掛毯 (TPR) 2003 Q4 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 Investor Relations at Coach Ms. Andrea Shaw Resnick, you may begin.

Thank you Wendy and good morning and thank you for joining us. With me today to discuss our quarterly and annual 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 current expectations, based upon risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences or control costs. Please refer to our latest annual report on form 10-K for a complete list of these risks 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 that all per share historical numbers that will be discussed have been adjusted to give effect to the company's two for one 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 fourth quarter and fiscal 2003 results as well as our strategies going forward. Mike will then follow with details on financial and operational highlights, for the quarter and year, as well as our outlook for the first quarter and full fiscal year 2004. Following Mike, we will hold a Q&A session. Now I would like to introduce Lew Frankfort, Coach's Chairman and CEO.

Thanks, Andrea. And welcome, everyone. It is particularly gratifying to be speaking with you this morning about our strong fiscal 2003 results highlighted by a 32% increase in revenues and a 67% increase in net income. It has been a year of many accomplishments including the opening of 20 new North American retail stores. A 25% increase in full price U.S. comparable store sales for the year, driven by accelerated traffic and improved conversion.

Double-digit gains at POS for U.S. department and specialty stores and an exceptional year for Coach Japan where sales at retail rose over 60% to over $175 million, driven by double-digit increases in same location sales in Japan and successful new store openings in general, and specifically by the very strong first year performance of the Ginza flagship store which opened in May of 2002. Most broadly, we effectively executed our growth plans for fiscal 2003 and realized companywide performance that outtakes our stated goals. We remain confident in our ability to sustain our growth and deliver superior results over our planning horizon.

Before we do in the quarter, I did want to touch on how pleased I am to announce that Reed Krakoff and Keith Monda have joined me in entering into five-year employment agreements with the company. While the financial details of the contracts will be provided along with a form 10-K filing later this quarter, we did want to let you know that these have been signed, underscoring the continuing commitment that Reed, Keith and I have towards the business.

As you know, this morning, we announced strong results for the fourth fiscal quarter ended June 28, 2003. Ahead of both our expectations and analysts' estimates. Our net income and EPS increased over 75% from prior year levels, as a 35% increase in sales combined with an improvement in margins continued to drive the bottom line. Some highlights of our fourth fiscal quarter were, first, net income rose 80% to $29.9 million, or 32 cents per fully diluted share. Compared with 16.6 million, or 18 cents per share in the fourth quarter of fiscal year 2002. Second, net sales totaled $231.5 million, versus $171.4 million a year ago. A gain of 35%. Third, direct to consumer sales which consists primarily of sales at U.S. Coach stores rose 31% to $139.9 million during the fourth quarter. From $106.5 million in the comparable period of the prior year. And lastly, same store sales for the quarter rose 21.6%, with retail stores up 37.1% and factory store sales up 3.6%.

During the quarter, as planned, we opened six retail stores, bringing to 20 the number of new retail store openings in 2003. We also opened one factory store during the fourth quarter. Thus, at the end of the period, there are 156 full-priced and 76 factory stores in operation. In addition, during the quarter, we expanded two full price stores and four factory stores, bringing the total number of expansions to nine in both channels. Indirect sales in the quarter rose 41% to $91.6 million, on a year over year basis. Driven primarily by strong gains at Coach Japan.

All three new stores that opened in Japan during the period, including the Shibuya flagship contributed to results. During the quarter, in addition to the Shibuya flagship two retail stores opened in Japan, including one in Rapungi outside Central Tokyo and one in Osaka, this draws the total to ten net store openings for the year on target with our expansion plans.

While all areas of our business performed well in the fourth quarter, we were particularly delighted with particularly delighted with the continued momentum of our U.S. full price business which enjoyed increases in both traffic and conversion in our own stores, and significant increases in U.S. department store POS sales. Results continue to be driven by handbags and women's small leather goods, reflecting the success of new introductions, as well as category expansions, and the strength of ongoing collections.

Finally, we were especially pleased with the significant improvement in operating margins, as our stable pricing and supply chain improvements in combination with efficiency initiatives and leveraged spending continue to drive our bottom line results. While Mike will get into more detail on our financials, I wanted to give you this recap and tell you how pleased we are with Coach's fourth quarter and year-end performance. Although the new year has just begun our momentum across all our business channels has continued through July, and we're confident in our outlook for fiscal 2004.

