Coach's CEO Discusses Q4 2011 Results - Earnings Call Transcript

 |  About: Coach, Inc. (COH)
by: SA Transcripts

Coach (NYSE:COH)

Q4 2011 Earnings Call

August 02, 2011 8:30 am ET


Victor Luis - President of Coach Retail International

Michael Tucci - President of Retail Division - North America

Lew Frankfort - Chairman and Chief Executive Officer

Michael Devine - Chief Financial Officer, Chief Accounting Officer And Executive Vice President

Andrea Resnick - Senior Vice President of Investor Relations & Corporate Communications


Dana Telsey - Telsey Advisory Group

Robert Drbul - Barclays Capital

Brian Tunick - JP Morgan Chase & Co

Omar Saad - ISI Group Inc.

Kimberly Greenberger - Morgan Stanley

Lorraine Hutchinson - BofA Merrill Lynch


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 Resnick

Thank you. Good morning, and thank you all for joining us. With me today to discuss our quarterly results are Lew Frankfort, Coach's Chairman; and Mike Devine, Coach's CFO.

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

Please note that the results for the fourth quarter and fiscal year ending July 2, 2011, included 13 and 52 weeks, respectively, while the same periods in fiscal 2010 included 14 and 53 weeks, respectively. All discussions of comparable store sales are calculated based on an equivalent number of weeks for each period, 13 weeks versus a comparable 13-week period for the fourth quarter and 52 weeks versus 52 weeks for the fiscal year.

Now let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our fourth fiscal quarter and annual 2011 results and will also discuss our overarching strategy. Mike Devine will continue with details on financial and operational results of the quarter and the year. Following that, we will hold a question-and-answer session where we will be joined by Mike Tucci, President, North American Retail; Victor Luis, President, International Retail; and Jerry Stritzke, our President and Chief Operating Officer. This Q&A session will end shortly before 9:30 a.m. Lew will then conclude with some brief summary comments.

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

Lew Frankfort

Thanks, Andrea, and welcome, everyone. As noted in our release this morning, we were very pleased with our fourth quarter results, including excellent sales and earnings growth. This quarter's performance demonstrated a continuation of the momentum we have been experiencing throughout FY '11, as we continue to improve productivity while expanding our distribution in new and existing geographies. Our results reflect a growing recognition of the Coach brand globally and the success of our new initiatives.

Before I review the highlights of the quarter, I wanted to mention our CFO transition. First, as you know, Mike Devine announced his retirement earlier this year effective later this month. This will be his last earnings call with Coach, and we will miss Mike greatly. Mike has played a critical role in developing and executing the strategies that have driven our superior sales and earnings growth during his tenure with the company. We wish him every success in the future. At the same time, we're pleased to welcome Jane Nielsen as our new CFO who will be officially starting in early September.

Moving on with some key highlights of our quarter and fiscal year. Our performance in FY '11 was highlighted by increases of 18% in revenues, 20% in operating income and 30% in earnings per share, all on a comparable 52-week basis. It was a year of many milestones including, first, Coach surpassed $4 billion in sales, driven by gains in all of our business units. Second, we placed an increased emphasis on the globalization of our business, as we accelerated our international distribution growth, especially in Asia while we continued to open new stores and gain market share in North America. Third, we successfully refocused on the men's opportunity for Coach, as we began to open dedicated men's and dual gender locations globally, doubling the business year-over-year. And fourth, we increased our quarterly dividend by 50% and authorized another $1.5 billion buyback in January, demonstrating our financial strength, cash flow generation and our commitment to shareholder return.

This annual performance was capped off by an excellent fourth quarter. Some key metrics were: first, net sales totaled $1.03 billion, an increase of 17% on a comparable 13-week to 13-week basis. Second, earnings per share totaled $0.68, up 22% from the $0.56 in the prior year on a same 13-week basis. Third, direct-to-consumer sales rose 18% on a comparable 13-week to 13-week basis. Fourth, North American same-store sales for the quarter rose 10% on a comparable basis from prior year while total North American store sales rose 18%. Fifth, sales in Japan rose 6% in dollars and declined 7% in constant currency, also on a comparable basis, modestly impacted by the ongoing effects of the earthquake and tsunami. And finally, we continue to generate very strong sales and comps in China.

During the quarter, we opened 3 North American Retail stores, including 2 in new markets for Coach, Fredericksburg, Virginia and Albuquerque, New Mexico, as well as our first mall-based men's store in Copley Plaza in Boston. We also closed 2 locations. In addition, we opened 9 factory stores, including 6 men's dedicated locations.

