掛毯 (TPR) 2003 Q2 法說會逐字稿

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 divisional Vice President of Investor Relations at Coach, Ms. Andrea Shaw-Resnick. Ms. Resnick, you may begin.

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 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 projections based on risks and uncertainties such as expected economics trends or unability to estimate future consumer preferences or control costs. Please refer to our latest annual report on Form 10-K for a complete vice of these risk factors. Also, please note historical growth trends may not be indicative. We presently expect to update our estimates each quarter only but the failure not to update shouldn't be seep as Coach's acceptance of these on a future basis. Finally please note all prior years' per share numbers that will be discussed have been adjusted to give effect to the company's 2 for 1 stock split effective in early July 2002.

Let me outline the order of speakers and topics for this conference call. Lew Frankfort will begin with an overall summary of our second quarter fiscal 2003 results as well as our strategies going forward. Mike will then follow with financial and operational highlights for the quarter and details on what will follow, as well as our outlook for the second half and full fiscal year 2003. Following Mike we will hold a question and answer session which will conclude by 9:30 a.m. I now would like to introduce Lew Frankfort, Coach's chairman and CEO.

Thanks, Andrea and good morning, everyone.

I'm happy to be speaking with you today about another strong quarterly performance that reflects the increasing vitality of the Coach brand and the relevance of the product offering across all of our business units. 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 about 40% versus prior year levels as a 31% increase in sales combined with an improvement in margins continued to drive the bottom line.

The highlights of our second fiscal quarter were net income rose 41% to $62.4 million or 68 cents per diluted share. This compared with 44.2 million or 49 cents per share in the year-ago period. The recently revised consensus estimate for the quarter was 66 cents per share.

Net sales totalled $308.5 million, up 31%. Direct to consumer sales which consist primarily of sales of Coach stores, rose 19% to $191.5 million during the second quarter. Finally, comparable store sales in the U.S. rose 12.7% with retail stores up 18.1% and factory stores up 5.8%.

During this quarter we opened six U.S. Coach retail stores with excellent results, including our first full price store marking the first time we brought a full-price store into a market we first entered with factory stores. Per our strategy to expand our most productive locations, we also expanded our Georgetown location. Finally we renovated two retail stores, Sacramento and Southstreet Seaport and five factory stores. At the end of the fiscal quarter there were 150 Coach retail stores and 76 factory stores in operation in North America.

Indirect sales rose 56% to $117.1 million from 75.3 million in the same period last year. All indirect businesses including Coach Japan, U.S. department stores, international wholesale, and special markets contributed to the significant increase. To date, in this fiscal year, we have opened five new full-price locations in Japan, including one in the first fiscal quarter and four in the second. We also closed one location in the first quarter. At the end of the second quarter we have a total of 89 locations in Japan, including 71 shops in shops, eight full price stores including Ginza flagship, eight factory outlets and two airport locations.

While Mike will get into more detail with you on our financials, I wanted to give you this recap of Coach's second quarter results. In U.S. retail our 18% comps reflected increases in both traffic and a higher conversion rate as we continued to attract a consumer more predisposed to purchase. In addition we generated double digit comps in each of the quarter's three months, including December where we were up against the most difficult comparison. We were also gratified to experience significant increases in sales at U.S. department stores which reflected market share gains. During the quarter our POS sales rose about 25%. We are also very pleased with our continued 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 women's small leather goods reflecting the success of introductions such as the smooth duffel handbag and wristlets, as well as category expansions such as hats, gloves and scarves.

I believe it's important to emphasize that our distinctive business model is based upon the underlying premise that Coach offers accessible luxury American lifestyle accessories to a loyal and growing consumer franchise. We provide consumers with relevant aspirational products that are extremely well-made at an exceptional price. By doing so, we are able to continually strengthen Coach's leadership position by building lasting market share. This premise is key to our belief that we will achieve sustained accelerated growth in the years ahead and continue to significantly increase our share of the premium accessories market.

