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Coach, Inc. (NYSE:COH)

Q3 2010 Earnings Call

April 20, 2010 8:30 am ET

Executives

Lew Frankfort – CEO

Mike Devine – CFO

Ian Bickley – President International

Mike Tucci – President NA Retail

Andrea Shaw Resnick – SVP IR

Analysts

Bob Drbul - Barclays Capital

Kimberly Greenberger – Citigroup

David Schick – Stifel Nicolaus

Christine Chen - Needham & Company

Brian Tunick – JPMorgan

Lorraine Hutchinson – Bank of America/Merrill Lynch

Dana Telsey - Telsey Advisory Group

Laura Champine – Cowen and Company

Erika Maschmeyer – Robert W. Baird

Maria Driscoll – Standard & Poor’s

Antoine Belge – HSBC

Marni Shapiro – The Retail Tracker

Michael Binetti – UBS

Operator

Good day and 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. You may begin.

Andrea Shaw Resnick

Good morning everyone and thank you for joining us. With me today to discuss our quarterly results are Lew Frankfort, Coach's Chairman and CEO, and Mike Devine, Coach's CFO. Ian Bickley, President of Coach International, is also joining us.

Before we begin I must note that this call will involve certain forward-looking statements including projections for our business in the current or future periods. Future results may differ materially from our current expectations and historical growth trends may not be indicative of future growth based upon a variety of risks and uncertainties. Please refer to our latest Form 10-K for a complete list of these risk factors.

Now let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our third fiscal quarter 2010 results and will also discuss our strategies

Ian Bickley will then discuss the increasing globalization of the Coach brand. Mike Devine will continue with details on financial and operational results of the quarter. Following that we will hold a Q&A session that 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

Thanks Andrea and welcome everyone. As noted in our release this morning, we were very pleased with third quarter results including excellent sales and earnings growth and a further strengthening of our full price businesses across all geographies.

Our performance reflects the continued attraction of the product and pricing strategies we put into place this fiscal year and bodes well for the future. Beyond our recent performance we’re also very pleased to announce the doubling of our dividend at the one-year anniversary of its initiation signaling our confidence in our outlets.

We’ve also offered authorized a new $1 billion stock repurchase program. Finally we’re encouraged with the progress we’re making in transforming Coach into a global brand. As Andrea just mentioned we’ve asked Ian Bickley to join today’s call to talk about our initiatives notably in Asia, and our development strategy for Europe, initially focusing on the UK, France, and Spain.

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 quarter first. Some key highlights of our third fiscal quarter were, first, earnings per share rose 40% to $0.50 compared with $0.36 in the prior year.

Second, quarterly net sales totaled $831 million versus $740 million a year ago, an increase of 12%. Third, direct to consumer sales rose 15% to $726 million from $634 million. Fourth, North American same store sales for the quarter accelerated rising 5% from prior year while total North American store sales rose 16%.

Fifth, sales in Japan declined 1% in constant currency and rose 2% in dollars. And finally, we continued to generate very strong sales growth and significant double-digit comps in China. During the quarter we opened two North American retail stores, both in new markets for Coach, Burlington, Ontario, and Brownsville, Texas and closed two others.

We also opened one factory store. So at the end of the period there were 343 full price and 119 factory stores in operation in North America. Moving to Japan, we opened our first men’s location as well as the factory store and [inaudible] location. At quarter end there were 166 total locations in Japan, with 20 full priced stores including eight flagships, 116 shop in shops, 24 factory stores, and 6 wholesale duty free locations.

Indirect sales decreased 1% to $105 million from $106 million in the same period of last year. This decline was due to the slightly reduced shipments into US department stores. We continue to manage inventories into this channel carefully although we’ve seen significant improvement at retail as sales at POS rose 11%, the first quarterly sales gain in two years.

International POS sales also rose in the period driven primarily by distribution. We estimate that the addressable US handbag and accessory category rose at least 5% in the first calendar quarter continuing the improving trend noted over the back half of calendar 2009. Coach’s bag and accessories sales rose about 15% across all channels in North America over the most recent quarter.

In our own stores, handbag and accessories sales rose 18%. Our total revenues in North America rose at a similar pace as our overall top line, up 13% with our directly operated stores up 16% driven by both distribution growth and positive comp performance.

