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Coach, Inc. (NYSE:COH)

F4Q 2013 Earnings Conference Call

July 30, 2013 8:30 AM ET

Executives

Andrea Shaw Resnick - SVP, Investor Relations and Corporate Communications

Lew Frankfort - Chairman and CEO

Victor Luis - President and CCO

Jane Nielsen – EVP and CFO

Analysts

Bob Drbul - Barclays

Ike Boruchow - Sterne Agee

Oliver Chen - Citigroup

David Schick - Stifel

Barbara Wyckoff - CLSA

Brian Tunick - JPMorgan

Liz Dunn - Macquarie

Operator

Good day, and welcome to the Coach Conference Call. Today's call is being recorded. 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. You may begin.

Andrea Shaw Resnick

Thanks you. Good morning and thank you for joining us. With me today to discuss our quarterly and fiscal year end results are Lew Frankfort, Coach's Chairman and CEO, Victor Luis, Coach’s President and Chief Commercial Officer and Jane Nielsen, --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 or future quarters or fiscal year. 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. 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 and Victor Luis will provide C results and will also discuss our overarching strategy. Jane Nielsen will continue with details on financial and operational results for the quarter and in the year along with our outlook for FY 14. Following that, we will hold a question-and-answer session. This Q&A session will end shortly before 09.30 am. Lew will then conclude with some brief summary of comments. I'd now like to introduce Lew Frankfort, Coach's Chairman and CEO.

Lew Frankfort

Thanks Andrea and welcome everyone. We shared a lot of news in our press release this morning and we understand that it will take some time to digest. This year has obviously been unique and we have recognized all that is -- that’s not been business as usual. Most importantly, we have taken significant steps to help reposition the company to return to superior growth rates while maintaining outstanding profitability levels. Our focus and priority is on the brand and driving its relevance to reinforce our customer’s emotional connection to Coach notably in North America. We have a proven group of Coach Leaders to execute our transformation strategy. This is a multiyear journey and we’re excited about the future, building upon our strong brand and business equities with an exceptional team at the helm. I also want to take this opportunity to thank Mike and Jerry for their important contributions in building Coach into a leading international accessories brand. The entire Coach team has great admiration and respect for their significant accomplishments and we wish them the best. And now to our results and outlook.

During the fourth quarter we approached double digit growth in constant currency and continued to gain overall traction on our key strategies supporting our transformation. We generated strong international results, leveraged the men’s opportunity globally, strengthened our digital capabilities and drove excellent results in the re-launch of footwear. While we maintained our outstanding profitability levels, we were not satisfied with our performance in the women’s handbag and accessories category in North America.

Moving on to some key highlights of our quarter and fiscal year. Our performance in FY’13 was highlighted by increases of 7% in revenues, a 2% rise in operating income and 6% in earnings per share. It was a year of many milestones. First, we continued to leverage the international opportunities for Coach, growing organically through distribution and productivity while accelerating the acquisition of international retail businesses to our direct control. In China, Coach sales exceeded $430 million, up 40% ending the year with about a 125 locations including over 100 on the Mainland.

Second, our men’s business grew almost 50% in FY13 to about $600 million as we continued to open dedicated standalone and dual gender locations globally while also rolling out a broader expression of men’s through additional North American retail stores. Third, we successfully expanded our digital initiatives, driving double digit online sales growth while also exploring new ways to engage with our consumer and grow our database reflecting, shifting, shopping preferences. Fourth, we increased our quarterly dividend by 13%, demonstrating our financial strength, cash flow generation and our commitment to shareholder return and confidence in the future. And fifth and most importantly we embarked on our journey to transform Coach into a global luxury lifestyle brand building upon our leadership position in accessories.

Some key fourth quarter metrics were. First, net sales totaled $1.22 billion, an increase of 6%. On the constant currency basis, sales rose 9% for the quarter. Second, earnings per share totaled $0.89, up 3% from $0.86 in the prior year.

Third, North American sales increased 6% to $825 million from $781 million last year with direct sales up 5% and comparable store sales down 1.7%.

And fourth, international sales increased 7% to $386 million from $362 million last year, driven in part by a 35% gain in sales in China with a continuation of double digit comps. On the constant currency basis, international sales rose 17%. Most broadly we were also very pleased with profitability levels in both the quarter and year.

