掛毯 (TPR) 2003 Q3 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 Vice-President of IR at Coach, Ms. Andrea Shaw Resnick, you may begin.

Good morning and thank you for joining us.

With us to discuss our quarterly results are Lew Frankfort, Coach's Chairman and CEO and Mike DeVine, CFO.

We will point out this conference call will result in forward-looking statements including projections for our business in the current fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our projections based upon risks and under certainties such as expected economic trends or our ability to anticipate consumer preferences or control costs.

Please refer to our annual report on form 10-K for a complete list of these risks tax. Also note that historical trends play not be indicative of future growth. We expect to up date our estimates each quarter. To update this information is not to be taken as Coach's acceptance of these estimates on a continuing basis. Coach may choose discontinue presenting future estimates at any time.

Finally please note that all prior year per share numbers that will be discussed have been adjust to give effects of the company's two for one stock split which was affective in early July of 2002.

Now, let me outline the order of speaker and topics for this conference call. Lew Frankfort will begin with an overall summary of our third quarter physical 2003results as well as our strategies going forward. Mike will follow on details of financial and operational highlights for the quarter as well as our outlook for the fourth quarter, full year fiscal 2003 and initial guidance for fiscal 2004. Following Mike we will poll the question and answer session that will conclude by 9:30 A.M.

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

Thanks, Andrea and good morning, everyone.

I'm delighted to be speaking with you today about another strong quarterly performance that reflects the vibrancy of the Coach brand and the product offerings that continues to be embraced by our consumers. As you know, this morning we announced strong quarterly results ahead of our recently revised guidance and analyst estimates. Our net income and EPS more than doubled versus prior year levels as a 36% increase in sales combined with an improvement in margins continued to drive the bottom line.

The highlights of our third fiscal quarter were, first, net income rose 117% to $31.9 million or 34 cents per diluted share. Of this compared with 14.7 million or 16 cents per-share in a year ago period. The recently revised consensus estimate for the quarter was 29 cents per-share.

Second, net sales totaled $220.4 million, up 36%.

And third, directed consumer sales which consists primarily of sales at Coach stores rose 30% to $121.6 million during the third quarter.

Finally, comfortable store sales in the U.S. rose 14.1% with retail stores up 25.5% and factory stores up 2.4%. Our exceptional comp's in retail stores reflected gains and market share due to both higher traffic and higher conversion rates as we continue to attract a consumer more predisposed to purchase.

During the quarter we opened one and closed one Coach retail store and closed one factory store resulting in the total of 150 retail stores and 75factory stores at March 29th. Indirect sales rose 46% to $98.8 million from 67.7 million in the same period last year. All indirect businesses, including Coach Japan, International wholesale, U.S. department stores and special markets contributed to this significant increase.

During the third quarter, we opened a total of six new locations in Japan, including four shop-in-shop, one retail and one factory store bringing the total to 11 new locations in FY '03 or seven net new locations. At the end of the third quarter, we have a total of 92 locations in Japan, including 75 shop-in-shops, six full-priced shores excluding the Ginza (ph) flagship, nine factory outlets and two airport locations.

We were also pleased by a continuation of double-digit increases in sales at U.S. department stores which reflected further market share gains. Finally, we were delighted with a stretch in Japan where double-digit comp. performance also continued.

Throughout our business, consumers enthusiastically embraced our transitional and spring offerings. These included new styles and colors in our Hampden's leather and Ergo handbags and our Mini Signature logo collection which broadened our logo offering and it's appeal resulting in net plus business. More recently in March, both Soho Twill and the sporty Hampden's Weekend group enjoyed excellent sell through.

As mentioned in our press release, our momentum has continued into April both in the U.S. and in Japan driven by fashion innovation with increases in traffic and conversion at Coach stores. We have a strong pipeline of fresh and innovative products planned for the next several months starting with a pastel signature group of demi's (ph) clip (inaudible) scarves and hats as well as straw basket totes which were just successfully introduced. These totes will anchor our strong black and white mother's day assortment which will for the first time also comprise many pre-boxed items including Signature wallets and cosmetic cases, polished calf wallets and novelty accessories such as jewelry pouches, umbrellas and book marks.

In May we'll feature our successful Hampden's weekend collection and follow that up in June with the introduction of classic stripe, a denim and canvass base group of totes and handbags, some with a Jaquard Signature pattern as well as additional color (inaudible) Hampden's weekend.

