掛毯 (TPR) 2004 Q1 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 instructions, I would like to turn the call over to Vice President of Investor Relations at Coach, Andrea Shaw Resnick.

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

Before we begin, we must point out that this conference call will involve certain forward-looking statements, including projections for our business in current and 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 risk factors. Also, please note that historical growth trends may not be indicative of future growth.

We presently expect to update our estimates each quarter only. However, 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 earlier this month.

Now, let me outline the order of speakers and topics of this conference call. Lew Frankfort will begin with an overall summary of our first-quarter 2004 results and our strategies. Mike will then follow with details on financial and operational highlights for the quarter, as well as our outlook for the second quarter and full fiscal year 2004. Following Mike, we will hold a question-and-answer session, which will end at 9:30 AM Eastern.

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

Thanks, Andrea, and welcome, everyone. It's enormously gratifying to be speaking with you today about our very strong first fiscal quarter 2004 performance, which reflects the vibrancy of the Coach brand well-received transitional and fall product offerings and are proven growth strategy across all major distribution channels and geographies.

As you know, earlier today, we announced strong results for the first fiscal quarter ended September 27, 2003, ahead of both our expectations and analysts estimates. Our net income and EPS increased over 80 percent from prior year levels as a 34 percent increase in sales, combined with an improvement in margins, continued to drive the bottom line.

Some highlights of our first fiscal quarter were -- first, net income rose 88 percent to $42.3 million, or 22 cents per diluted share, compared with 22.5 million, or 12 cents per share, in the first quarter of fiscal year 2003.

Second, net sales totaled $258.4 million, versus 192.8 million a year ago, a gain of 34 percent.

Third, Direct-to-Consumer sales, which consist primarily of sales at U.S. Coach stores, rose 26 percent to $134.5 million during the first quarter from 106.6 million in the comparable period of the prior year.

Lastly, same-store sales for the quarter rose 17.8 percent with full price stores up 29.2 percent and factory store sales up 7.6 percent.

During the quarter, we opened seven and closed one retail store and opened one factory store. Thus, at the end of the period, there were 162 full priced and 77 factory stores in operation. In addition, during the quarter, we expanded four full priced stores, three were relocations and one was an expansion in place.

Indirect sales in the quarter rose 44 percent to $123.9 million on a year-over-year basis, driven primarily by strong gains, both in Japan and other international markets. U.S. department store results were quite strong, both at POS and in shipments, while B2B sales were also robust. In Japan, we continued to experience double-digit comp-store sales gains in combination with excellent results at our new stores, such as Rapungi Hill (ph), in the Tokyo market.

During September, two locations were opened in Japan, including one retail store and one shop-in-shop, while one location was closed, bringing our total locations in Japan to 96.

While all areas of our business performed well in the first quarter, we were particularly pleased with the continued momentum of our U.S. full priced business in both our own stores and 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 expansion and the strength of ongoing collections.

Finally, we were very pleased with the continued and significant improvement in operating margins, as our 365 day full priced policy in retail stores 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 first-quarter performance.

Although the important holiday quarter has just begun, our momentum across our business channels has continued well into October, and we're confident in our outlook for the balance of fiscal 2004. Our confidence stems from the continuing strength of our business, our market share gains and from the vitality of the key drivers of our growth.

This fall, we continue to experience strong traffic increases in our retail stores and enjoy the benefits of a 5 percent higher average transaction size, as consumers embrace our exclusive products and our flagship and premier locations and the more sophisticated products at higher price points throughout our full priced assortment.

Also, speaking to the vibrancy of our brand was the fact that we achieved double-digit comps in all of our major U.S. markets and retail stores. Our top two performing markets this quarter, where our comps rose 45 percent, illustrates the wide-ranging appeal of Coach -- first, Boston, a classic stronghold and one of our most developed markets, and Los Angeles, one of our newest and fastest-growing regions, where we will open three new stores in FY '04. In fact, some sales in the Boston and L.A. markets were up about 80 percent over their levels just two years ago.

