Zip Code)

(212) 594-1850

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.            [X]   Yes        [ ]   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act.

[X] Large accelerated filer         [ ] Accelerated filer         [ ] Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).             [ ] Yes         [X] No

On February 2, 2007, the Registrant had 370,173,392 outstanding shares of common stock, which is the Registrant’s only class of common stock.

The document contains 29 pages excluding exhibits.



COACH, INC.

TABLE OF CONTENTS FORM 10-Q


    Page
Number
PART I – FINANCIAL INFORMATION
ITEM 1. Financial Statements 1
  Condensed Consolidated Balance Sheets   –
At December 30, 2006 and July 1, 2006		 1
  Condensed Consolidated Statements of Income   –
For the Quarters and Six Months Ended
December 30, 2006 and December 31, 2005		 2
  Consolidated Statements of Stockholders’ Equity   –
For the period July 2, 2005 to December 30, 2006		 3
  Consolidated Statements of Cash Flows   –
For the Six Months Ended
December 30, 2006 and December 31, 2005		 4
  Notes to Condensed Consolidated Financial Statements 5
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 25
ITEM 4. Controls and Procedures 26
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings 27
ITEM 1A. Risk Factors 27
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
ITEM 4. Submission of Matters to a Vote of Security Holders 27
ITEM 5. Other Information 27
ITEM 6. Exhibits and Reports on Form 8-K 28
SIGNATURE   29


Table of Contents

SPECIAL NOTE ON FORWARD-LOOKING INFORMATION

This Form 10-Q contains certain ‘‘forward-looking statements’’, based on current expectations, that involve risks and uncertainties that could cause our actual results to differ materially from our management’s current expectations. These forward-looking statements can be identified by the use of forward-looking terminology such as ‘‘may’’, ‘‘will’’, ‘‘should’’, ‘‘expect’’, ‘‘intend’’, ‘‘estimate’’, ‘‘are positioned to’’, ‘‘continue’’, ‘‘project’’, ‘‘guidance’’, ‘‘forecast’’, ‘‘anticipated’’, or comparable terms. Future results will vary from historical results and historical growth is not indicative of future trends, which will depend upon a number of factors, including but not limited to: (i) the successful execution of our growth strategies; (ii) the effect of existing and new competition in the marketplace; (iii) our exposure to international risks, including currency fluctuations; (iv) changes in economic or political conditions in the markets where we sell or source our products; (v) our ability to successfully anticipate consumer preferences for accessories and fashion trends; (vi) our ability to control costs; (vii) the effect of seasonal and quarterly fluctuations in our sales on our operating results; (viii) our ability to protect against infringement of our trademarks and other proprietary rights; and such other risk factors as set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2006. Coach, Inc. assumes no obligation to update or revise any such forward-looking statements, which speak only as of their date, even if experience, future events or changes make it clear that any projected financial or operating results will not be realized.

WHERE YOU CAN FIND MORE INFORMATION

Coach’s quarterly financial results and other important information are available by calling the Investor Relations Department at (212) 629-2618.

Coach maintains a website at www.coach.com where investors and other interested parties may obtain, free of charge, press releases and other information as well as gain access to our periodic filings with the SEC.



Table of Contents

PART I

ITEM 1.    Financial Statements

COACH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)


  December 30,
2006		 July 1,
2006
  (unaudited)  
ASSETS  
 
Current Assets:  
 
Cash and cash equivalents $ 265,335
$ 143,388
Short-term investments 554,588
394,177
Trade accounts receivable, less allowances of $8,712 and $6,000, respectively 125,099
84,361
Inventories 249,577
233,494
Other current assets 144,108
119,062
Total current assets 1,338,707
974,482
Property and equipment, net 329,324
298,531
Goodwill 221,226
227,811
Indefinite life intangibles 11,939
12,007
Other noncurrent assets 99,703
113,689
Total assets $ 2,000,899
$ 1,626,520
LIABILITIES AND STOCKHOLDERS’ EQUITY  
 