Our five key strategies will remain unchanged and are all focused on achieving accelerated and sustained growth. As most of you know, they are: First, driving productivity through fashion innovation and product diversification. By doing so, we are attracting a younger, more stylish consumer into the franchise while growing and evolving the loyal Coach user. This spring for example, we have a number of mixed material and leather groups such as a new mini signature subtle mini logo and soho twill which updates Hampden's twill with iconic soho style, along with Hampden's weekend, our first entry into the casual weekend segment. At the same time, naturally, we are introducing new colors and silhouettes to keep our existing assortment fresh, and we are updating wearables with new fabrics and styles, with hats, scarves and outerwear. In addition, we are introducing women's footwear to an additional 20 stores next week, bringing a total to 80 retail stores that will be carrying footwear this spring.

Number two, we will also be adding 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 20 new retail stores which include an additional seven by year end. Most of these units will open in the fourth quarter. Examples of planned second half new stores include locations and existing markets such as Westfield and New Jersey and fixed plaza in Atlanta. As well as our second retail store in Orlando.

As we have mentioned previously, another growth vehicle for us is the of our most productive stores. Per this strategy we will be expanding three full-price stores and four factory stores in the second half of the fiscal year. In addition, during the rest of FY '03 we are targeting at least high single digit increases in same-store sales based upon our continuing momentum, the vibrancy of the brand and the strength of our new and expanded offerings.

Number three, we will aggressively expand market share with the 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 to 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 10 new locations in Japan which includes an additional six by year end and the opening of our second flagship store located Japan during April.

Fourth, we are raising Coach's awareness as a 365 day lifestyle accessory resource for self purchase and gifts. By continuing to integrate in-store direct mail, web site, and local and national advertising we will drive our key gift item strategy around important gift-giving opportunities throughout the year. For example, for the first time this year we will offer pre-packaged gifts for valentine's day, mother's day, and father's day in our full price and factory stores. We are also emphasizing new age occasions such as weekends or evening and offering items at a broader range of prices such as our successful wristlets, which is either a great item for self-purchase or a gift.

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 Japan, 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 that I've just outlined build upon our expanding consumer base and our design to enable to us achieve superior financial results in calendar 2003 and in the years ahead.

Before asking Mike to give you details on our financials, I did want to mention our pleased I am by your new senior appointments. Mike Tucci as President of U.S. retail, and Cassie Natarastak as President of U.S. wholesale. Mike, who joined us in the gap brings a terrific balance of merchandising and retail experience with him. He hit the ground running last week and will spend the next few months immersing himself in the business and visiting our stores around the country. Cassie Natarastak who will officially start with us in early February is coming from Natori where she held the position of President and COO. Her background includes both brand and department store experience, and her leadership skills and merchandise and savvy will enable her to build on the strong momentum we are experiencing in U.S. department stores. Cassie has already begun the onboarding process.

Now I will 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 our second quarter results. As Lew previously mentioned, our quarterly revenues increased by 31% with direct to consumer up 19% and indirect up 56%. In the second quarter, our gross profit margin expanded by 170 basis points over the comparable period of the prior year to 70.3% of sales as we reported our first ever 70% plus quarter.

There are three primary contributors to this quarterly improvement. First, the positive impact of sourcing cost initiatives. Second, product mix driven by increased penetration of higher margin mixed material products. And third, channel mix as our highest gross margin channels grew faster than the business as a whole. Selling, general, and administrative expenses declined in the quarter, and representative 37% of sales versus 38.9% of sales in the year earlier period. This reduction was primarily due to efficiency initiatives and leverage in core businesses.

Our operating income rose 46.7% to $102.6 million in the second quarter versus the same period last year. Operating margin in the quarter was 33.3% representing our first ever 30% plus quarter compared to 29.7% in the year-ago quarter. Net income for the quarter increased 41.4% to $62.4 million or 68 cents per diluted share as compared to $44.2 million or 49 cents per share in the year ago period. Results for the second quarter were ahead of the recently revised consensus estimate of 66 cents per share inventory levels of December were $135.9 million. 20.5 million or 17.7% above prior year levels.