Turning to global distribution, during the fourth quarter we opened three new North American retail stores and closed four others. We also opened two factory stores including one dedicated men store. At the end of FY ‘13, there were 351 full price and 193 factory stores in operation in North America. Total square footage grew 11% for the year.

Moving to China, during the quarter we added eight new locations on the Mainland, bringing the total to a 126 Coach locations in China including 108 locations on the Mainland and 47 cities. In aggregate, there was an increase of 30 net new locations for the fiscal year or square footage increase of 33%.

In Japan, seven locations were added during the quarter, bringing the total to 198 with 24 standalone full price stores including nine flagships, 124 shop-in-shops, 43 factory stores and seven distributor-operated wholesale locations. In total, a net of 11 locations were added in Japan during FY ’13 yielding total square footage growth of about 9%. We also directly operate 92 locations in Asia comprised of 48 in Korea, 27 in Taiwan, 10 in Malaysia and seven in Singapore.

Moving on to sales and productivity, starting in North America, our total revenues rose 6% for the quarter with our directly operated businesses up 5% on a 1.7% comparable store sales decrease, due in part to the Easter shift which we called out as a benefit to last quarter. While men’s and our newly relaunched footwear categories performed well. As I mentioned, we were disappointed by our overall performance in women’s bags.

More generally, internet sales and traffic continued up double-digit consistent with consumers shifting shopping preferences, while in-store trends notably traffic were weak. On these lower traffic levels in-store conversion was up and transaction side fell.

In department stores, sales trends at POS were slightly above last year, while shipments into this channel also rose. Overall, we estimate that growth in the addressable women’s North American handbag and accessory category remained strong rising low double digits in fiscal 2013 to about $12 billion as bags and accessories continue to represent a growing portion of our wardrobe spend.

The combined North American premium women’s and men’s market rose about 15% in FY ’13 to about $11 billion. Coach continued to participate in a market growth with our own direct channels posting solid gains for the year up 6% as mentioned with the combined market share of about 30%.

As we’ve discussed, we’re also continuing to drive our men’s business globally to new standalone and dual gender of side-by-side stores and by dedicating more space for broader men’s assortment in existing retail stores. In FY ’13, Coach’s sales of men’s bags and accessories increased 50% in North America, driving the overall men's premium category which grew 25% to about $1 billion.

Looking ahead, we remain excited about the prospects to our global men’s business where we believe we can reach $1 million in sales in three years from the $600 million achieved last year.

I'd now like to turn it over to Victor to discuss international sales, product performance this quarter, as well as to give you an update on our progress, on transformation and what you can expect in FY ’14. Victor?

Victor Luis

Thanks, Lew. Starting with international, which today represents about a third of Coach's business, sales rose 7% in the fourth quarter or 17% on the constant currency basis, consistent with prior quarter and full year trends.

During the quarter, China sales rose about 35% from prior year, fueled by distribution and double-digit same-store sales. As Lew noted upfront, this took our full year sales to over $430 million, up 40%.

Clearly, the Chinese consumer continues to embrace Coach, as repurchase intent has remained high at over 80% among existing consumers. This is also evident by the increasing contribution of the Chinese tourist to our global sales.

Our other Asia direct businesses outside of Japan and China, Korea, Taiwan Malaysia and Singapore also posted strong aggregate growth in the quarter and the year. In total, they benefited from the retail step up from the prior year from Malaysia and Korea, which were acquired in early FY ’13. It’s important to note that their combined POS sales also rose at a high single-digit rate for the quarter and a double-digit rate for the year. As noted, for the quarter, we posted a 4% increase in local currency in Japan despite the top compare, while dollar sales declined 15% reflecting the weaker Yen.

Similarly, for the year, sales were essentially even with prior year on a constant currency basis and down 9% in dollars. Moving on to product, Legacy and Madison remained our key collections in the fourth quarter with new silhouettes and on trend colors introduced throughout the period. The Madison Phoebe Shoulder Bag launched at the end of the March in North America and later globally was particularly successful. We also featured a new group of Satchels and Totes across multiple collections in June.

Looking forward, we’re excited about the re-launch of Madison this quarter, which follows the same design aesthetic as Phoebe with clean sophisticated lines, feminine details, Rich leathers, and understated branding.