Given the strength of our results against a particularly challenged backdrop it is important to emphasize our business model is unique. It is based upon five key differentiating elements.

Number one, our distinctive brand. We are America's leading accessible luxury accessories brand. We offer an aspirational (ph) that is relevant, extremely well-made and provides exceptional value.

Number two, a market leadership position with growing share. Coach's America's number one accessories brand and each year as our market share increases, our leadership position strengthens.

Number three, Coach's loyal and involved consumer. Coach consumers have a specific emotional connection with the brand. Part of our every day mission is to cultivate our consumer relationships by strengthening this emotional connection.

Number four, our multi-channel international distribution. This allow This allows us to maintain our critical balance because our perform does not depend on a single channel. On the context of currently globally event, Coach finds itself insulated against disruptive factors like declining international travel. This is because nearly 90% of our sales comes come from consumers who purchase Coach products in their home country.

And finally, number five, Coach is innovative and consumersentric (ph). We listen to our consumer through our rigorous consumer research. Strong customer orientation and work to accept our changing needs by keeping it our soft and fresh and relevant.

These five elements set Coach apart from the competitive set. Against this backdrop as most of you know, we have been implementing four key strategies that focus on sustaining accelerated growth.

First, we are driving market share by building on our unique position as an American accessible luxury lifestyle brand. As part of this strategy, we're emphasizing new usage occasions such as weekend or evening and offering items on a broader range of prices. We're also evolving our marketing programs to create a more satisfying shopping experience. For example, we recently begun offering protective cloth bags with each handbag purchase in our retail stores. We now also place receipts in holders at checkout and to extend the shopping experience beyond the store visits, starting this month in April, we're placing coffee table quality catalogs in every Coach shopping bag at the time of purchase. And perhaps most importantly, Coach has become identified as a 365 day resource for both gifts and more significantly for self-purchase. Hampden's weekend just introduced in March as an excellent example of products which allow us to express a sporty, fun attitude for Coach addressing the every day active lifestyle of our consumers. By addressing an increasing variety of usage occasions in every day needs, our most significant gains have been realized during the non-holiday periods. In fact, this fiscal year left 50% of your EPS will come from the holiday quarter.

Our second strategy is to continue acceleration of growth in U.S. retail by adding100 U.S. retail stores over the next four to five years bringing the retail store base to at least 250. During the fourth quarter, we are adding a total of six retail stores, including our second retail store in Orlando and our first two footwear and handbag concept stores bringing the total to 20 openings this year.

Third, we're aggressively expanding market share with the Japanese consumer from about 3% today to 6% over the next few years and part driven by new locations, including the opening of additional flagship stores.

Our strategy is three-fold, first, we will open select new locations including flagships. As you know, we opened our second Japan flagship in the Shibuya (ph) area last week to a terrific reception. Similar to the U.S., we will also drive sales to improved store productivity. We're continuing to target double digit comps. in Japan.

Finally, to strengthen our presence in Japan's premier department stores, we are expanding our most productive shop-in-shops.

Our fourth strategy is to continue to drive gross margin higher through channel and product mix as well as optimizing sourcing and logistics while leveraging our expense base. These strategies and actions are designed to enable us to achieve superior financial results through our planning horizon.

I will now turn it over to Mike DeVine, our CFO, for further detail on our financials. Mike?

Thanks, 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 third quarter results.

As Lew mentioned, our quarterly revenues increased by 36% to $220 million with direct-to-consumer up 30% and indirect up 46%.

In the third quarter, our gross profit margin expanded by 370 basis points over the comparable period of the prior year. From 68.8% to 72.5%. There are three primary contributors to this quarterly improvement

First, the positive impact of product mix, driven by increased penetration of higher margin mix materials.

Second, channel mix as our highest gross margin channels grew faster than the business as a whole.

And third, our various sourcing cost initiatives.

Selling general and administrative expenses as a percent of sales declined in the quarter to 48.6%, a 550 basis point decrease from the 54.1% reported in the year-ago quarter. This reduction was primarily due to efficiency initiatives and leveraging core businesses driven by the strong comp. line growth and double-digit comps in U.S. stores.

Our operating income rose 122% to $52.7 million in the third quarter verses the same period last year.

Operating margin in the quarter was 23.9% compared to 14.7% in the year ago quarter. Net income for the quarter increased 117% to $31.8 million with 34 cents per diluted share as compared to $14.7 million or 16 cents per-share in the year ago period. And with the head of the recently revised consensus estimate of 29 cents per-share.