The year-over-year increase is primarily related to our inventory in Japan some of which was on our distributor's balance sheets in Q2 last year. At the same time it should be noted CGI inventories fell about 10% from September levels. Supply chain improvements and inventory management programs allow us to limit non CJI inventory growth to only 5.2% versus prior year levels, an increased Q2 turns by 14% while supporting the 22% net new stores and increased sales levels.

Our accounts receivable balances rose approximately $38 million primarily related to an increase in credit card receivables of $21 million as mentioned on our first quarter call. We have accepted slower payment terms for more favorable fees on certain credit cards. As of today, 80% of December's credit card receivable balances have been paid down. The balance of the increase in receivables is due to higher sales in our direct -- I'm sorry, in our indirect businesses. Quarter-ending day sales outstanding in trade receivables were at 39 days which is flat to last year's levels. We ended the second quarter with $171 million of cash. Only Coach Japan's revolver entrepreneurings of $42.5 million remained on the consolidated balance sheet at quarter's end. At the end of the period, approximately $20 million remained available for future repurchases under our $80 million repurchase program which expires in September 2004.

Net cash from operating activities in the second quarter was $118.9 million compared to $90.7 million generated last year during Q2. Free cash flow in the second quarter was $105 million versus 79.2 million in my same period last year primarily due to increased earnings. Cap Ex spending primarily for new stores and renovations was $13.9 million versus $11.6 million in the same quarter a year ago.

Now I'd like to provide you with our goals for the second fiscal half and full fiscal year. For the full year 2003 ending June 28 we are targeting the following: Net sales growth of at least 25% to at least $900 million with double digit comparable store sales gains in both U.S. Coach stores and Japanese locations, a gross margin of about 70% versus 67.2% reported in fiscal year '02, and a significant improvement of about 100 basis points in SG&A expenses as a percentage of sales on a year-over-year basis. As a result for the full year, operating income should grow by nearly 55% with operating margins exceeding 23%.

As you know, three factors will somewhat moderate that growth on the EPS line. 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 versus fiscal year '02 of 37%. So taken together, on our 25% sales growth target we should generate earnings per share of at least $1.40 per fiscal year '03 or a 45% increase over FY '02. That means for the second half of fiscal 2003 we are targeting the following: Sales growth of at least 20% to about $400 million, at least high single digit comp store sales increases, operating margin for the half about 400 basis points above the year-ago levels with gross margins increasing and SG&A as a percentage to sales declining, and earnings per share of at least 48 cents with a third and fourth quarters approximately equal. 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 that 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. At this time if you would like to ask a question, please press star one on your touch tone phone. You will be announced by name prior to asking your question. To withdraw your question, press star two. Once again to ask a question, please press star one at this time. Our first question comes from Bob Shile. State your question and company name.

Lehman Brothers. Good morning, congratulations, guys. Two questions. The first one is as you look at the Mini Signature launch that you have, what are your expectations in the foreseeable future? On the gross margin line, where do you think you are in terms of the game of getting continued gross margin expansion?

I'll answer the first question. We have both tested and pilotted the mini signature and came away with the view that it would represent a net plus increase of some significance for Signature as it brings in a more sophisticated consumer. I'm pleased to share with you, Bob, early selling indications both in Tokyo and in initial markets in Florida, it's living up to our expectations. In fact, mini Signature ran about 15% of sales in these locations last week. We are confident it will do what it is expected to do.

Bob, on the gross margin question, you may recall on our last call we said that perhaps a 70% gross margin rate was within sight and we are thrilled to say we have -- with the announcement today we have actually achieved that. Going forward, gains will continue but at a slower pace. We should continue to be able to pick up additional gross margin leverage through channel mix as our high gross margin channel mix gross more quickly than the company as a whole. We are guiding to a 70% gross margin rate approximately for the full fiscal year.