At the end of FY '11, there were 345 full price and 143 factory stores in operation in North America. This was a net increase of 3 full price stores, including one men's retail store, as well as 8 factory stores and 14 men's factory stores from the end of FY '10. Total square footage grew 7% for the year.

Moving to Japan, 2 locations were added, a shop-in-shop and a men's factory store. Separately, all but 2 of the stores that were closed due to the earthquake and tsunami had reopened by year end. And over the last month, the remaining 2 have reopened.

At year end, there were 176 total locations in Japan, with 20 stand-alone full price stores, including 8 flagships, 119 shop-in-shops, 30 factory stores and 7 Duty Free locations. In total, a net of 9 locations were added in Japan during FY '11, and 3 were expanding, yielding total square footage growth of about 4%.

And in China, we added 11 new locations, 9 on the Mainland and 2 in Hong Kong. At the end of the quarter, there were 66 Coach locations in China, including 53 locations in the Mainland and 22 cities. Additionally, there were 11 locations in Hong Kong and 2 in Macau. In aggregate, there was an increase of 25 net new locations for the fiscal year for a square footage increase of 62%.

Indirect sales, which represent about 13% of Coach's sales on an annualized basis, increased 12% on a comparable 13 to 13-week basis or 4% as reported to $113 million. This increase was driven by both international wholesale shipments and shipments into U.S. department stores.

At POS, international sales rose significantly, driven by both distribution and comps, while U.S. department store sales rose high single digits.

We estimate that the addressable U.S. women's handbag and accessory category rose 5% to 10% during our fiscal fourth quarter. Over the same period, Coach's bag and accessories sales rose about 14% across all channels in North America including in our own stores.

For the fiscal year ended June, we estimate that the addressable category rose about 10% to approximately $9.3 billion, while Coach's North American bag and accessories sales rose 14% across all channels and 17% in our own stores over the same period.

Separately, it's worth noting our customers' outlook for the economy has been stable over the last few quarters with 1/3 of those surveyed still believing that the U.S. economy is improving. Our intention to purchase Coach remains high, with over 2/3 of consumers surveyed noting they probably or definitely would purchase a Coach product in the next 12 months.

Our total revenues in North America was up 17% in the quarter on a comparable 13-week to 13-week basis, with our directly operated stores up 18%, as distribution growth augmented the comp performance.

Fueling these overall comp results were strong gains in both the full price and factory channels, driven by significant increases in conversion from prior year while ticket and traffic were essentially the same. We were particularly pleased with the improvement in the conversion rate since it is the driver that we have the most control over through product and service.

We also have been delighted by the very strong sales trends we're experiencing in our North American business, our largest store which, of course, is also extremely profitable. While we have long viewed this channel primarily as a marketing vehicle, sales growth accelerated at a significant double-digit pace during the fourth quarter. We expect that Internet sales will grow rapidly in the years ahead while also importantly driving consumers into the stores.

While the fall season is just underway, we are pleased with our current trends and consumers' continued response to our product and positioning. As noted for the quarter, we posted a 7% decrease in local currency in Japan and a 6% gain in dollars, excluding the extra week from last year's results. Five of the 7 stores that remain closed at the end of March due to earthquake and tsunami damage reopened during the fourth quarter, and the remaining 2 just reopened this month as mentioned. Generally, business in Japan is trending where it was prior to the events of March 11, as business improved over the period.

Naturally, I want to call out China, which is our single largest geographic growth opportunity. During the fourth quarter, as for all previous quarters this year, we achieved significant double-digit comp growth. And as I referenced earlier, we are opening stores primarily on the Mainland where increasing numbers of consumers are participating in the category.

Moving on to product. During the fourth quarter, we maintained a high level of product innovation and distinctive newness. In April, we introduced a collection of Natalie novelty straw totes along with new colors and a Dream C print in Poppy. In May, we launched Audrey, a modern tote story featuring perforated leather, op art and print concepts. Additionally, our lead collection for Mother's Day was Madison, offered in fresh colors and patterns. For June, we introduced new leather and pattern colors in Kristin, as well as a strong new op art print. Our Kristin hobo continues to be the key item within the collection. This season's product was very well-received, and both handbags and women's accessories achieved strong comps in the quarter with handbag penetration in our North American Retail stores remaining at 55%.