As noted Q3 same store sales rose 5% reflecting a further strengthening of our full price business. Fueling this total retail comp gain was significant gains in conversion from prior year while in aggregate traffic was equal to last year’s levels. We were particularly pleased with the conversion improvement as it is the driver that we have the most control over through product and service.

And full price stores average transaction size was slightly lower compared to prior year as increased handbag penetration offset most of the impact of lower handbag and accessory pouches. Traffic trends improved from the second quarter and were only slightly down from the prior year. In factory where we continued to leverage the flexibility inherent in our business model to drive sales through pricing we saw increases in both traffic and conversion while ticket declined slightly.

While most of the quarter remains ahead of us we’re tracking well and our excited about Mother’s Day and the rest of the spring season. Its 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 while maintaining the integrity of our full price proposition in retail stores.

As you know we have resale price maintenance 365 days a year, a full price proposition. As noted in Japan we posted a 2% increase in dollars on a 1% decline in constant currency. Our market share further expanded against a continued very weak category backdrop and reflect the relevance of our acceptable luxury positioning with the Japanese consumer who is becoming much more value oriented.

We were also very pleased with our performance in China where our proposition of New York fashion and accessible luxury clearly resonated with both domestic consumers and with tourists and our Hong Kong and Macau stores. Clearly our double-digit comp store sales growth further demonstrates Coach’s great potential with this emerging consumer group.

Finally as mentioned in our press release our sales are trending a year ahead of our original plan unveiled two years ago when we announced our intention to take control of this business. Moving on to products, during the third quarter we maintained a high level of product innovation and distinctive newness.

Beginning on December 26 we transitioned to spring with the introduction of a Peyton collection offered across multiple fabrications and silhouettes anchored by both our carry all and shoulder bag styles. This was followed by the relaunch of Poppy in February and the new Kristin collection in March. With its new and distinctive hardware and soft feminine styling Kristin represents another [inaudible] design evolution for Coach and was supported by our spring ad campaign.

Just this month we introduced a collection of new [inaudible] along with new floral, graffiti prints, and Poppy. And yesterday we launched Julia, a modern tote and hobo story featuring new branding and leather op art and print concepts along with fresh colors and patterns in Madison which are the key statements for Mother’s Day.

In addition this July on its anniversary, we will relaunch Poppy, in new and updated styles, new materials, patterns, and prints, with a comprehensive and integrated marketing campaign. Our strong product offerings and rebalanced assortment strategy continues to resonate with consumers. [inaudible] prices are down about 12% this quarter, similar to the first half of the year. These factors were the primary drivers of our conversion improvement in full price as handbag unit sales rose 22% on a comp store basis.

Handbags represents a 59% of sales in our North American retail stores in the third quarter, up about 10% or five points from the 54% handbags represented in the same period last year. Moving to factory our business remained strong. Here we are focused on maintaining very high levels of productivity through the introduction of innovative factory exclusive products combined with in store and direct marketing initiatives targeted at our best factory customers.

Of particular note our factory business was a significantly higher penetration of factory exclusive products at 80% compared to last year’s 60% levels. This improvement in mix favoring made for factory products as well as improved manufacturing costs resulted in significantly higher profitability in this channel.

More broadly our strategies remain largely unchanged focusing on expansion opportunities both here in the North America and increasingly in international markets. In addition as always we’re focused on improving performance in existing stores by increasing Coach’s share of our consumers’ accessories wardrobe while continuing to attract new customers into the franchise.

Starting in North America we plan to open an additional five stores this quarter bringing the total to 20 new American retail stores for the year. In addition we will open two factory stores. In total we expect North American square footage growth of about 8% this year, down from about 13%. I’d now like to introduce Ian Bickley, President Coach International to talk about our abundant opportunities outside of North America.

As many of you know Ian has been with Coach since 1993 and has been a key architect of our international growth strategies.

Ian Bickley

Thanks Lew, and good morning. I’m very pleased to be able to talk about the globalization of the Coach brand. We now expect the global luxury handbag and accessories markets to reach about 29 billion during 2013. Today about 50% of global category sales and 90% of Coach sales are generated in North America and Japan, pointing to a very large opportunity outside of our core markets.

The most rapid growth is coming from the emerging markets notably in Asia, with China clearly our largest opportunity as it is expected to double from about 10% of the global market today to nearly 20% by 2013 contributing the lion’s share of category growth.