Should be noted that the net income figures we have quoted in the year ago period excludes a restructuring charge for the closure of a manufacturing facility in Puerto Rico in March of 2002. Including this charge and the late adjustments, net income in last year's third quarter was $11.8 million or 13 cents per diluted share.

Inventory levels at March 29, 2003, were$136 million. 4.2 million or 3.2% above prior year levels. The year-over-year increase is related to the strength of our overall business and the 20 net new U.S. stores and 11 net new Japan locations which opened in the last 12months. Offset by supply chain improvements and inventory management programs. Inventory turns improved by 16.3% this year's third quarter versus last.

Accounts receivable balances rose approximately $21 million over last year's levels, primarily due to an $11 million increase at Coach Japan driven by their sales gains. And an increase in credit card receivables of approximately $5 million.

As mentioned on our first and second quarter calls, we have accepted slower payment terms for more favorable fees on certain credit cards. The balance of the increase in receivables is due to higher sales in our indirect businesses. Day sales outstanding for non-CJI trade-receivables at quarter end were flat versus year ago levels at 41 days.

We ended the third quarter with $192 million of cash on the balance sheet. Only Coach Japan's revolver borrowings of approximately $33 million remained on a consolidated balance sheet at quarter's end. At the end of the period approximately $120 million remains available for future repurchases under our recently increased and expanded share repurchase program which expires at the end of January, 2006.

We generated $38 million in net cash from operating activities in the third quarter compared to a virtual break even generated during last year's Q3. Free cash flow in the third quarter was $26 million versus an outflow of 13.8 million in the same period last year mainly due to increased earnings.

CAPEX spending primarily the new store expansions and renovations was $12.1 million versus 7.9 million in the same quarter a year ago.

Now I'd like to provide you with our goals for the fourth fiscal quarter and full fiscal year 2003. For the fourth quarter ending June 28, 2003, we're targeting the following.

Sales growth of over 25% to at least $215 million, including a comp. store sales increase of at least10% led by gains in our retail stores. An operating margin for the quarter which will be about 600 basis points above the year ago level with gross margins increasing significantly and SG&A as a percentage of sales declining modestly. The sales increases as an improved margin will result in earnings per-share of at least 28 cents. When added to Q3 year-to-date, this will translate to net sales growth for FY '03 fiscal year of at least 30% to over $935 million with double-digit comparable store sales gains in both U.S. Coach stores and Japanese locations.

A gross margin of over 70% compared to 67.2% reported in FY '02. An improvement of over 200 basis points in SG&A expenses as a percentage of sales on a year-over-year basis which will result in a 600 basis point improvement in our operating margin to about 25% for the full year.

Therefore, operating income is expected to grow by over 70% in FY '03 versus FY '02. Resulting in earnings per-share of at least one dollar and 54 cents.

Moving into 2004, our preliminary goals for the fiscal year ending July 3rd, 2004 are, net sales growth of at least15% to at least $1.075 billion with at least mid single digit comparable store sales gains, an operating margin at least 100 basis points higher than FY '03's , and as a result operating income is expected to grow by at least 20% in fiscal year'04 over fiscal year '03.

Three factors will somewhat moderate that growth on the EPS line in2004. First, the higher share count brought about by option exercises.

Second, a larger minority interest payment to our Coach Japan joint venture partner as a result of higher sales and profits at Coach Japan.

And third, a higher tax rate due in part to the year ago closer of Wharez (ph) and the final elimination of the remaining Puerto Rico tax benefit related to that closure , as well as the fact that incremental taxable income is being at higher rates. Including these factors, we expect to generate EPS growth of at least 17% which would produce earnings per-share of at least $1.80.

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 the 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're confident that our key strategies and profitability initiatives will enable us to continue to gain market share and strengthen Coach's position as America's number one accessory brand.

Thank you for your attention and now Lew, Andrea and I will take some questions.

Thank you. At this time we're ready to begin the question and answer session. If you would like to ask a question please press star one on your touch-tone phone. You'll be announced prior to announcing your question. To withdraw your question you may press star two. Once again if you would like to ask a question, please press star one on your touch-tone phone.

Our first question comes from Bob Dirble (ph). You may ask your question. Please state your company name.

Lehman Brothers, good morning, congratulations.

Great quarter. A couple of things, Lew. First of all, as you look forward, you know, how do you keep this thing going? What do you think the keys are to the key drivers to really keep putting up these stellar numbers?