More generally, we saw a continuation of trends favoring leather hand bags across all price segments. In particular, we enjoyed healthy year-over-year sales increases in small bags and the above 400 segments continued to perform well at about 16% of handbags. Our overall handbag penetration was even for last year. And I’d be remiss not to mention that this distinct newness in our factory channel where new designs are beginning to arrive in stores and online. Metro a great Tote group was a winner of late this spring and Park a fashionable leather based collection has just hit the stores and has been very well received. In fact, by the end of Q1, about 80% to 85% of our factory handbags will be new, innovative factory exclusives.

Turning to North America’s department stores, we are committed to growing this business and positioning Coach to win. We’re focused on improving performance with an emphasis in growing our leather handbag and accessories business taking advantage of our auto replenishment program and executing our new shop renovation and case line transformation with significant roll out this year. We’re also looking at incremental new door distribution opportunities with current partners.

I’ll now give you an update on our footwear business, which as you know, we re-launched this spring in over 170 retail stores in North America with the objective of elevating our products proposition. Supporting Coach as a lifestyle brand and reinforcing our fashion credibility. The collection featuring great ballet flats, driving moccasins, fashion wedges, heels and on-trend casual style has been very well received by consumers. In fact, footwear in these locations went to almost 12% of the business immediately and stayed up the level for the fourth quarter versus about 7% in the year ago quarter positively impacting productivity in these stores.

We’re focused in building our market share within this fragmented $20 billion global category. This fall we’ll include more dominant fashion footwear assortments in our international and wholesale locations and continue to focus in building our key items. We’re evolving our mix and growing both AUR’s and overall penetration levels across all of our businesses. Over the next few quarters the level of innovation across all products categories will continue to increase, adding emotion while strengthening fashion credibility and relevance for the brand.

This will be most notable in the holiday quarter with the arrival what we’re calling Capsule a curetted product assortments across categories focused on key items in bags, foot wear and outerwear. This Capsule collection will support our lifestyle imagery and to be available in select locations globally. At the same time, we’re enhancing our store environment across all channels and developing innovative marketing campaigns to communicate a more aspirational and consistent brand story reinforcing the bond with our existing consumers while driving new customer engagement globally. Our intent is to drive brand relevance, building on our leadership position in accessories.

Moving on to e-commerce as mentioned our North American online business was strong again this quarter with sales and traffic growing at a double digit pace with an increasing penetration coming from mobile and tablet. Additionally, we have been extremely pleased with our website evolution earlier this month as we improved the functionality and upgraded the look and feel of Coach.com across all devices.

Earlier this year, we talked about our brand transformation into a global lifestyle brand anchored in accessories. As we have built out our strategic plan, we have focused on three key elements: product, stores and marketing.

To this end, we’ve made several important hires to strengthen our team and enhance the Coach experience. Importantly and most recently, we announced that Stuart Vevers will be joining Coach as Executive Creative Director in September and will be responsible for leading all creative aspects of the Coach brand, including women’s and men’s design, brand imagery and store environments.

Stuart’s appointment marks an important milestone in our transformation and we’re extremely pleased that he will be leading our strong creative team already in place. His depth and breadth of experience will be an invaluable asset to the business in general and the design team in particular as we continue to evolve.

I’m confident that his creative expertise with some of the world’s leading leather goods brands will enable him to draw upon Coach’s rich heritage to create innovative product and brand imagery, elevating the customer experience and creating a fuller expression of the brand. And today we announced the reorganization primarily within the North America leadership team to enhance focus and drive execution in the company's largest market.

Most of you know, Coach Veteran, Francine Della Badia, who is currently the EVP, responsible for all North America Retail Merchandising, Planning and Allocation as well as Coach’s Global Men’s and Factory merchandising. She is succeeding Mike as President, North America Retail.

Longtime Coach leader, David Duplantis, EVP, Digital Marketing, is taking on the new role as President of Global Digital and Customer Experience. Javan Bunch, SVP Of Licensing, who has spearheaded our footwear relaunch, will assume the expanded role of SVP and President, North America Wholesale and Licensed Categories, reporting into Todd Kahn, our General Counsel in his expanded role as Executive Vice President, Corporate Affairs.

In addition, Ian Bickley, President, Coach International, is expanding his role to take on responsibility to include all international direct retail businesses as President, International Group. Finally, Stephanie Stahl, currently Senior Vice President, Strategy and Consumer Insights, is taking on an expanded role as Executive Vice President, Marketing and Strategy. Fran, David, Todd, Ian and Stephanie will report to me in their expanded roles.

As Lew mentioned, during the fourth quarter, we took significant steps to set the foundation for return to strong growth by streamlining the business, committing to additional brand investments and forging the next group of Coach leaders to drive our transformation.