Both in the U.S. and Japan, we've also seen outstanding performance from our relocated and expanded units, such as our new Manhasset store here in New York, where we opened a 4200 square foot store, tripling the size of old location. This is store is expected to nearly double its sales to $5 million in the first 12 months of operation in its new location. An example in Japan is the recently relocated and expanded Umeda Hansu (ph) shop-in-shop in Osaka, where we increased the square footage by 30 percent to 465 square feet and moved to a prime space within the store. This location is now projected to generate over 750 million yen, or nearly $7 million, in the first 12 months after expansion, 50 percent higher than it was running in the prior 12 months. Either way, this equates to over $13,000 per square foot, making it the most productive location in the world.

Before moving onto our key growth strategies, I did want to discuss our product -- the heart of our brand. While we have mentioned that handbags and women's small leather goods continue to drive our business, we wanted to note that our results are generated from a diversified offering of products that meet a wide range of usages and attitudes. For example, in handbags, we introduced two leather groups last quarter -- Soho Leather, which represented 10 percent of sales in August, its launch month, and an updated Hamptons Leather group, which represented nearly 9 percent in September. These collections complemented our new Soho Mini Signature and Classic Signature handbag offerings.

In accessories, we saw exceptional growth in wristlets and other small pieces across a wide range of fabrications and price points.

During the quarter, we were particularly pleased with the Soho collections, which together represented 20 percent of retail sales across all fabrications led by the Hobo Silhouette at 9 percent, followed by the black satchel at 4.4 percent.

Looking forward to Q2, we just introduced the Soho Duffel group in October, our key silhouette for holiday. It's already performing strongly and you should know that this group is offered in 13 customer choices, including two different sizes, three fabrications and a variety of colors. This group is representing 9 percent of sales months-to-date in U.S. retail stores and 15 percent in Japanese locations.

Also for holiday will be a new plaid group, a popular gallery tote offering and a strong cold weather assortment of hats, gloves and scarves. In addition, we will be offering a small group of occasion bag and clutches and embossed patent leather and lurex and for the first time, a Castle collection of kids outerwear and accessories.

We've also just introduced Classic Favorites, a program focused on long-term customers who particularly appreciate our classic heritage products, such as the iconic stewardess bag, station bag and traditional briefcases, which have not been regularly available in our assortment. We have begun with about 40 styles, consisting primarily of the handbags and business items, which we are marketing by special order in full priced stores and throughout the Internet.

As I mentioned, we also implemented the Cheer (ph) pricing strategy and broader price points during the first quarter, which will continue to have a positive impact on the average transaction size during holiday.

Looking beyond holiday, as you know, we have four key growth strategies in place to ensure continued financial momentum. First, we are driving market share by leveraging 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 everyday lifestyle accessory resource to self-purchasing gifts. As part of this strategy, we are emphasizing new usage occasions, such as weekends and evening and offering items at a broader range of prices.

Second, we are 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, of which seven were opened in Q1 and four more are planned in time for holiday. Among this year's new stores is a 7200 square foot flagship location in Waikiki scheduled to open in mid-November.

During FY '04, as part of our strategy to expand our most productive locations, we will expand a total of eight retail stores, which taken together will add 14,000 square feet. Four were completed in the first quarter. These eight stores are expected to generate an additional $8 million in annualized sales attributable to their expansions alone.

As we've said before, we now believe that the Coach franchise can support 300 to 350 total retail stores in the U.S. due to our strong market share gains, as reflected in our significant same-store sales increases over the last few years.

Third, we are aggressively expanding market share with the Japanese consumer from over 3.5 percent today to our goal of 6 percent during the next few years. This increase will in part be driven by continued gains in same-location sales and by new shops, including the opening of additional flagship stores. In FY '04, we expect to open about ten new locations in Japan. Similar to the U.S., we're also relocating and expanding some of our most productive locations, primarily shop-in-shops where we believe we have an opportunity to significantly increase sales.