First, Bob, as we say, this is not a comp. story. We're into gaining sustained market share and everything we're about goes - harkens (ph) back to our unique position. We are the market leader. We have grown market share each -- each year in the U.S. We have a distinctive proposition. We listen to our consumers actively. We're innovative. We work hard to provide relevant product that accepts our consumer's needs. We work hard also to develop and sustain lasting relationships with consumers and we continue to out pace our competitors.

Okay. That is great. And in terms of the Japanese business, can you give us -- I guess, since the Shibuya (ph) opening, any fault in the neighboring stores and can you give us an up date where you think that business ends FY '03 and the expectations of revenues for '04 as well?

Sure, obviously in Japan many of our colleagues it was an exciting opening. We had about 150 people waiting for the actual opening, the first person actually lined up at 3:00 a.m. so that she could enter the Coach store. We opened at 11:00.

The store did remarkably well, exceeded our expectations and what we're finding in the six days since we opened that our comps are within the Tokyo market and our Japan overall have not faulted. We have been able to integrate this store beautifully and our expectations are that the business will continue to grow. In fact, our business is up overall by, I believe, about 50%this year in Japan and we're just reaching the number four position, we're told, as the fourth largest imported brand having been number five for a while. Our outlook, Mike -

In terms of fiscal '03, Bob, we're still looking at a number in U.S. dollars of approximately $165 million and with our growth expectations we believe $200 million is achievable for Coach Japan in '04.

How much was it during the quarter?

I'll have to look for that and we'll get that number to you after the call if that is okay.

Okay, sir. I guess one final question for you, Mike. In terms of cash flow and CAPEX for this year and next year, can you give us an idea where you think you end up?

Sure. We are still looking in fiscal year '03hitting a number in the range of $60 million in spending.

Okay.

About 10 million of that is targeted for Coach Japan. Most of it about eight is geared toward opening of new stores and there is about 2 million being spent in Coach Japan on investing in systems and infrastructure.

In non-Japan spending, about $50 million still once again the majority being dedicated to U.S. stores, but also roughly10 million on our whole -- being spent with our wholesale partners both in the U.S. and internationally.

Looking forward to '04, we anticipate seeing our CAPEX spending growing from 60 up to 70 million. The majority of that increase coming in Japan as we expect to accelerate our spending on infrastructure and systemization in Japan and also we have an aggressive plan at this time to get two flagship stores open before the end of fiscal year '04.Those obviously have a much higher capital requirement than the other stores so that - those two changes we'll see spending in Japan go to approximately 20 million in '04 to get the number to 70.

Great. Okay, thank you.

Our next question comes from Dana Telsey (ph). Ask your question and state your company name.

Good morning, everyone and congratulations. It's very exciting. Can you talk a little bit about the gross margin on the SG&A side, actually it got leverage from sales.

How is the impact from Japan figure into the gross margin and the SG&A since your anniversarying (ph) your time there. Also, do you have enough inventory to support the sales growth that you currently have. Thank you.

Sure. Let me take the gross margin and SG&A questions first. Dana, with regard to the Coach Japan part of that question, when we talk about channel mix helping to grow our gross margin rate, we're looking at Coach Japan and U.S. retail stores which have our highest gross margin growing faster than the company as a whole and when we talk about Coach Japan, we are including the two layers of gross margin that the company recognizes.

Firstly, the wholesale sale of Coach, Inc., to Coach Japan and then secondly the stepped up gross margin that is achieved in Japan. So we are anniversarying as you pointed out the first time full quarter over full quarter for the entire Japan entity, but nonetheless because of its strong growth, it is contributing to the gross margin rate. Second, of course, is product mix that we talked about on the call. And then various sourcing in cost initiatives where we're leveraging our volume and optimizing our factory mix and raw material supplies.

Moving to SG&A, we enjoyed an incredible leverage in Q3 driven by top-line growth, leveraging our corporate functions most notably but also in our U.S. stores we achieved incredible leverage because of the strong comps, the 14% comps. At this time Coach Japan is still a drag, if you will, or its SG&A growth is hurting the company as a whole but we obviously more than offset it with leverage in our other businesses.

In terms of inventory availability, Mike?

In terms of inventory availability, I think we can see from the top line that the sales have not been dramatically constrained by-product availability. The supply chain has never been functioning better. The 16% improvement in turns was achieved in a planned-ful (ph) way and we don't feel constrained by inventory. We still think we have some life there and have the ability to continue to improve turns modestly going forward.

