掛毯 (TPR) 2003 Q1 法說會逐字稿

Good morning 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 Vice President of Investor Relations at Coach, Miss Andrea Shareznick. You may begin Thank you, good morning 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.

Before we begin, we must point out that this conference call will involve certain forward looking-statements. Including projections for our business in the future, for current 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, economic trends or our ability to anticipate consumer preferences or control [INAUDIBLE]. 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. We presently expect to update our estimates each quarter only. However the failure to update this information should not be taken as Coach's acceptance of these estimates on a continuing basis. Coach may also choose to discontinue presenting future estimates at any time.

Finally, please note, all prior year per share numbers that will be discussed have been adjusted to give effect to the Company's 2 for 1 stock split which was effective in early July, 2002. Now let me outline the order of speakers and topics for this conference call. Lew Frankfort will begin with an overall summary of our first quarter fiscal 2003 results as well as our strategies going forward. Mike will then follow with details on financial and operational highlights for the quarter, as well as our outlook for the second quarter and full fiscal year 2003. Following Mike, we will hold a question and answer session which will conclude by 9:30 a.m. I would now like to introduce Lew Frankfort, Coach's Chairman and CEO.

Thanks, Andrea and good morning, everyone. It's enormously gratifying to be speaking with you today about our very strong first fiscal quarter 2003 performance which reflects the vibrancy of the Coach brand, well received transitional and fall product offerings and our proven growth strategies across all major distribution channels and key geographies. Before we get into a discussion of these results in our strategies, however, I did want to touch on a recent event within the Coach organization. Dave DeMatte, the President of North American retail and wholesale divisions has chosen to leave Coach after the holiday season at the end of January. Dave joined us in July 1998, speerheading the transformation of U.S. Coach stores to a more modern and inviting format and has directed the Company's accelerated U.S. retail store expansion program. Clearly Dave's passion is fixing businesses, charting new courses and finding challenges. He has accomplished much in his 4 1/2 years with Coach but is eager to start his own retail consulting business.

Today all of Coach's retail stores reflect the updated Coach format. Our factory store renovation program is under way. Our expansion strategy is established and our remarkable sales, both in retail and wholesale North American locations evidence these changes which showcase our powerful product offering. This will allow Coach's momentum to continue unabated in the seasons ahead supported by strong and seasoned retail and wholesale teams. Further, we are confident that we will effect a smooth transition because our brand is so vibrant and our retail strategies have long been established. As you know this morning we announced strong quarterly results ahead of our recently revised guidance and analysts estimates.

Our net income and EPS increased over 70% versus prior year levels as a 28% increase in sales combined with an improvement in margins continued to drive the bottom line. The highlights of our first fiscal quarter were, one, net income rose 79% to $22.5 million or 24 cents per fully diluted share. This compared with $12.5 million or 14 cents per share in the year-ago period. The consensus estimate for the quarter was 21 cents per share. Two. Net sales totalled $192.8 million, up 28%. Three. Direct to consumer sales which consists primarily of sales at Coach stores rose 24% to $106.6 million during the first quarter. Finally, comparable store sales in the U.S. rose 13.2% with retail stores up 20.9% and factory stores up 7.5%. During this quarter, we opened seven U.S. Coach retail stores and closed one marginal location. We also opened two factory stores.

Per our strategy to expand our most productive locations, we also expanded one retail and one factory store during the quarter. At the end of the fiscal quarter, there were 144 Coach retail stores and 76 factory stores in operation in North America. Indirect sales increased 34% to $86.2 million from $64.5 in the same period last year. Results were driven by strong gains in both the U.S. wholesale and international divisions. International growth was fueled by the complete ownership of our distribution in Japan through our joint venture. Double digit sales gains in comparable locations and new shop openings in Japan.

To date in this fiscal year, we have opened three new full-price locations in Japan including one in the first fiscal quarter and two in the current period. We also closed one location in the first quarter. While Mike will get into more detail with you on our financials, I wanted to give you this recap of Coach's first quarter results and tell you how delighted we were with the strength of our full-price businesses, both in the U.S. and in Japan. In U.S. retail, our 20% plus comps reflected increases in both traffic, which actually accelerated throughout the quarter, and the higher conversion rate as we are attracting a consumer more predisposed to purchase. Significant increases in sales at U.S. department stores reflected market share gains. We were also very pleased with our double digit comp performance in Japan where we were up against a strong year-ago comparison. Our sales continued to be driven by handbags and womens small leather goods reflecting the success of new introductions such as the Ergo handbag group as well as category expansions, such as footwear and hats.