As we enter FY ‘14, our strategic focus remains on the four pillars of growth we have previously shared. First and most broadly, growing our business in North America and globally by transforming into a global lifestyle brand; second, leveraging the global opportunity by aggressively growing our international businesses; third, tapping into the large and growing men's accessory category which I’ve already touched on; and fourth, harnessing the growing power of the digital world.

Starting with distribution, we expect that our square footage globally and across all channels will increase about 9% in FY ‘14 compared to 11% in FY ‘13. Beginning in North America, as noted we are primarily focused on elevating our retail environment and replatforming our stores to showcase the full breadth of Coach’s lifestyle categories.

In Full Price, where we have a significant number of leases coming due, we're taking the opportunity to streamline our store base and reposition while at the same time reviewing expansion and relocation opportunities and capture men’s footwear and outerwear businesses.

In the North America factory channel, where there is an enormous amounts of new real estate development, we’re focused on select new market entry as well as capitalizing men’s opportunity with some repositioning in smaller stores. Balancing these factors, we will open about 20 new stores in FY ‘14, including two new full priced locations and at least 15 factory outlets most of which will be dual gender stores with one free standing men’s store planned as well.

In addition, we’ve planned to close 16 full price locations as we streamline our store base by closing less productive units. Importantly, we are also expanding about 20 locations, seven full price and about 13 factory to accommodate the full build out of our dual gender presentation by adding men’s to our existing stores. In total, we expect North American square footage growth of about 7% this year driven by the net of these activities versus about 10% in FY13.

Turning to China, in FY ’14, we again expect to open about 30 new stores, all dual genders bringing the total to about 155 at the end of the year. In total, square footage in China is expected to grow about 25% in FY’14. We expect sales to total about $530 million driven by both distribution and double digit comparable location sales. In terms of our other direct Asia markets of Korea, Taiwan, Malaysia and Singapore our primary focus remains productivity as we’ve invested in training, merchandising, store environments and systems creating a brand right experience. In Japan, during FY’14 we expect to open about five to ten net new locations most of them dedicated men’s stores. In total, we expect net square footage growth in Japan will increase by about 3% this year.

As discussed in our release, in early July we completed the repurchase of our partners’50% interest in our European JV. In addition, also in July, we transitioned the two (inaudible) locations to our direct control. Therefore today, we operate 20 locations across the U.K, France, Ireland, Spain, Portugal and Germany.

As a reminder, Coach’s annual sales at retail in Europe are approximately $40 million with the vast majority represented by the stores that are now directly operated as retail businesses. As you know, Europe is a large market for women’s and men’s luxury accessories, representing about 20% of the global category sales. We believe the region have significant long-term potential for Coach, attracting both domestic shoppers and the international tourists. It’s important to note that was in bags and accessories accessible luxury is growing rapidly and as we have proven with our other directly operated businesses, we plan to play a leadership role in the development of this market segment.

Further, Coach’s heritage linked to New York fashion as appealing for many Europeans and creates a differentiated positioning compared to the traditional luxury brands. Moving forward, we expect to swiftly increase our distribution primarily to wholesale locations and key retail stores. All together, we expect to open approximately 70 wholesale and ten retail locations across the U.K and Europe in FY’14.

Finally, beyond our directly owned international businesses, we have significant and growing distributor run businesses in other countries. We’re focusing on expanding through partners in these other regions. First, Latin America including Mexico, Brazil, Venezuela, Colombia, Panama, Chile and Peru.

Second and other Asia-Pacific market such as Australia, Thailand and Indonesia and third in the Middle East. These are in addition to the significant global travel retail opportunity that Lew mentioned earlier and continues to exist for Coach as the brands recognitions continues to grow globally.

I have just reviewed our strategies to drive growth while taking steps to streamline our fleet and maximize productivity in North America. At this time, I will turn it over to Jane Niel, our CFO for further details on our financials. Jane?

Jane Niel

Thanks, Victor. Lew and Victor have just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our fourth quarter and fiscal year results.

Our quarterly revenues increased 6% with North America up 6% and International up 7%. As noted, on a constant currency basis, revenues rose 9% overall, international sales up 17%. For the fiscal year, sales rose 7% totaling $5.08 billion with North America up 5% and International up 10%. On a constant currency basis, total sales rose 8% for the year with International sales up 15%.