In addition, in July, we launched the new Chelsea collection and evolved Poppy with updated styles, patterns and prints. The Chelsea collection features a modern faceted turnlock inspired by our heritage and offered in timeless silhouettes. Poppy has an updated look with new leather and local fabrics and new pushlock closures.

In August, we're offering new fall fabrications, colors and patterns in Madison and a new shoulder bag in Chelsea. On the factory side, our strong results were fueled by a powerful combination of new product introductions with key styles offered at great prices. Additionally, our inventory investment strategy enabled us to capture sales upside throughout the quarter. Our product assortment was also supported by our in-store and direct marketing campaigns.

Naturally, I also want to touch on men's, a global initiative. As many of you know, we decided about 18 months ago that we would create a strong capability to leverage our reputation in the marketplace for quality leather men's products. Over this period, we've built a team and the infrastructure to become a market leader in the men's category. And we’ve begun to expand our global footprint in men's. In the U.S., we've opened 3 full price dedicated men stores: Bleecker Street in New York, Copley Plaza in Boston and, most recently, Garden State in New Jersey. In addition, we've created about 40 dedicated men's concept shops in select full price flagships. We also opened a total of 14 North American men's dedicated factory stores as mentioned. Our results have exceeded our expectations and underscore the opportunity for Coach men's in the U.S.

Outside of the U.S., where the male customer tends to be more style conscious, we've also opened a number of men's dedicated stores, notably in Japan where we have 7 men's stores today. Our future store growth in Japan will primarily be dedicated men's locations. More generally, in Asia, including China, we are seeing excellent early results from dual gender stores.

Our first year results have been excellent, as our men's sales doubled to over $200 million in FY '11. This performance underscores our confidence in men's as a significant growth driver for Coach, and we now believe it could contribute 25% or more of the company's growth over the next several years.

As we enter FY '12 beyond the men's initiative, our overarching strategies remain largely unchanged. We will continue to focus on expansion opportunities, both in 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.

Moving on to distribution growth. We expect that our square footage globally and across all channels will increase about 12% in FY '12 compared to 9% last year.

Starting in North America, we will open about 40 new stores in FY '12 with more than half being dedicated men's locations. In total, we expect to open about 15 net new full price locations, about half will be men's, and 25 factory outlets, including 15 men's stores. In total, we expect North American square footage growth of about 7% this year in line with last year and driven by men's.

As we've discussed many times, outside of North America, China is clearly our largest geographic opportunity, given the size of the market and the rate of growth. The Chinese consumer has embraced Coach, as evidenced by the significant double-digit comps we're consistently generating and the extremely high repurchase intent among existing customers.

Our sales in China totaled over $185 million, up from $108 million last year, as the market grew rapidly, and we increased our share to 6% on the Mainland. In addition, our unaided brand awareness among P.R.C. consumers jumped to 16%, about double last year's level. This year, we will accelerate new store openings with about 30 locations planned for the Mainland. The vast majority will be dual gender stores, given the size of the men's opportunity in China. Overall, we're now projecting sales of between $280 million and $300 million for FY '12, up from our previous guidance of $250 million. We also intend to open a few locations in Hong Kong in FY '12, along with 1 or 2 in Singapore where we just acquired the operations of our distributor last month as planned.

In FY '12, we will make significant investments towards increasing awareness in China, as we leverage our 70th anniversary campaign to build on our positioning as a New York fashion brand grounded in heritage and history. This integrated campaign will have several key elements, including an international brand ambassador, Gwyneth Paltrow, who has proven relevancy in China and other international markets.

In Japan, the overall consumer market remains very challenging, and the category continues to contract. Our focus continues to be on gaining market share, and we have done this quite well in our core women's business. As discussed, we're now also focusing on men's where we have seen early success.

During FY '12, we expect to open about 15 net new locations in Japan, nearly all of them dedicated men's doors. In total, we expect the net square footage growth in Japan will increase by about 10% this year compared to about 3% last year.

Finally, beyond our directly owned international businesses in Japan, China and now Singapore, we do have significant and growing distributor-run businesses in other Asian countries. We're also pleased to announce distribution agreements to open the first Coach stores in Brazil, which are expected to open next spring, and in Vietnam with the first openings expected late this calendar year. During FY '12, we expect to open between 35 to 40 net new international wholesale locations, bringing our total number to nearly 250.