Looking to this quarter. We are confident that the momentum which has continued this month, driven by our brand vibrancy, proven growth strategies, strong product offering and loyal consumer base will ensure superior financial results for the holiday season. As you know, our growth strategies include, number one, driving productivity through fashion innovation and product diversification. We will continue to bring in a younger, more stylish consumer while evolving the core Coach user. In fact, the 18 to 24-year-old consumer segment doubled for Coach over a four-year period. Most recently representing 11% of sales, up from 5% in 1996. We will continue to ensure relevancy of our product offering giving our customers new reasons to visit Coach. This holiday for example, we have a number of strong leather groups such Ergo, the focus of the fall campaign and slim duffle which just arrived in October to considerable success. At the same time naturally, we will introduce new colors and silhouettes to keep our existing assortment fresh and will update wearables with new fabrics and styles and hats, scarves and outerwear.

In addition, we believe that our footwear opportunity is significant and have expanded it to about 60 stores this fall where it has met our expectations. Number two, we are also adding more than 100 U.S. retail stores over the next four to five years. Bringing the retail store base to at least 250. During this fiscal year we will add at least 20 new retail stores of which we will open 13 in time for the holiday season. Most of our new retail stores will be located in existing cluster markets consistent with our expansion strategy. Examples of planned second quarter new stores include locations in existing markets such as on Bay Street in San Francisco, and King of Prussia outside Philadelphia. As well as a new market for Coach Orlando, where we do have two successful factory stores and have just opened our first retail store.

By the way, we opened the Millenia last weekend and the performance in the first three days are equal what we thought it would do in the first week. As we mentioned previously, another growth vehicle for us is the expansion of our most productive stores. Proven strategy we will also be relocating our Georgetown store in time for holiday and up to four other expansions in the second half of the fiscal year. We will also be expanding two factory stores. In addition, during the rest of FY '03, we are targeting at least mid-single digit increases in same store sales. Number three. We will aggressively expand market share with a Japanese consumer. In part driven by new locations, including the opening of additional flagship stores. As we have said many times our intention is to double market share in Japan from 2 or 3% to 6% during the next few years, through opening at least 25 locations including at least three additional flagships and ten retail stores and by targeting continued double-digit comp location increases in FY '03 and during our planning horizon. During this fiscal year, we expect to open at least ten new locations in Japan, including two retail stores, eight shops, and possibly a second flagship sometime late spring.

Fourth, we are raising Coach's awareness as a 365-day gift resource. By continuing to integrate in-store direct mail web site and local and national advertising, we will drive our key gift item strategy this holiday season and around important gift-giving opportunities throughout the year. Many of these gift items will be pre-packaged on focus tables during the holiday, making the shopping experience faster and easier, both in retail stores and for the first time in factory stores. Also, we will be implementing new gift packaging, our first in factory stores this year. By the way, as you probably know, we did implement gift packaging late last holiday in full price with a positive impact during December.

Finally, for the first time we will be sending out a holiday gift guide in the first week of December rather than simply remailing our 24-page holiday catalog. This smaller sized gift guide will focus on key holiday items that are available in Coach stores and department stores and is expected to drive additional Christmas sales. This guide will also be used as a bag stuffer in retail stores for the first time.

We are also implementing a field sales training program beginning now which we believe will positively impact the holiday season. And lastly, we are continuing to drive gross margin higher and leverage our expense base. Specifically we expect to recognize additional cost savings as we further refine our global sourcing strategy and continue to manage inventories tightly. Channel mix will also augment our margins as our highest gross margin channels, U.S. retail and international, will grow faster than our overall business.