In fact, this year, we expect to expand as many as 14 shops, many of these relocations as well, adding an additional 70 percent square footage to these locations and a projected $12.5 million in additional sales, which is a 50 percent increase above the current run-rate.

Fourth, we are continuing to drive growth margin higher and leverage our expense space. The strategies and actions I've just outlined build on the strength of our core brand and business equity. They are designed to reinforce Coach's leadership position as an American classic lifestyle accessory brand offering accessible luxury to our consumers worldwide.

I will now turn it over to Mike Devine, our CFO. Mike?

Thank you, Lew, 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 first-quarter results.

As mentioned, our quarterly revenues increased by 34 percent with Direct-to-Consumer up 26 percent and indirect up 44 percent.

In the first quarter, our gross profit margin expanded by 460 basis points over the comparable period of the prior year, going from 68.1 percent of sales to 72.7 percent.

There are three primary contributors to this quarterly improvement. First, the positive impact of product mix, driven by increased penetration of higher margin mixed-material products; second, sourcing cost initiatives, and third, channel mix, as our highest gross margin channels grew faster than the business as a whole.

The Selling, General & Administrative expense ratio declined 360 basis points in the quarter and represented 45 percent of sales, versus 48.6 percent in the year earlier period. The declines for the quarter were the result of leverage in the core businesses offsetting the increased spending rate at Coach Japan.

Our operating income rose 90 percent to $71.6 million in the first quarter versus the same period last year. Operating margin in the quarter was 27.7 percent of sales, compared to 19.5 percent in the year-ago quarter.

Net income for the quarter grew at a much faster pace than the top line, increasing 88 percent to $42.3 million, or 22 cents per share. The first-quarter results were well ahead of the consensus estimate of 18 cents.

Moving to the balance sheet, inventory levels at September were $176.8 million, 24.1 million or 16 percent above prior year levels. Our supply chain improvements and inventory management programs allowed us to support 19 net new U.S. stores, ten net new stores at Coach Japan, and a 34 percent increase in sales with a lower level of additional inventory investment.

Accounts Receivable balances rose approximately $14.9 million, or 33 percent, in line with the growth of our overall sales.

During the first quarter, we strengthened our cash position by approximately $26 million from the end of our fiscal year to $255.4 million as a result of free operating cash driven by significantly higher net income and options exercises. Only Coach Japan's revolver borrowings of $28.2 million remained on the consolidated balance sheet at quarter's end.

Net cash from operating activities in the first quarter was $28.4 million compared to $7.6 million last year during Q1. Free cash flow in the first quarter was an inflow of $14.2 million versus last year's outflow of 5.4 million, mainly due to higher net income. CapEx spending, primarily for new stores and renovations, was $14.2 million versus 13 million in the same quarter a year ago.

As noted in the last conference call's Q&A, we expect CapEx of approximately $70 million in FY '04 with the uptick versus '03 primarily due to increased spending 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 are implementing a new POS system in U.S. retail, which is expected to drive both improvements in productivity and provide us with substantial clientele and marketing benefits. It is being piloted in six stores during the second quarter and it will roll out to all stores in the second half. The fiscal year '04 cost of the system is expected to be in the area of $7 million for a total investment of about $10 million.

Now, I'd like to provide you with our updated goals for fiscal 2004. For the second quarter, we are targeting net sales of at least $385 million, representing a year-on-year increase of at least 25 percent with comparable store sales gains of at least 10 percent in the U.S., driven by full priced retail stores and continued double-digit gains in Japan; operating income up more than 35 percent year-over-year and earnings per share of at least 44 cents for an increase of at least 28 percent.

