Coach, Inc. F4Q09 (Qtr End 06/27/09) Earnings Call Transcript

| About: Coach, Inc. (COH)

Coach, Inc. (NYSE:COH)

F4Q09 Earnings Call

July 28, 2009 8:30 am ET


Andrea Shaw Resnick - Senior Vice President of Investor Relations and Corporate Communications

Lew Frankfort - Chairman and CEO

Mike Devine - CFO

Mike Tucci - President North American Retail


Bob Drbul - Barclays Capital

Kimberly Greenberger – Citigroup

David Schick – Stifel Nicolaus

Christine Chen - Needham & Company

Liz Dunn – Thomas Weisel

Dana Telsey - Telsey Advisory Group

Laura Champine – Cowen

[Rick Battell] – BAS-ML


(Operator Instructions) Welcome to the Coach conference call. At this time, for opening remarks and introductions, I would like to turn the call over to Senior Vice President of Investor Relations and Corporate Communications at Coach, Ms. Andrea Shaw Resnick.

Andrea Shaw Resnick

With me today to discuss our quarterly results are Lew Frankfort, Coach's Chairman and CEO, and Mike Devine, Coach's CFO.

Before we begin we must point out that this conference call will involve certain forward looking statements including projections for our business in the current quarters and fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences or control costs.

Please refer to our latest Annual Report on Form 10-K for a complete list of these risk factors. Also, please note that historical growth trends may not be indicative of future growth.

Now let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our fourth fiscal quarter and annual 2009 results and will also discuss our strategies going forward. Mike Devine will continue with details on financial and operational results of the quarter and year. Following that we will hold a question and answer session where we will be joined by Mike Tucci, President North American Retail. This Q&A session will end shortly before 9:30 a.m. Lew will then conclude with some brief summary comments.

I'd now like to introduce Lew Frankfort, Coach's Chairman, and CEO.

Lew Frankfort

As noted in our release this morning we were once again pleased to generate sales that were essentially even with the prior year, and encouraged by the continued ability of our comparable store sales in North America through the first half of calendar 2009. Though still early days we are also encouraged by the improvement of our July full priced business notably in North America and Japan where we have seen strong consumer response to Poppy and our broadened assortment of handbags in the $200 to $300 range, supported by comprehensive new marketing programs.

Our results for both the year and the quarter demonstrate the resiliency of the Coach model and our commitment to maintaining the integrity of our full price proposition in retail stores even in the face of an extraordinarily challenging environment. This performance also reflects the strength of our franchise and our flexibility in adapting to changing business conditions. This year we have taken the steps necessary to reduce our expense structure while also investing in growth areas such as China in order to position Coach for future profitable growth.

Despite the economic backdrop and future uncertainty we remain confident in Coach’s durability and growth prospects over our planning horizon. Clearly the opportunities both hear at home in North America and abroad notably in emerging markets remain abundant. While I will get into further detail about current conditions and the outlook for the category and our business shortly, I did want to take the time to review our year and quarter first.

Our performance in FY09 was highlighted by an increase of 2% in revenues. It was a year of many milestones including; first the opening of 42 total net new stores in North America, 33 net new retail stores and nine new factory stores. Second, direct to consumer sales rose 7% to $2.7 billion with a 5% increase in North American store sales, driven by distribution, while we also experienced rapid growth in China sales.

Third, a solid DF for Coach Japan, retail sales there were essentially flat on a constant currency basis while dollar sales rose 11% against very weak category sales for imported bags and accessories. Coach strengthened it number two sales position in this market to about a 14% share this year. Fourth, we successfully completed the phased buyout of our retail businesses in China and saw increasing interest in the brand as the market continued to grow rapidly. Finally, we initiated a quarterly dividend, sending a clear message about our financial strength, cash flow generation, and business outlook.

This annual performance was capped off by a solid fourth quarter. Some key metrics were first, net sales totaled $778 million versus $782 million a year ago, a slight decline of 1%. Second, earnings per share excluding unusual items totaled $0.43 compared with $0.50 in the prior year on the same basis. Third, direct to consumer sales rose 3% to $683 million from $662 million in the prior year. Fourth, North American same store sales for the quarter remained stable from the third quarter, declining 6% from the prior year while total North American store sales rose 5% driven by distribution.