Finally, we will continue to optimize our supply chain by leveraging volume, maximizing our factory mix and fine-tuning worldwide logistics. The strategies and actions I've just outlined build on the strength of our core brand and business equites. They are designed to reinforce Coach's leadership position as an American classic lifestyle accessories brand, offering accessible luxury to our consumers worldwide. I will now turn it over to Mike Devine, our CFO. Mike?

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 the first quarter results. As Lew mentioned, our quarterly revenues increased by 28% over Q1 fiscal year 2002 with direct to consumer up 24% and our indirect segment up 34%. In the first quarter, our gross margin expanded by 400 basis points over the comparable period of the prior year, from 64.1% to 68.1% of sales. There are four primary contributors to this quarterly improvement. First, the positive impact of the joint venture in Japan, due to the fact that sales previously recorded at wholesale prices are now recorded at retail. Second, sourcing cost initiatives. Third, product mix driven by increased penetration of higher margin mixed materials.

And lastly, channel mix as our highest gross margin businesses, U.S. retail and Coach Japan, Inc., are growing faster than the overall business. Selling, general and administrative expenses declined in the quarter and represented 48.6% of sales versus 51.2% of sales in the year earlier period. A 260 basis point improvement. This reduction was primarily due to efficiency initiatives and leverage in our non-CJI operations. Which more than offset costs associated with the joint venture. It should be noted that SG&A expenses for the first quarter include a mark to market adjustment due to the applications of SFAS-133 accounting for derivative instruments and hedging activities. Related to CJI's forward foreign exchange contract for dollar denominated inventory purchases. As a result, SG&A expense were decreased $1.8 million in the first quarter. Excluding the impact of this adjustment, SG&A expense as a percent of sales would have totalled 49.5% in the quarter. Still down 170 basis points from the prior year.

However, as CJI is a joint venture, only half of this after-tax adjustment is reflected in Coach's net income. As the remainder is allocated to our partner through the minority interest account. Excluding this adjustment, earnings per share for the quarter would have been 6/10 of a penny lower, but still would have been 24 cents per share. Our operating income rose 93.1% to $37.6 million in the first quarter versus the same period last year. Operating margin in the quarter was 19.5% compared to 12.9% in the year-ago quarter. Net income for the quarter increased 79.3% to $22.5 million or 24 cents per fully diluted share as compared to $12.5 million or 14 cents per share in the year-ago period. This 24 cents per share for the first quarter was ahead of the street's consensus estimate of 21 cents per share.

Inventory levels of September 28, 2002 were $152.7 million, $20.2 million or 15% above prior year levels. This increase is virtually all related to our inventory in Japan. A portion of which was on our distributor's balance sheet last year. U.S. inventory balances were up only 1% versus prior year levels as our supply chain improvements and inventory management programs allowed us to support the 26 new stores and the increased sales levels with this modest additional inventory investment. Accounts receivable balances rose approximately $11 million, primarily related to an increase in credit card receivables and higher sales in our indirect channels.

We have changed our terms on certain credit cards to obtain reduced fees in exchange for longer payment terms. Day sales outstanding and [INAUDIBLE] receivables at quarter end were 38 days versus 44 days a year ago. A six-day or 14% improvement. During the quarter, under our $80 million stock repurchase program, we repurchased and retired 1,929,000 shares of common stock at an average cost of $25.89. At the end of the period, approximately $20 million remained available for future repurchases under this program which expires in September 2004. Despite this $50 million expenditure and a $10 million stock repurchase in Q2 of fiscal year 2002, we ended this first quarter with $44 million of cash. Only Coach Japan's revolver borrowings of $35 million remained on the consolidated balance sheet at quarter's end. This represents a dramatic swing from the close of last year's first quarter when we had a negative net short-term liquidity position of $35 million in borrowings.

Net cash from operating activities in the first quarter was a positive $7.4 million, compared to $9.2 million use last year during Q1. Free cash flow in the first quarter was an outflow of $5.5 million versus the $27.5 million outflow in the same period last year. Mainly due to increased earnings and the impact of the acquisition of PDC in the year-ago quarter. CAPEX spending, primarily for new stores and renovations, was $13 million versus $9.7 million in the same quarter a year ago.