When we examine the strength of the Coach franchise, we look at three dimensions, internally we view them as lagging, coincident and leading indicators. First, traffic, or the number of consumers coming into our stores is our lagging indicator. It reflects the cumulative impact of everything that has shaped the consumer's view of the relevance of the Coach brand up to this moment, such as satisfaction with her last Coach purchase, her last shopping experience in a Coach store, recent advertising, and the trial [ph] mentions, and so on. This takes a long time to build, and similarly, a long time to deploy the businesses with established accessories, franchises, such as Coach.

Second, conversion or transactions over traffic is what we consider our coincident indicator. It reflects the consumers' response today to the products she sees in the store, its relevance to her lifestyle, how it fills a real or perceived need. Third, market research and testing and piloting of our product, are leading indicators, giving us a gauge of future demand for new groups we will introduce in the seasons to come. We also conduct annual surveys in both the U.S. and Japan to gauge our consumers attitudes about the brand, measuring the health and vitality of the franchise. Our very strong increases in full price same-store sales this fiscal year reflect a surge in traffic and continued improved conversion rates, while maintaining the same average transaction amount.

Looking forward, we're extremely pleased with the strength of all of our indicators which bode well for the future. And in FY '04 we have some specific initiatives in place to drive these key components of productivity. They include first, strong new product introductions. Key product launches for the fall and holiday period includes the Soho signature group, introduced in July, as part of our transitional assortment. It features the drapey silhouettes, and proprietary half-moon hardware, that characterizes the line, off of the many significant fabric with leather trim. This will be followed by Soho leather and suede being introduced next week which tested and piloted very well. An updated Hampden's leather group arrives in September.

For the second quarter, in October, we introduced a Soho Duffle group, our key silhouette for holiday. You should know that it is piloting today on par with last year's slim Duffle which was very successful. Rounding out the holiday will a new plaid group, a return of the popular gallery tote and the strong cold weather assortment of hats, gloves, and scarves. We will also be offering a capsule group of occasion bags and clutches and embossed patent leather and lurex.

Second, in the area of merchandising, for the first time, we will focus on increasing the average transaction by at least 5% through a tiered merchandising strategy, offering more distinctive relevant and exclusive product in our flagship and premiere locations, both in Coach stores and in department stores. As well as broadening our price points throughout our full price assortment. At the same time, in factory store, starting in July, Coach is offering discontinued signature styles at a modest discount, in 20 remote locations. This follows a successful six-week pilot this spring where we saw both a positive impact on comp and margins in those locations where signature was offered.

Third, we will be introducing a classic favorite program during the second quarter. This program is focused on long-term customers who particularly appreciate our classic heritage product, such as the Iconic Stewardess, or station bag, which have not been regularly available in our assortment. We will begin with about 40 styles, consisting primarily of handbags and business items, which we will market by special order, from full-priced stores and through our Internet site. In addition, and for holiday only, we will be piloting a capsule collection of kitchen accessories that will include hats, mittens and scarves along with some outerwear and fun items such as a game boy cover and a backpack.

And lastly in the communications area, as mentioned in previous conference calls, we're shifting our communications emphasis to drive business into Coach stores. After the success of our perfect bound catalog which we introduced last spring, we will be providing at least 2 1/2 million copies for store use during the current year. Most of these copies will be placed in consumers' shopping bags after they make a purchase.

As you know, we have four overarching growth strategies in place to ensure continued financial momentum. First, the driving market share by leveraging out our leadership position as an accessible luxury lifestyle brand. And gaining a greater share of our consumers' accessories wardrobe. We are intensifying Coach's awareness as an every day lifestyle accessory resource for self, purchase and gifts. As part of this strategy we are emphasizing new usage occasions such as weekend or evening and offering items at a broader range of prices as noted.

Second, we're adding 100 U.S. retail stores over the next four to five years, bringing the retail store base to at least 250. This includes about 20 new stores in FY '04. And we expect that as many as 10 of these will open in time for holiday. Among this year's new stores will be a 7200 square foot flagship location located in Waikiki, scheduled to open before the holidays. Due to our strong market share gains as reflected in our same store sales increases, we now believe that the Coach franchise can support 300 to 350 total retail stores in the U.S.