Fifth, sales in Japan declined 4% in dollars and declined 10% on a constant currency basis as consumer spending contracted significantly during the period. Finally, we are continuing to generate very strong sales and comps in China.

During the quarter we opened nine North American retail stores including four in new markets for Coach; Laredo, Texas, Capitola, California, Kennewick, Washington, and Boise, Idaho. We also closed three retail locations as previously announced. In addition, we opened three factory stores and closed one. Lastly, we expanded one retail store and four factory locations. At the end of the period there were 330 full priced and 111 factory stores in operation in North America.

Moving to Japan, one location was added, two closed, and one was expanded. At quarter end there were 160 total locations in Japan with 20 stand alone full priced stores, including eight flagships, 113 shop in shops, 22 factory stores, and five distributor operated locations. Also, during the fourth quarter and as part of our Poppy marketing programs we opened two temporary stand alone Poppy locations in event spaces in key department stores. They were extremely successful and we expect to do more of these pop up locations going forward.

Indirect sales which for context now represent just over 15% of Coach’s sales on an annualized basis decreased 21% to $95 million from $119 million in the same period last year. This decrease was primarily due to reduced shipments into US department stores where sales declined about 30% for the quarter, essentially even with the prior quarter. Discounting continued at high levels throughout the period in department stores while Coach was generally excluded from these promotions. Naturally we continue to tightly manage inventories into the channel given lower demand.

International retail sales declined modestly in the period as we continued to experience a bifurcation between locations catering to the domestic consumer, where we saw sales gains and those serving the international tourists which were impacted by the slowdown in travel, exacerbated by the Swine Flu epidemic.

We estimate that the addressable US handbag and accessory category declined 10% to 15% during the first half of the calendar year. At the same time, Coach’s bag sales declined 3% across all channels in North America over that six month period.

Our total revenues in North America were essentially even with prior year in the quarter, with our directly operated stores up 5% as distribution growth offset the negative comp performance. As noted, Q4 same store sales were down 6% consistent with 3Q trends. In addition, our key comp metrics in the fourth quarter were also quite similar to 3Q.

Specifically, we would note that in full price stores traffic continued to be weak on the year over year basis, while conversion and average transaction size both declined modestly. In factory, where we continued to leverage the flexibility inherent in our business model to drive sales through pricing, we continued to see solid increases in traffic and conversion while ticket was flat.

As noted, we posted a 10% decline in local currency in Japan and a 4% decrease in dollars. Business in Japan continued to be fueled primarily by distribution through new stores as our market share further expanded against a very weak category backdrop. In fact, Coach now holds a 14% Yen share of the Japanese imported accessories market. Our growth in share this year in the very tough Japanese market reflects the strength and relevance of our accessible luxury positioning with the Japanese consumer who is becoming more discerning and value oriented.

I also wanted to call out China, which is only a very small portion of our total sales to date but represents a significant growth opportunity. As many of you know, this was the first quarter that we were directly operating all the China stores, having completed the acquisition of the mainland stores on April 1st. During the fourth quarter we continued to achieve significant double digit comp growth as the Coach brand is taking hold with increasing numbers of consumer, both domestically and mainland China and with many of the Chinese who are traveling to Hong Kong.

Clearly, China is already becoming a significant market for imported brands that will grow rapidly over the next several years as personal income and consumer spending increase. We estimate that the market for imported handbags and accessories grew over 40% during the last year, while the number of target consumers in mainland China alone grew from six million to over eight million.

To implement our growth strategy as announced in May, we’ve appointed Andre Cohen to lead our on the ground team. Based in Hong Kong he now has responsibility for the strategic leadership and operating results of Coach China. Andre originally joined Coach International in early 2008 and has extensive prior experience in the region, building brands and businesses. His experience and market knowledge, together with our financial strength, brand positioning and consumer research; provide a solid foundation for Coach’s expansion in the Chinese market.

During the fourth quarter, as always, we maintained a high level of product innovation and distinctive newness. Beginning in April we introduced a whimsical collection of bags and accessories inspired by our body, cash and archives, and in May we introduced Cricket, a spectator carry all based item group in a broad range of colors.

Cricket, along with our strong Madison collection, updated in a beautiful spring pallet across multiple fabrications for the key statements for Mother’s Day and for June, Ali was our new group, focused on soft, drapy shoulder bags and hobos. Of course we continue to update our core collections during the spring including Parker with new colors and silhouettes.