The Chinese consumer loves Coach, as evidenced by the significant double-digit comps we’re consistently generating and the extremely high repurchase intent among existing customers. Coach’s potential in the China market is reflected in our very low unaided brand awareness of 8% compared to 72% in the US and 63% in Japan, among target consumers.

As mentioned our business is trending about a year ahead of the plans we originally articulated back in the spring of 2008. We’re now targeting to achieve about $250 million in sales during FY12. And as a result of this growth we are now profitable in China, also ahead of schedule as strong unit economics have allowed us to leverage the considerable infrastructure investment.

In China we expect to open five new locations during the remaining few months of the year. This will bring our net FY10 openings to 13 resulting in approximately 50% growth in square footage. As mentioned this week we’re officially opening our first flagship location on the mainland in Shanghai, just ahead of the World Expo, which is expected to attract 70 million visitors to the city over six months.

This 7000 square foot store reflects Coach’s latest flagship design. We believe this important store will further elevate the brand’s image and is consistent with our strategy of raising awareness and aggressively growing market share with the Chinese luxury consumer. Next year we will accelerate new store openings with at least 20 new locations planned.

To support our growth in China and the region, we have just started up an Asia distribution center in Shanghai, allowing us to better manage the logistics in this region while reducing costs. Its important to note that our growth in China is not constrained by finding the right locations, but rather our emphasis on excellent customer service which requires recruiting and training the right retail teams to run our stores, a much greater challenge than finding store sites.

In Japan the overall consumer market is very challenging and the category continues to see declines. Our focus remains on growing market share and we have done this quite well in our core women’s business. We’re now exploiting new categories such as men’s, where we’ve already seen early successes.

For context the men’s imported leathers at market is nearly $1 billion in size and has been less impacted by the macroeconomic environment than women’s. With only a 3% share of the men’s market today Coach is very under penetrated. And over the next few years we believe it has an opportunity to match our total market share of 14%.

We will open two more locations in FY10 or seven net new locations for the year including the first two men’s shops. In total we expect that net square footage growth in Japan will increase about 5% this year compared to about 8% in FY09.

Finally beyond our directly owned international businesses in China and Japan, we do have significant and growing distributor run businesses in other Asian countries. For example, in Korea, Singapore, Taiwan, and Malaysia, there are about 90 total Coach locations generating nearly $200 million of sales at retail.

Coach is already among the top five imported brands in these markets, with significant potential for further strong growth. During the quarter we plan to open six net new international wholesale locations. This would take us to about 25 net new international distributor operated locations this year.

At fiscal year end there will be about 180 Coach international wholesale locations in over 20 countries around the world, generating sales at retail of nearly $350 million. We’re also pleased to announce our expansion plans into Western Europe. As you know Europe is a large market for women’s and men’s luxury accessories, representing about 25% of the global category sales.

Our experience with European tourists in combination with recent consumer research has given us confidence that our current design direction resonates with Europeans and that our price points will offer a compelling value proposition. Further Coach’s heritage linked to New York fashion is appealing for most Europeans and creates a differentiated positioning compared to the traditional luxury brands.

As discussed in our press release we are starting with a two-pronged approach with strong local partners. Initially we will focus on France through a distribution agreement with the prestigious Printemps department store group. Through Printemps, we expect to open at least 14 shop in shops in their stores over the next three years.

The first will be a 1700 square foot shop which will open in June in their flagship boulevard Haussmann location in Paris, followed by five additional locations by the end of the calendar year. We have also agreed in principal to establish a joint venture with Hackett Limited, the iconic British retailer to open in the UK, Spain, Portugal, and Ireland, creating a multichannel distribution model in these markets. We expect the first locations in the UK, Spain, and Portugal, to open during the next 12 months.

With that I will turn it over to Mike Devine.

Mike Devine

Thank you Ian, Lew and Ian have just taken you through highlights and strategies, let me know take you through some of the important financial details of our third quarter results. As mentioned, our quarterly revenues rose 12% with direct to consumer which represents over three quarters of our business, up 15% and indirect down 1%, due to slightly lower shipments to US department stores.