Current Liabilities:  
 
Accounts payable $ 82,094
$ 79,819
Accrued liabilities 328,019
261,835
Revolving credit facility 14,309
—
Current portion of long-term debt 235
170
Total current liabilities 424,657
341,824
Long-term debt 2,865
3,100
Other liabilities 90,479
92,862
Total liabilities 518,001
437,786
Commitments and contingencies (Note 6)  
 
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 – 369,082,546 and 369,830,906 shares, respectively 3,691
3,698
Additional paid-in-capital 855,094
775,209
Retained earnings 630,181
417,087
Accumulated other comprehensive loss (6,068
)
 (7,260
)
Total stockholders’ equity 1,482,898
1,188,734
Total liabilities and stockholders’ equity $ 2,000,899
$ 1,626,520

See accompanying Notes to Condensed Consolidated Financial Statements

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COACH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
(unaudited)


  Quarter Ended Six Months Ended
  December 30,
2006		 December 31,
2005		 December 30,
2006		 December 31,
2005
Net sales $ 836,387
$ 650,336
$ 1,390,238
$ 1,099,287
Cost of sales 191,911
145,660
321,082
253,250
Gross profit 644,476
504,676
1,069,156
846,037
Selling, general and administrative expenses 282,489
230,734
509,503
426,986
Operating income 361,987
273,942
559,653
419,051
Interest income, net 7,888
6,990
14,477
12,877
Income before provision for income taxes 369,875
280,932
574,130
431,928
Provision for income taxes 142,402
106,758
221,041
164,139
Net income $ 227,473
$ 174,174
$ 353,089
$ 267,789
Net income per share  
 
 
 
Basic $ 0.62
$ 0.46
$ 0.96
$ 0.70
Diluted $ 0.61
$ 0.45
$ 0.94
$ 0.69
Shares used in computing net income per share  
 
 
 
Basic 368,138
380,837
368,346
380,144
Diluted 375,496
390,620
374,775
390,247

See accompanying Notes to Condensed Consolidated Financial Statements

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COACH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(amounts in thousands)


  Total
Stockholders’
Equity		 Preferred
Stockholders’
Equity		 Common
Stockholders’
Equity		 Additional
Paid-in-
Capital		 Retained
Earnings		 Accumulated
Other
Comprehensive
Income (Loss)		 Comprehensive
Income (Loss)		 Shares
of
Common
Stock
Balances at July 2, 2005 $ 1,055,920
$     —
$ 3,784
$ 566,262
$ 484,971
$ 903
 
378,430
Net income 494,277
—
—
—
494,277
—
$ 494,277
 
Shares issued for stock options and employee
benefit plans		 78,444
—
105
78,339
—
—
 
10,456
Share-based compensation 69,190
—
—
69,190
—
—
 
 
Excess tax benefit from share-based compensation 99,337
—
—
99,337
—
—
 
 
Repurchase of common stock (600,271
)
 —
(191
)
 (37,919
)
 (562,161
)
 —
 
(19,055
)
Changes in derivatives balances, net of tax (4,488
)
 —
—
—
—
(4,488
)
 (4,488
)
  
Translation adjustments, net of tax (3,780
)
 —
—
—
—
(3,780
)
 (3,780
)
  
Minimum pension liability, net of tax 105
—
—
—
—
105
105
 
Comprehensive income  
 
 
 
 
 
$ 486,114
 
Balances at July 1, 2006 1,188,734
—
3,698
775,209
417,087
(7,260
)
  
369,831
(Unaudited):  
 
 
 
 
 
 
 
Net income 353,089
—
—
—
353,089
—
$ 353,089
 
Shares issued for stock options and employee
benefit plans		 58,484
—
43
58,441
—
—
 