Now I'd like to provide you with some of our goals for fiscal year 2003. For our second quarter ending December 28, 2002, we are targeting the following. Net sales of about $290 million, representing a year-on-year increase of over 20%. And we are targeting high single-digit comparable store sales gains in U.S. retail. Operating income growth of approximately 30% year-over-year and earnings per share of about 61 cents or 24% above FY '02's second quarter. Our goals for the full fiscal year 2003 ending June 28, 2003, are as follows: net sales growth of at least 20% to at least $865 million with at least mid single-digit comparable store sales gains in U.S. retail. Gross margin rate of about 200 basis points above prior year levels. A modest improvement in SG&A expenses as a percentage of sales on a year-over-year basis. And operating income growth of more than 40% in FY '03 over FY '02.

Three factors will somewhat moderate that growth on the EPS line in '03. First, a higher share count brought about by option exercises. Second, a larger minority interest payment to our CJI joint venture partner as a result of higher sales and profits at Coach Japan. And lastly, a higher tax rate at 37% due in part to the large Puerto Rico plant closure and the reduction of the related 936 tax benefit. Net results of which should generate earnings per share of at least $1.27 or 30% above FY '02's earnings.

While these are our current goals, our actual results may vary from these targets based upon a number of factors including those discussed under the business of Coach, Inc. and risk factors in our annual report on Form 10-K. Coach also does not assume any obligation to update these targets as the year progresses.

In summary, we are confident our growth strategies will enable to us continue to gain share in the large and growing global market for fine accessories and gifts. Thank you for your attention and now Lew, Andrea and I will take some questions.

Thank you, Mike.

Thank you. At this time we are ready to begin our question and answer question. If you would like to answer a question, please press star one on your touchtone phone. You will be announced prior to asking your question. To withdraw your question, press star two. Once again, please press star one to ask a question. Our first question comes from Robert Dibble, please state your company name.

Lehman Brothers, good morning. Nice quarter. Thank you. Couple of questions. On the Japanese business, can you talk about what the revenues were in the first quarter, talk about the Gingas store, Tokyo comps, and just elaborate a little bit more than you did in the prepared remarks? Second question is, you might be able to give us an idea on the footwear revenues, how many doors you're in and what you're seeing with that rollout. And finally Lew I'd be curious to hear your plans with Dave's departure in terms of replacing him or where you are in that whole process.

Sure. Let me begin with the third question first. Dave and I have been talking for a while about his plans to start his own retail consulting practice. As you know, Dave be with us through the holiday season and through January. We're beginning a search and will look for a talented retail president to join Coach. We think Coach is a desirable company. We do have a strong and seasoned retail team in place. As I mentioned earlier, our strategies have long been established. Our brand is vibrant and we believe that we will be able to move forward without missing anything we would otherwise miss. Mike, in terms of our Japanese sales.

First quarter in Japan hit our expectations, reaching the low to mid-$30 million levels with our store openings on target. The Gengis store doing extraordinarily well and as we had in our prepared remarks double-digit comps on a very difficult compare from Q1 for last year. So we are very pleased with our results out of CJI for Q1.

In terms of footwear, performance continues very strong. POF sales are up over 40%, actually, POF sales are up over 70% in our U.S. department stores. We estimate that same store department store sales are up about 40%. We have met our expectations in Coach stores, footwear, Andrea is about -- in about how many stores today?

56.

About 55 stores. Sales are running between 7 and 8%. We are going to be expanding footwear this spring to an additional 20 stores.

Just one follow-up. In terms of for the full year for the Japanese business, can you tell us where you are right now and what your expectations are for the full year?

We have previously given guidance to about the $135 million range and we are still very comfortable with that figure.

Thank you. Margaret Major, you may ask your question. Please state your company name.

Hi, it's Margaret Major from Goldman Sachs. Great quarter. Awesome, really. Nice to see you raising the guidance going forward. I have a question about the gross margin, the outlook for the profitability of Coach in general. Can you talk a little bit about how the three segments, the pieces that are feeding into the higher gross margin are contributing? Is it sourcing, a bigger factor than channel mix, and talk about that. Then going forward, how high is high for the gross margins and then secondly with regard to the expense leverage, just wondering how marketing plays into that because I know in the past you've gotten some leverage on your marketing expenses and how that's shaking out, how you see it shaking out this year? All right. We are sorry to see Dave go, I know he was a big contributor, but I'm sure you'll find a solid replacement.