Our current goals for the full fiscal year 2004 are net sales growth of at least 27 percent to at least 1.2 billion with at least 10 percent comparable store sales gains in the U.S. and a continuation of double-digit same-location sales in Japan; an operating margin that is 300 basis points over prior year levels, driven primarily by gross margin rate expansion in combination with some SG&A leverage. Taken together, this will result in operating income dollar growth of at least 44 percent in FY '04 over FY '03.

As we've noted in the previous year, three factors will somewhat moderate that growth on the EPS line in 2004. First, a higher share account brought about by options exercises; second, a larger minority interest payment to our Coach Japan joint venture partner as a result of higher profits at Coach Japan; thirdly, a higher tax rate -- moving to 37.5 percent in fiscal year '04. All of these factors taken together is expected (sic) to generate earnings per share of at least $1.09.

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 for your attention. Now, Lew, Andrea and I will be happy to take questions.

We are ready to begin to question-and-answer session. (OPERATOR INSTRUCTIONS). Bob Drbul of Lehman Brothers.

Good morning. Two questions -- first one for you, Lew. As you look at the overall spending environment -- and there's been a lot of discussions for luxury goods spending improving and we've seen some numbers recently. Can you talk about sort of your comfort level as you look out into the next several months and then throughout the next year as it relates to any improvement in consumer spending on the high-end?

First, Bob, with regard to Coach, as you know, we represent a strong value proposition of positioning ourselves in the accessible luxury market, and we've been able to gain significant market share and grow very strongly over the last several years.

With regard to an improved outlook, we do see it. Certainly, our September numbers are stronger; consumer confidence seems to be rising in general, and Coach will only benefit this holiday season and in the quarters ahead from stronger consumer spending. We are, in fact, experiencing some further rates of traffic increases from prior quarters, which Mike talked to also overall increased spending, or at least a propensity to spend.

The second question would be, if you might be able to elaborate a bit more on the components of the 5 percent average ticket increase.

Sure. Four percent of the 5 percent comes actually from broader price points that are generated by a more sophisticated product. The other one percent comes from what we would call special edition or exclusive product that is offered in flagship and premier locations.

Jeff Edelman, you may ask your question.

Good morning. It sounds like you guys are having fun here! A question on Japan -- Mike, as I sort of play around with the numbers, it looks as if you are probably hitting high teen operating margin in Japan. Could you give a sense of where those revenues were and what we can see, going forward?

Sure. As usual, Jeff, you calculated it correctly. It would say, though, that you might be a little on the Op income rate; its probably mid-teens, approaching 16 percent for the quarters on an actual basis. We did about 49 million in dollar sales when we convert the yen back to the financial statements. We are looking to continue with robust growth in Japan on a yen basis, and then also being helped by conversion rates. We were up 50 percent Q1 over Q1 at CJI, actually up 60 percent at POS, so the business there is remarkably strong. We're now pointing to about 245 million of sales for the full year at CJI, so things continue to go our way in Japan as well.

Second question -- as we look at the buildup in cash, at what point does it start to make sense for you to be bringing back in-house the other half of the joint venture?

That's a good question. Contractually, we have an opportunity beginning -- I believe it's in year seven, which would be approximately up --.

The end of fiscal year '07.

Thank you -- when we can begin to buy the remaining 50 percent back.

Great, thank you.

Margaret Mager.

Good morning, it's Margaret. Awesome quarter once again. A couple of questions -- first of all, just following up on that question about the operating margins in Japan, is that just for CJI, or would that include the wholesale part of the transaction as well?

That's just CJI's P&L. It does not include the additional profitability we get by selling product into Coach Japan and recognizing the wholesale margin on the New York financials, if you will, pre-consolidation.

Right, okay. I just want to clarify that. With regard to your outlook, you still have three quarters left in the fiscal year and you have some really difficult comparisons in the second half, in the spring, on your same-store sales. I'm just wondering, what gives you the confidence at this stage in the year to come out with a guidance of 10 percent same-store sales increases in the U.S.? If you could help us understand that a little bit.