4,254
Share-based compensation 26,086
—
—
26,086
—
—
 
 
Excess tax benefit from share-based compensation 21,970
—
—
21,970
—
—
 
 
Adjustment to excess tax benefit from share- based compensation (16,658
)
 —
—
(16,658
)
 —
—
 
 
Repurchase of common stock (149,999
)
 —
(50
)
 (9,954
)
 (139,995
)
 —
 
(5,002
)
Changes in derivatives balances, net of tax 4,345
—
—
—
—
4,345
4,345
 
Translation adjustments, net of tax (3,153
)
 —
—
—
—
(3,153
)
 (3,153
)
  
Comprehensive income  
 
 
 
 
 
$ 354,281
 
Balances at December 30, 2006 $ 1,482,898
$ —
$ 3,691
$ 855,094
$ 630,181
$ (6,068
)
  
369,083

See accompanying Notes to Consolidated Financial Statements

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COACH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)


  Six Months Ended
  December 30,
2006		 December 31,
2005
CASH FLOWS FROM OPERATING ACTIVITIES  
 
Net income $ 353,089
$ 267,789
Adjustments to reconcile net income to net cash from operating activities:  
 
Depreciation and amortization 38,916
31,625
Share-based compensation 26,086
30,080
Excess tax benefit from share-based compensation (21,970
)
 (57,284
)
Increase (decrease) in deferred tax assets 9,173
(7,341
)
Decrease in deferred tax liabilities (16,663
)
 (583
)
Other noncash credits, net (226
)
 (6,685
)
Changes in operating assets and liabilities:  
 
Increase in trade accounts receivable (40,738
)
 (57,646
)
Increase in inventories (16,083
)
 (20,623
)
Increase in other assets (14,746
)
 (11,619
)
Increase in other liabilities 9,627
3,128
Increase in accounts payable 2,275
22,747
Increase in accrued liabilities 96,903
110,060
Net cash provided by operating activities 425,643
303,648
CASH FLOWS FROM INVESTING ACTIVITIES  
 
Purchases of property and equipment (73,808
)
 (50,822
)
Proceeds from dispositions of property and equipment 123
—
Purchases of investments (800,091
)
 (453,662
)
Proceeds from maturities of investments 639,214
215,500
Net cash used in investing activities (234,562
)
 (288,984
)
CASH FLOWS FROM FINANCING ACTIVITIES  
 
Repurchase of common stock (149,999
)
 (95,498
)
Repayment of long-term debt (170
)
 (150
)
Borrowings on revolving credit facility 57,225
45,048
Repayments of revolving credit facility (42,916
)
 (44,103
)
Proceeds from exercise of stock options 61,414
53,314
Excess tax benefit from share-based compensation 21,970
57,284
Adjustment to excess tax benefit from share-based compensation (16,658
)
 —
Net cash (used in) provided by financing activities (69,134
)
 15,895
Increase in cash and cash equivalents 121,947
30,559
Cash and cash equivalents at beginning of period 143,388
154,566
Cash and cash equivalents at end of period $ 265,335
$ 185,125
Cash paid for income taxes $ 184,622
$ 85,508
Cash paid for interest $ 572
$ 94
Noncash investing activity – property and equipment obligations incurred $ 15,951
$ 6,087

See accompanying Notes to Condensed Consolidated Financial Statements

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COACH, INC.

Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)

1.    Basis of Presentation and Organization

The accompanying unaudited condensed consolidated financial statements include the accounts of Coach, Inc. (‘‘Coach’’ or the ‘‘Company’’) and all 100% owned subsidiaries, including Coach Japan, Inc. (‘‘Coach Japan’’). These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (‘‘SEC’’). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from this report as is permitted by SEC rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with the audited consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended July 1, 2006 (‘‘fiscal 2006’’).

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial condition, results of operations and changes in cash flows of the Company for the interim periods presented. The results of operations for the quarter and six months ended December 30, 2006 are not necessarily indicative of results to be expected for the entire fiscal year, which will end on June 30, 2007 (‘‘fiscal 2007’’).