Third, we are aggressively expanding market share with the Japanese consumer from over 3 1/2% today to our goal of 6% during the next few years. This increase will be in part driven by continued improvements in same location sales, and by new shops, including the opening of additional flagship stores. In FY '04 we expect to open about 10 new locations in Japan.

And fourth, we are continuing to drive gross margin higher, and leverage our expense base. The strategies and actions I've just outlined build on the strength of our core business, and brand equities. 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. And good morning, everyone. Lew has just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our fourth quarter and year-end results. As mentioned, our quarterly revenues increased by 35%. With direct to consumer up 31%. And indirect up 41%. For the full year, total revenues rose 32%, with direct to consumer gaining 25%, and indirect was up 45%.

In the fourth quarter, our gross profit margin expanded by 660 basis points over the comparable period of the prior year, from 66.6% to 73.2% of sales. Bringing the year end at 71.1%. There are three primary contributors to this quarterly improvement. First, channel mix. As our highest gross margin channels grew faster than the business as a whole. Second, the positive impact of product mix driven by increased penetration of higher margin mix material collections. And third, gross margin rate increased at Coach Japan [Inaudible]. The selling general and administrative expense ratios declined 130 basis points in the quarter and represented 51.3% of sales versus 52.6% in the year earlier period.

For the full year, SG&A as a percent of sales declined 45.5% of sales, from last year's 48.1%. The declines for both the year and quarter were a result of leverage in the core businesses more than offsetting the increase in spending at Coach Japan. In addition, associated with the employment agreement Lew mentioned earlier, was a sign-on business for Reed which increased SG&A expense for both the fourth quarter and fiscal year. Our operating income rose 113% to $50.8 million in the fourth quarter versus the same period last year, excluding a small impact of a positive adjustment to the year-ago quarter relating to a reorganization charge. Operating margin in the quarter was 21.9%, compared to 13.9% in the year-ago quarter. For the full fiscal year, operating income rose 78% to $243.8 million from the prior year. Excluding the impact of real charges taken in FY '02. Operating margin for the full year on this basis rose 660 basis points to 25.6%, from 19%. Well ahead of our expectations. Net income for the quarter increased 80% to $29.9 million, or 32 cents per share. As compared to $16.6 million, or 18 cents per share in the year ago period. Including the positive adjustment in the year-ago period, net income rose 73%.

Results for the fourth quarter were ahead of the consensus estimate of 30 cents per share. Net income for the year rose to $146.6 million. Up 67% from the $88 million earned in the prior year, excluding real charges. Including the impact of these charges, net income rose 71% from prior year levels while earnings per share rose 67%. Excluding Reed's sign-on bonus expense, the fourth quarter and full year earnings per share would have been 3 cents higher, or 35 cents and $1.61 respectively, representing adjusted EPS growth of 94% and 55%.

Moving to some balance sheet highlights, inventory levels at year end were $143.8 million dollars. $7.4 million were 5% above prior year levels as our supply chain improvements and inventory management programs allowed us to support 20 net-new U.S. stores, 10 net-new stores at Coach Japan, and substantially increase sales levels with minimal additional inventory investment. Accounts receivable balances rose approximately $4.5 million or 14.7%. Less than half the overall growth in sales.

During the fourth quarter, we strengthened our cash position by approximately $37 million, to $229 million as a result of increased cash flows from operating activities, driven by significantly higher net income, and option exercises. Only Coach Japan's revolver borrowings of $26.5 million remains on a consolidated balance sheet at year end. I'm also pleased to note that CJI paid down their line of credit, during the year, by $8 million. Net cash from operating activities in the fourth quarter was $56.5 million, compared to $26.6 million last year during Q4.

Free cash flow in the fourth quarter was an inflow of $39.1 million. Versus an inflow of $14.1 million in the same period last year, primarily due to higher net income. Capex spending primarily for new stores and renovations was $18 million this year versus $13.6 million in the same quarter a year ago. Of all of fiscal year 2003, net cash from operating activities was $221.1 million. Compared to $107 million a year ago. Free cash flow in fiscal year '03 was an inflow of $164.6 million, versus $52 million in fiscal year '02. As noted in last quarter's conference call's Q&A we expect capex to rise to about $70 million in fiscal year '04. With the uptick from '03 primarily due to increased spending for new store openings in Japan.