Earnings per share for the quarter increased 40% to $0.50 as compared to $0.36 a year ago, while net income rose 37% to $158 million from $115 million. Excluding the one-time charge from last year’s third quarter EPS rose 31% and net income increased 28%.

Operating income totaled $249 million, up 34% from the $185 million reported in the comparable year ago period, while operating margin was 30% versus 25.1% reported for the prior year. Excluding the one-time charge last year operating income rose 25% from prior year or double the rate of sales growth as the year ago operating margin was 26.9% on the same basis.

In the third quarter gross profit rose 17% to $616 million, from $525 million a year ago and gross margin rate increased to 74.1% versus 71% flat in the prior year. The primary driver of our substantial gross margin expansion was lower manufacturing costs. Product mix notably the increased sell through of handbags in our full price stores and the increase of higher margin made for factory product in factory stores was also a contributor to the year over year improvement.

SG&A expenses as a percentage of net sales at 44.1% compared to 45.9% in the year ago quarter. Excluding the one-time charge in the year ago comparison, the expense ratio was equal year over year at 44.1%. Once again our two primary direct businesses here in North America and in Japan both provided leverage not only to their own P&L’s but to the corporate consolidated P&L as well.

Inventory levels at quarter end were $307 million, down about 14% from prior year on a comparable basis. On a unit basis inventory was up 3% reflecting our lower average unit cost. Cash and short-term investments stood at $908 million as compared with $551 million a year ago despite repurchases of $700 million worth of Coach common stock over the last 12 months.

During the third quarter we continued our repurchase activity buying nearly 11.3 million shares of common stock at an average cost of $35.52. As of the end of the period approximately $10 million remained under the company’s previous repurchase authorization. As noted in the press release and by Lew earlier on this call the Board has authorized a new $1 billion repurchase program.

As you know we’ve also announced the doubling of our dividend rate from $0.30 to $0.60 annually, effective with our July payment. Its important to note that it will still represent only a fraction of our cash flow at about $180 million a year, leaving us more than ample cash to fund our growth and continue our buyback program.

Net cash from operating activities in the third quarter was $205 million, compared to $207 million last year during Q3. Free cash flow in the third quarter was an inflow of $190 million versus $180 million in the same period last year, due to lower CapEx and a higher net income. Our CapEx spending was $15 million versus $27 million in the same quarter a year ago.

Naturally we were very pleased to report third quarter earnings that demonstrated our ability to achieve strong top line and accelerated income and earnings growth. Looking ahead I think it would be helpful for you modelers out there to keep a few things in mind when projecting our fourth quarter.

First, we would reiterate that our gross margin is expected to expand significantly in Q4 versus last year, although it will likely be somewhat lower than our Q3 rate due to channel mix as factory will be distorted in the 14-week quarter.

Second, as a result of our sales productivity gains and our ongoing operating efficiencies we continue to expect that our SG&A dollar growth will be quite close to our top line growth for the fourth quarter. We are targeting these levels in spite of more difficult compares from last year’s fourth quarter due to our higher investment spending and increased incentive compensation accruals.

Third, we do expect to see some inventory growth as we plan to build inventories for the fall season and we begin to anniversary our average unit cost improvements. Separately based on some changes in project timing we now expect that this year’s CapEx will be in the area of $90 to $100 million, down from our previous guidance of $110 million.

In summary, our double-digit growth demonstrates our ability to manage our business nimbly, while investing prudently in longer-term opportunities for the brand. We’re accelerating our distribution plans to leverage the emerging market opportunity with a particular focus on China while also exploring new geographies, capitalizing on the increasing popularity and recognition of the brand with discerning consumers globally.

And with a business model that generates significant cash flow and with virtually no debt, we are in a position to take advantage of profitable growth opportunities globally, while continuing to return capital to shareholders.

Thank you all for listening this morning, and we’d be happen to open it up to Q&A.

Question-and-Answer Session

Operator

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

Bob Drbul - Barclays Capital

The one question that I have for you is when you look at the results this morning, very encouraging, do you view this quarter as in inflection point for Coach and why do you think.

Lew Frankfort

We do see it as another inflection for Coach. I think in a year from now or two years from now we will look back upon this quarter, the initiatives that we announced in Europe, the acceleration of our business in China and the rejuvenation of our full price businesses and conclude that it indeed was an inflection point.

We’re extremely encouraged by the results across all channels and geographies last quarter.