Excluding unusual items, net income for the quarter totaled $254 million, up 1% with earnings per diluted share of $0.89, up 3%. This compared to net income of $251 million and earnings per diluted share of $0.86 in the prior year's fourth quarter.

For the quarter, operating income totaled $371 million essentially even with the year ago period on a non-GAAP basis while operating margin was 30.3% versus 32.1%. During the quarter, gross profit rose 6% to $892 million from $838 million reported a year ago, while gross margin was 73%, an increase of 40 basis points versus year ago primarily due to sourcing cost improvements.

SG&A expenses, as a percentage of net sales, totaled 42.6% compared to the 40.5% reported in the year-ago quarter. For the full year FY '13, operating income totaled $1.58 billion on a non-GAAP basis, 2% above the $1.55 billion reported in the year-ago period. Also on a non-GAAP basis, operating margin was 31.1% versus 32.6% last year.

During the year, gross profit rose 7% to $3.7 billion from $3.47 billion a year ago. The gross margin rate was 73%, up 20 basis points versus a year ago and in line with our guidance. SG&A expense as a percentage of net sales totaled 41.9% compared to 40.2% reported in fiscal FY ‘12.

As I turn to GAAP metrics, let me recap the unusual items. In the second and fourth quarters of fiscal 2012, we recorded favorable tax settlements and made charitable contributions which precisely offset the benefit of the tax settlements to net income and earnings per share in both these periods. As noted in our press release, during the fourth quarter of FY '13 we recorded charges of $53 million for unusual items.

These consisted primarily of corporate restructuring, severance related expenses, impairment charges related to retail stores, as well as the write-down of a small amount of inventory. These steps include a reduction in corporate staffing levels with an elimination of over 200 jobs globally. And in aggregate, these actions increased our SG&A expense by $48 million and cost of sales by $5 million in the period negatively impacting earnings by $33 million after tax or $0.11 per diluted share.

Separately, as you saw in the press release this morning, we did announce that we’ve entered into a binding agreement to sell the Reed Krakoff to a group led by Reed. The sale was anticipated to close in the first quarter of FY ’14 and Reed will depart the company upon the sale of the business.

Including charges, net income for the fourth quarter totaled, $221million with earnings per diluted share of $0.78 bringing total year net income to $1.03 billion and earnings per share of $3.61. Taken together, these restructuring actions will streamline our business, drive efficiencies and leverage our technology in global capabilities. In addition, these savings will fund key initiatives related to our European acquisition and our transformation. Notably, an increase in marketing spend around brand development. Importantly, we believe they will have a one-year payback and result in savings of over $50 million annually.

Moving to the balance sheet. Inventory levels at quarter end were $525 million, up 4% from FY ’12 year end. Cash and short term investments stood at $1.1 billion, 24% above $917 million a year ago. During physical year 2013, we repurchased and retired over $7 million shares of common stock at an average cost of $56.61, spending a total of $400 million. At the end of the year, approximately $1.4 billion remained under the company’s current repurchase authorization.

As noted last quarter, we increased our cash dividend by 13%, raising it to an annual rates of $1.35 per share, reflecting our commitment to return capital to shareholders, balance with our investment in growth of the business.

Net cash from operating activities in the fourth quarter was $375 million compared to $283 million compared last year during Q4. Free cash flow in the fourth quarter was an inflow of $293 million versus $210 million in the same period last year. Our CapEx spending was $81 million versus $73 million in the same quarter a year ago.

For the full physical 2013, net cash from operating activities was $1.4 billion, compared to $1.2 billion a year ago. Free cash flow in fiscal ’13 was an inflow of $1.2 billion versus $1.0 billion in fiscal year ’12. Capital spending totaled $241 million for the year compared to $184 million in the prior year. It’s important to note that based on our current plans for FY ’14, we expect CapEx for the next year to be up in the area of $280 million, primarily due to new store openings and expansions across all our geographies elevating our store environments within our existing store and investments in the technology and infrastructure necessary to enable global expansion.

Consistent with our practice, over the past several years, we will not be giving specific guidance for FY ’14. As you know, we are focused on driving sustainable long term growth against the healthy and attractive brand propositions. The restructuring charges we reported today will allow us to align our resources for maximum impact, while effectively managing our expense ratio.

As you think about 2014, keep the following in mind. While we are enthusiastic about early iterations of our transition to a life style brand, which will begin to be seen during this holiday season, we recognize that a full reflection of this positioning is part of a multi-year journey. Therefore, we are not building in an improvement from the negative low single digit Q4 North American comp run rate into out FY ’14 plans at this time.