In the U.S., as Lew noted, we will be opening approximately 20 new retail stores, a few factory stores, and continuing our expansion and factory remodel programs. In addition, as you know we will be implementing a new POS system in U.S. retail. Which is expected to both drive improvement in productivity, and provide us with substantial clientele and marketing benefits. It will be piloting in six stores during the the second quarter and rolled out to all stores in the second half. The fiscal year '04 cross system is expected to be in the area of $6.5 million and a total project investment of over $9 million.

Now, I would like to provide you with some of our goals for fiscal '04. For the first fiscal quarter we're targeting the following: Net sales of at least $230 million. Representing a year on year increase of at least 20% with comparable store gains of at least 10% in the U.S., driven by full price retail stores, and continued double-digit gains in Japan. Operating income up more than 35% year over year. And earnings per share of at least 33 cents per share, an increase of at least 37%. Our current goals for the full fiscal year 2004 are; net sales growth of at least 16%, to at least 1.1 billion, with high single digit comparable store sales gains in the U.S., and a continuation of double digit same location sales in Japan. An operating margin that is at least 100 basis points above prior year levels driven by gross margin rate expansion, resulting in operating income dollar growth of at least 24% in FY '04 over FY '03.

As we've noted in the past, three factors will somewhat moderate that growth on the EPS line in 2004. A higher share account brought about by option exercises. Secondly, a larger minority interest payment to our Coach Japan joint venture partner as a result of higher sales and profits at Coach Japan. And lastly, a higher tax rate, moving up to 37.5%. Which taken together should generate earnings per share of at least $1.92. 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're confident that our growth strategies will enable us to continue to gain share in the large and growing global market for fine accessories and gifts. Thank you all 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 followed by one on your touch-tone phone. You will be announced by name prior to asking your question. To withdraw your question, you may press star two. Once again to ask a question, please press star followed by one at this time. And our first question comes from Bob Drbul, you may ask your question and please state your company name.

Lehman Brothers. Good morning, congratulations.

Thank you.

Terrific quarter. Terrific year. Two questions. The first one is, can you give us an idea, in terms of where you ended the fiscal fiscal year in terms of the mix, fabric versus leather and sort of your expectations in '04 around those same metrics? And the second question for Mike would be, around the Japanese business, can you elaborate a little further in terms of how the strong Yen impacted margins and maybe put numbers around them for us.

Sure, why don't I take the second question first, Lew, if that's okay.

Sure.

What happened, Coach Japan and the impact on the gross margin rate is as the Yen strengthened throughout the year, Coach Japan needed to spend less Yen to buy inventory from Coach Inc., in U.S. dollars. So as a result of that, their first cost for their product that hit their Yen P&L was a lower figure. And in the fourth quarter, the strong yen versus the prior year quarter accounted for about 90 basis points of the 660 improvement year over year Q4 to Q4.

With regard to product mix, Bob, due to the strengthening of our business in the nonholiday quarters, particularly this last quarter where we enjoyed such healthy increases, not surprisingly, our fabric and leather groups grew disproportionately so the quarter, they represented 75% of our full price of pure west sales and for the year, they represented somewhat more than 50% of our sales. We expect this mix to roughly stabilize at the current levels, with the movement towards all leather product increasing as we move into the fall and holiday seasons.

Okay. Great, thank you.

Thank you, our next question comes from Jeff Edelman. You may ask your question and please state your company name.

UBS, good morning. And not a bad quarter, Lew.

Thank you.

Two questions, one is the spread in the traffic growth and conversion vis-a-vis the prior year still on a rising track?

Actually, we saw an acceleration in traffic in Q4 over the rates that we had been experiencing previously while conversion, which has been running as we had reported, in the double digits ahead, in the prior quarter, remained at about the same levels.

Okay. Great. Secondly, it appears as if you will have the benefit of a lot of the luxury brands raising prices in the U.S., we've seen, I guess anywhere between 5-7% for fall. Do you have any sense of what these brands are doing in Japan?

We know that over the last six months, there have been increases, either one or two increases from -- on most of the major brands.