2.    Share-Based Payment Plans

During the second quarters of fiscal 2007 and fiscal 2006, total compensation cost charged against income for share-based payment plans was $13,384 and $17,079, respectively and the total income tax benefit recognized in the income statement from these plans was $5,326 and $6,839, respectively. During the first six months of fiscal 2007 and fiscal 2006, total compensation cost charged against income for share-based payment plans was $26,086 and $30,080, respectively and the total income tax benefit recognized in the income statement from these plans was $10,280 and $12,045, respectively.

Coach maintains the 2000 Stock Incentive Plan, the 2000 Non-Employee Director Stock Plan and the 2004 Stock Incentive Plan to award stock options and shares to certain members of Coach management and the outside members of its Board of Directors. These plans were approved by Coach’s stockholders. The exercise price of each stock option equals 100% of the market price of Coach’s stock on the date of grant and generally has a maximum term of 10 years. Options generally vest ratably over three years. Share awards are subject to forfeiture until the vesting period, which is generally three years, is complete.

For options granted under Coach’s stock option plans prior to July 1, 2003, an active employee can receive a replacement stock option equal to the number of shares surrendered upon a stock-for-stock exercise. The exercise price of the replacement option is 100% of the market value at the date of exercise of the original option and will remain exercisable for the remaining term of the original option. Replacement stock options generally vest six months from the grant date.

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COACH, INC.

Notes to Condensed Consolidated Financial Statements  - (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

Stock Options

A summary of option activity under the Coach option plans as of December 30, 2006 and changes during the period then ended is as follows:


  Number of
Outstanding
Options		 Weighted-
Average
Exercise
Price		 Weighted-
Average
Remaining
Contractual
Term
(in years)		 Aggregate
Intrinsic
Value
Outstanding at July 1, 2006 30,817
$ 23.48
 
 
Granted 6,491
30.83
 
 
Exercised (4,414
)
 16.71
 
 
Forfeited or expired (617
)
 30.21
 
 
Outstanding at December 30, 2006 32,277
$ 25.75
7.13
$ 555,517
Exercisable at December 30, 2006 15,382
$ 23.02
5.63
$ 306,753

The following table summarizes information about stock options under the Coach option plans at December 30, 2006:


  Options Outstanding Options Exercisable
Range of
Exercise
Prices		 Number
Outstanding at
December 30, 2006		 Weighted-
Average
Remaining
Contractual
Term
(in years)		 Weighted-
Average
Exercise
Price		 Number
Exercisable at
December 30, 2006		 Weighted-
Average
Exercise
Price
$2.00-5.00 939
4.35
$ 3.96
939
$ 3.96
$5.01-10.00 1,588
5.27
6.64
1,588
6.64
$10.01-20.00 8,899
7.00
15.73
4,927
15.64
$20.01-30.00 7,715
8.46
29.19
1,743
27.85
$30.01-40.00 12,913
6.87
34.24
6,185
34.63
$40.01-44.00 223
6.52
42.51
—
—
  32,277
7.13
$ 25.75
15,382
$ 23.02

The fair value of each Coach option grant is estimated on the date of grant using the Black-Scholes option pricing model and the following weighted-average assumptions:


  Six Months Ended
  December 30,
2006		 December 31,
2005
Expected lives (years) 2.41
2.83
Expected volatility 29.98
%
 35.18
%
Risk-free interest rate 4.92
%
 4.20
%
Dividend yield 0.0
%
 0.0
%

The expected term of options represents the period of time that the options granted are expected to be outstanding and is based on historical experience. Expected volatility is based on historical volatility of the Company’s stock as well as the implied volatility from publicly traded options on Coach’s stock. The risk free interest rate is based on the zero-coupon U.S. Treasury issue as of the date of the grant. As Coach does not pay dividends, the dividend yield is 0%.