Clearly the big news at the end of the quarter was the introduction of the Poppy collection. Poppy is youthful in attitude and is proving to have broad customer appeal. Presented in a variety of new silhouettes, vibrant colors and prints, it offers great value with an average handbag price of about $260. Poppy’s launch has been supported by comprehensive marketing campaign, “Are you Poppy” utilizing several elements in digital media, including stand along flash Poppy websites, email campaigns, Facebook fashion blogs and targeted online banner advertising to get the word out.

The marketing and press around Poppy is clearly driving more traffic into our stores, resulting in a significant improvement in trends from the prior few quarters. Not surprisingly the impact of Poppy has been most significant in our direct to consumer channels, notably North American full price stores in Coach Japan, retail locations where we have made the largest investment in both product and marketing and are experiencing the largest returns.

Our retail store environment is also where we are best able to merchandise Poppy as a lifestyle collection across all categories from footwear to jewelry to scarves, along with its handbags, wallets, and wristlets. Poppy will continue to be a key collection throughout FY10, regularly updated with new color pallets, fabrications and styles, such as the book tote coming for holiday.

Of course I would be remiss not to mention Maggie, also introduced in July. This key handbag silhouette provides a more sophisticated counterpoint to Poppy. Maggie will evolve and continue to be important through the holiday season.

Just last week we introduced two new handbag groups, Tribeca, a collection of East-West totes and Garnet, which focuses on satchel silhouettes. Both are offered at new core price points furthering our strategy to rebalance our handbag assortment, an important area of focus in this year.

Starting with Poppy in our July product, we rebalanced our assortments within our current range by increasing the proportion of bags introduced at prices below $300 from about 30% of the assortment in FY09 to 50% in FY10. This rebalancing gives the consumer more choices at prices she is willing to spend or is able to afford. As you know, our plan is to exploit this opportunity by designing into this price point engineering collections that can provide excellent value and still generate excellent margins.

Now that the rebalancing is in place we have begun to achieve the goals we set out for our North American full price business. These include higher handbag penetrations, now running at about 55% of sales versus 50% a year ago, or a 10% increase. As planned, this strengthening in merchandise mix favoring handbags has resulted in flat overall unit retails in our stores.

As noted, we have also seen an improvement in traffic trends for the very weak levels of the first half of the calendar year. We are encouraged that the execution of our strategies is resulting in a sequential improvement in retail store performance from Q4 levels.

As we move to FY10 our primary focus will continue to be on restoring productivity to our existing full price store base. At the same time our July trends and the factory channel remain robust with strong consumer response to new made for factory product such as the pleated Soho collection. That said, it’s also important to note that we manage our North American store business in aggregate. As such, we will continue to fine tune our marketing and promotional levels to maximize the long term returns of both channels.

Moving to our stores, we opened 39 new retail stores in FY09 and in aggregate they generated volumes of about $1.6 million, modestly below pro-formas of about $1.8 million. All of these stores are very profitable and operate at high levels of productivity. However, and perhaps most noteworthy, is that the 13 stores we opened in new markets for Coach, such as Baton Rouge, Louisiana, and Modesto, California, actually outperformed their planned volumes, underscoring our plan to focus on new markets in FY10 openings.

In addition, we saw excellent response to new stores in our developing Canadian markets as well, another area of focus this year which I will touch on more in just a minute.

As we’ve discussed many times, we have two drivers of long term growth. First is distribution as we expand our global network of store and shop locations with an emphasis on North America and China and second is productivity which we drive across all geographies through the introduction of innovative and relevant product in a compelling store environment.

In FY09 our erosion and same store sales was more than offset by distribution growth. The current macro economic backdrop does not change our long term strategy though we have sharpened our focus on distribution putting more emphasis on the largest opportunities both in North America and abroad. We will continue to build market share here in North America and grow our store base, although at a slower pace this year due to the challenging environment.

Given our strong productivity metrics and grand proposition we are a highly desirable tenant and as such have ample real estate opportunities to choose from. This year we’re opening 20 North American retail stores rather than the 40 we’ve opened for each of the last two years. In addition, as I mentioned, we will focus on those store segments where we have seen the best relative performance, notably Canada, with six openings planned for next year and new US markets.

A total of 14 of this year’s stores are targeted for new North American markets for Coach. In addition, we will open at least six North American factory outlets. In total we expect North American square footage growth of about 9%, down from about 13% in FY09.