Margaret, I guess it all depends on your perspective. We don't look at same-store sales the way most retailers do. We look at it in terms of market share. I mentioned earlier, in two markets, we were up 80 percent in same-store sales over the last two years. In fact, in the United States, nationally, were up 55 percent in same-store sales over the last two years, and that's all market share gains. Last year this quarter, we were up 20 percent in the full-priced stores and this year, we reported 29 percent.

We don't believe, in any way, that our forecast is not achievable. We're very confident, based on building sustained market share and continuing to generate satisfied consumers, that we will continue to achieve good sales results.

Okay. At this juncture, can you tell us how you're doing with market share in the U.S. and what you think is the size of the U.S. market? Is the market growing as well? Are you helping to maybe expand the overall market?

First, Margaret, as you know ,there are not good nationally published numbers. I will use one reference first. In U.S. department stores, our POS sales were up 35 percent in the first quarter this year. Last year, they were up 40 percent. So together, over the last two years, at POS, our sales rose about 90 percent. When we analyze the increases in sales within department stores over the last two years, perhaps they went up 5 percent, which meant that our market share grew over 80 percent, about 20 percent on an annualized basis.

We believe we have about 20 percent market share today and the better on the handbag and accessories arena. We have delineated plans over the next few years that will allow us to increase our market share to north of 30 percent.

The market is growing modestly. We're taking market share from the international luxury brands and are bringing consumers along -- new consumers into our franchise as well.

Right, so the better handbag market, Lew, is that 100 and up, or $100 and up?

It's 100 and up. We sometimes put a fine-tune on it and say it's 150 and up, but the consumers between 18 and 24 sometimes classify it as 100 and up but generally speaking, it's over $100.

Okay. I think the number that I kind of have in my head for that market size 6 billion. Is that the right number?

No, actually it's not; that would be the total market. The total handbag market is probably around 5.1b for handbags and another .7b or .8b for accessories. We define the premium handbag market a little bit -- handbag and accessories market just above 2.5 billion, so roughly half of that, a little bit less.

That's U.S. only.

U.S. only above $100 0 -- (multiple speakers).

I actually believe I have a few more questions, but I will be courteous and step off and get you guys later. Congratulations. That's really terrific.

David Schick, you may ask your question.

Good morning. Just a couple of questions, and congratulations.

Who is this?

David Schick. First, if you could refresh us. I know you mentioned some of this in your commentary, but refresh us on the selected bags that received higher price points during the quarter and how those did as they went through that transition.

I think, David, the best way for me to answer that is to share with you that we added a make to our product this year. There's a higher level of detail. It's a like-for-like style on average at POS generated sales about 4 to 5 percent higher than last year basically during the quarter. So, it's really like-for-like styles on average were 5 percent higher. Illustratively, demi zip, which was priced $138 this year, is $148 as an example, so it was across the board.

In addition, we introduced, in the accessory arena, particularly in wristlets, a higher to tier of product, which raised the average selling price.

How did the layering in of these higher price points in the categories do versus your expectation?

They were exactly on point.

The second focus is on holiday packaging. I know that you've done a better and better job at this and talked about continuing to improve it. If you could just remind us what you're planning to do this calendar fourth quarter and the potential implications -- how you're planning that?

Sure. I think the first place for me to start -- and I'll be brief -- is in the area of consumer contacts. The Internet continues to grow. We expect the number of people that will be visiting us via the Internet to increase by 45 or 50 percent during our holiday season. We are also providing at point-of-sale perfect bound catalogs with every purchase, as well as copies to anyone who would like to purchase them. We have an active e-mail campaign to help consumers get familiar with our offerings and a continued strong newspaper and magazine advertising during the period.

With regard to packaging, as you know, last year, we introduced a cloth bag , which we wrapped in every single -- which we use to place our handbags. We also have gift boxing and we have prepacked items, which we think will represent about 5 or 7 percent of our sales. We're going to do one additional item in our stores this holiday by changing our floor set twice during the strong five-week selling period before Christmas. A second floor set change will occur about December 15th because a good number of our consumers visit twice during December.