We expect to deliver mid-single digit sales growth in constant currency. Assuming the Yen at close to 100, this would equate to low-to-mid-single digit in dollars with currency another factor in the first half.

Gross margin is projected at 71% to 72% for the year. The expected decline versus prior year primarily reflect currency notably the weaker yen, rising labor cost, especially in the second half, as well as inventory amortization from the JV acquisition in Coach Europe.

SG&A expenses are expected to grow in line with sales. Increased investments in Europe, marketing and other brand transformation initiatives are expected to be funded by the restructuring actions. Taken together, we would expect operating margin to remain high at about 30%.

And finally, our tax rate is expected to be in the area of 33% for the year. In terms of how the quarters layout, there will be puts and takes through the year. Looking at overall topline growth, the first half and especially the first quarter will be most impacted by the yen.

Regarding our balance sheet, cash flow and capital allocation, we continue to have a strong balance sheet and very healthy operating free cash flow of over $1 billion annually. We will continue to prudently invest in the growth of our business, while also returning cash to shareholders through dividends and share repurchases.

We expect that dividend growth over time will be at least in line with net income growth and that share repurchases will be executed opportunistically based on our outlook on the capital needs of the business and liquidity.

Our current FY 2014 outlook reflects approximately $700 million in share repurchases, approximately equivalent to our prior three-year average. Most importantly, our long-term commitment to growth and shareholder value are unchanged. We have a business model that generates significant cash flow, and we’re in a position to invest in our brand while continuing to return capital to shareholders.

I’d now like to open it up to Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question today is from Bob Drbul with Barclays.

Bob Drbul - Barclays

Hi. Good morning.

Jane Nielsen

Good morning.

Bob Drbul - Barclays

I guess, Victor, I have a question for you. In terms of all of the management appointment and some of the departures this morning, is the team now complete? Are there any other major hirings that you think you need to do, how should we think about it from that perspective?

Victor Luis

Thanks Bob. I would say that certainly the majority of the team is complete, and you have heard this morning, it really is leveraging the very deep bench that we have. We are at the moment looking for and recruiting for a replacement for Jerry as COO and that is a major appointment outstanding.

Bob Drbul - Barclays

Okay. And then, I just have one follow-up question and it is, can you talk a little bit about the capital allocation, I mean, Jane, and whether the company would consider an acquisition at this point to drive growth?

Jane Nielsen

Sure, Bob. As I just said, our long-term and long-standing commitment is to growth and creating shareholder value. We’ve got a strong balance sheet and a great cash flow in our business, but our priorities for cash are first and foremost to invest in the growth of our business. Our strong ROIC and discipline in deploying capital creates significant value for our shareholders.

I would say, secondly, we are open on a selective and opportunistic basis to making value creating acquisitions that would build platforms for long-term growth. We’d be open to a deal that would create leverage for our global infrastructure, our organization capabilities, and our operating strength.

And then, finally, as always, we’re committed to returning capital to shareholders through both dividends and share repurchases. As we -- as I just mentioned, we’d expect our dividend to grow at least in line with net income growth, and we’ll execute share repurchases opportunistically this year expecting to return to that $700 million level where we’ve been for the last three years or so.

Bob Drbul - Barclays

Thank you.

Operator

Thank you. Our next question is from Ike Boruchow with Sterne Agee.

Ike Boruchow - Sterne Agee

Hello, you guys there?

Jane Nielsen

Yeah. Please go ahead.

Ike Boruchow - Sterne Agee

Sorry about that. Thank you for taking my question. I guess my question is about the store streamlining -- the full-price store streamlining in the U.S., the sixteen doors you plan to close in North America this year. Are any of those doors losing money or is there anything specific about those locations, and maybe could you comment on the margin implications there as well as you streamline that part of the business?

Unidentified Participant

Okay, well the first, calling [stocks] (ph) from our fleet is routine, because populations might make people move. The second -- each of the stores that we selected are stores in catchment areas as where another Coach store is in immediate proximity, and these stores are – were at the bottom of our performance hurdle with only modest four wall contribution.

Lew Frankfort

Yes, I just have one another comment on that. The stores that we closed were at the end of their lease, and so we chose opportunistically to close those stores at the end of a lease action.