Thank you.

Why don't I field the gross margin question first, Margaret, if that's all right. We listed four major contributors to the Q1 improvement of 400 basis points. The largest being the step up to retail at CJI. As many of you are aware, Q1 will capture the largest impact of that for the full year because we did not own the joint venture until August 1 of last year. So we only had two out of three months in the same period a year ago and then it wasn't until later in the year where we completed the purchase by buying in the second distributor which represented about 15% of the volume. Clearly we will continue to enjoy some step-up due to the joint venture in Japan through the rest of the year, but this quarter it had its largest impact.

Moving down, then, we did pick the second largest impact was a result of sourcing and cost initiatives, the biggest component was the Laura's closure taking some of our classic leather production into third party manufacturing facilities. We will continue to enjoy some leverage on that line through this year. And then anniversarying it, you know, will stay in our base rate, but continuing to get market year-over-year improvement out of that portion of the contribution will be somewhat difficult. The remaining two, product mix and channel mix, are upside that we will continue to enjoy, particularly channel mix. We are projecting with new store openings, U.S. retail, and CJI to grow more quickly than the overall business. Fortunately those two businesses carry our highest gross margin rate. So we have guided to 200 basis points or fiscal year '03 over '02, that would bring us in at 69.2. We see a number beginning with the 7 in sight two to three years out to cap our total upside.

Thanks. And the expenses and marketing?

First, Margaret, as you know, we do continue to leverage our map expenses in most areas for the first quarter our actual map expenses ran 6.4% of sales compared to 7.4% for the prior year. For the full year, we are also expecting similar levels of improved leverage. Specifically in terms of media, our budget remains at constant dollar levels with last year.

Okay. Thank you and congratulations, Lew and everybody. We'll see you soon.

Thank you.

Thank you. Carol Murray, you may ask your question. And please state your company name.

Hi, good morning. Salomon Smith Barney. Congratulation on a great quarter. It's nice to see.

Thanks, Carol.

A couple of questions. First on the management search, could you also just talk about -- I understand Mary Wong is going back to Donna Karan. In terms of, are you thinking of kind of changing just the structure with maybe recruiting someone new for Dave and obviously now U.S. wholesale there's an opening. Could you talk about whether there could be any kind of newer positions or a change in how you're thinking about the business with the departure of Dave and Mary?

First, Carol, we are comfortable with the organizational structure. We do recognize it's our people that make up the team. We have a very strong executive team that is intact. We have a very strong leadership group. We will go forward with our search, identifying the best possible successors and based on their qualifications and backgrounds we will determine how we should actually compose the exact structure. This is not a science. We are not a packaged goods company. Everything has to blend together.

So the search will be for retail and wholesale just or just for retail?

First we do have a search underway for wholesale. We began the search recently when Mary informed us she was returning to Donna Karan. We're in the midst of interviewing candidates. We do need a person for the department stores's head position who is skilled and seasoned and understands the rules of the road. It is a position that does require, again, someone who has a background in that area. Separately, we are going to be looking for a person to lead our retail group.

Okay. Secondly, this might be a little bit more philosophical. But obviously the results in terms of the actual numbers and just one of the comments you made that traffic is accelerating. There really seems to be a contrast to everything else we are hearing at retail. I was wondering how you're thinking about that and what you might attribute kind of the dichpony in your strong performance when most other retailers really seem to be struggling.

Sure. First, we have a unique franchise. We do have a market leadership share in the United States somewhere between 15 and 18% today, and we are desirable, that is consumers tend to be predisposed to buy Coach. And what we're finding increasingly is that we're getting destination shoppers visiting our store. Even though absolute mall traffic may be down, those people who are going to malls are singling Coach out and they are coming to Coach in higher numbers than last year. In addition they're more predisposed to purchase. So, we are enjoying both increased traffic and increased conversion. It's due the vibrancy of the brand and the very strong product offering and the retail environment and strong staff and so on. We think that will continue.

Last question. In terms of the success of Ergo this fall, are there any kind of penetration rates you could share with us on how well that line did?