Touching on Europe. Last year, we opened a total of 14 locations, including 7 in Printemps in France and through our JV with Hackett, 6 shop-in-shops in El Corte Inglés, 5 in Spain and 1 in Lisbon, along with 1 retail store in the U.K. We've been pleased with our initial performance and the early reaction of domestic shoppers and international tourists to the Coach proposition. For FY '12, we expect 3 additional openings in Printemps, including 2 men's shops, as well as a number of new locations in Spain, the U.K. and Ireland through our joint venture. Naturally, we're very excited about our New Bond Street flagship, which is on target for a September opening and will be supported by our new ad campaign featuring Gwyneth Paltrow.

Beyond the opportunities in the Coach brand, as you know, we launched Reed Krakoff last September in a few boutiques in the U.S. and Japan, as well as through prestigious international specialty retailers. We are pleased that the product is appealing to the targeted pinnacle luxury consumer. As we mentioned on the 3Q call, Valérie Hermann joined Reed Krakoff as President and CEO this April from YSL and has been a valuable addition to the leadership team.

What I have just reviewed are our strategies to drive our business at a double-digit pace, given the continuing strength of the Coach business and our increasing global expansion. We have significant runway ahead of us, both in North America, which remains a growing market, and worldwide, while our refocus on men's provides an additional opportunity for growth. At this time, I will turn it over to Mike Devine, our CFO, for further details on our financials. Mike?

Michael Devine

Thank you, Lew. Lew has just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our fourth quarter results. As mentioned, on a comparable non-GAAP basis, our quarterly revenues rose 17% with Direct-to-Consumer, which represents about 87% of our business, up 18%, and our indirect segment, up 12%.

Similarly, operating income rose over 20%. Net income for the quarter increased 18% and totaled $202 million with earnings per diluted share of $0.68, up 22%. On a reported basis, sales rose 9%. Net income rose 4%, and earnings per share gained 7%. For the fiscal year, sales rose 18% on a comparable non-GAAP basis, totaling $4.16 billion, while earnings per share were $2.92, up 30%, and net income was $881 million, up 24%. On a reported basis for the full year, sales rose 15%, net income gained 20%, and earnings per share increased 26% from fiscal 2010.

For the quarter, operating income totaled $312 million, up 20% from the prior year on a comparable non-GAAP basis and 5% above the $297 million reported in the year-ago period. Operating margin was 30.3%, 80 basis points better than the 29.5% generated in the prior year on a comparable basis and versus 31.2% on a reported basis.

During the quarter, gross profit rose 6% to $740 million from $697 million reported a year ago, while gross margin rate was 71.8% versus 73.3%, reflecting the impact of higher sourcing costs, partially offset by channel mix and modestly lower levels of promotional activity in our North American factory business.

SG&A expenses as a percentage of net sales totaled 41.5% compared to the 42.1% reported in the year-ago quarter. We were pleased that we were able to gain 60 basis points of leverage on a reported basis in the quarter, as our primary direct businesses here in North America and in Japan provided leverage to the corporate P&L, more than offsetting the impact of our investment spending. We believe we're striking the right balance between driving future growth opportunities and operating efficiencies.

For the full year, operating income totaled $1.3 billion and 32% of sales, up 20% from the prior year on a comparable basis and 14% above the $1.15 billion reported in the year-ago period. On a comparable basis, operating margin expanded 50 basis points and was above our stated objective and last year's actual margin of 31.5%. On a reported basis, operating margin was 31.4% versus 31.9%.

During the year, gross profit rose 15% to $3.02 billion from $2.63 billion a year ago. Gross margin was 72.7% versus 73.0% a year ago. SG&A expenses as a percentage of net sales totaled 41.3% compared to the 41.1% reported in fiscal 2010.

As a reminder, there were a number of items that affected comparability for the fourth quarter and the full year. First, the 53rd week in FY '10 contributed about $70 million to sales, $24 million to net income or $0.08 to earnings.

In addition, as noted in our press release, we recorded certain onetime items during the third quarter of 2011 which resulted in a substantially lower tax rate of 26.5% in that quarter. These included a favorable settlement of a multiyear tax return examination, which decreased Coach's provision for taxes by $16 million. In addition, the company made a $21 million contribution to the Coach Foundation and also contributed JPY 400 million or just under $5 million to the Japanese Red Cross.

Together, these contributions totaled nearly $26 million pretax, impacting GAAP SG&A expenses by that amount and precisely offsetting the benefit of the tax settlement to both net income and EPS.