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COACH, INC.

Notes to Condensed Consolidated Financial Statements  - (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

The weighted-average grant-date fair value of individual options granted during the first six months of fiscal 2007 and fiscal 2006 were $7.04 and $8.92, respectively. The total intrinsic value of options exercised during the first six months of fiscal 2007 and fiscal 2006 were $86,327 and $162,549, respectively. The total cash received from these option exercises was $61,414 and $53,314, respectively, and the actual tax benefit realized for the tax deductions from these option exercises was $30,619 and $64,572, respectively.

At December 30, 2006, $94,563 of total unrecognized compensation cost related to non-vested stock option awards is expected to be recognized over a weighted-average period of 1.7 years.

Share Awards

The grant-date fair value of each Coach share award is equal to the fair value of Coach stock at the grant date. The following table summarizes information about non-vested shares as of and for the period ended December 30, 2006:


  Number of
Non-vested
Shares		 Weighted-Average
Grant-Date
Fair Value
Non-vested at July 1, 2006 1,329
$ 22.06
Granted 265
31.04
Vested (145
)
 12.89
Forfeited (12
)
 29.17
Non-vested at December 30, 2006 1,437
$ 24.74

The total fair value of shares vested during the first six months of fiscal 2007 and fiscal 2006 were $4,386 and $12,622, respectively. At December 30, 2006, $18,385 of total unrecognized compensation cost related to non-vested share awards is expected to be recognized over a weighted-average period of 1.5 years.

The Company recorded an adjustment in the first quarter of fiscal 2007 to reduce additional paid-in-capital by $16,658, with a corresponding increase to current liabilities, due to an excess tax benefit from share-based compensation overstatement in the fourth quarter of fiscal 2006. This immaterial adjustment is reflected within the cash flows from financing activities of the Consolidated Statement of Cash Flows.

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COACH, INC.

Notes to Condensed Consolidated Financial Statements  - (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

3.    Investments

The Company’s investments consist of U.S. government and agency debt securities as well as municipal government and corporate debt securities. As the Company has both the ability and the intent to hold these securities until maturity, all investments are classified as held to maturity and stated at amortized cost. The following table shows the amortized cost, fair value, and unrealized losses of the Company’s investments at December 30, 2006 and July 1, 2006:


  December 30, 2006 July 1, 2006
  Amortized
Cost		 Fair
Value		 Unrealized
(Loss)		 Amortized
Cost		 Fair
Value		 Unrealized
(Loss)
Short-term investments:  
 
 
 
 
 
U.S. government and agency securities $ 69,199
$ 69,199
$ —
$ 49,986
$ 49,641
$ (345
)
Corporate debt securities 197,814
197,735
(79
)
 198,191
197,529
(662
)
Municipal securities 287,575
287,575
—
146,000
146,000
—
Short-term investments $ 554,588
$ 554,509
$ (79
)
 $ 394,177
$ 393,170
$ (1,007
)

Securities with maturity dates within one year are classified as short-term investments. Securities with maturity dates greater than one year are classified as long-term investments. Actual maturities could differ from contractual maturities, as some borrowers have the right to call certain obligations.

4.    Debt

Coach’s revolving credit facility (the ‘‘Bank of America facility’’) is available for seasonal working capital requirements or general corporate purposes and may be prepaid without penalty or premium. During the first six months of fiscal 2007 and fiscal 2006, there were no borrowings under the Bank of America facility. As of December 30, 2006 and July 1, 2006, there were no outstanding borrowings under the Bank of America facility.

Coach pays a commitment fee of 10 to 25 basis points based on any unused amounts of the Bank of America facility. Coach also pays interest of LIBOR plus 45 to 100 basis points on any outstanding borrowings. Both the commitment fee and the LIBOR margin are based on the Company’s fixed charge coverage ratio. At December 30, 2006, the commitment fee was 10 basis points and the LIBOR margin was 45 basis points.

