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Another great quarter from Coach (NYSE:COH) and Coach Japan. Full speed ahead is the theme in Japan as Coach continues to grab market share. Details from its latest conference call transcript follow.

Excerpt from Coach's F1Q07 earnings conference call transcript:

Lew Frankfort - Coach Chairman & CEO:

In Japan, eight locations were added while two were expanded. At quarter end, there were 130 total locations in Japan with 21 full-price stores, including eight flagships, 94 shop-and-shops, 11 factory stores and four wholesale locations.

We were also very pleased with the performance of Coach Japan this quarter where sales grew 21% in yen and 16% in dollars as our market share continued to increase rapidly. Last quarter, our growth in Japan was fueled primarily by distribution through both new stores and expansions augmented by mid single-digit, comparable retail locations sales.

[...] outside the US, we're continuing to rapidly grow market share with the Japanese consumer from about 9% this past year to a goal of 15% during the next few years. We are driving growth in Japan primarily by opening new retail locations and by expanding existing ones. Overall, we expect that eventually we will have a total of at least 180 Coach locations in Japan.

During this fiscal year, we expect to open 15 to20 net new locations in Japan, a net increase of at least 25,000 square feet or at least 13% to the store base. We also plan to expand about 15 of our most productive retail and factory locations in FY '07 adding over 7,000 square feet or about 4% to our retail base.

Thus, in FY '07, overall, we're targeting Coach Japan's constant currency sales to increase about 20% from the prior year. Our increases will primarily come from distribution growth with mid single-digit comps expected for the year. As we've said previously, the opportunities of our core markets of North America and Japan are abundant. Notably in East Asia and especially in Greater China, we're intensifying our efforts to build awareness by creating a presence that will position us for meaningful sales in the future.

Mike Devine - Coach CFO:

For Japan, we've previously reported full price Coach Japan comps only. Going forward, we plan to increase our disclosure to combine full price and factory, or total comps. This will provide a better bridge to our overall direct-to-consumer sales results. For the first quarter of '07, our total comps were up high single-digits, consistent with last year's first quarter when full price comps rose at a mid single-digit pace and total comp was high single-digit.

Excerpt from Q&A session:

[I.] Jim Hurley - Chelsea Advisory Group:

My question is about Japan. Obviously very good results out of that region, which has not been the case for some of your competitors, and I just wanted to understand the integration efforts with CJI, and specifically if you are able to see operating expense leverage in the first fiscal quarter?

Mike Devine:

I'll take the latter part, the financial answer, Jim, is that we did not see leverage there. We're continuing as we guided the Street to build infrastructure in Japan and we'll see that happen throughout '07. So in none of our projections or any of our forward-looking guidance have we planned on that happening in '07 and we are continuing to build that infrastructure so we can capture some of the integration opportunities that we believe we have there.

Jim Hurley - Chelsea Advisory Group:

Just in terms of how that business is developing. It seems like the strength has been maintained when that's not been the case for the rest of the market. Anything that you're doing on a merchandising front?

Lew Frankfort:

I think the most important thing to appreciate Jim, and I know you do, is that we have an alternative to the established brands. We offer a value-based proposition. Our accessible luxury proposition resonates especially well in Japan with the younger consumers and what we're finding, as we open in regional markets as well as our continued presence in existing markets is a very strong penchant towards Coach. They're embracing our monthly product flow, the innovation that we're offering in product responding very well.

[II.] Margaret Major - Goldman Sachs:

[...] I would like to ask about Japan, too. If you wouldn't mind running through how FX impacts the Japanese results, not just on the translation of the top line, but on gross margin. Because if you are sourcing in dollars and selling in a strong yen, wouldn't that be a positive?

Mike Devine:

[...] about FX, ... we actually have that as a gross margin negative because we're buying inventories now with a weaker yen and therefore it costs us more yen to convert to dollars to buy the bags. So although, we've hedged pretty effectively, there still is a modest negative impact to our gross margin rate as a result of the weaker yen. In the prepared remarks, I talk about weaker yen and channel mix driven by the success of factory being negative. The two combined hurt us about 30 bp in Q1.

[III.] Brad Stevens - Morgan Keegan:

[...] what percentage of your Japanese business is now at the premium price points , and is there potential longer term to increase your 70% markup for doing business there?

Lew Frankfort:

[...] there's always an opportunity that we have to weigh that against the cost and we're very comfortable with the relative positioning between the United States and Japan, and we're not looking to make any adjustment in the relative pricing of Japan to the United States.

In terms of our limited edition product, in Japan, we're only scratching the surface . For example , last quarter, as part of our 65th anniversary, we presented a series of four bags that were numbered and I believe the total quantity was 2,000, and we sold through that enormously quickly. The Japanese consumers are particularly appreciative of limited edition product and again, we're in early days there.

Disclosure: The author does not own shares of Coach.

Source: Coach: Rapidly Growing Market Share in Japan