Moving to the balance sheet. Inventory levels at quarter end were $422 million, up about 16% from FY '10 year end, consistent with our expectations and sales growth. This inventory level allows us to support 25 net new North American stores, 8 net new locations at Coach Japan and 25 additional Coach China stores from the year-ago period, as well as the Asia distribution center, the Reed Krakoff brand and our men's initiatives. Further, our current inventory support the strong underlying business trends and will allow us to maximize sales this summer and fall.

Cash and short-term investments stood at $702 million, essentially even with $696 million a year ago after $1.1 billion of share repurchase in the interim 12 months. During the fourth fiscal quarter alone, we repurchased and retired about 6.3 million shares of our common stock at an average cost of $60.08, spending a total of $381 million. At the end of the year, approximately $962 million remained under our present repurchase authorization.

Net cash from operating activities in the fourth quarter was $221 million compared to $182 million last year during Q4. Free cash flow in the fourth quarter was an inflow of $164 million versus $152 million in the same period last year. Our CapEx spending was $57 million versus $29 million in the same quarter a year ago.

For the full fiscal year 2011, net cash from operating activities was $1 billion compared to $991 million a year ago. Free cash flow in fiscal year '11 was an inflow of $886 million versus $910 million in fiscal year '10. CapEx spending totaled $148 million for the year compared to $81 million in the prior year.

It's important to note that based on our current plans for FY '12, we expect the CapEx for next year will be up in the area of $200 million -- up to the area of $200 million, driven by the timing shifts of certain projects or primarily for the opening of new stores across all geographies and investments in technology necessary to enable our global expansion.

While we are not giving specific guidance for FY '12, we see the year unfolding very similarly to FY '11 with strong revenue trends, robust core businesses delivering leverage while we continue to invest in the future.

First, and most generally, we do expect to achieve double-digit sales with earnings per share growth ahead of the top line. Our sales will be driven in part by at least mid-single-digit comp store sales in North America. Second, as we've said before, our gross margin is likely to improve sequentially in the first half of the year versus the second half of FY '11, though it will still contract on a year-over-year basis. The second half is expected to be slightly easier as we anniversary increased sourcing costs, while channel mix and our sourcing initiatives contribute to profitability. On balance, we expect gross margin to remain high and in the 72% to 73% range for FY '12. Third, on SG&A, we expect our core businesses to continue to deliver leverage while we will also continue to invest in global growth for the future. Fourth, we are committed to delivering an operating margin similar to what we've generated over the past 2 years. And fifth, our tax rate is likely to be in the area of 33% for the year, as we further refine our international tax strategies.

In summary, our fourth quarter and FY '11 results demonstrated our ability to manage our business nimbly while investing prudently in longer-term opportunities. 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 Coach brand with discerning consumers globally. We are also optimizing the brand's potential on men's, leveraging our long heritage in this category. 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.

As Lew mentioned, this will be my last earnings call. So before I open it to questions, I just wanted to say that this has been the most remarkable and rewarding 10 years of my professional career. I'm quite proud of what Coach has accomplished over this time. And in addition to all the many people at Coach I need to thank, at this time, I'd especially like to thank all of my many, many good buy-side and sell-side friends out there. Your support has been tremendous. I'd also like to welcome Jane, who I know is listening as she takes the best CFO job in global branded retail, and close by saying that I plan to be a long-time shareholder as Coach's prospects have never been brighter. And I look forward to watching its continued success as I pursue my board work and spend more time with my family. Thank you. I would now like to open it up to questions and answers.

Lew Frankfort

Thank you, Mike D.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Bob Drbul with Barclays Capital.

Robert Drbul - Barclays Capital

I guess the first question that I have is on the comp results for this quarter, what really drove the upside to your plans? And do you think those drivers should remain intact for potential for upside in your plans for the next fiscal year?

Lew Frankfort

Mike Tucci will take that.

Michael Tucci

Sure. We had -- we're very pleased with the quarter. We're very pleased with the year. The drivers behind it, conversion’s significant, more importantly behind conversion, improved handbag productivity through pricing where we had average unit retail increases as well as unit comps. That was a significant driver, and I think it speaks to the longer-term rebalancing of the assortment and driving a focus on balance in our assortment in handbags. Additionally, we're starting to see men's become a comp driver, contributing to overall productivity in our stores, particularly in the significant high profile stores where we have men’s in a more definitive and larger format within those stores. As you well know, we tend to be conservative planners. And while it's early in the quarter in Q1, the trends and tempo of the business that we saw coming out of Q4, we really see that continuing in the early stages of July. We like what we see happening with the response to product, largely driven by Chelsea, a very strong response to what I would call a more a refined look within Poppy and continued reaction to newness in our factory channel where we continue to refine our flow strategies there. And I think the other important channel to mention is that our digital opportunity continues to be a growth driver for us, not only from a sales and revenue standpoint, but in terms of visitation and browse. And we know that a large reason for our consumers coming to our site is to pre-shop our stores, so we see that as a continued opportunity as we enter into Q1.