Lastly, we just introduced a gift card, which we believe will generate as much as 3 or 4 percent of sales during the month of December.

Last question very quickly -- have you seen anything on the competive front, not in terms of pricing but in terms of product, within or outside the department stores of note in the last quarter or as we head into the holiday?

We are very respectful of our competitors and we've seen a lot of fine products, as we always do.

Nothing particular of note?

Nothing particular to note.

Paula Kolindiak (ph).

Good morning and let me add my congratulations. A couple of questions -- first of all, can you tell us, just with regard to handbags, how does the SKU count currently compare to around this time last year?

Andrea, do you want to do that?

Our SKU count during the quarter, Paula -- and this is across everything, so from wholesale Japan, etc. -- was 1659 versus 1577. So as you can see, one thing that you and I have talked about -- we talked about it with the Wall Street community -- is that even though we are broadening our portfolio, we continue to keep our SKU integrity very good. So,we had very modest growth in our SKU count throughout our product line. Our style number has also stayed exactly the same, the number of styles that we offer at just under 700.

Okay. Then infrastructure-wise, how are you fixed in terms of your distribution center capacity?

We are very comfortable that our distribution center can handle this year's requirements as well as requirements over the next few years. We have introduced a second shift, which is going to become part of our permanent staffing during the future, and everything is being processed very efficiently, more so even than last year.

Then finally, I think you were experimenting with a new store concept and opened one in King of Prussia. Can you give us an update on that?

Sure. We have two new concept stores which are focused on handbags and shoes. As you say, one in King of Prussia and the other in Atlanta at Phipps Plaza. The stores are running on plan. Shoes are representing about 50 percent of sales season-to-date and we're pleased with the results.

The next question comes from Seth Kleinfelder.

Congratulations to the whole team on a great start to the year. Two quick questions -- one, could you give us an update -- I know one of your strategies for the department store sector in the U.S. is to maybe pare back slightly the total number of doors that you are in and go a little bit deeper in those total doors. Could you give us an update on the number of doors you are in and kind of what -- if that strategy is continuing?

Then any sort of updates on the geographical strength within the U.S. -- is there any particular area of strength, and are you gaining market share in others that have been maybe lagging the overall national average?

Then finally, one quick update on your international expansion -- anything there to update beyond Japan in terms of Europe and the rest of the Far East?

Sure. First, the way we like to discuss our wholesale business is to really talk about our focus on the primary doors. The top doors do represent the vast majority of our sales, and we are intensifying our distribution within these locations. In fact, we have exited approximately 300 department store locations and today, we are in around 1100. Having said that, these stores are generating 35 percent increases in POS sales against the 1400 locations last year, so we're pleased with the results.

Geographically, consistent with what we've reported before, a warm weather market such as Florida and Southern California continue to generate the largest levels of increases. I had mentioned earlier, for example, that department store sales are up approximately 90 percent over the last two years. In Florida, they are up with over well over 100 percent. Beyond that, internationally, our focus continues to be on the Japanese consumer, wherever she shops. We have opened up, successfully, additional locations in the Korea, Taiwan, other markets as well.

With regard to Europe, we have a limited presence, as you well know, in the UK, and we are in early stages with this business, but again, more broadly, all of our growth plans focus on the United States consumer and the Japanese consumer.

One additional market we just entered is Mexico, where we opened a freestanding store in partnership with a distributor as well as several wholesale locations, and we're hopeful that this small market will produce some excellent results.

Liz Dunn.

Thank you, good morning. The operating margin, you know -- obviously tremendous and you're looking for 300 basis points improvement this year. Do you still believe you can garner an additional 100 basis points increase next year off of that very strong expected result?

The short answer is yes.

Okay. That's really going to be driven mostly by SG&A leverage at that point, once the gross margins --?