And, Lew can you talk about obviously Cassie Natarastak (ph) and Mike Toucci (ph) joined you in the quarter. What did they bring to the party that will be different and we should look for in there tail area or the whom sale area?

Well, first, their transition has been seamless. Both are seasoned veterans who are --who have hit the ground running as I said earlier. When we spoke I believe at our last conference call in the -- Cassie's case, Cassie's one of her priorities is to build upon our relationships with the stronger -- the department stores such as our Federated Nordstroms and Sachs where we're enjoying very substantial gains. As I mentioned, this spring we're running up do you believe digit in department stores again not withstand the challenging overall environment in that channel.

With regard to our retail, Mike Toucci has been look taking a heart look at our assortment and one of his priorities for next fiscal year is to layer in a broader range of price points within our offering so that we can provide the truly premier consumer a product that she might want so you'll see a wide arrange of handbag prices and accessories. Cassie is doing the same in department stores. I think you'll see more color in our assortment of department stores as well. They're bringing their own experience. As I said, they hit the ground running

Our next question comes from Margaret Magers (ph). Ask your question and state your company name.

Hi, good morning it is Margaret Magers from Goldman Sachs.

I actually have a couple of questions. Let's see, first of all, I was just wondering with regard to the rate of growth in SG&A being up over20%, can you talk about how much of that is variable and how much of it is fixed just so we can get a sense of what it will look like say your comps were only up four or 5% instead of up 14%,would your SG&A rate of growth be in line with that sort of lower level of comps? I'm just trying to get a sense how you flex your SG&A up when your comp. store sells are running as strong as they are and what are the drivers?

Margaret, that is a complex question. The SG&A leverage we achieved in the U.S. retail stores was considerable this quarter, in excess of 300 basis points largely driven by, you know, the 14% comps. We look at the components of SG&A obviously the big variable one is transactional costs around wages. We would accept to see the SG&A grow mid single digits going into '04 and if we -- as we have guided to comps at those levels going forward, we should be able to stay at approximately the same levels of SG&A rate in the retail selling businesses.

We've talked at CJI is a drag on SG&A leverage and we would expect to see continued growth in their infrastructure next year so it will continue at that level. Where we're really gaining our transaction is around our corporate functions.

For example, our media and advertising spend, while up in this quarter in real dollar terms, we achieved, I think, 130 basis points of leverage on that single line alone. So the leverage will come from growth and taking advantage of the corporate functions while attaining do you believe -- I'm sorry, flat in the selling units if we can achieve mid single digit comps.

Okay. And so when you -- when your business is as strong as it is, do you add more people into the retail stores or give the existing people more hours? How do you handle the operation or the management of labor in the stores relative to comp. store sales?

That is a good question, Margaret, and as you would expect, it depends. It depends on the time of the year and the market and the type of store and whether staffing can handle -- can handle the existing workload and Randy Jackson and her team are constantly looking at budgeted hours and flexing them based on the higher sales we're achieving. It's a combination of more hours and new people. During the holiday we have less latitude because the volume is so strong on a daily basis and to a very heavy extent we do add additional help and for part-timers, we work with them to increase their hours if they're schedules will allow.

Okay. I'll probably follow up on you with this, Lew.

Sure.

But one last question. The travellers or 90%of your sales you say are domestic.

Within the home markets where consumers live, correct. So either in Japan or the U.S., nearly 90% of our sales occur among -- indigenous in those residents.

I understand. The 10% , percentage is that Japanese Travelers largely and what is going on with that10% margin with the SARS situation?

Largely, these are Japanese and I - our business in southeast Asia represents less than 3%of our overall sales and Hong Kong and Singapore represent less than 1%. This very negligible numbers our business has trended down about 40 to50% within Hong Kong and Singapore sins the SARS outlook. But overall the impact is not meaningful to us.

Okay. How about Hawaii?

Our business is still comping positively versus last year, surprisingly notwithstanding the Iraqi conflict. While the rate of the comp. increase has declined, it's still do you believe digits in Hawaii. People still traveling here.

Wow, that is fantastic, Lew. Congratulations.

Our next question comes from Jeff Edelman (ph). You may ask your question and state your company name.

Thank you, Jeff Edelman from UBS Warburg. I guess it would be an understatement to say nice quarter.