We have also been slowing the pace of square footage growth in Japan given the economic environment, by reducing the number of new openings and stemming expansion activity. This year we expect to open about 10 new locations including a few Poppy locations next Spring. Further, we are developing plans to open the first few men’s stand alone shops in Japan given that the stylish male shopper in this market is underserved in the accessories category. In total we would expect that square footage growth in Japan will increase by slightly less than 5% this year compared to about 8% in FY09.

In China we now expect to open about 15 new locations this year up from the 10 forecast previously given our performance and the opportunity. Looking further out over the next five years we expect to open a total of at least 50 new locations, aggressively growing our sales and market share in this rapidly expanding region.

Our market research indicates that by 2013 that China, Hong Kong and Macau premium handbag and accessories market will likely exceed $2.5 billion, a significant increase from its current size of about $1.6 billion. With the investments we’re making in stores, marketing, organization and infrastructure we are well positioned to replicate our success formula in Japan.

In Asian markets such as Korea, Taiwan, and Singapore, the Coach brand is among the top five brands with good headroom for further strong growth. We’ve also made significant headway in the Middle East and expect continued strong performance.

Finally, as we grow our brand awareness across new markets, global travelers will increasingly represent a significant growth opportunity for Coach. At about $4 billion in global sales for fashion and accessories we believe we can double our share of the global travel retail market from about 4% today to around 8% during the next five years.

Thus, across all geographies and channels we expect to grow our square footage by about 9% in FY10, modestly below the 11% distribution growth last year with the greatest moderation in our North American full price expansion.

Finally, I would like to touch on the announcement of the Reed Krakoff label a new global brand which we intend to launch in the fall of calendar 2010. It will encompass all women’s categories including ready to wear, handbags, women’s accessories, footwear, and jewelry. We believe that this concept will serve to define the new American luxury and engage a different customer who is looking for exclusivity and limited distribution.

While still in the development stage, the Reed Krakoff brand is targeted at the rapidly evolving luxury market. It will be a stand alone brand separate and apart from Coach while leveraging Coach’s infrastructure. It will have a unique point of view in aesthetic, reflecting Reed’s personal design philosophy. Initially, Reed Krakoff will be launched with a few boutiques in the US, Japan and Hong Kong as well as limited distribution in specialty stores.

In closing, while our new fiscal year has just begun we are very encouraged by the early success of Poppy and our pricing strategy in this very tough environment. Accordingly, we will plan cautiously until we see concrete evidence of a change in consumer behavior. Irrespective of the backdrop we are confident that our proven growth strategies built upon or leadership position and diversified business model will continue to deliver excellent returns in the seasons ahead and over our long term planning horizon.

At this time I will turn it over to Mike Devine our CFO for further details on our financials.

Mike Devine

Lew was just taking your through the highlights and strategies, let me now take you through some of the important financial details of our fourth quarter results. As mentioned, our quarterly revenues declined just under 1%, with direct to consumer which represents nearly 85% of our business up 3% and indirect down 21% primarily due to lower shipments to US department stores.

Excluding the impact of certain unusual items which I will touch on in a moment, net income for the quarter totaled $136 million with earnings per diluted share of $0.43. This compared to net income of $172 million and earnings per diluted share of $0.50 in the prior years fourth quarter. For the full fiscal year earnings per share were $1.91 as compared to $2.06, while net income totaled $622 million versus net income of $742 million recorded in FY08.

On the same basis our operating income totaled $220 million, below the $281 million reported last year, while operating margin was 28.2% versus 35.9%. For the full fiscal year operating income was $1 billion even, a 15% decrease from $1.18 billion generated a year ago. Operating margin for the year was 31% flat as compared to 37.1% a year ago.

During the quarter gross profit totaled $547 million versus $593 million a year ago. Gross margin rate which met our expectations was 70.4% versus 75.9% a year ago. As planned, we maintained the high level of promotional activity in factory stores which was the primary driver of our lower gross margin rate year on year.

Channel mix and the sharper pricing initiative in our full price divisions also dampened margin. We anticipate delivering similarly high rates of gross margin in the coming quarters. For the full year gross profit declined 4% to $2.32 billion from $2.41 billion a year ago. Gross margin rate was 71.9% FY09 versus 75.7% posted in FY08.