Great, thank you.

You're welcome.

Our next question comes from Dana Telsey. You may ask your question. Please state your company name.

Good morning, everyone. Bear Stearns. Congratulations. Couple things. Can you talk a little bit about the expense savings and expense ratio which certainly did very well this quarter? How much of the savings came from Japan? Secondly, can you talk about leather versus mix materials and the penetration of leather? And also Mike and Cassie beginning, any differences in their roles or responsibilities from what they Nate and Wong had before? For you, Mike, Cap Ex, what do you expect it to wind up at? Just a couple there.

I'll take the first and the last. Yes, talking to expense leverage. Firstly, as most of you know, this is the first year that we have had Coach Japan in its entirety on the Coach, Inc., consolidated financial statements, so the assumption of the SG&A expenses around operating the stores and the distribution network in Japan, et cetera, coupled with the investment we have made in putting infrastructure in place, to capitalize on the growth opportunity there, Coach Japan has been a detriment to our SG&A leverage. And we will expect to see that change going forward as we begin to lever the investment there. The good news is the rest of the business with the fabulous sales growth and expense control has produced leverage, most notably in our mat line, our advertising line where we have actually picked up about 110 points of gross margin leverage on approximately the same media investment as we made in prior years. And I should also add while we have also increased the number of customer contacts through targeting media placements. So that is where the majority of the SG&A leverage came from in the quarter. Now going to Cap Ex, then you may recall that we have previously guided to capital spending of approximately 50 million in the non CJI portion of our business. I think that's still a pretty good number. You'll recall we spent about $38 million there last year. The majority of that is dedicated to new stores and renovations through all non CJI channels, but of course primarily Coach U.S. stores. In Japan, I think previously we guided to or $9 million. Since that time we have announced that we plan to open our second flagship, she Sheboulya store. I think it might be more appropriate now to target a 10 to $11 million Cap Ex spend in Japan.

Thank you, Mike. With regard to our ratios of leather to mixed material and leather products, consistent with what we had anticipated for the second quarter, leather sales at POS ran about 55 to 60% of total handbag sales with virtually the -- a good part of the remainder coming from signature. As we move into the third quarter, our third fiscal quarter, there is a shift towards more mixed materials as we move into the spring months. In terms of our -- Dave and Cassie -- rather, Mike and Cassie, Dave's replacement, Mary's replacement. First, Mike is responsible, as Dave was, for retail North America. Those will be his responsibilities. He will not have oversight over the U.S. department stores as Dave did during the last part of his tenure at Coach. Cassie will come in as a president of U.S. department and specialty stores and will have full responsibility for that business unit as her predecessor did.

Thank you very much.

Thank you. Jeff Edellman, you may ask your question and please state your company name.

UBS Warburg. Thank you and good morning. Two questions. One, regarding what was the average ticket in the quarter, gifts that you would expect for the year, and how do you expect to increase the store productivity in next year's December quarter on top of what you've just experienced here?

First, our average transaction was about $165 consistent with last year. Productivity, Jeff, comes from a variety of sources. It comes from traffic and it comes from conversion. As I indicated, our traffic was up substantially during the holiday quarter and our conversion was as well. That momentum has continued into the spring and we believe that as our brands continues to grow as more people are attracted to Coach and are more inclined to purchase that we will be able to increase both traffic and conversion. In fact, what we are finding from some of the consumer research that we are conducting is that the people who are the newest to the franchise, those who have entered in the last one to two years are more predisposed to spend than those who entered the franchise in earlier years. Which means we are attracting a consumer who is as loyal as our original classic consumer. So we believe it's about market share, Jeff, and that we will continue to grow market share and our productivity, assuming we continue to stay focused and we plan to and deliver the right product and be single minded about what we do, including excellent consumer service and image enhancing retail environment, good product flow and assortment management, we will continue to drive productivity gains not just in our calendar 2003, but in the years beyond.