I think what we will see -- diminishing continued returns from gross margin, although we will see year-over-year increases, we're optimistic, largely driven by channel mix. But we will see SG&A leverage contribute at a greater rate in fiscal year '05 than it will in '04 year-over-year out margin increase.

Okay. I know you mentioned the two stores that have a greater penetration of footwear, but can you just discuss footwear in general? How is a doing? What percent is it running of your total store base? Are you happy with the product?

Sure. First, footwear is running basically on plan. During the first quarter within Coach stores that carried footwear, sales penetration was about 6.5 percent, compared with about 5.5 percent the prior year. Footwear sales have improved actually during October, running about 8 percent, and we do see, over time, footwear penetration increasing to north of 10 percent in future years. It brings in a new consumer, as you know, and women do buy footwear more often than they buy handbags.

Great. Final question -- how many stores carry Pinnacle product? Is there an opportunity to expand the number of stores and thus lead to higher price points overall?

Sure. First, we classify our stores as pinnacle, flagship, fashion and core stores. We have about what we consider 10 or 15 Pinnacle and flagged and flagship stores. We're going to be expanding the number that carry exclusive product to as many as 25 stores during the course of FY '05. What we're finding is that we do have premium oriented consumers in all of our stores who have embraced the more sophisticated products, which on average is costing more to purchase.

Eric Veeder (ph), you may ask your question.

Good morning. Two questions -- one is, what is the level of newness in the stores in terms of sales?

The second is kind of more of a philosophy question. In terms of the signature line, do you believe that the Signature line has the going power to become kind of a classic line like the Louis Vuitton LVs (ph), or that type of line, going toward?

Let me take the second part first. The answer is yes; we see it having longevity as well as legs. We are into our third year; we've been able to extend the expression of Signature very successful to Mini Signature, when we look at overall signature, it's now pretty much even between classic and Mini Signature. We find that Mini Signature, which offers a softer, drapier look, attracts a more sophisticated consumer. We've also been able to combine Signature with a variety of additional fabrications ranging from leather & suede and expressive across a whole range of applications, which have convinced us that it has not only longevity but will be a permanent part of Coach in the future.

In terms of the newness, Eric, for the quarter, newness across all channels represented about 65 percent of sales. As has been the case in the past, more than half of that was new styles where the other just less than half of that was color additions and updates to previous styles. In the new styles, obviously we saw Soho Leather & Suede, which Lew discussed. We saw Mini Signature, which represented a significant portion. Remember, that came out in February, so it wasn't there in the like quarter a year ago. On the updates to previous styles, that would include Hamptons, with obviously now has been around its fourth successful fall.

Two quick housekeeping -- what is the square footage in the stores? What was the D&A in the quarter?

In terms of the square footage in the stores, I'm going to give you the usual full priced and factories in total. Full priced was 386,-316 (ph), up 20.4 percent; factory was 235,-894 (ph), up 3.6 percent, and therefore totaled 622,-210 (ph), up 13.4 percent. Depreciation and amortization in the quarter was 8.8 million.

Jeanne Fontana (ph).

I'm talking for Todd Slater (ph). Just a question on price points -- I was just wondering if, going forward with new styles or increasing in prices, what you see as potentially further increases or adding more bells and whistles and keeping price points the same, or if you have sort of a strategy there?

Generally speaking, the price points that we offer today will be the price points we offer next year. The real question is assortment mix and level of emphasis. As I said earlier, we're going to be expanding the number of stores that carry exclusive and limited edition product. As we generate sales, we do have a dynamic model stock and forecasting system, which adjusts our future planning to reflect consumer take away. What we're finding is that consumers have embraced our more sophisticated product and to some extent, might even be trading up.

Mark Friedman, you may ask your question.

A couple of things, one on the footwear -- I know we touched on it in the Coach stores. I was just curious how it was doing elsewhere in the department stores? Are you expanding the line, or do you foresee growth in the next 12 months in the footwear?