Again, excluding the unusual items in FY09 and FY08’s fourth quarters SG&A expenses as a percentage of net sales totaled 42.1% compared to the 40% flat reported in the year ago quarter. For the fiscal year on the same basis SG&A expenses as a percentage of net sales totaled 40.9% compared to 38.6% reported in FY08.

As the result of our recent profitability initiatives we believe our expense spending strike the right balance between driving future growth opportunities and operating our core businesses efficiently.

As mentioned in our press release we recorded unusual items resulting in a substantially lower tax rate of 29.5% for the fourth quarter. These consisted of a favorable settlement of a multi-year tax return examination which decreased Coach’s provision for taxes by $9 million as well as certain other tax accounting adjustments. These items also increased net interest income by $2 million. In addition, as a result of this favorable tax settlement we made a contribution to our charitable foundation which increased expenses by $15 million pre-tax or $9 million after tax.

As you may remember, in the third quarter, we had announced a one time net charge related to the reduction of corporate staffing levels in the US, the closure of four North American retail stores, and the closure of our sample making facility in Italy. In aggregate these actions increased the company’s Q3 SG&A expenses by $13 million.

Including the impact of the unusual items in all periods net income totaled $146 million or $0.45 per diluted share for the current quarter and $214 million or $0.62 per share for the fourth quarter of 2008. For the year, net income totaled $623 million for 2009 as compared to $783 million in 2008, while earnings per diluted share was $1.91 compared to $2.17.

Inventory levels at quarter end were $326 million essentially even in both dollars and units with prior year on a comparable basis. This is consistent with management’s second half expectations as we have worked through all of the excess inventory from calendar year end. This flat inventory level allows us to support 42 net new North American stores, six net new locations in Coach Japan from the year ago period, as well as our 28 Coach China stores.

Cash and short term investments stood at $800 million as compared with $699 million a year ago. During the fourth quarter we did not repurchase any of our own shares thus $710 million is still available under the current repurchase authorization. Net cash from operating activities in the fourth quarter was $270 million compared to $323 million last year during Q4. Free cash flow in the fourth quarter was an inflow of $245 million versus $268 million in the same period last year.

Our CapEx spending was $26 million versus $55 million in the same quarter a year ago. For all of fiscal year 2009 net cash from operating activities was $809 million compared to $923 million a year ago. Free cash flow in fiscal year ’09 was in inflow of $569 million which included the $103 million purchase of our corporate headquarters building here in New York City, versus $749 million in fiscal year ’08.

CapEx spending totaled $240 million for the year, also including the cash outlay for the headquarters purchase as well as for new stores and technology and corporate infrastructure investments. This compared to $175 million spent for CapEx last year. As you know, we did eliminate certain long term payback initiatives this year as well as benefited from negotiated savings for ongoing projects. It’s important to note that based on our current plans for FY10 we would expect that CapEx for next year will be down further and will be in the area of $110 million.

While as you well know we are not giving specific guidance for FY10 I believe it would be helpful for some of your modelers out there to keep a few things in mind when we’re looking at the new year. First, as we mentioned on our third quarter call our gross margin is likely to stay in the 70% to 72% area over the next few quarters.

We noted previously that our cost cutting actions will net at least $50 million in SG&A savings in FY10; however, it will still be an investment year for Coach in terms of China and our new business Reed Krakoff. Taken together they will impact FY10 earnings per share by about $0.05 or about the same amount as they did in FY09. Finally, our tax rate is likely to be in the area of 37% for the year.

Before we open it up to Q&A I want to reiterate Lew’s earlier comments. Our fourth quarter and full year 2009 results demonstrate Coach’s strength, our resiliency and the flexibility and balance our diversified operating model provides in challenging times such as these.

Thank you all for your attention and now Lew, Andrea, Mike Tucci and I will be happy to take some questions which will then be followed by a brief summary by Lew. Thank you all for joining us on the call today and we’ll now take questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Bob Drbul - Barclays Capital

Bob Drbul - Barclays Capital

The questions that I have all stem around the top line as you look at the business. The comment that you made around Poppy in July, can you maybe expand upon just how dramatic there was an improvement during the month of July. The second part of that would be can you just talk about in the factory channel the email promotions to factory consumers and how sustainable you think the factory channel is.