You should be. As far as gifts are concerned, I believe last year they ran at the annual rate of 40%. Do you have any sense of where that might go this year?

Actually I believe that it's declining somewhat. What's interesting to us as we become a resource, 365 days a year where we see very strong gains during our non-holiday quarter, we are finding that women are buying for self-purchase at increasing rates. And while we believe we will continue to increase gifting in absolute dollars from a relative perspective we are more focused on gang an ever-increasing share of our target consumer's wardrobe spent. Most of that is self-spent.

Thank you.

Margaret Major, you may ask your question and please state your company name.

Hi, it's Margaret.

Hello, Margaret.

Hi. Congratulations.

Thank you.

On your results. And just a question on your planning for high single digit same source sales increases for the next two quarters, I think you also were planning high single digit in the past two quarters. And yet we all know you're facing more difficult comparisons in the first half. Can you walk us through some of the key programs that will be coming out in the next six months and any preliminary insights or plans you can share with us for the second half of '03 would also be much appreciated?

Sure. Let me begin, Margaret by saying, as I mentioned earlier, the momentum that we enjoyed has continued into the first four weeks of January. So we feel terrific about the transition. And during January when you visit our stores, you'll see a very fresh spring palette that includes Hampdens, which has performed extremely well and is one of our platforms. We also introduced mini signature -- sorry, we introduced a Signature duffel in a small size as well as a few additional Signature colors all performing very well. Mini Signature is being launched next week. I said earlier our first selling indications reinforce our confidence that it's going to be a key component and it will drive additional net plus sales. We are also expanding, of course, footwear, and in March we will be launching Soho Twill, which is a very beautiful product and also has tested extremely well. Hampdens Weekend, in addition, is coming, and for later this spring, we also have straw and our seasonal spring patterns. We are very confident that the momentum that we enjoy during the holiday season and is continuing through January is with us. As I said earlier to Jeff, this is not about same store sales. This is about growing market share. And our productivity we are confident will continue to improve this season and in the years ahead.

Does that conclude your question?

Margaret?

We'll go on to the next question. David Schick, you may ask your question and please state your company name.

Good morning. SunTrust Robinson Humphrey.

Thank you, David.

I would like to ask three questions real quick. Can you update us on New York and tourist area comps, first of all? And second, if you guys have clearly defined the market for some time, but if you could mention if you see anything different out there from any competitors? Lastly, a very quick question: You have had a couple malls where you have been talking about implementing a handbag-only store. If you could update us on that.

First, as we reported, our full-line stores had about 18% same store sales for the quarter. In the tri-state area, our -- our comp sales were up 15%. And that's -- that includes New York City. And we enjoyed stronger results in the suburbs than we did in Manhattan this year. Overall again, we were up 15% within the market. In terms of the competitors, we don't see anything different from them. We tend to be more inwardly focused with us talking directly to consumers. Relative to our new store concepts, we are opening up two stores later this spring. I believe in April or so we will be opening -- what we are focusing on is a handbag and footwear concept. And one will be located outside Philadelphia and King of Persia and other in the Phipps Plaza. These are two pilot stores.

Thanks a lot.

You're welcome.

Thank you. Mannery Shapiro, you may ask your question. Please state your company name.

Merrill Lynch. Could you talk briefly a couple things? Inventory through the spring season, you guys mentioned hats, scarves and shoes. Cold could you talk a little bit about how jewelry which you didn't discuss, has performed and what the plans are for it, and about the very small but adorable pet segment? Could you walk us through again back to spring, the leather versus nonleather product launches versus last year? I understand you've added one mixed materials launch, but how in total does it compare mixed materials number of launches versus last year?

Okay. Mike, you want to take the first part in inventory.