Operator

Your next question comes from the line of Kimberly Greenberger – Citigroup

Kimberly Greenberger – Citigroup

The comp acceleration this quarter was nice, I’m wondering if you could give us any color on if the factory versus the full price comp, if that differential has been closing further and do you think that the go forward comp can be sustained here in the mid single-digit range or are you looking for a low single-digit going forward.

Lew Frankfort

In terms of fall’s precision, when we say low single-digits, mid single-digits, to us that’s just a very subtle change. What we said publically quite recently is that we do believe we can achieve during our LRP period double-digit top line growth with the bottom line growing at a faster rate.

And what we also said is that we’re anticipating low to mid single-digit comps worldwide. If we get some wind at our back it will be higher, if we don’t it will be somewhat lower. With regard to the earlier part of your question, yes there has been a convergence between full price and factory, its increasing, the convergence.

Operator

Your next question comes from the line of David Schick – Stifel Nicolaus

David Schick – Stifel Nicolaus

Kind of a question going back on the broad thinking over a year, one of the reasons I think Coach didn’t face comparisons that were dropped off the table was that you recognized the change, called it the new reality, had some strategic changes around that a year ago, so as you lap that and I know you mentioned that the handbag unit comp was 22 but the down 12% I think you said in price on the call, is there any reason to revisit the new reality or would any improvement off of the new reality be taken care of in the RK line, how should we think about your thinking on that strategic [ship].

Lew Frankfort

I’m going to ask Mike Tucci who’s sitting in with us on the call to take that question.

Mike Tucci

Specifically on handbags, the unit acceleration has been a key. Obviously with the rebalancing and repricing strategy and its stabilization of traffic, the key for us in getting productivity back is selling more units in handbags, we had a positive comp, high single-digit in our full price stores in dollars which was key.

If we’re looking out as we build our assortments through Q4 of this year and into the first half of next year, we actually do see some subtle opportunity to blend the product differently going forward and the key for us is really in the middle. Its sits between, in the Coach handbag hierarchy, between Poppy which is our introductory price offer and Madison which represents a higher price offer.

The best representation of that today in the stores is Kristin and Julia which launched yesterday, really targeting that core leather and signature sweet spot between $298 and $358. As we built that in Q3 we saw the strengthening of our handbag business in particular and our overall business.

We will build on that significantly in FY11 and beyond and I think that bodes very well for us to give us three layers in our pricing and positioning hierarchy to meet three very distinct consumer segments.

Operator

Your next question comes from the line of Christine Chen - Needham & Company

Christine Chen - Needham & Company

Congratulations on a great quarter, I wanted to ask about the international customer, as you go global going into Western Europe and then also focusing on China, what differences do you see between the customer across the country. Is the Chinese customer similar to the Japanese customer, does the European customer shop differently than the US customer versus the Asia customer and how do you think about that as you grow.

Ian Bickley

I believe that overall the differences between our customers are very subtle and we’ve learned through our consumer research that consistently our heritage as a New York fashion brand as well as our accessible luxury positioning and compelling value proposition for the consumer is something that resonates globally.

Christine Chen - Needham & Company

And then with respect to Europe, what are you doing differently this time other than partnering with key retailers than when you tried to grow in Europe in the past.

Lew Frankfort

Let me take that one because this is our second try at Europe, as you know, I failed the first time and a few things. First it was the old world of Coach, it was online leather bags, I’m not sure you’re old enough to remember them, but we—

Christine Chen - Needham & Company

I remember, I’m old enough.

Lew Frankfort

Okay, well we actually developed a great business in North America but it did not resonate that well with the Europeans who wanted products that were more stylish and more sophisticated. Second, we did not have local partners and we did it remote without putting the level of investment into these markets that we’re doing today.

Today as we announced we have two great partners that we’re starting with and we’re very enthusiastic about what we can do together.

Operator

Your next question comes from the line of Brian Tunick – JPMorgan

Brian Tunick – JPMorgan

You had talked about the gross margin expansion you saw in the quarter and I think you pointed out the lower product cost, channel mix and made for factory product at factory as the primary drivers, is it possible to quantify those in terms of basis point impact.

Mike Devine

I would probably stay away from going with too much more precision but rest assured that of the 310 of margin expansion far and away the biggest contributor was from those two factors which we actually look at them, think about, as very closely related because they both end up resulting in a growing expansion between our average out the door pricing and the average unit cost for the item sold.