The Bank of America facility contains various covenants and customary events of default. The Company has been in compliance with all covenants since the inception of the Bank of America facility.

Coach Japan has available credit facilities with several Japanese financial institutions. These facilities contain various covenants and customary events of default. Coach Japan has been in compliance with all covenants since the inception of the facilities. Coach, Inc. is not a guarantor on any of these facilities.

During the first six months of fiscal 2007 and fiscal 2006, the peak borrowings under the Japanese credit facilities were $25,518 and $21,568, respectively. As of December 30, 2006 and July 1, 2006, the outstanding borrowings under the Japanese facilities were $14,309 and $0, respectively.

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COACH, INC.

Notes to Condensed Consolidated Financial Statements  - (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

5.    Goodwill and Other Intangible Assets

The changes in the carrying value of goodwill for the period ended December 30, 2006, by operating segment, are as follows:


  Direct-to-
Consumer		 Indirect Total
Balance at July 1, 2006 $ 226,295
$ 1,516
$ 227,811
Foreign exchange impact (6,585
)
 —
(6,585
)
Balance at December 30, 2006 $ 219,710
$ 1,516
$ 221,226

The total carrying amount of intangible assets not subject to amortization is as follows:


  December 30,
2006		 July 1,
2006
Trademarks $ 9,788
$ 9,788
Workforce 2,151
2,219
Total Indefinite Life Intangible Assets $ 11,939
$ 12,007

6.    Commitments and Contingencies

At December 30, 2006, the Company had letters of credit outstanding totaling $92,672. Of this amount, $14,941 relates to the letter of credit obtained in connection with leases transferred to the Company by the Sara Lee Corporation, for which Sara Lee retains contingent liability. The remaining letters of credit were issued primarily for purchases of inventory.

Coach is a party to several pending legal proceedings and claims. Although the outcome of such items cannot be determined with certainty, Coach’s general counsel and management are of the opinion that the final outcome should not have a material effect on Coach’s financial position, results of operations or cash flows.

7.    Derivative Instruments and Hedging Activities

Coach is exposed to market risk from foreign currency exchange rate fluctuations with respect to Coach Japan as a result of its U.S. dollar denominated inventory purchases. Coach Japan enters into certain foreign currency derivative contracts, primarily foreign exchange forward contracts, to manage these risks. These transactions are in accordance with Company risk management policies. Coach does not enter into derivative transactions for speculative or trading purposes.

Coach is also exposed to market risk from foreign currency exchange rate fluctuations with respect to Coach Japan as a result of its $231,000 U.S. dollar denominated fixed rate intercompany loan from Coach. To manage this risk, on July 1, 2005, Coach Japan entered into a cross currency swap transaction, the terms of which include an exchange of a U.S. dollar fixed interest rate for a yen fixed interest rate. The loan matures in 2010, at which point the swap requires an exchange of yen and U.S. dollar based principals.

The fair value of open foreign currency derivatives included in current assets at December 30, 2006 and July 1, 2006 was $15,626 and $2,578, respectively. For the six months ended December 30, 2006, changes in the fair value of contracts designated and effective as cash flow hedges resulted in an increase to equity as a benefit to other comprehensive income of $4,345, net of taxes. For the six months ended December 31, 2005, changes in the fair value of contracts designated and effective as cash flow hedges resulted in a decrease to equity as a charge to other comprehensive income of $1,811, net of taxes.

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COACH, INC.