Sure. Ergo, which we introduced in August in Japan and featured in September in the United States, generated about 10% penetration during this period. Recently, as you know, we just introduced slim duffle and in the United States it's exceeding our expectation running north of 13% of sales. In Japan, 25% of sales across all materials. This is primarily a leather collection. We are really pleased with its performance and what it bodes for the holiday quarter.

Thanks very much.

You're welcome.

Anne Marie Peterson, you may ask your question. Please state your company name.

Yes. Thomas Weisel Partners. Could you talk a little bit about the performance of stores in existing markets as you continue your expansion there, what you see in terms of cannibalization and then the ramp?

First, when we opened. When we contemplate opening a store, we budget an expected cannibalization rate and do all of our pro formas net of whatever sales we anticipate we might lose based upon the proximity of other stores. What we generally find and it varies by market, but in major markets like New York City. We have found virtually no reduction in sales when we open new stores in strong cluster markets. So for example we opened our store on 16th Street and 5th Avenue and our Soho store continued to comp well against last year as did our other stores in New York. In secondary markets where the density is less, we sometimes experience 10 or 15% cannibalization for the first year, and then we resume growth in that original store.

Great. Thanks and then one more question. Can you talk about comp performance at mall versus non-mall locations, are you seeing any differences there?

We haven't broken it down that way, but our comps are running so far ahead of last year in retail that, as I just scan in my mind the stores, we don't see a difference.

Great. Thanks so much.

Thank you. Eric Bader, you may ask your question. Please state your company name.

Good morning. A few quick housekeeping questions, what was the depreciation amortization for the quarter and what was the square footage in the stores?

The square footage in the stores, Eric, in full price, 320,873. Factory square footage, 227,776. Total square footage, 548,649. Do you need the year-ago?

No, thank you. Just a policy question. In terms of Signature line, Signature line continues to evolve. Where do you see it evolving in the holiday and going forward into calendar 2003?

Sure. Well, first, as you know, we do have significant leather introductions this fall and as I mentioned earlier, Ergo is performing extremely well and that is a major item that we are featuring during the holiday season. Slim duffle we have just introduced to great success in all geographies in all channels. Those collections along with Hampdens and Legacy West, which are all leather collections, we expect a good performance from through the holiday season. And Signature will decline on a relative basis from a penetration perspective in Q2 as these leather collections take further hold and the seasonal holiday shift occurs.

In the spring we are going to be introducing Mini Signature, which will be one of several handbag platforms, and Mini Signature is a more sophisticated smaller sized pattern that we'll be featuring alongside of our classic Signature product. So we will give consumers additional choices. We do think it will appeal based on testing and piloting to both existing users and to existing Signature users and to those who may not have chosen to buy a classic Signature product.

Thank you.

You're welcome.

Eric to answer your first question, depreciation and amortization for Q1 was about $6.1 million versus 5.9 a year ago.

Thank you.

Jeff Edelman, you may state your question. And please state your company name.

Thank you, it's UBS Warburg. Guess it's an understatement to say nice job.

Thanks.

Two questions. One, what was the average ticket versus last year in the quarter?

A little changed year-over-year.

Actually it was virtually the same as full price and we are just reaching for the number.

About $170 full price which was consistent with the year-ago period and up ever so slightly just above $135 in factory. Again, just slightly above last year's figure.

Then second question, when you're talking about a mid single-digit comp for the year, obviously if you take what you've got in the first quarter, what you're looking at in the second quarter, you could be down in the second half and still get mid single-digit. I'm sure you're not planning that. Would you discuss what you're seeing in tourist stores and what kind of a lift you expect that to provide you and really what you're looking at in the second half as far as your plans are concerned?

Sure. First, Jeff, to be precise, we said we are targeting at least a mid single-digits. You understand the way in which we construct language.

Okay.