The other traditional big movers of our gross margin rate were relatively quiet this quarter versus last year. Our levels of promotions in the factory channel were very similar, TYO [wise] and also we’re starting to see some easing of the pressure brought about by channel mix due to a number of factors, firstly the convergence that Lew just spoke to, and we discussed in our prepared remarks. Its taking a little bit of pressure off the channel mix and also the rapid growth while its still small to the total company, Coach China with its very healthy gross margin rates also helped move the needle on channel mix a little bit this quarter.

So the big story really is about price versus cost which is very exciting for us.

Brian Tunick – JPMorgan

And with the increased penetration of the made for factory product and if you are able to continue to diverge the full price in the factory channel comps, is it reasonable to assume that you could possibly get back to a 75-ish percent gross margin.

Mike Devine

Again we’re not giving specific forward guidance, but what I would say is that we’re feeling good about our gross margin rates heading into Q4 and for the coming quarters. We do expect to be able to deliver year over year gross margin expansion out over the next couple of quarters. We’ve locked in many of our material costs at historically low levels.

That being said we are beginning to see some inflationary pressures so that will be a challenge for us going forward, however we do have many opportunities to look to offset this pressure, whether its through alternate materials, counter sourcing, channel mix, as China grows as I mentioned earlier, and our convergence between full price and factory.

So, we’re feeling like there are opportunities but there are headwinds on the inflationary pressure side.

Lew Frankfort

I’d also just like to add if I could, is that we actually internally nicknamed Mike Devine Mike Gross Margin Devine and we feel so [unsuccessful] but with all of you guys, migrating you to operating margins because we do think that’s really the way you need to evaluate us. And that’s a more comprehensive measurement, notwithstanding everything positive about our outlook on the gross margin side, I just urge you to move down the P&L.

Operator

Your next question comes from the line of Lorraine Hutchinson – Bank of America/Merrill Lynch

Lorraine Hutchinson – Bank of America/Merrill Lynch

Can you talk about your thought process in choosing your new European partners, where exactly do you see the synergies with Hackett and Printemps.

Ian Bickley

Well first of all we really see the new partnership with Printemps as the cornerstone for going into Western Europe. France obviously is a very important market. It’s a leading fashion market and we believe if we’re successful there we really will build a halo effect for the rest of Europe.

Printemps for us is a perfect partner. We know that they get the vision for the Coach brand. They will help us to establish image enhancing locations and they will give us broad geographic coverage throughout France and enable us both to leverage the domestic consumer as well as international tourists which especially in their flagship Printemps location in Paris represent a very significant share of the business.

In terms of Hackett with whom we are jointly developing other key Western European markets, we do believe again they are a group that understands Coach, understands the positioning in the market, has strong local expertise and also have a high touch customer service model that is very consistent with the way we drive our business.

Lorraine Hutchinson – Bank of America/Merrill Lynch

Can you provide some color on the markets you expect to target in terms of demographics.

Lew Frankfort

The question is can we talk about who we’re trying to target, we actually have a very broad reach. As a democratized luxury brand where we’re available to consumers who are aspirational trading up into Coach as well as consumers who are purchasing alternative brands at our levels and of course the European luxury brand.

So we find that we’re able to develop a broad and diversified consumer base in each of the markets we’re in and that’s one of the elements that’s very compelling to our proposition.

Operator

Your next question comes from the line of Dana Telsey - Telsey Advisory Group

Dana Telsey - Telsey Advisory Group

Congratulations, can you talk a little bit about as you see the department store business or indirect business any updates there in terms of what’s happening and then just to clarify on the positive high single-digit comp that you mentioned for full price, is that just in handbags, or is that overall.

Lew Frankfort

The positive comp was in handbag units, 22% more units. With regard to department stores, we had an excellent quarter at POS, our sales were up 11% driven by full price sales and that compared actually to down 22% just in the last quarter and I think that’s both a reflection of Coach’s strength and the strength in department stores.

They have really backed away from the promotional proposition and are giving consumers a stronger every day value. We’re benefiting from that of course and we’re encouraged. We believe that we will stay in positive territory at POS in US department stores. It bodes well for not only Coach but other brands and their entire franchise.