Notes to Condensed Consolidated Financial Statements  - (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

8.    Retirement Plans

The components of net periodic pension cost for the Coach sponsored benefit plans are:


  Quarter Ended Six Months Ended
  December 30,
2006		 December 31,
2005		 December 30,
2006		 December 31,
2005
Service cost $ 183
$ 3
$ 366
$ 6
Interest cost 88
81
176
163
Expected return on plan assets (77
)
 (63
)
 (154
)
 (127
)
Recognized actuarial loss 55
57
109
114
Net periodic pension cost $ 249
$ 78
$ 497
$ 156

9.    Segment Information

The Company operates its business in two reportable segments: Direct-to-Consumer and Indirect. The Company’s reportable segments represent channels of distribution that offer similar merchandise, service and marketing strategies. Sales of Coach products through Company operated stores in North America and Japan, the Internet and the Coach catalog constitute the Direct-to-Consumer segment. The Indirect segment includes sales of Coach products to other retailers and royalties earned on licensed product. In deciding how to allocate resources and assess performance, Coach’s executive officers regularly evaluate the sales and operating income of these segments. Operating income is the gross margin of the segment less direct expenses of the segment. Unallocated corporate expenses include production variances, general marketing, administration and information systems expenses, as well as distribution and customer service expenses.


Quarter Ended December 30, 2006 Direct-to-
Consumer		 Indirect Corporate
Unallocated		 Total
Net sales $ 675,355
$ 161,032
$ —
$ 836,387
Operating income (loss) 337,122
102,866
(78,001
)
 361,987
Income (loss) before provision for income taxes 337,122
102,866
(70,113
)
 369,875
Depreciation and amortization expense 14,009
1,715
4,360
20,084
Total assets 811,689
109,302
1,079,908
2,000,899
Additions to long-lived assets 16,944
6,418
10,082
33,444

Quarter Ended December 31, 2005 Direct-to-
Consumer		 Indirect Corporate
Unallocated		 Total
Net sales $ 503,807
$ 146,529
$ —
$ 650,336
Operating income (loss) 245,275
94,070
(65,403
)
 273,942
Income (loss) before provision for income taxes 245,275
94,070
(58,413
)
 280,932
Depreciation and amortization expense 10,790
1,524
5,322
17,636
Total assets 702,074
103,194
953,895
1,759,163
Additions to long-lived assets 25,774
4,117
5,133
35,024

10



Table of Contents

COACH, INC.

Notes to Condensed Consolidated Financial Statements  - (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)


Six Months Ended December 30, 2006 Direct-to-
Consumer		 Indirect Corporate
Unallocated		 Total
Net sales $ 1,079,575
$ 310,663
$ —
$ 1,390,238
Operating income (loss) 503,541
197,187
(141,075
)
 559,653
Income (loss) before provision for income taxes 503,541
197,187
(126,598
)
 574,130
Depreciation and amortization expense 26,900
3,340
8,676
38,916
Total assets 811,689
109,302
1,079,908
2,000,899
Additions to long-lived assets 40,927
7,895
20,890
69,712

Six Months Ended December 31, 2005 Direct-to-
Consumer		 Indirect Corporate
Unallocated		 Total
Net sales $ 818,352
$ 280,935
$ —
$ 1,099,287
Operating income (loss) 368,850
177,492
(127,291
)
 419,051
Income (loss) before provision for income taxes 368,850
177,492
(114,414
)
 431,928
Depreciation and amortization expense 20,933
2,767
7,925
31,625
Total assets 702,074
103,194
953,895
1,759,163
Additions to long-lived assets 41,486
5,728
9,695
56,909

The following is a summary of the common costs not allocated in the determination of segment performance:


  Quarter Ended Six Months Ended
  December 30,
2006		 December 31,
2005		 December 30,
2006		 December 31,
2005
Production variances $ 2,908
$ 2,654
$ 5,822
$ 4,047
Advertising, marketing and design (28,325
)
 (25,030
)
 (54,021
)
 (44,968
)
Administration and information systems (37,559
)
 (31,615
)
 (66,492
)
 (65,691
)
Distribution and customer service (15,025
)
 (11,412
)
 (26,384
)
 (20,679
)
Total corporate unallocated $ (78,001
)
 $ (65,403
)
 $ (141,075
)
 $