Okay. So the spread between you and those brands is really widening now?

Somewhat. But we don't see that as material to our success.

Okay. Great. Thanks.

Thank you, our next question comes from David Schick, you may ask your question and place state your company name.

Hi, Legg Mason. Good morning.

Good morning, David.

I have two questions,. First, you talked a little bit about taking space back from men's to the women's business in the stores. Could you give us an update on your thoughts there? And second, a little more detail on that pilot you talked about, where Signature has gone to factory. Anything you saw in the full price stores surrounding that? Any more details we could hear about that would be helpful. Thank you.

Sure. As we said earlier, relative to our thrust, we're primarily a women's concept. And when we look at year on year increases, we see the fastest levels of growth continuing to occur in handbags and small leather goods. And toward that end, we have been broadening our offering to both cover different usage occasions as well as to give consumers greater choices. And our shift this fall is to move the larger men's items such as business cases and travel, to our classic favorites programs, and those stores which will no longer be carrying them, we will be continuing to offer these products I believe in about 30 of our stores, using the freed-up space to augment our women's offerings. With regard to the other men's products we will continue to offer men's wallets and belts in all of our stores, smaller pieces. With regard to the Signature pilot, we did not see any lost Signature sales, nor did we expect to, in any full-priced stores. As we had indicated, we are offering Signature in remote locations and we do not believe it is going to have any impact on our franchise whatsoever.

Thanks a lot.

Just lastly, to add, the intention with Signature is entirely a disposition strategy. We are in our third year of offering Signature. And it has demonstrated its vitality and we're confident the group is going to be with us a long time. And we need to get on with the business of disposing of discontinued inventory.

Thank you.

You're welcome.

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

Hi, Lew, Andrea, congratulations.

Thank you.

Let's see. A couple questions. First of all, can you talk about the outlook for gross margin next year? The 100 basis points improvement. What are the drivers? And I guess I'm particularly interested, given that the mixed material percentage is already very, very high. How can you get those gross margins to continue to go up? And the second question is related to SG&A and your marketing. Maybe you could give a little more description of what your plans are for your marketing for fiscal '04? And could you talk about the leverage that you got on marketing in fiscal '03 and what your thoughts are on that for '04? Thanks.

Margaret, I will take the first one on gross margin. You're correct, we've got it to about 100 basis points improvement year over year on the op income line with far and away the majority of that coming from gross margin. And the main source for the additional improvement will be around channel mix, because once again, you're correct, we've really pretty much maximized the benefit we will get from product mix. But the two fastest growing channels are Coach Japan of course, and then our full price retail chain, with the high comps and the opening of 20 new stores, those two channels have gross margin rates well above the consolidated gross margin rate, and so with them growing at a faster rate than the whole, we will pick up gross margin basis points there. In addition to that, we are also continuing to optimize our factory mix, looking for sourcing, cost initiatives, and we have opportunities in things like raw materials, such as hardware and zippers, even beyond leather and fabric. We are also looking to optimize our worldwide logistics, duty and freight is an opportunity for us, so we're confident that we will be able to deliver another 100 basis points in '04.

Okay, Mike, before you go on from from that, are you incorporating any maybe slight negative product mixed shift into the forecast that you're giving and investors at this point, you know, just maybe to be a bit conservative or are you assuming your mix will stay the same? And on the question of the currency what is your assumption there? Because that also helps.

Sure. We have kept our product assumptions very similar in '04 to '03, about the same product mix, mixed material to leather. And in terms of our expectations for the Yen, we have built our forecast around a budget rate of 125 Yen to the dollar.

And then the marketing, Lew?

Sure. We continue to leverage our marketing as our sales increase by using more efficient forms of communication. Advertising itself rather what we call communications investments, in the fourth quarter, actually fell to less than 2% of sales from 2.6% the prior year. For the full year, our communication expenses were about 2.3% of sales last year. And we're looking for it to be in the neighborhood of 1 1/2 to 1.7% next year. Primarily due to a shift in the use of more economical e-mails as a primary form of communication and the decision on our part to reduce the number of catalogs in the mail.

Any other highlights from marketing plans?

We mentioned classic favorites, which will be a new initiative in the fall. And we know that that program is going to be well received by the innumerable requests we get daily from consumers for iconic product and we will be launching that at the beginning of the fall season.