Operator

Your next question comes from the line of Laura Champine – Cowen and Company

Laura Champine – Cowen and Company

Given the CapEx guidance for the full year that’s changed a little bit but the step up in Chinese growth and also the European plan, can you give us kind of an initial look at 2011 CapEx.

Mike Devine

We haven’t completed yet our complete CapEx planning for our new fiscal year 2011 out through next June. I can tell you that the reduction this year from the $110 to the $90 to $100 million is just project timing. So I would anticipate from that $110 million level if you look at that as a go forward number and then have the movement of $10 to $20 million, I think we’re probably will end up coming forward with a CapEx plan that would be in the $130 to $150 million range for next year.

But its very early in our detailed planning processes. The relationships that we’re forming with our new partners and our growth in China will increase our CapEx spend but we’ve done tremendous work around store construction costs and sourcing and so we feel like our CapEx spend will continue to be very well controlled.

Operator

Your next question comes from the line of Erika Maschmeyer – Robert W. Baird

Erika Maschmeyer – Robert W. Baird

I noticed that your unaided awareness in the US looks like its had a nice jump, could you talk about the factors there.

Lew Frankfort

Our unaided awareness is extremely high. I’m not quite sure what source you’re referencing but our unaided awareness is I believe north of the 70% in the US, so seven out of 10 consumers who we target mention Coach as a top of mind brand.

Perhaps it’s a bit higher than it was, but we haven’t seen the results of that effect.

Erika Maschmeyer – Robert W. Baird

I thought you had said 80% unaided awareness there, I’m sorry if I misheard that.

Lew Frankfort

I think what we referenced was 80% unaided awareness in China compared to in the 60’s in Japan and 70’s in the US and the reason Ian made that point was to suggest that the opportunity for us to continue to grow rapidly as awareness builds is balanced in China.

Operator

Your next question comes from the line of Maria Driscoll – Standard & Poor’s

Maria Driscoll – Standard & Poor’s

I have a question about how you’re going to keep flowing your goods in Europe and Asia, will you be flowing them as constantly, as frequently as you do here in the US.

Lew Frankfort

The short answer is yes, we do that today with the same pace. We have a global calendar and when we update our windows in the United States we do the same in China, Korea, and every other market so the cadence is exactly the same.

What we did announce and Ian touched on it I believe today is an Asian distribution center which is just opening now and for the first time we will be shipping goods for Asian markets directly into a distribution center that will enable us to provide much more rapid response.

Today for countries outside of Japan they’re located in Asia, the goods go all the way to Florida, believe it or not and then go back to Asia. We’re going to be cutting four to six weeks of transit out. We’re going to be able to have a pooled inventory so that we can respond to country variations in demand in a much more spontaneous way.

So, we’re trying real hard to strengthen our capabilities there.

Maria Driscoll – Standard & Poor’s

And can I just ask you also have an e-commerce platform in Europe.

Lew Frankfort

Is that a question, we do not today have an e-commerce platform in Europe. We’re actually launching later this week I believe if we’re still on track, a Japanese e-commerce site. What we have in China and several other markets and will have in Europe once we launch, is an informational site that will provide updated information on product, newsworthy stories, as well as directions on where they can go within the respective countries and purchase Coach.

Operator

Your next question comes from the line of Antoine Belge – HSBC

Antoine Belge – HSBC

Regarding your expansion in France, will be your pricing much different from your pricing in the US and the same [level] of profitability do you expect some initial earnings dilution from going into Europe.

Ian Bickley

In terms of the pricing in France no we expect to, as Lew talked about earlier, position our brands [inaudible] as an accessible luxury brand between the international brands and the domestic brands targeting about 20% premium.

Lew Frankfort

And we do not see any dilution of earnings from this initiative in France.

Operator

Your next question comes from the line of Marni Shapiro – The Retail Tracker

Marni Shapiro – The Retail Tracker

Congratulations, I saw Julia yesterday and I think its one of the best lines you have put forth in a while, its absolutely—

Lew Frankfort

Think about buying it for a loved one, or yourself.