Robert Drbul - Barclays Capital

Great, and just one follow-up question is, I think, Lew, you mentioned strong gains on a comp basis in both full price and factory. Was there a variance between the 2 this quarter?

Lew Frankfort

It was roughly the same.


Our next question comes from Omar Saad with ISI Group.

Omar Saad - ISI Group Inc.

Quick question on your international wholesale business. It sounds like there's some -- a little bit of acceleration in the store growth plan for this year, especially in light that a couple more of those businesses are now in-house. Could you kind of put that in context, what's going on there, especially with the announcement today on Brazil and in Vietnam?

Lew Frankfort

I mentioned earlier that our growing awareness globally has created substantial opportunities for us. And so first, in existing markets, we're finding that we're gaining on higher awareness, increased traction, which gives us confidence that we can continue to open new locations. We're also benefiting in many markets from the global tourist who is contributing substantially to our sales in many locations. Due to the new distribution agreements and increased traction, we're in a position to open many more locations than we have had -- than we have opened in the past.

Omar Saad - ISI Group Inc.

And how will the sourcing work in Brazil? I know there are sometimes some tariff issues for imports. Is your partner there going to source locally?

Lew Frankfort

We're going to be -- consistent with the way we run our business, we're going to do outsourcing [ph]. We're going to deal with the tariffs as we need to. The assortment will be a global assortment.

Omar Saad - ISI Group Inc.

Okay, great. And then one quick question on men's. Could you remind us what it was historically at its peak in terms of a percent of total Coach sales? And do you think it could get back there someday?

Lew Frankfort

I'm sorry, men's...

Andrea Resnick

20% to 25% of our sales as recently as the late 90s, Omar.

Lew Frankfort

It's conceivable that we could. I mean, right now, we're looking to grow our business from about 4% to over 10% during our planning horizon.


[Operator Instructions] Our next question is from Kimberly Greenberger, Morgan Stanley.

Kimberly Greenberger - Morgan Stanley

I wonder if you could talk about your pricing and your mix strategies in North America. And are you planning to increase price in order to offset rising cost of goods sold? And then Mike, could you just help me a little bit on your gross margin outlook? Can I read your comments to mean that you're expecting flat gross margin in 2012? Or do you think there's a possibility you could see some recovery in the year, obviously, with the improvement in the second half of the fiscal year?

Michael Devine

Why don't I take the latter half of that first, and then, perhaps Mike or Lew could jump in on the first part of the question? But Kimberly, we're -- yes, what we're asking people to model is essentially a flat gross margin rate. At this point in the year, it's still very early days of the year, but we're actually feeling guardedly optimistic about gross margin. We do believe that the quarter just reported is likely the low point. And we feel that we can continue to deliver margin rates similar to '10 and '11 for FY '12 with some gradual upside improvement in the out years, and that's in spite of continued sourcing pressures, the most worrisome of which is wage inflation in China. As we've talked about, we're at the beginning of a very aggressive program to move 50% of our units produced out of China. And while it's early days, we're ahead of schedule on this one, and we'll continue to battle it as we're now actually hearing some rumblings of wage inflation elsewhere. But in terms of materials, our design, merchandising and sourcing teams have done just a remarkable job in designing into cost and counter-sourcing. And of course, our cost of materials are not as dramatically impacted as some of the apparel brands you might be following. And we do feel like as we move into the second half of the year, we'll be anniversary-ing the worst of the material cost inflation. Really, all the other dynamics of the business will be helpful to gross margin as we move forward, most notably, channel mix, as our full price businesses in our mature markets continue to trend positive. And notably, China grows far more quickly than total Coach. Also the conversion of these distributor businesses, namely Singapore thus far, with Malaysia on horizon will also be helpful to gross margin rate. And I think, ultimately, long term as men's shares increases, we can also drive gross margin rate longer-term, as our relatively new men's team gets their legs under them. And frankly, we believe that our male consumers are not as bargain-obsessed as their wives and girlfriends. So the last thing I think that can be helpful to gross margin rate is as the overall economy generally improves, I think we'll continue to see full price trending nicely and perhaps over time have a little bit of pricing power in the factory channel as well. So we're looking for -- to model relatively flat FY '12 as the year plays out. The wildcard will be the promotional levels probably in factory, but there is gradual improvement in upside into the out years.