Are you cutting catalogs? That's my last question. Are you actually going to reduce your number of catalogs year over year?

That's correct.

Not just the number of mails but the absolutely number printed?

That's correct.

Okay. We can talk about that in follow-up. Thank you.

Sure.

Thank you, our next question comes from Mark Friedman. You may ask your question and please state your company name.

Merrill Lynch. Good morning, everybody. Congratulations.

Thank you.

Lew, could you give us an update on shoes, I know you're expanding stores for fall, what are you looking at for spring, as far as getting the shoe mix up? I was also wondering, any kind of mark market research you're doing on trying to understand this delicate balance between continuing to take market share but yet maintaining the hipness and the coolness of the brand, if you could share that with us.

Sure let me take the second one first. Every indicator we have tells us that our franchise has never been stronger. When we measure attitudes of consumers, we -- that we measure future purchase intent, we also measure their attitudes towards various dimensions of the brand, and what is particularly gratifying to us is that we continue to score at historically high levels on quality, durability, value and craftsmanship, while we're continuing to drive scores higher in fashion, femininity and fun. What we're finding in addition is that consumers who are joining the franchise recently, we might call them the freshman class, that is consumers who joined us for example in 2002, spent about 20% more in their first year than consumers who joined us just two years earlier. We're finding that consumers are accepting and embracing the broader world of Coach. So we don't see any concern whatsoever. Lastly, on that whole subject, when you visit a Coach store and I know you do that often, Mark, you see a broad and diversified range of products, we do cover different attitudes, different usage occasions, we have products that can transcend generations, as well as different fashion sense.

With regard to footwear, we had a very strong spring season in stores where we offer footwear, our sales approached 13%, overall footwear represented about 9% in our Coach stores, we're expecting to increase the number of stores offering footwear from 80 to about 90 largely due to our fall openings, before the holiday season. In the spring, we plan to continue to offer footwear in most of the new stores that will be opening and expanding to an additional 15 or 20 stores. So by the end of June, it looks like we will have more than 115 stores carrying footwear.

Thank you. And I was just wondering, I think your opening in Harvey Nickles with your partner this weekend, is there anything you're doing there, to make a big splash or is this more of a soft opening just to get the joint venture up and running?

It is more of a soft opening in that we know that we're going to benefit from the very heavy traffic that Harvey Nickles enjoys each day, and our intention is to build an awareness through daily visitors and satisfied users through purchases.

Great. Thank you.

You're welcome.

Thank you. Dana Telsey you may ask your question and please state your company name.

Good morning, everyone and congratulations.

Thank you.

Hi, Mike, can you tell us a little bit, any more details about Japan sales and perhaps profit expectations for next year and what you're looking for? And also, do you have enough inventory, given the solid sales that you've reported, and Lew, any comment or color on travel and tourist business, either in Hawaii or New York, and in previous calls you've mentioned demographics of younger people buying merchandise. What have you been seeing in your mix of customers and demographics? Thank you.

Mike, would you like to --

Why don't we start with the first question about guidance around Japan. We had a very strong '03 in Japan, obviously, and a particularly strong Q4. We finished the year with revenues at Japan of just about $176 million. And a minority interest, those of you may have seen in the earnings release this morning for the full year was about $7.6 million. Expectations next year are for continued strong growth in the high teens, to over 200 million, 205 to 210 is probably a good target to use. We are not modeling the same level of profitability for '04 that we picked up in '03. Largely around the strength of the Yen and the positive impact it had on Coach Japan's gross margin rate. And we've guided to flat SG&A spending as a percentage of sales for next year, to slightly up. But we still would expect to see an increase in overall profit dollars. And it might be appropriate to model a minority interest level around 8 million, perhaps a little bit higher than that, so we're looking at an operating margin in the low teens.

Okay.

Dana, with regard to Hawaii and travel, first, our Hawaii business which enjoyed significant increases last year, have leveled off. As Japanese traveled less, in fact it's the only market within the United States that's not showing increases this month. Now, we expect the traffic in Hawaii to continue to be soft relative to last year. We're told that overall travel is down 20-40% in Hawaii. And our sales are running about even with last year, which suggests we're doing better than traffic. With regard to East Asia, Hong Kong and Singapore are bouncing back from where they were. Although they are -- continue to be adversely affected by continuing concerns about SARS and the international climate. For us, those businesses represent a de minimus share and have no impact on our overall results.