Ike Boruchow - Sterne Agee

It’s okay, great, and then a quick follow-up on -- could you maybe comment a little more on the wholesale opportunity that you mentioned here in North America, maybe how many doors -- how many US stores are you currently in, how many shop transformations have you identified, and maybe could you size that opportunity?

Lew Frankfort

Well, first for context, we are in about 1000 locations, and there are a substantial additional number of locations that we think are appropriate for Coach where our consumers shop. We’re contemplating opening about 100 additional locations this year. In terms of our wholesale business overall, it’s a very sharp focus for us, and we are looking to open about 20 shops or rather I should say where we’re renovating about 20 shops before the holiday and another 30 after Christmas. Beyond that, we’re moving to open case line where we have about, I believe about 20 locations today with open case line, and we’re moving to about 300 locations in open case line. We’re excited about the appointment of Jason Bunch, as noted. He has spearheaded the re-launch of our footwear, proven merchant, and very versatile up in that channel. So, overall we’re very enthusiastic, so when we talk about our case line, we’re moving to actually open sell from case line to be more precise.

Ike Boruchow - Sterne Agee

Okay, great. Good luck.

Lew Frankfort

Thank you.

Operator

Thank you. Due to the number of questions in the queue, we do ask that you limit your request to one question per request. The next question is from Oliver Chen with Citigroup.

Oliver Chen - Citigroup

Hi, guys. Thanks. Regarding your plans and your stated plans to intensify North America and your performance in women’s handbags, could you just articulate your average unit retail strategy and where you feel comfortable with the price points in the future versus currently, and how that portfolio may evolve in terms of how that may impact overall AUR there, thanks?

Lew Frankfort

Sure, first for a context, when we talk about our women’s handbag and accessories business in North America, it should be noted that we’ve been challenged in the global portion of our business only. Our leather business is extremely healthy and robust. And as we move into this fiscal year as Victor mentioned both on the factory side and on the full price side, we’re focusing primarily on leather-based collections and CAPSULE is also going to provide us with an additional group of what we would call aspirational and more sophisticated products. Overall, our [AGT] is expected to be about the same, and the average handbag we’re looking to be slightly up in the neighborhood of $300, that’s somewhat higher.

Oliver Chen - Citigroup

Thank you. Good luck.

Lew Frankfort

Thank you.

Operator

Thank you. The next question is from David Schick with Stifel. Mr. Schick, please check your mute button.

David Schick - Stifel

Hi. Good morning. Thank you.

Lew Frankfort

Good morning, David.

David Schick - Stifel

I just wrapped up with the mute button on. Could you talk about the online trends both the business you’re seeing, any engagement -- any engagement stats that you’d care to share before and since the re-platforming that you’ve done? Thank you.

Lew Frankfort

Sure. Actually, we are just beginning our second month, so everything we say is based on pretty much the last 30 days, and we’re pleased with the improvements. We made changes in a variety of areas; first, we have moved to horizontal navigation. But we have elevated photography which does include on-figure handbag shops, stronger product pages, and the alike, and what we’re finding is an overall increase in demand. We do have a reduced bounce rate and improve conversion rate. And we are also finding that a greater portion of people are engaging with mobile and tablets just because it’s easier to navigate. So net-net, we’re very pleased, and as you know today that the digital world is more in a constant evolution.

Operator

Thank you. Our next question is from Barbara Wyckoff with CLSA.

Barbara Wyckoff - CLSA

Hi, everybody. Could you talk about -- actually on the digital subject, your digital efforts outside the United States and then elaborate a little bit on the travel retail opportunity? And then lastly, just could talk about the performance of footwear in stores that had product both in North America and Asia?

Lew Frankfort

Sure. How are you, Barbara? Thank you for your continued interest in our international business as we can always count on you. In terms of, first, I’ll start with your last section which is footwear. We have been very pleased with the initial rollout this past quarter here in North America, whereas I mentioned in our speakers’ notes, we’re seeing penetration really from the start of the launch at 12% compared to 7% last year.

Some great news in further – a little bit more texture is that we’ve seen the AUR increase 20% year-over-year as we’ve move to much more of a fashion-based collection from traditional sneaker and moccasin-based business that we were in the past. So that points to really promising news moving forward.

In addition, internationally, really the launch is taking place in the month of September as we’ve been gearing up with the international last, and so we’re really excited about that, some initial tests in Japan and in China in very select doors points to also very promising direction there, so we’re very excited.