Michael Tucci

Okay, on retail pricing, the answer is we absolutely see opportunity for pricing, and it's not absolute price increases. It's driven by mix and offer. Couple of things that are happening in the market that are favorable to us. One is we're in a strong leather cycle, which affords us the ability to get higher retails, and that will drive average unit retails up in our handbag category, had an impact on Q4 where you see average handbags over $400 contributing 17% to our overall handbag sales versus '11 in the prior year. That's a big deal. The refinement of the Poppy strategy allows us to work the mix with inside of Poppy for some potential retail upside. And one other significant opportunity is what we're calling small bags and cross body, which offers us a pricing opportunity and also protects our opening price points both within Poppy, as well as in the overall mix. That's a very important element. So while we dialed back to a target of $300 and landed in the $280 range a couple of years back, we're now working our way back in trying to capture that $20 of upside in average unit retail in handbags. And I think overtime, we see that as a real opportunity. On the factory side, it's a similar story with a strong leather trend and also being very creative there on our pricing strategy to create differentiation in our retail strategy between leather offer and signature offer which the customer accepts on the factory side and allows us to gain average unit retail increases in our handbag category. That was also helpful and a driver, and we see that continuing.

Michael Devine

And a driver of gross margin rate as well, particularly in factory.

Lew Frankfort

I'd like to just add one clarification, Mike D. When we talk about 50% of our units coming from outside of China, what we're really referring to was incremental production requirements. We plan to maintain the same level of jobs in China that we have today, but all of our future requirements we're planning to come from outside of China.


Our next question comes from Brian Tunick with JPMorgan Chase.

Brian Tunick - JP Morgan Chase & Co

I guess my question's on the SG&A side. Just maybe talk about the investment spending this past year on RK in Europe and the continuation of the design buildout. How much of a drag was that this past year? And how should we think about that going forward in FY '12? Can this business get back to that 38% SG&A, as a percentage of sales, especially if you guys get to that $5 billion in revenue target over the next couple of years? And just quickly, on the Hong Kong listing, is there any update on timing of what we should we be looking for and your time -- your thoughts on that?

Michael Devine

I'll take the simpler one, the Hong Kong listing first, although actually it's not simple. It’s proving to be complex. And we're currently going back and forth with the exchange answering some questions based on the documents we've submitted, required to get listed. I think we're looking probably for a listing sometime in the early fall. But going back to SG&A, we were very pleased actually in the fourth quarter and the way we just delivered, as we talked about, we delivered, on an as reported basis, 60 basis points of leverage to the SG&A line, and we did that in spite of losing some of our healthiest revenue from Japan as a result of the earthquake. And again, that's on the 14 versus 13-week compare. So we're continuing to see great leverage being delivered by our mature businesses here in North America and in Japan while we continue the investment spend. So we talked about that investment spending as it was directed for RK, the infrastructure build in China and in other parts of Asia to allow us to capitalize on the opportunity there as being an investment in the neighborhood of about $0.08 this most recent year. I think we can look to see that investment continue to improve into '12 and into the out years. Valérie Hermann has come in and is really doing, I think, a number of the right things around RK. We're likely to pick up a couple of pennies of investment spend there. What will happen is that in the first half of the fiscal year, we will pick up the Singapore direct expenses. And while relatively modest to total Coach, that will be a drag to the SG&A rate. It will take Victor Luis and his team a little bit of time to bring that business to its full profit potential. We will get there, but to get there quickly, it takes a while for us to install our retail processes, adjust the assortment. And remember, when we transition a business from the distributor to a direct business, we're buying that inventory back at wholesale prices. So the first 6 months of selling is also at somewhat reduced gross margin rates. But going forward into FY '12, the balance of all these investments and the leverage we expect to get from our mature businesses looks like we're going to have a pretty flat SG&A rate for the year while we grow the business very strong double-digit top line.


Our next question comes from Lorraine Hutchinson, Bank of America.

Lorraine Hutchinson - BofA Merrill Lynch

Just wanted to follow up on the men's business. And how are you thinking about the total store base for both factory and full price domestically and then in Asia?

Lew Frankfort

Mike T?