Lew Frankfort

What we are saying here at Coach is that Poppy created a positive inflection point for Coach in our North America full price stores and Japan. When we talk about an inflection point it is significant, we’d rather not be specific of course because it’s early days, its four or five weeks and we have a long view. What it does do is reinforce our new pricing strategy to rebalance our assortment as well as the opportunity come out with a broad new lifestyle collection that is youthful in attitude yet appeals to our broad and diversified consumer base.

With regard to factory our business continues to be very robust and we feel very confident that we can continue to grow our factory base because we have a very strong consumer who is brand loyal but is looking to buy Coach on a sale. Its effectively a diffusion channel, we do not go on sale in our full price stores so we force the consumer who want to buy Coach and get a full array assortment of Coach, although last year’s product or product made exclusively for factory to go to the factory channel. Its works very well.

In terms of emails, what I can say is that it’s a marketing lever for us we’re very enthusiastic about our ability to draw into factory stores consumers who are exclusive factory shoppers and they do respond to price. Again, we do not go on sale in our full price stores.


Your next question comes from Kimberly Greenberger – Citigroup

Kimberly Greenberger – Citigroup

Do you have something following Poppy that you think can sustain the momentum that you’re seeing here in July? I know the Poppy collection will live in the stores or do you think it’s that the improvement in full price is really driven by the new pricing strategy and the collections that follow also have that lower price point of view.

Mike Tucci

I think what we see is Poppy is a nice catalyst for us. It’s created a platform, an energy in the stores; certainly the response has been terrific to the product assortment and the marketing. It’s really part of a much more broad strategy across the board and specifically targeted at building handbags, conversion and penetration in our stores.

Interestingly we just release Tribeca and Garnet and these are two, what I would categorize as core groups within the mix, again priced against our new strategy and we’re seeing very strong results with those two groups over the weekend. Again, targeting price points that have been traditionally very strong for Coach $268, $298, $328, and $358 to build this presence.

What we feel strongly about going forward is sustaining momentum in Poppy and building the foundation at $300 for the long term. You’re seeing us very quickly react to what’s going on in Poppy by flexing our on order, moving goods through the pipeline. We don’t see it as a specific reorder business but we do see it as a newness and excitement business. We’re reinvesting in 10-1 and 11-1 in our pipeline today and we’ll turn those products around very quickly.

What I think is also important to note, the marketing and positioning campaign both in traditional print and digital media as well as our in store presence you’ll see us replicate that again specifically in Q2 with a strong Poppy message and a very broad gifting message. I believe it’s just the beginning of what we’re doing and use Poppy as kind of a benchmark for how we’ll launch products going forward.

Kimberly Greenberger – Citigroup

On gross margin, could you help us understand the sort of relative weight of the three different contributing factors to the gross margin pressure here in the fourth quarter?

Mike Devine

Of the more than 500 basis points of year over year decline, slightly more than half of that is going to be driven by the increased level of factory promotions. I would say the remaining let’s call it half is roughly split between channel mix and sure margins on the sharper price product in the full price divisions. Let me quickly say, however, that since that time and since the product had sold through in Q4 in the full price divisions our supply chain, our merchandising and design teams, everyone involved here in getting product into the stores, has done a magnificent job to work on the full price sharper price selections to move the gross margin rates back to longer term more acceptable Coach levels.

With the state of the world the way it is today and the receptiveness of our suppliers, etc. I’m happy to say as an example the Poppy collection has a gross margin rate that is quite consistent with the balance of the full store chain. I do think that there is some opportunity in that third metric that caused the fourth quarter decline as we move into the fiscal year.

Kimberly Greenberger – Citigroup

You were not seeing any of the deflationary trends benefit the fourth quarter but they should start in first quarter?

Mike Devine

Correct. The product that we’re selling through in the stores now is showing in the full price collections that are “sharply priced” generating higher gross margin rates then what we had in Q4.


Your next question comes from David Schick – Stifel Nicolaus

David Schick – Stifel Nicolaus

On China, what’s really selling there, you talked about the big comps? How is the brand positioned there, is it similar to Japan or how should we think about that?

Lew Frankfort

What’s selling well in China is what’s selling well worldwide. Poppy is doing extremely well as are our other ranges. We are positioned similarly in China as an acceptable luxury brand, targeting the growing middle class professional female who is looking for great product that is relevant to her lifestyle at an excellent value. What we’re finding is that our business and product is resonating very well with the emerging middle class in China.