But as I look at the Japanese business and if I try to sort of work back wards and adjust for currency, first of all, it would appear as if CJI would have an operating margin somewhere in the 12 and a half percent area this year and if we adjust -- if we currency adjust it around 11%. Am I sort of in the ballpark there?

Good point, well-done.

Thanks.

Look at our models.

Secondly, if there is no change in currency going forward over the next 12 months or 15months, should we use our base as the 127 or the11?

Actually, Jeff, I would split the difference frankly but we're probably talking about a rounding error now. We're continuing to invest in infrastructure so we will get some negative leverage on the SG&A line there against the sales growth but gross margin rates continued to improve for Coach throughout the world so I think at a 12%level is probably a good one to model. Do recall of course as you're well aware that of course the nit gets tax affected and then we share 50/50 with SumiComo (ph).

Sure.

That is a factor whether you use 12 or 11. Of course, Jeff, as I mentioned earlier, we're not forgetting about the gross margin that Coach gets to realize selling in to Japan that is not in that12%.

I realize that. Knowing that you're going to be investing heavily over the next 12 to 18months, beyond that you should start to get some additional all rating leverage in Japan.

How does the profit model evolve? Can that hit a mid teen? Can it hit a high teen number as you start to anniversary some of these step-up in investments?

Yeah, I think a mid-teen longer term is achievable, no question.

Okay, good. One final thing, thing, Lew I'll get you in the act here.

Appears as if the spread between your directed customer sales and your comp. store sales as widened now for two consecutive quarters.

Is this telling us that your new store openings are really accelerating the pace of momentum or is it just a function of timing of openings?

It's a combination of effects. First our new store openings are actually doing better than we had budgeted as is our entire business n part, It has to do with a return reserve adjustment that we actually made in the third quarter which increased the spread but the overall spread is well within the range that we expected.

So it hasn't been a surprise, Jeff,.

if you actually go back and look seasonally, you see a dip in our second quarter and that is due to a number of factors, one of which is that we do need to put a return reserves on the books at the end of the quarter because all of the sales come late in the quarter around Christmas holiday. And then that gets cleaned out as we process returns in Q3 so that widens the spread quarter-to-quarter. The other thing is, Lew talked about our new stores which are not in the comp. number obviously performing exceptionally well against our expectations.

Right. Okay, great. Thank you.

Thank you our next question comes from Mark Friedman (ph). You may ask your question and state your company name.

Merrill Lynch. Good morning everybody and congratulations on a great quarter

I was wondering if you could give us an update on the U.K. business as far as how that is progressing relative to where you assigned it last year and if anything had changed there. Then on the men's business, I thought you guys were looking at doing some new things to kind of add to the men's business. What is the status and what is the timing of it? Thank you.

Sure. First we need to provide context.

When we talked about the U.K. business, we indicated that over the next three to five years assuming success it would arise to 1% of our overall sales. Within that context it is a very small business. We will be opening a significant shop in major department store in London which will be formally announcing within the next few months.

We are also opening up several other shop-within-shops. The overall climate in London is stuff. Tourism is significantly down. Never recovered from the 9/11period and we have modest expectations for our U.K. enterprise. With regard to our men's which represents about 10% of our sales as we have said consistently, our focus is primarily on the Coach woman and our business continues to roar against the Coach woman. At the same time, we do have a great new group of highly edited men's products that we are in the (inaudible) of our stores called Hudson. You can see them in some of our other stores and we will be layering on a series of travel and accessories items in select Coach stores, different stores and at international locations during the course of this calendar year.

Great. Thank you. And I was just curious, Mike, on the sourcing opportunity I continue to get great benefits there. Are you guys as far as manufacturing and production, are there new markets you're looking to move manufacturing going forward or do you still think the opportunities are in the same countries that you're currently working at?

We continue to evaluate our opportunities all over the world but we are largely satisfied with the markets we're in. It's all about optimizing the factory mix and we think the future improvements from sourcing initiative will not be country or factory based or -- as far as alternate sourcing of raw materials. We still think there is some opportunity there.

Thank you

Our next question comes from the Lee Backus (ph) please state your company.

Buckingham Research and again let me add my congratulations.

Your domestic store productivity is pretty incredible. Could you comment on the store size, whether the new stores you're opening are going to be similar size? I know you're expanded some stores. Do you expect to expand additional stores this year or next?