Sure. We are currently looking for inventory levels just modestly ahead of year-end levels at the end of fiscal year '02. So we believe that we can continue to drive turns improvements through the supply chain and management of inventories in the stores as well. We would target an inventory growth certainly no more than 10% probably closer to 5 to support the business strong second half business and put us in a good position heading into fiscal year '04. So we are pleased with inventory management to date, and we have aggressive plans to continue along those lines.

With regard to miscellaneous categories such as jewelry, one of the lessons we are learning from our consumers, they looking for distinct jewelry from us, and you will see a more focused edited assortment with more distinctive jewelry. We do believe jewelry is a category that is here to stay and will grow with us; we are confident with that. Our consumers have told us that. For us, pet is fun; it performed really fine. It brings a smile to consumers faces, and we will continue with a pet group, especially during the holiday season. One of the things I said earlier, Mannery, is that we are focusing on becoming an ever-increasing important resource to our consumers wardrobe and 365-day resource. What's become very clear to us in the spring and summer seasons, women want lightweight handbags that are more fun and that provide for versatile lifestyles. And with that, we are continually focusing on what the groups we can provide that will meet that requirements. With that in mind, we are expecting leather group this spring to represent 30% of sales down from nearly 40% last year and with mixed material and leather representing the rest. This is really a planned diversification on our parts to fulfill a larger portion of our consumers' lifestyles. And when you look at for example, Soho Twill, it's great for the office, it's great for the weekends. We are launching a Hampdens Weekend, which is our first real entry into the casual relaxed segment. And that can go on to basically say that we have the view that we can fulfill our target consumers entire accessory requirements through a broader range of products, handbags and accessories. And that's our goal.

Congratulations.

Thank you.

Thank you. We have a follow-up question from Margaret Major.

Hi. Sorry about that.

No problem.

Had a problem. Lew, I was wondering if there was anything you could say about your outlook into the second half at this point? I know you plan your product out fairly far in advance. I also had a question about in-stock position. I know a lot of -- some of the really great items were not really available as we got closer and closer to Christmas and then post-Christmas for returns and what not. I'm thinking about some shoes in particular and key handbags. Can you talk about how you manage the inventory to achieve comps that you did manage to get, and how you think about in-stock versus out of stock and if that was even a restraint on the business at all?

First of all, it's a very tight or delicate balance to walk between inventory management and merchandising availability. And we do have a series of sophisticated programs where we try to anticipate upside in key styles and we have never out programs and we manage as best as we can the wind was really behind us. We did not anticipate the strength of the business as it was and we did experience some stockouts, although we did do heavy consolidation in order to maximize sell-through high pressure satisfy consumers. We also had a very dramatic increase in our -- what we call ship from factory business, which is a vehicle for us to provide consumers who are not able to purchase what they want in a store with a product the next day at their home by ordering directly from our distribution center. It's a resource that we are going to use increasingly to manage our -- manage upside where it's not good business for us to have that amount of inventory in all stores. So that's going to be an opportunity for us. In terms of law sales, we think it was marginal. We did increase our sales by 30% for the quarter. Again you can always get better. And we are planning to fine-tune some of our inventory management programs. With regard to the fall, we are ready, we are in the midst of finalizing our product through the fall and into the holiday season. We did debut some of our product both with consumers in tests as well as with department and specialty store leadership. And the reaction is extremely strong. We are going to of course be continuing with mini Sergeant signature in the fall. We will be introducing the very strong leather so who product group, which is inspired from the product from our archives. We think it's very strong for the holiday season and will allow us to continue to realize good gains.

Thank you so much.

You're welcome.

Jack Buckingham, you may ask your question and please state your company name.

Buckingham research. Let me add my congratulations. The joint venture operating profits were significantly above what you had originally projected them. Can you give us a sense of where you see these operating profits -- what levels you ultimately see them achieving?

Let me ask Mike to take that.