Michael Tucci

We’re a little further along on the factory side only because it's more demonstrated there. We do have 15 stores opened. We opened a handful of stores this past several weeks, so we're adding to that. The factory opportunity from a store count standpoint is significant. And while we're not committing to a long-range number, we will be nimble and aggressive in terms of taking opportunities in the marketplace to gain space on the factory side. On the full price side, we're really pleased with what we see happening in the couple of stores that we have open outside of Bleecker Street, and we’ve committed to a handful of stores this year that we're working on, including a format where we have men's and women's side-by-side with a pass-through that will open in the spring in Pentagon Center Mall outside of D.C. That's when we talk dual gender. That's the format that we want to get into the marketplace. It's a format that we're seeing a lot of success with internationally, and we think that opportunity may play itself out in North America as well. I think it's important to note on the full price side that men's is a more premium proposition for us, and we're going to target the absolute best real estate within the full price arena. As we get more experience, we'll be better informed, and we'll approach the men's full price opportunity accordingly.

Lew Frankfort

Victor, would you touch on Asia for us, please?

Victor Luis

Sure. First, from the size of opportunity perspective, I think it's important to understand the scale of the opportunity that stands in front of us. We're looking at a premium handbag and accessories market in Asia of about $12 billion today, of which approximately 25% is men's. That would be the approximate penetration in Japan and in P.R.C., in Mainland, China, we see the penetration of men's closer to 50%, so a truly tremendous opportunity for us. From a distribution perspective, of course, you're all aware that we have a more mature distribution in Japan. And as Lew mentioned in the speakers’ notes, today, we have already 7 locations in Japan, 3 full price locations and 4 factory locations. We're planning to open 15 doors in FY '12, the vast majority of which will be men's freestanding locations. Increasingly, we're also experimenting with bringing men's into current women's doors where it makes sense from a distribution perspective. This is slightly more difficult in Japan, given that most of our locations are in department stores, where often we're on the women's handbag floor. In China, the opportunity is truly boundless, as we like to say. We have, today, 53 locations in the Mainland combined with 13 in Hong Kong and Macau, as you know. Of those 53 locations in the Mainland, already 23 of those are those dual gender locations that Mike referred to earlier. And of the 30 locations that we’ve plan to open in FY '12, approximately 27 of those will also be dual gender locations, so it is very much at the center of our strategy.

We have the opportunity to go boldly there, given that, of course, we are building distribution from scratch. Across other Asian markets, we are looking at both strategies as we are in Japan and here in the U.S. where we have the opportunity to start with new doors and it works, we're going in with the dual gender location, and where not, we're going in with the men's standalone locations.


[Operator Instructions] Our next question comes from Dana Telsey, Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

I wanted to -- a couple of things, how much production are you planning to shift out of China in this upcoming year? And if you think about the outlook [ph] business and the returns, what was the penetration of the main 4 products this quarter versus last year, and how you see those margins?

Lew Frankfort

The first question, in terms of -- over 85% of our production will be coming out of China this year. And if I understood your question correctly, Mike, in terms of made for factory?

Michael Devine

About 85%. [indiscernible] was where we've been.

Lew Frankfort

And to close out on that, yes, Dana, that does carry a slightly higher margin than the full price transfers into the channel.

Dana Telsey - Telsey Advisory Group

Great, and any thoughts on any remodels for the full line stores for this year with CapEx dollars?

Michael Tucci

We are -- there are a couple of things happening. One is we're actually in the process of taking a look at the entire fleet on a full price side and, in particular, looking at potential locations where we either have lease opportunity or space opportunity to better position men's and renovate the stores at the same time. And an example I would give you, a couple of examples locally, one would be we're about to reopen our store at 342 Madison where we were able to reformat the space and add a men's point of view and shop in that space. We did a very significant project at 595 Madison. So we have at least allocated slightly more capital to the idea of renovation and remodels within North America, particularly around taking advantage of the men's opportunity.

Andrea Resnick

Thank you all for joining us on our conference call today. That will be our last question. I'd like to turn it back now to Lew for a few closing words. Lew?

Lew Frankfort

I think our results and our comments speak for themselves. We're off to a great start in fiscal '12, and we believe we have the strategies in place to continue to grow at double digits with the bottom line growing faster than the top line. And as I've said many times before, stay tuned. Thank you, and have a good day.


Thank you, and this does conclude the Coach Earnings Conference. We thank you for your participation. You may now disconnect your lines.

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