Your next question comes from Christine Chen - Needham & Company

Christine Chen - Needham & Company

With Poppy, could you just share with us, is it attracting the younger customer that you were hoping it to attract? I know it has broad appeal but are you seeing addition of new customers?

Mike Tucci

I think Poppy is absolutely appealing to a younger consumer as part of the story. I say that because we’ve been spending a lot of time in our stores working with the consumer, watching her and we’ve also been spending an enormous amount of time online dialoguing with the consumer through some of the social media sites, Facebook as an example. She’s very engaged, she’s excited. That’s not the total story though; Poppy has a strong foundation of product that appeals to a very broad range of Coach consumers.

That’s really important, we have hallmarks in Poppy like classic signature, pop art, very important trim details, and things like our turn lock that we’ve given a new sort of energy to. That rings truth through the entire collection; I think it offers us an opportunity to speak to the Coach audience in a very powerful way. We’re pleased with the consumer response and we also believe that part of our traffic improvement is really excitement around Poppy and what it brings to the brand and what it brings to the store from an environment standpoint.

Christine Chen - Needham & Company

Could you share with us how same store sales trends progressed during the quarter? I would assume that June, even though it was just the last part of June, that June showed a bigger improvement over April and May trends?

Mike Tucci

Actually to be clear, Poppy hit on literally the last Friday of June so I wouldn’t attribute June’s performance as anything that happened with Poppy.

Mike Devine

We had two days in the quarter.

Mike Tucci

We did spend a lot of time in June setting Poppy up in terms of launch activity and marketing activity but the true impact of Poppy is coming with the July floor set.

Christine Chen - Needham & Company

What about quarterly trends for same store sales?

Mike Tucci

Quarterly trend for us was very consistent throughout the quarter. We didn’t see a lot of wavering there. It really held in both full price and factory our trends held very consistent throughout the quarter and consistent with what we saw in Q3.


Your next question comes from Liz Dunn – Thomas Weisel

Liz Dunn – Thomas Weisel

A follow up on the question surrounding the improvement related to Poppy. You saw traffic improvement, was there also a conversion improvement? Can you talk us through some of the gives and takes around increasing handbag penetration but at lower prices? Will the net effect of that have sort of a neutral impact on transaction value or how should we think about that?

Mike Tucci

You actually answered your question within your question. It absolutely what the goal has been for us. The broadest goal for us is to improve productivity in our full price stores. Behind that is an object to drive handbag penetration in our stores and drive handbag conversion that’s our brand hallmark, that’s the foundation of the brand.

What we’re seeing is handbag penetration improving, unit sales in handbags from a run rate standpoint improving which has a virtuous positive impact on average dollar transactions. As the handbag becomes a greater portion of our overall transaction it helps us to drive productivity and that’s what we’re seeing. I think what we want to build on is an improvement in visitation in our stores, work with that consumer, develop the relationship with her and then ultimately as we improve conversion we think that that is a driver of restoring productivity in our stores as well.

Liz Dunn – Thomas Weisel

Will you continue to have many of these events like you’ve been having for Poppy?

Mike Tucci

We will. We’ll continue to focus on things like preview events. We will also use very dynamic web marketing to drive events in store, things like pre-sell, some of the gift with purchase ideas, we’re absolutely committed to that and we will fund that going forward.

I don’t want to totally dodge your conversion question, it is early but I would say that what we’re happy with is a sequential improvement in conversion performance. That’s important for us to continue to monitor and as you know an important driver of comp.


Your next question comes from Dana Telsey - Telsey Advisory Group

Dana Telsey - Telsey Advisory Group

Congratulations on the improvement and traction you’re seeing, I was in Tokyo just a few weeks ago and I saw the excitement from the Poppy collection. What are you seeing the impact of Poppy in other channels, wholesale, online, and do you see Poppy at all going into factory and as you get leaner in inventory at factory do you keep factory excited with other merchandise, how do you see that trending?

Lew Frankfort

To answer the second part of your question first, we don’t have any plans in the foreseeable future to put Poppy into our factory stores, it will stay out of factor stores indefinitely. We see it as a sub-gram, as I mentioned earlier and you were in Japan and you saw the excitement there, we are going to be opening Poppy stores in Japan and possibly here in the United States as well at some point. As we experience more we’ll fine tune our strategies and refine our thinking.