Second, we are very confident we're going to have an excellent second half for a number of reasons. First and most significantly, we have a very strong product platform. I mentioned earlier and I believe you have seen this group, we are introducing Mini Signature, it has been tested and piloting with great success. We are also introducing a product that has been reinterpreted from our archives called Soho. It was a great success in the early 1990s and we are introducing that in a group called Soho Twill. We have a third new group, a weekend group we will be introducing in March called Hampdens Weekend. It's a very attractive lightweight, multi-size carrying bag that we believe is going to create new usage and bring new consumers into the franchise as well. Beyond that we are also expanding footwear, as I mentioned, to an additional approximate 20-plus stores where we'll have about 80 stores in the spring.

You need to realize, Jeff, that compares to only about 20 or 25 stores last spring. Lastly, we are up against very soft tourist numbers in the -- in our second half of the fiscal year, that is in the January through June number, we are up against lower levels of tourism, particularly Japanese tourists, and they have come back to all markets now with the exception of New York. Very strong. A good part of the acceleration that we experienced in September occurred actually after 9/11 when we have easier comparisons particularly in the tourist markets. As I said, that acceleration has continued through October. We are very confident with our projections for the second half and believe that our outlook is going to be achievable.

Great, thanks.

You're welcome.

Thank you. Marnie Shapiry you may ask your question and please state your company name.

Merrill Lynch, congratulations, everybody. Just a couple of housekeeping. Tax rate for the balance of this year should be at 37. Is that correct?

That's correct.

Could you just go over the average store size at full price and factory, has that changed this year?

We ended last year at about 2100 square feet at the end of June. We are at approximately the same level now. Factory stores are closer to 3,000, about 2,900 and change and they are also opening at the same level.

Could you guys just touch a little bit about jewelry. It's the one factor you haven't mentioned today. How many stores is it in and what are your plans for holiday?

It was in 70 stores in the last quarter, representing just about 2% of stores where it was offered. Do you want to talk a little bit about holiday, Lew?

We do have a few items which we are featuring and we'll also be introducing some specialty pieces that have signature material, which we are confident will do well.

Thanks, guys. Congratulations.

Thank you.

Stacey Peck, you may ask your question. Please state your company name. Stacey Peck, your line is open for questions. Our next question is from Elizabeth Montgomery, you may ask your question and please state your company name.

Hi, good quarter from S G Cowan I actually have two questions. The first is, I was hoping you could give more color on sales trends by geographic regions. And the second is, I believe on your last conference call you were talking about how you operate the shops in Japan as lease shops rather than consignment stores? I wondered if you could discuss if your experience in those shops has given you any idea of how you can partner with U.S. retailers to increase your sales productivity or your conversion rates within the U.S. department store channel?

Let me just answer the second one, Elizabeth, first. The situation in Japan is fundamentally different. We operate within the ways in which Japanese department stores operate, and they do offer leased shops to major brands and resources. And that is the way in which we work in over 85% of our sales within department stores in Japan are in leased shops. In the United States it's quite the opposite. Department stores like to run and control their own space. We have been unsuccessful in our efforts to obtain leased shops in our individual discussions. So we just don't go there because it's not productive.

With regard to regional performance, I'll just hit some highlights. It needs to be taken into -- in the context of our overall full-price comps with nearly 21% for the quarter. I'm only going to highlight areas that were materially ahead of those numbers. Florida was up 50%, that excludes Puerto Rico. We have only one store in Puerto Rico. There we continue to enjoy comps of 100%. New Jersey ran 39% ahead of last year. Also in the metropolitan area, Long Island ran 45% ahead. In what we call the Los Angeles/Las Vegas area, we ran 39% ahead. And Hawaii ran 30% ahead with almost all of that occurring because of spectacular results during September -- actually September I commented earlier in some ways is a milestone because of 9/11. We actually enjoyed in Hawaii a 63% comp, my records show, in the month of -- in the month of September.

Okay, great.

Thank you. Stacey Peck, you may ask your question. Please state your company name.

Sorry about that. Do you have there what Signature duffle and Hampdens are now as a percent of sales? That's the first question. Also can you just tell us in your new Q2 guidance what we should assume for revenue by segment? And on this comp that was just reported, what was the impact of remodels, if any? Finally, there are any other positions open other than Mary and Dave?