In terms of digital internationally; we have, as we’ve discussed in the past, a pretty robust business in Japan and that is one of our leading doors as it is here in North America, and we’re really leveraging a lot of the learnings that our North American digital team has been taking into the channel here and leveraging them in Japan quite effectively.

As you know in China, very young business, we’re just about to comp our first year, and there we are very excited because we are seeing distribution, whereas today we have doors in 47 cities, we’re seeing distribution in I believe now over 110 cities. It is giving us very good indication of the opportunities outside of locations where we exist today.

We are seeing a consumer that is a little bit more youthful, younger than the traditional consumer in our stores, and even seeing categories such as jewelry doing better online that we have not seen in our stores. So, a lot of learning that we are leveraging in the quarters ahead. I’m especially excited about a lot of the work that we’re doing internationally and engaging with the consumer through social media, whether it’s in Japan, Korea through Facebook where we’ve just started, and in China especially through Sina Weibo where we have consistently been the number one international fashion brand there approaching now 700,000 fans online, which is a very strong point of engagement between ourselves and our consumers. In terms of the international tourists, there is a lot of puts and takes there of course as our awareness grows globally. We begin to see different tourist opportunities. I would say that the most recent trends point of course to the continued very strong growth of the Chinese tourists, which is a very major part of our business now outside of Mainland, China, of course across Asia, here in the U.S and as well in our European capital flagships. We have seen a little bit of a downshift in the Japanese tourists. This is of course driven more by the impact of the yen as the Japanese consumer has decided to shop more at home, and now we’re seeing the most recent trends are very promising and pointing to increasing flows of tourists from Indonesia and Thailand where we are growing our businesses through very good domestic partners and slowly but surely beginning to see our Brazilian tourist business also pick up, especially in the Miami area and here in New York city.

Barbara Wyckoff - CLSA

Well, okay great thank you.

Operator

Next question is from Brian Tunick of JPMorgan.

Brian Tunick - JPMorgan

Thanks and good morning.

Lew Frankfort

Good morning Brian.

Brian Tunick - JPMorgan

Guys, just hoping we could tie back the negative comp guidance for the upcoming year with some of the comments you guys have been making about the enthusiasm around the product launches, you know the impact of comp on men’s and footwear, the increased marketing spend, so just hoping you guys could talk about what kind of comp maybe difference that you saw between the factory channel and full price, and are you expecting both channels to be negative low singles in the upcoming year, thanks very much.

Lew Frankfort

Well first, Brian as you know, we do not disaggregate comps. We can tell you that the trends are similar in terms of improved conversion in both channels on (inaudible). The reality is that, we do see this as a multi-year journey, and while we’re very sensitive as to quarter-to-quarter trend, we’re taking the point of view that until we actually experience traction within our stores, we’re not going to forecast it and that’s our tradition. Anything else, Brian?

Operator

Thank you, the next question is from Liz Dunn with Macquarie.

Liz Dunn - Macquarie

Hi, thanks for taking my question. My question relates to sort of the North American stores plans, what is the optimal footprint that includes footwear, like how much square footage do you have to add to the stores and what else might your plans entail in moving from kind of what I think of as sort of pristine box, it’s very efficient at selling handbags to something that maybe drives the customer in a bit more, and keeps her engaged in the store and in the lifestyle? Thanks.

Lew Frankfort

Well first, fortunately when we’re moving to a system where we will no longer need cash wraps, so we’re going to be able to eliminate cash wrap stations and use that additional space for productivity. And in terms of driving productivity in our stores, our overall footprint is adequate. What’s critical is for us to create more surprise, more moments, and more unexpected, and you are going to see as we move forward in which we’ve already begun within our stores a merchandising configuration that does encourage exploration, and we’ll tell a much more complete story on that, we believe, it’s going to resonate very well with consumers.

Andrea Shaw Resnick

Thank you all for joining us today on our conference call. As Jane noted, I’d now like to turn it back to the team for a few closing words.

Lew Frankfort

First, let me begin by saying that we’ve been doing this for a long time. We have a strong and seasoned management team and a strong bench. I know some of you are concerned. We do expect this to be a seamless transition, and we’re committed to delivering strong top and bottom line growth over our planning horizon. We have a great grand, we have excellent business equities, and we have an exceptional group of people working at Coach. So, as I’ve said before, stay tuned and have a good day everybody.

Andrea Shaw Resnick

Thank you.

Operator

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

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