With regard to demographics, I was preparing to make some comments, if asked, around the strength of our franchise geographically. The remarkable situation for us this spring is that both in the Northeast, as well as Florida, and the Southwest, you can go to particular -- almost any market, and you could see very hefty increases naturally with 37% increases in same store sales. What we're experiencing is basically a sea level change in demand and that's coming from our established franchise, as well as new consumers entering the franchise, who have embraced particularly the more stylish offerings, we're finding that we're continuing to grow share in the Latin market disproportionately as we look at some of our staff, and we expect that to continue, as we gain market share among those underrepresented groups.

Thank you. And on the inventory level?

Yeah, Dana if I could take the inventory question, I would first start by saying that our sales results somewhat speak for themselves in terms of inventory management. Obviously we've been able -- we had the inventory to support driving the sales growth and comps that we've driven, but having said that, there also is a strategy that we employ and it kind of goes to Mark's question earlier around the cool and hipness and exclusivity of the brand that we do plan to sell through and sell out certain seasonal and fashion items, the straw collection was an example this spring, but again nonetheless, we do feel like our inventory levels are fine, and they are supporting the sales growth of the business. One point I would make, when you just look at inventory dollars, it doesn't take into account units. Our units are actually up at a significantly higher percentage than the dollars are, because of the increased improvements we've gotten in our cost of goods sold. So our inventories are perhaps on a unit basis, which is probably more important to sell through, not as narrow as the dollars would make them appear. And then the other thing, I just wanted to add on the answer to the Japan question, when we talk about minority interest and the profitability of Coach Japan, that of course does not include the second tier of gross margin that Coach Inc. recognizes when it sells on a wholesale basis into Japan. So the Coach Japan business is far more profitable than just the minority interest indicates.

Thank you very much.

Thank you. Janet Clockenberg, you may ask your question and please state your company name.

Good morning. JJK Research. Congratulations to all of you. What a great job.

Thank you.

I do have a question for Mike about the SG&A. It sounds like you're marketing spend will be down a little bit in '04. At least that's what I have down in my notes. And with the -- some leverage, I would expect from the strong comps you're looking forward to, I was wondering if that was a conservative estimate. And for Lew or Reed, I wanted to ask if you are contemplating a broader role for new categories, including addressing the kids like you're doing at Christmas, perhaps more apparel or other areas, thank you.

Why don't I take the SG&A question first. We do feel like there is opportunity for some marginal amount of SG&A traction, depending on our selling results going into '04. But we're comfortable with our guidance of 100 basis points in the op income line, primarily being driven by gross margin. We do have plans to continue to build infrastructure. And have higher spending levels at Coach Japan, to capture the tremendous market share opportunity that we have there. And that should offset gains and leverage that we will get in our other businesses. But we feel like guidance of flat SG&A rate is appropriate for '04.

Thank you.

With regard to our new categories, first, as I mentioned, we're offering a capsule collection of kids' items, primarily scarves and gloves, with a few outerwear items, the backpack and the like, it is actually a total of only about 15 different items. Our intention is to pilot this offering during the second quarter, and if it is successful and of course we are believing that it will be successful, we will come back the following holiday and with the view that we would likely continue it during the spring and summer seasons. We're looking to generate about 3 to 5% of our sales in our retail stores from the kids' offering while it is there.

Okay.

In terms of other categories, I mentioned occasion bags before. Basically we're talking about items for special occasions be they handbags or accessories, we are offering it this holiday season, we expect them to generate at least 3% of our sales. And it is all part of our strategy to broaden our coverage of all handbag potential usages, so that the Coach consumer can buy what she needs in this area from Coach, not elsewhere.

And that's all for now in terms of new categories?

That's correct.

And Mike, just one last question. Should we look for inventory levels to continue to be this lean as we move to '04?

We will see the move obviously directionally with sales but we don't feel like there are still opportunities to improve turns marginally so we do not anticipate inventory levels growing at the same rate as sales.

Great. Thank you.

Thank you. Paula Kalandiak, you may ask your question and please state your company name.