Okay. Let me take them in the reverse order. We do have one other senior position that is open, the head of visual merchandising and new store design is also leaving Coach to pursue other opportunities. In terms of your other -- your earlier question, around on Signature, I'm just reaching for some numbers. I'm going to actually give you Signature for -- I can give it to you for month to date for October, which is probably a more relevant number than last quarter. Signature represents about 30% of sales in full-price stores. What's most -- what's important to note is that our handbags are about 17% compared with about 12% last year, which means that the rest of the growth has occurred from hats, women's accessories and shoes.

The Signature performance is exactly in line with what we thought it would be, and it will trend somewhat down seasonally as the quarter moves along.

Mike? Why don't I take your question about segment revenues for Q2. That's not something that we have typically broken down in our forecast, but I can give you some color. We have talked to our expectations around retail comps. I would also say that we are anticipating momentum to continue through all of our major channels in all key geographies, that would include Japan where we are anticipating continued double digit comps there and also in our U.S. wholesale business where into October that business remains remarkably strong.

And the remodel impact on comp, if any?

We don't look at it anymore. Our remodel program, as we said last year, is over, and we are not doing any full-price remodels. We are beginning on the factory side.

Yeah. In factory we have seen very positive results from remodel there with comp being nearly double as those remodel locations versus the nonremodeled factory stores.

Great. Thank you.

You're welcome.

Thank you. Liz Dunn, you may ask your question. Please state your company name.

My questions been asked. Thank you.

Thank you. Once again to ask a question, please press star one on your touchtone phone. Thank you, Carol Murray, you may ask your question and please state your company name.

It's Carol Murray at Salomon Smith Barney again. Just two housekeeping issues. With respect to some of the below the line items, you said share count and minority interest. Could you give us a sense what we should be thinking about those numbers for the year?

Sure. Share count, we are targeting an average share count of about 92 million shares for the full year. In terms of minority interest we are looking for about a $2 million plus share with our joint venture partner Sumitomo. So we're looking for net income after tax profitability in Japan approaching $5 million.

In terms of CAPEX, any changes to the annual budget?

No. Little change, I think on previous calls we have given guidance in the direction of about $50 million of capital spent domestically and 8 to $9 million in Japan. Those numbers still are approximately correct. If anything, we may have some problems spending and getting to all of those projects before year-end. If anything, we are trending to be slightly below previous guidance.

And then just the last question. In terms of the gift packaging for the factory outlets, when will that be in store, and what is it going to look like?

I believe it's going to be in stores sometime in November. It will be -- I believe -- I'm not exactly sure the color, I think it's going to be red -- it's going to be a red border with white background.

As opposed to your full price, which is the brown border?

Correct. It's going to be an appropriately modified box to reflect factory, a gift box might cost a dollar in a Coach store and in factory about 30 or 40 cent box.

Do you also do the gifting concept in the factory outlets as well?

Yes. What you're going to see when you visit factory stores during November and December, a very strong gift wall presentations. We just completed our floor set, it's extremely powerful. We are featuring about 10 or 12 key items that will be preboxed. They will also be highlighted in factory communications.

And the drop on the holiday book, in early December, the gift book, is that going to be to -- your normal list or are you expanding distribution on that at all in terms of consumer direct?

On the first, it's going to be primarily to our best buyers, but it needs to be seen as an element in an overall program. We are going to be circulating 1.2 million gift guides. The theme of the gift guide is perfect presents. That will also be the theme on our Internet. The theme in our stores. What we are planning to do is take 12 key product groups that include Ergo and duffle and Signature clip Hobo and wristlets and gloves and scarves and the like, and we are going to be using the power of our newspaper advertising, national advertising, Internet, in-store marketing, as well as catalog to do -- to provide editing and focus for the consumer. This is the most powerful holiday item focus that we have had in our history. We are confident it's going to result in very strong performance.

Just a last question. I would assume from a financial perspective the margins on the gift items are more attractive than the average. Would that be a fair statement?

What's fair to say is like the rest of our line, a gift items have excellent margins.

Okay, great. Thanks very much.

You're welcome.

As it is now 9:30, we are going to thank everybody for joining us. Mike and I, of course, will be available for questions during the day and Lew as well, if you need to speak with him. Thanks again and talk to you soon.

Thank you, everybody.

Thank you.

This concludes the conference. You may disconnect. Thank you for your participation.