We were looking -- just looking on a limited time horizon the second half of the year. We would expect to see a minority interest payment in each of the two quarters of about a million dollars apiece. Another 2 million between now and the end of the fiscal year. The business there has been quite strong and we are very pleased with that. Lew alluded to the double digit comps. We have continued to realize and that momentum has continued into January. The one thing I would add is we are benefiting at the moment from a stronger Yen, and that helps in a couple ways. Firstly, the Yen P&L, of course, Coach Japan does business all in Yen translates back in dollars and into our consolidated financial statements at higher levels. Secondly, when they buy product from Coach, Inc., they're getting a more favorable rate. They are spending less Yen to buy handbags from Coach, Inc., in dollars. That is positively impacting their gross margin rate at the moment. So that is helping to boost their profitability at this point in time. But going forward, we would anticipate that we should see income levels in the high single digits growing as we continue to leverage the SG&A infrastructure that we have built this year.

Also could you comment on the U.K. distribution agreements, how that's going and do you see other distribution agreements, international agreements like this and do you also ship or manufacture for the U.K. as you do for your CJI?

I'll answer the second part first. Everything sold under the Coach name is manufactured under our direction and supervision.

Just do you get the same kind of margins shipping to the U.K. distribution as you do Japan.

Yes, we do. In terms of projects, we are still within the first year of our plan where our distribution partner is operating two stores in London where we are expecting to open a shop within a shop in a major U.K. department store sometime during calendar 2003 and we are looking for additional points of distribution. It's too early to say how we are going to bear that a good portion of our business comes from loyal U.K. customer and we have confidence that that business can grow. With regard to other distribution agreements, we are always contemplating opportunities that might exist in other key countries such as France and Germany. At the moment, however, we are not engaged in any serious conversations with potential partner.

Thank you.

Thank you. Pierre Jordan, you may ask your question and please state your company name.

Yes. From JP Morgan in London calling. Could you gives a little bit of a sense of what is your target in terms of market share in the U.S. market? You mentioned that is one of your key drivers of strategy. And second, could you also gives a little bit of the initiatives you are undertaking to improve your sourcing and your logistics?

Sure. First in terms of market share in the U.S., we have somewhere today between 15 and 20% market share of our target consumers handbag and small leather good spend. What you should appreciate is that our market share is twice the size of our nearest competitor and is growing in distance each year. As we continue to improve productivity within our existing locations and expand our distribution. Over the next -- over the next years, during our planning horizon, we believe we can grow market share to 30% comfortably within the United States. Mike, you want to talk about --

Sure, sourcing initiatives. Sure. As we announced last year, we moved to close our final manufacturing facility and have gone to 100% sourcing model. That is what's driving much of the gross margin rate improvement that we are currently enjoying and in particular in quarter two, that last facility was in Puerto Rico. And we picked up the benefit from that now. So being 100% sourcing entity has been helpful. Now we are spending our energies on optimizing our factory mix, the countries in which we produce product. We have undertaken projects around sourcing and counter sourcing hardware. And other alternatives urn other raw materials, leather, fabric, et cetera, so we will continue to tweak our supply chain to look for continued gross margin rate improvement through sourcing initiatives.

May I ask a couple extra questions? Could you us a little bit of a sense of the performance of the men's products versus the women's product and also the performance in Hawaii?

First with regard to Hawaii, our business really rebounded during the holiday quarter and in fact our same store sales were up 80% or 90%. Still somewhat below or just equal with pre/11 levels. Tourism is back in Hawaii and we are enjoying the benefit and that momentum continues into January. With regard to -- on the men's area, what you should appreciate is that over the last few years we have really focused on our primary consumer, who is the woman. She tends to be more brand loyal than her American counterpart. And in addition, we have been able to build market share in our key categories handbags and women's small leather goods why. Those businesses have grown attack sell rated rates. And with that female focus, we have not had the same emphasis on men's and men's today represents about 10% of our sales. We do at the same time have a loyal male consumer. Our business tends to be focused in a few key classifications such as the men's wallets and belts. This spring we will be introducing a broader range of our bags for the modern Coach man that will include weekend travel. Messenger bags for the office and a relaxed but sophisticated range of small leather goods as well.