We're actually challenging our store size because we think that in secondary markets we can actually open very highly productive units somewhat smaller than the 22 to 2500 square feet that we have been averaging so we expect overall store size to remain roughly the same and with flagship locations they could be as large as 4000square feet or perhaps more and in secondary markets as small as 15 or 1800 square feet. But we think the average between 2000 and 2500 square feet is something that we're going to go forward with.

Also on footwear, I just see increasing amounts of your footwear in the department stores and it looks terrific. Could you comment on the footwear business and also maybe do you see any other additional licensing opportunities to, you know, in -- to extend in the brand?

Sure. First, we did as we -- as we shared with you Coach footwear out to a majority of our stores we're in nearly 80 stores now and footwear is representing, I believe, about seven or 8% of our sales in those stores exactly on plan. We're really pleased with its performance because it is helping to increase traffic as with - because when we do purchase more footwear than they do handbags.

With regard to department stores, the business continues to grow and actually their growth rate is similar to the growth rate that we're experiencing in U.S. department stores. It's do you believe digits. This spring we're in about I believe 550 locations. So we're pleased with women's footwear. It's doing very well and it is becoming a key category for us.

At the same time as I have said many times, our growth continues to be primarily in women's handbags and accessories and we do believe within the range of products that we offer today which does include several licensed categories in addition to shoes such as -- such as watches, we have the opportunity to continue to grow our comps up significantly in increased market share and we're not actively contemplating any additional licensing categories at this time.

Thank you.

Thank you. Our next question comes from Liz Dunn (ph). You may ask a question and state your company's name.

It is actually Liz Dunn from prudential.

The first question I have is can you go into a little more detail about next year? Your first half versus second half comp. and sales and earnings expectations, any light you can share or shed?

At this point we would rather not be more specific. We think there is opportunities throughout the entire year. Again, we have a Longview. This is a marathon, not a quarterly Sprint. We're not even halfway done with our marathon before we sign up for another race.

Okay. On April, has business continued to be strong both in the U.S. and in Japan during April?

Yes. As we mentioned, our momentum has continued unabated in both the U.S. and Japan.

Okay. Can we get a little more detail on the more favorable terms on the credit card? You mentioned, you know action slower paying for better terms. Can we just get a little more detail on that?

Yes. At the highest levels what we have agreed to accept is a longer payment period from our credit card partners in exchange for lower fees at the end of the day it's a net win to the bottom line. We're trading cost of money for lower fees and the lower fees outweigh the cost of money in this case so it was a slam dunk financial decision.

Can you quantify how much that added?

We haven't quantified that at this time.

Okay. And then just finally, average price point over the quarter versus last year?

Just give me a second. The average transaction in Coach of retail stores was approximately the same. It was actually 2% up at about 164 dollars per transaction. The average handbag was down negligent, just under $200.

And in units per transaction, do you usually show that?

We do. Do you have the number offhand? Units per transaction in our full price stores was up slightly to nearly 1.5 units for the quarter.

About 2%.

Okay, thanks. Great job

Our next question comes from Paula Calandiac (ph). You can ask your question and please state your company name.

Wells Fargo Securities. Good morning and congratulations. I just have one question. I believe that in the spring selling season you in the percentage of mixed material handbags that you were featuring from about 60% last year to about 70% this year and I know that in the fall and winter you typically feature more all leather products. There is room for you to increase the percentage of mixed material during those selling seasons as well?

Whether there is room to increase it or not, we have -- we have multiple handbag collections, we have multiple platforms and we let the consumer determine the rate at which they buy mixed material and leather product and there is obviously the seasonal buyers that you mentioned.

We think it's likely that the leather fabric mix will remain directionally the same in the fourth season as it did last year but again our consumers will tell what you say the exact numbers.

can you strategically influence what you feature so that there is more mixed material in the stores?

We can -- sure. But what we influence is what we think consumers want the most, depending on the time of the year and the environment and we plan our floor key tables and marketing around our experience.

And as you mentioned, Paula, in the spring consumers want lighter weight bags and we have gravitated to an assortment of fabric and leather bags where we have a leather skeleton bag priced exceptionally well an in the fall we have a good mix an there is also a variation interestingly and not surprising, regionally in colder weather climates we tend to sell more leather products for more months than we do in warmer weather climates. We think we now have the breadth of assortment that provides us to have the natural adds and flows.

Thank you.

Thank you our next question comes from Janet Clockenburg (ph).

(inaudible) congratulations to you all.

To follow up on the discussion of the mixed fabrication product, if it is a smaller percentage of the product mix in the fall and I'm not sure you said it would be, Lew so I'm a little confused on that.