Sure. First, department store sales are running about even to 5 percent ahead of last year and a somewhat larger number of doors -- I believe we have about 550 locations today, compared to perhaps 500 last year this time. Our business grew meteorically in department stores. We're now at a point of what I would call stabilization as we fine-tune and calibrate our offering. We do believe there's significant opportunities to grow our footwear business as we become more of an authority in various segments, such as everyday usage for work within the classic and fashion arenas, as well as for weekend usage.

That 5 percent that it's up through department store sales of footwear, that is this past quarter over a year ago?

That is correct.

Then, you said on the major department store accounts, 300 -- you've exited 300 doors and are now at 1100?

That's correct. This is now Coach accessories, not footwear.

Yes, Coach bags and accessories. Those went to 1100. Where would you see that going to in the next 12 months?

We're not going to provide a forecast in this area.

Would you expect it to continue to decrease or increase?

That's a reasonable assumption to expect that we would have fewer doors one year from now than we do today.

The strategy behind that?

We think it's a twofold focus. I mentioned earlier, we believe we can do a more effective job in the larger locations that can truly reflect the Coach brand. The second part, or the reciprocal of that, is that in the smaller doors, Coach is not well represented; we're not able to turn the goods adequately from our point of view, and we would rather focus our energies on the doors that can truly build the Coach brand and franchise.

But these doors are all within the same chains? There's no chain that's not going to have a department?

That's correct, meaning the 1100 locations are in the same chains as the 1400 locations were.

Steve McMillin (ph), you may ask your question.

Thank you. I just have two currency related questions. First of all, can you quantify how much of the sales and earnings increase for the quarter was due to the weaker U.S. dollar if you haven't done so already?

Also, regarding sourcing costs, are you likely to see any higher sourcing costs from the weak dollar? Are you concerned at all about a re-evaluation of Chinese currency?

No, let me take the last one first. Our contracts in China are in U.S. dollars, so we're not impacted by movement in that currency.

To answer your question on yen movement in the quarter, there was little impact. Quarter-over-quarter, for the full quarter, weighted average -- it was only movement of about 1 yen, so it only impacted our sales growth by about two points. We had talked earlier about year-over-year. We had 50 percent growth at Coach Japan, at CJI. Forty-eight percent yen growth, 2 percent from currency gave us the full 50, so a very small impact. Now, that will be a different story in Q2 now, as the stronger yen will be present for the entire quarter, but the Q1 impact was minimal.

Is the change in the yen a major contributor to the increase in guidance versus consensus estimates?

No, it still is a percentage of the $1.2 billion guidance we've given for the year, a very small impact.

(OPERATOR INSTRUCTIONS). We do have a question from Linda McDonough (ph).

I might have missed this number. I think you said the Japanese sales were about 49 million for the quarter. Could you tell me what the other international sales number was?

That's not typically a number that we disclose, but I will say that the international sales were a highlight for us in the quarter. Lew spoke to the fact that we look to service a Japanese traveler through our international distribution partners, and that was an area that, as the quarter went on, we saw the business strengthen.

At POS, we saw year-over-year increases of about 25 percent, but on an escalating basis for the quarter, and so our shipments to our partners were up nicely, Q1-over-Q1 as well.

Can you just sort of give me a sense of what geographies those are in?

It's primarily Asia, but we will follow the Japanese traveler wherever she goes. Korea is a strong market for us; we also have wholesale partners in Hawaii and Hong Kong, Singapore. Guam is another major travel market for the Japanese, so where the Japanese traveler goes, Coach will be there.

But that's only a wholesale sale, correct? Not any partners like CJI there?

That's correct. That is in the indirect channel.

At this time, there are no further questions. I will now turn it back to management for closing comments.

Thank you, Shirley. That concludes today's conference call. As always, Mike and I will be available for any follow-up questions you may have either via e-mail or phone. Thanks, everybody, have a great day.

That does conclude today's conference call. Thank you for participating. You may disconnect at this time.