Wells Fargo Securities. Good morning and congratulations.

Good morning, Paula.

Two quick questions, the first is can you tell us what the sales were for the first 12 months of the Ginza flagship was open? And the second was, did you notice any change year over year in the average age of your consumer at your full price retail stores?

First, in terms of the Ginza sales, during its first 12 months sales were just over $16 million. In line with our high level forecast. In terms of the average age of our consumer, we don't calibrate that closely, although our research is telling us that she is tending to skew somewhat younger. And we believe that trend is likely to continue. But we're talking small, small age gradations.

Is the average age still about 40, would you guess?

Based on some new research techniques that we're introducing, it appears that the average age might in fact be closer to 35.

Okay. Thank you.

Thank you. Eric Beder, you may ask your question and please state your company name.

Northeast Securities. Good morning.

Good morning.

Two housekeeping questions, what was the square footage and what was the percentage of product of new items in the quarter?

The square footage at the end of the quarter, Eric, for full priced stores, 363,310. For factory stores, 232,898. For a total of 596,208.

And newness for the quarter, represented about 60% of sales. Although we break newness into a few different buckets and we consider only 36% true newness, with 10% just being color additions and 14% being updates to existing collections.

Okay. We have been seeing in some of these fashion magazines the reed car [ph] for Coach product. What is that all about?

It is -- what I think what you're referring to is editorial mentions where we have elected to more strongly associate our reed [ph] name with the product. The intention is to actually gain additional editorial space as we raise a consciousness that Coach is a designer leather business. Where we use proprietary design, by a very special talented designer, and his team, and we find that this is consistent with the practice of European luxury brands. So we are doing that selectively.

Okay. Thank you.

Thank you. Deena Friedman, you may ask your question and please state your company name.

Yes, good morning and congratulations on a fabulous quarter. I'm calling from Piper Jaffray. My question is what was the mix of seasonal items this quarter? And how does that compare to last year? And you know, I get the sense from you know, doing a lot of store walks that the seasonal items sold out quickly. Do you plan to increase your penetration of seasonal items next year?

Let me answer the last part first. As we are successful in new forrays such as straw, which is where we had a very substantial increase in the second year, naturally we will be looking for these very short duration product groups to play a larger role. In terms of seasonal product, more conventionally defined as product that lives for three to four months, within the handbag world, I would estimate that that product approached 40% of our sales during that period.

Great. Thanks a lot.

You're welcome.

Thank you, our next question comes from Todd Slater, you can ask your question and please state your company name.

Thanks. [Inaudible], good morning, and great results.

Thank you.

Thanks for providing the forics impact on the quarter. I was just wondering if you could gives the forics impact on fiscal '04 -- '03 gross margins on earnings for the year.

I'm sorry could you repeat that.

Could you give us the forics impact, the Yen dollar impact, the positive impact on the gross margins for the year?

For the year, the impact would have been about 50 basis points.

Okay.

It was stronger -- the strongest impact was Q4. We enjoyed it probably starting about the second quarter. So across the full year, it is about 50 fifths.

Okay. And you're incorporating looks like about 5% increase in the value of the Yen to about 125 on average for the year, in your, you know, $1.92 guidance?

I'm sorry, your question broke up on us. Would you mind repeating it?

I just want to make sure, you're expecting the Yen to sort of average about 5% higher in '04 -- fiscal '04 versus '03 to 1.25, is that incorporated into your gross margin assumptions for '04?

We have, yes, we've built our plans on 125. Which is actually, you know, a weaker Yen than where it is today. We have budgeted a weaker Yen so we're not anticipating getting the repeat improvement on gross margin rate in '04.

Okay. And now, just quickly to units, inventory units which you said obviously are up more than the dollars. What's your expectation -- what were the inventory units up in the fourth quarter and what's your expectation sort of for inventory unit growth in '04?

Can we take -- get that back to you on an offline follow-up question? I don't have those precise figures right in front of me. My apologies.

Sure, that would be fine. Thanks.

At this point, it is 9:30. And we did promise that we were going to end the call at 9:30. If you have any further follow-up questions, please feel free to reach out for me or Mike this later afternoon or shoot me an e-mail and I will be sure to get back to you. Have a great day, everybody.