With regard to other channels, we’re finding that Poppy is doing extremely well. In wholesale channels we tend to measure performance by sell through rates weekly and what we’re finding is that Poppy is selling through at two to three times the rate that prior collections last quarter sold through. Everyone wants more Poppy and we’re developing a rapid response program to get back into Poppy everywhere. In Japan we have a robust backorder program, similarly in the US we’re developing one and we think Poppy will be a continuing success story throughout the entire fiscal year.


Your next question comes from Laura Champine – Cowen

Laura Champine – Cowen

Looking at your comments on SG&A expense this year and that they’ll be $50 million flow through of savings offset by some investments. If I run that investment through the numbers you gave it seems like you still have an opportunity for SG&A improvement but I know you’re investing in marketing and other things. Do you think it’s possible you can actually take SG&A expense down year on year in fiscal 2010?

Mike Devine

With our conservative planning and where we are right now we don’t see that happening. We have made major strides though, I have to say, I couldn’t be more pleased with the way the business is operating in these challenging times. Perhaps the most exciting work really has been done in the field and in the selling teams where we actually have seen us move the needle significantly on the leverage point required for our SG&A line.

As an example, if you followed us for some time you may recall that we used to talk about North American retail store chains needing about 5% to 7% comp to deliver SG&A leverage to their own P&L. With the fabulous work that’s been done there largely around labor management, the great rent negotiations that we’ve had, the great new deals we’re booking on the new stores that we’re opening and just the fact that we challenged every line item on the store P&Ls. I think that we will see moving into FY10 that we can deliver leverage to the retail P&L which is roughly a flat comp. Real, real progress has been made.

Similar things happening in Japan where the cost cutting and expense spending review is fantastic so real, real progress has been made. None the less, with the investment that we’re making in new stores and the investment in China and Reed Krakoff its unlikely that we’ll get to a flat SG&A number next year but we’re going to continue to work hard and see what we can bring home.


Your next question comes from [Rick Battell] – BAS-ML

[Rick Battell] – BAS-ML

Can you just update us on how your sourcing relationships are changing? Do you plan on sticking with the countries and vendors you’ve been working with or do you plan to seek lower cost options?

Lew Frankfort

We have a broad constellation of partners that constitute our sourcing base and many of them who are entrepreneurial actually have migrated with us to lower cost areas. While we always look for new partners to work with we do have a very broad and diversified group of our suppliers who are working with us to establish significant capabilities in our Vietnam, India, and other parts of China where costs are lower. The key is to maintain quality and so we put as a premium those people who we have worked with in the past who understand the Coach way and our requirements.

[Rick Battell] – BAS-ML

Can you update us on your inventory plans going forward? Perhaps are you thinking about inventories both on a dollar and unit basis as you prepare for the holiday season?

Mike Devine

We’re very pleased with the way the second half of fiscal year ’09 ended. We’re able to manage the inventory flat on a year over year basis with significantly higher store base in North America, Japan and of course we took over the 28 stores in China. To get flat on dollars and units versus where we were coming out of December was a real accomplishment for the team.

We’ve gone into FY10 with a conservative approach against this very challenging macro economic backdrop but we are in a position now of looking at chasing, its something we as an organization did exceptionally well over the year as we changed comp as the business was so strong in the past that’s something that we’ll look forward to doing again. We have Jerry Stritzke, our COO and Angus McRae the head of our supply chain looking at and working very hard against that initiative.

As Mike talked about earlier we’re looking to get back into Poppy in a bigger way by October and again in February. I think we’ll continue to see very, very good inventory metrics as we go through FY10.

Andrea Shaw Resnick

As it is now 9:29 am I’m going to thank everyone for joining us today and I’d like to turn it back over to Lew for some closing words.

Lew Frankfort

Thank you everybody. The big story of course is Poppy, as evidenced by your comments. Really the larger story is the rebalancing of our assortment to bring great product to consumers at much more compelling prices to address a consumer who is more cautious and reluctant to spend. We’ve been working on this strategy for the last nine to 12 months and it’s exciting for us to actually bring product into the market and see the early results which are in keeping with our expectations. We shared with your previously that it’s our intention to emerge stronger from the adversity we’re experiencing and we’re committed to doing that.

Thank you everyone and have a good day.


This does conclude the Coach Earnings Conference. We think you for your participation.

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