Marni Shapiro – The Retail Tracker

So I have just a couple of questions about France and Western Europe and even a little bit about China, could you talk about as you roll the brands into these areas, how are you approaching this from marketing but also product wise, are you rolling in with brands with sub brands, like Madison and Julia or is signature there too, is Poppy there, and do you have a full assortment as far as fragrance, jewelry, small leather goods, just a little behind that. And I know the stores in the department stores, the shops will be smaller, so if you could just talk specifically about that versus a store say in China.

Ian Bickley

Well first of all let me talk about product and marketing, we expect the assortments for Europe to be very consistent with our assortments globally. Of course there will be preferences that consumers have there particularly we expect leather to be more important in Europe for example than a [logo] product.

And in terms of marketing we’ll be approaching each market that we’re entering with a specific launch strategy. We are partnering as part of our agreement with Printemps on a shared integrated marketing and communications campaign to launch the brand in France that will focus a great deal on the Haussmann store leveraging databases, windows, but also some degree of national advertising as well as editorials.

We’ll also be tapping into opportunities to leverage the international tourists in that market as well. And we’ll take a consistent approach when we go into the UK and Spain and those markets in advance of opening the first locations. With regard to the store sizes, as I mentioned earlier our location in the Printemps flagship location on boulevard Haussmann, is going to be 1700 square feet in a very prime location.

Actually when you go into the store it will have a three-room concept and will look very much like an elevated Coach freestanding store actually within a department store. In terms of the broader distribution we’ll probably be looking at shop in shop sizes that will range between 50 and 80 square meters in size.

Marni Shapiro – The Retail Tracker

And then could you just follow-up on China and I’m assuming just based on those store sizes that the assortment in France at least will be a little bit more limited and focused on handbags, is that correct.

Ian Bickley

No, it’s the same broad lifestyle collection that we offer, its no different to China.

Marni Shapiro – The Retail Tracker

No I’m sorry in France, China is getting now the full, is the full assortment but in France it will be smaller shop in shops, the assortments will be focused primarily on handbags.

Lew Frankfort

No what Ian was saying is that the smaller shops will have a comprehensive assortment. What we do in a smaller size flagship and we have many of them around the world, is have a more edited assortment of the comprehensive offering, but it will be a true flagship assortment which is a lifestyle expression of the Coach brand.

Operator

Your next question comes from the line of Michael Binetti – UBS

Michael Binetti – UBS

Congrats on a nice quarter, I was wondering if you could comment a little bit closer on whether the promotional cadence at the factory stores was higher year over year, I think last quarter when we talked you expected it to be about flat for the rest of the fiscal year, I don’t know if you kind of gave us directionally for the quarters, maybe give us any insight you have there, and maybe your outlook for the fourth quarter.

Mike Tucci

Really importantly on the factory side, what’s driving factory and the significant margin improvement in factory is mix where we are back to historical levels of 80% penetration in made for factory goods. Remember at this time last year we were peeking in the level of delete activity in our stores as we were clearing through excess inventory.

That situation no longer exists. The promotional cadence in factory is absolutely flat to last year. We’re trying some different methodology, it is a promotional channel. Its what drives traffic and drives purchase, that’s where we play and we will continue to do so so that value proposition within the factory channels, we have stated and will be committed to a very, very strong and value oriented experience for our consumer there and we see that carrying through Q4 and the tactics we will lever those tactics as we need to.

Mike Devine

And to build off of Lew’s earlier point, we want to bridge you down to operating income here and the expansion of the gross margin coupled with the increased productivity is driving operating margin expansion that’s driving earnings at an accelerated pace. The factory division itself actually, four-wall contribution is up 100’s of basis points year over year.

Michael Binetti – UBS

Could you try to quantify any kind of calendar shift in the third quarter as well as whether we should expect one for our models into the fourth quarter.

Mike Tucci

There really was no calendar shift in the third quarter. The way we report, the Easter shift had no bearing between Q3 and Q4 so we feel very good about April and how the fourth quarter shapes up.

Andrea Shaw Resnick

Thank you for all your questions today, as we draw towards the open of the market, I’m going to turn this back over to Lew for a few closing remarks.

Lew Frankfort

Thank you Andrea, first our results speak for themselves, its pretty self evident you can tell also by our enthusiasm regarding our outlook that we do feel that we have reached another inflection point for Coach, so I would just say stay tuned. Have a good day everybody.

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Source: Coach, Inc. F3Q10 (Qtr End 03/27/10) Earnings Call Transcript
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