Thank you very much.

You're welcome.

Thank you. Arthur Weiss, you may ask your question. Please state your company name.

Yes. Trainer Warson. Two questions. One, as you roll out your new store opening program, what is the department store's reaction then becoming more anxious especially in this environment and the second question is how did raw material price changes affect margins?

First, with regard to new store openings, department stores understand that multi-channel strategy is key to our overall brand positioning and direction. We do not experience any objections from department stores. As you know, our department store businesses is galloping ahead. I commented we ran 25% ahead POS in the fall for the whole year. We ran probably in the neighborhood of 40% ahead. We are told by our department store partners that Coach is the fastest growing resource that they have and we enjoy excellent relationships with them. Mike in terms of raw materials.

In terms of raw material price changes. We have enjoyed over the last year relatively stable pricing in raw material, most notedly leather which is the biggest component in our cost of goods sold. It has very little impact on cogs and gross margins.

Thank you.

Thank. You may ask your question, Janet Copenberg.

Congratulations. I did have a couple of questions on the mixed leather product. Could you talk a little bit about the differential in retail price versus the leather product and if that's going up, do you see your average transaction -- if mixed leather is becoming a higher percentage of sales, will the average transaction decline and could you talk about the margins on that product as well?

First, there's considerable material that goes into our fabric and leather handbags. We actually offer them at the same price as our 100% leather counterparts. If you look at a silhouette made out of leather side by side with a fabric and leather bag, you will see it is offered at the same price. We do not experience any consumer resistance to this pricing method. In fact, a recent surveys we have found that consumers find Coach to continue to be an exceptional value. We do anticipate that the average transaction next holiday will go up 2 or 3%. We are actually introducing a wider range of price points in our smaller Demi bags in wristlets as well as more sophisticated make in some of our ongoing handbag groups. So we do expect to actually see a modest increase in average transaction as I commented. With regard to margins, our mix material margins are somewhat higher than our 100% leather handbag margin.

Okay. And the only other last question I had was with regard to the department stores. Have you given thought at all to -- or do you at this time to this exclusive product for them or for your stores and would you think in the future that that may become a strategy so that your stores and the department stores?

We actually don't see them competing against each other. We have a very different view. Our view is to provide on accessible luxury products to our consumers and they shop both in department stores and Coach stores and we want to, one, have our products available to them wherever they choose to shop. That's all part of our operating strategy and brand positioning. In terms of differentiated product, first we have a global assortment. We believe in one look globally. That's key to growing a brand. For us, we have strongly believe you need to be consistently positioned and to be consistently positioned you have to have the same look that transcends environments. Now, having said that, we do have -- we do have some pinnacle and premier product and from time to time we do offer them in selected environments where the highest portion of our target consumer shops. So you might not be surprised to see in certain flagship locations, be they in Coach stores or in the future in high end specialty stores a layer of additional product for that pinnacle consumer.

Operator, I do want end to this call at 9:30. We have time for one more question.

Thank you. Our final question from David Berman. Sir, ask your question and please state your company name.

This is actually Christina Henry from Berman Capital. I have a question, and please forgive me if this question has already been asked and answered. On the balance sheet on your accounts receivable, there's a big increase, they were up 131% year-over-year. Granted still a very low number of days receivable, only 20 days, but I was just curious if this was due to new accounts and a change in policy or what the explanation was for the large increase?

Sure. We did answer that earlier, but ever so briefly. Earlier in the year we changed our payment terms with one of our largest credit card company providers, exchanging slower payments for more favorable fees, but at the end of the day was a wise economic decision, and that's what's carrying as a larger receivable balance coming right out of that Christmas selling season right at the end of the quarter. I'm happy to report 80% of that is paid down as of today.

Got it. Thank you so much.

You're welcome.

Thank you, everybody for joining us today. As always we will all be available for questions via E-mail or phone later this morning and today.

Thank you, everybody.