It is in the fall than it is in the spring.

Does that mean then the gross margin increases may not be as significant as we go forward into the fall?

When we look at gross margin, we always look at it on the comparable basis so to the extent that there are gross margin improvements next - plans for next year and there are, it will be against the mix that we had for the comparable period. So we do expect there to be improvement in each of the quarters.

I understand that but relative to the level of increase that you're seeing here in the spring season, would it be more country are strained in the fall season given a smaller percentage of the mixed fabric product?

The way I would look at it is, if we look at'03 over '02, we have delivered 300 basis points of improvement year-over-year largely a significant contributor to that is the increase in mixed material throughout the entire fiscal year if you look at it. We now have achieved levels of penetration through all seasons in '03 that we are comfortable with going forward.

So in looking forward into '04, I would not plan significant margin increases due to product mix. The majority of margin increase we get going forward will be driven by channel mix and sourcing cost initiatives because we're quite comfortable with our leather to mix material mixed and, yes, it will be seasonal but I would look at '03 as a model and try and model channel mix improvement with some small amount of sourcing cost initiatives and we have guided now to zero's 04 to delivering 100 basis points more on the op margin line. The majority of that is going to come out of gross margin coming out of channel mix and sourcing opportunities.

Thanks, Mike. A couple of more questions. Lew you could talk about the performance of some of your metropolitan area stores perhaps if you could discuss the performance of the Manhattan stores given lower tourism weights there and also to clarify on the Hawaii business, was that - has that business -- I know it's still terrific, but did I sense that it's slowed a bit since the SARS epidemic has broken out or is it slow just because you're up against tougher numbers, et cetera .Lastly, could you comment on the factory stores versus plant?

Okay. First, in terms of highlights for key retail markets, everything needs to be seen in the context. Our comp. was 25% ahead of last year so we enjoyed overall very large increases in many of our markets. I'll just highlight some markets. Here in the northeast, Boston was actually up 30%.In the tri-state area we were up 15% led by long island 35%, New Jersey at 25% and New York City was actually flat with last year and when we factor in a new store that we opened on lower fifth avenue, we were up 10% in Manhattan.

But the lower performance in Manhattan we attribute to a few factors, how much more travel this year in the spring quarter than last year, much colder winter which tended to have people shop indoors more than on high streets. And less of a campaign on the part of the city to buy in New York.

Other markets have performed well, continue to be the markets that have performed well over the last many periods, Florida was up 45%, Los Angeles up 60%, Puerto Rico up 80% al after being up 100% last year this quarter, Las Vegas was up 100% as well.

In terms of Hawaii, our comp. was 60% for the quarter and I said earlier that our comps in April have declined not because of SARS, we believe, but because of some concerns about the Iraqi war. When I say they decline, it is till running significant double digits but at a much lower rate.

Right.

Overall, what is occurring is that the vibrancy of our brand is so strong that we're enjoying every where increased traffic, higher conversion with -- among consumers that are more predisposed to purchase and net, net, we're gaining market share. Our popularity in Japan is translating to Hawaii even though our tourism may be down in Hawaii versus a prior period, Coach's market share is materially up. And that is the story in virtually every market.

And the factory stores, Lew?

With regard to factory stores, they look exactly on plan, we planned them to be low single digits and they performed on plan. We have a terrific team and we manage the level of promotion activity. We balance a variety of factors full price versus our factory imagery. The level of margin that we want to take out from our factory stores, the availability of discontinued products and the like the team is done a stellar job.

My last is for Mike on the inventory level Did I get it right they're only 3.2% above the prior year?

Right.

Is that an on a comparable store basis, Mike?

No. That's balance sheet inventory, so Our terms improved marketability on increases in business and stores. 16% improvement.

Which would translate to on the same -- on the comparable basis of 15%, 15% lower inventory in our retail stores.

Right. And you think you can generate these kinds of levels of business with that much lower inventory?

The answer is -- the answer is yes, we do have-- as Mike said, we have an efficient supply chain that is nimble. What we do on unseasonal product as we approach the end of the period, we consolidate in key stores. We do introduce new product each month as part of our ribbon that we have established a few years ago and it works very well. We don't believe we're losing material sales.

I think it's terrific. Congratulations and thank you.

Seeing that it is after 9:30 a.m. we're going to conclude now. If there are any further questions in the queue, please feel free to reach out to either me or Mike after the call has.

Thank you everyone. End.