掛毯 (TPR) 2004 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'd like to turn the call over to Vice President of investor relations at Coach -- Ms. Andrea Shaw Resnick. You may begin.

Good morning. Thank you, Wendy, and thank you all for joining us. With me 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 and projections for our business in the current or future quarters of the fiscal year. 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 the sales (inaudible) should not be taken as Coach's acceptance of these estimates on the continuing basis. Coach may also choose to discontinue presenting the future estimates at any time. Finally please note that all prior year (indiscernible) numbers that we discussed have been adjusted to give effect for the Company's two-for-one stock split was is effective in early October 2003. Now let me outline orders (indiscernible) and topics for this conference call. Lew Frankfort will begin with an overall summary of our third quarter fiscal 2004 results as well as our strategies going forward. Mike will then follow with details on financial and operational highlights for the quarter as well as our outlook for the fourth quarter full fiscal year and initial guidance for fiscal 2005. Following Mike we will hold a Q and A session that will conclude By 9:30 AM. I would now like to introduce Lew Frankfort, Coach's Chairman and CEO.

Thanks, Andrea, and good morning, everyone. I'm delighted to report that excellent results prevailed At Coach. For the 15 Quarters since we've become a public company we've achieved double-digit Sales and Earnings growth. This consistency of growth speaks to the sustainability of our business model; the clarity of our strategies; our ability to execute efficiently and most importantly the strength and endurance of the Coach brand.

As you know, this morning, we reported excellent quarterly results ahead of our recently revised guidance and analysts' estimates as a 42 percent 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 83 percent to $58.3 million or 30 cents per diluted share. This compared with 31.9 million or 17 cents per share in the year ago period. The recently revised consensus estimates for the quarter was 27 cents per share.

Net sales totaled $313.1 million up 42 percent. Direct to consumer sales which consist primarily of sales at Coach stores rose 32 percent to $160.3 million during the third quarter. Finally, comparable store sales in the U.S. rose 20.5 percent with retail stores up 28.7 percent and factory stores up 9.3 percent.

Our exceptional comps in retail stores reflect market share gains and category growth as we continued to bring in existing consumers more often and attract new consumers into the franchise. Our business was driven by well received monthly new product flow, surging U.S. Coach store traffic and higher average transaction size, which was partially offset as expected by a modest decline in conversion.

Further comps stress continues to be broad-based from developed markets in the Northeast, such as Boston and York City, to less developed markets such as California and Florida.

In factory stores, we are benefiting from the saliency of the brand and surging traffic which is allowing us to further reduce the level of promotional activity. During this quarter we opened two Coach retail stores -- one is in New Time Warner project in New York and the other, our second in Pittsburgh, resulting in the total of 167 retail stores and 77 factory stores.

Indirect sales rose 55 percent to $152.8 million from 98.8 million in the same period last year. All indirect businesses, including Coach Japan, U.S. department stores, international wholesale and special markets contributed to the significant increase.

We're also delighted with the continued stress (ph) in Japan where we achieved a double-digit comp performance as we have in 12 of the last 13 quarters. During the third quarter, we opened one new factory store in Japan. At the end of the quarter, we had a total of 100 locations in Japan with 10 full price stores including the Ginza and Shibuya flagships and about 80 shop-in-shops.

As you know, since the quarter ended we opened our third Japanese flagship in the Maronouchi section of Tokyo to an enthusiastic reception. In fact, we had over 100 people waiting online and achieved $150,000 in sales from the more than 2500 people who visited us during that first day.

We also opened a major shop-in-shop in the Shinjuku Takashimaya (ph) store, bringing the total number at FY '04 openings in Japan to 8. We were also very pleased by a continuation of significant double-digit increases in POS sales at U.S. department stores, which reflected a surge in their overall handbag and accessory sales and further market share gains for Coach.

Throughout our business, consumers enthusiastically embraced our transitional and spring offerings across categories and collections. These included new styles and colors in our SoHo collection, across multiple fabrications and silhouettes, including leather, suede, and mini signature and highlighted by the new flap hobo shape. In addition, we're also pleased with the continued strength of Hampton -- notably the updated carryalls, popular buckle demi, and flap satchel.

More recently in March we just introduced an updated SoHo twill and a sporty Hampton's weekend group enjoyed excellent sell through. As mentioned in our press release our momentum has continued into April both in U.S. and Japan.

As always, we have a strong pipeline of fresh and innovative products planned. This month we relaunched our popular straw basket totes which will be our Mother's Day feature as well. These totes and a new top handled style use a variety of materials in combination with straw including patent leather trim and leather appliques.

Also in April, our optic signature group in pink, blue and green premiered in three handbag styles in addition to scarves and hats. Finally turnout (ph) satchels and garden totes and bright spectator twill debuted this month as well. These bags were featured heavily in this spring's fashion magazines as the must have bag of the season.

In May our special addition, soft cinched tote, returns with an all-store distribution in several colors in both signature and leather fabrications. And just post Mother's Day for the first time, we will have a front table change in our stores, introducing Beach which features two new silhouettes to Coach -- the beach bucket bag in two sizes as well as the SoHo small hobo and clutch shapes.

Coming in June is Signature Stripe, a cotton jacquard in both natural and denim colors, accented with a turquoise leather and wide suede stripe detail. Also offered will be Patchwork Styles which are a combination of this season's leather, suede, and signature colors.

In each conference call, since our first in October 2000 we have reported excellent quarterly results. As in 14 of 15 periods, earnings have surpassed analysts' estimates with the 9/11 quarter being the exception where we met expectations.

Over this time we have also driven our annual operating margins to above 30 percent. While our accomplishments have been significant we have never been more optimistic about our future. We have clarity to our growth which rests on our distinctive proposition, strong brand equities and expanding market shares.

At the same time, our multi channel international distribution model, broad handbag platform, monthly product flow and market research activities help us diversify and mitigate risks. It's worth mentioning that our success is not predicated on the performance of any one collection.

All of this has allowed us to weather the economic and political uncertainty in the past and gives us confidence in our ability to do so going forward.

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 accessible luxury lifestyle brand. 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.

We are also evolving our marketing programs to create a more satisfying shopping experience. For example this quarter, we are piloting our Coach by Special Request program, an in-store selling guide featuring an assortment of classic favorites, business and travel, Signature and special addition product that are not available in most of our retail stores. Perhaps most importantly Coach is now recognized as a 365-day resource for both gifts, and more significantly, for self purchase.

Hampton's weekend reintroduced this quarter as an excellent example of product which allows us to express a sporty attitude for Coach complementing the everyday active lifestyle of our consumers.

By addressing a wide variety of usage occasions and everyday needs, our most significant sale gains have been realized during the non-holiday periods. Our second strategy is the continued acceleration of growth in U.S. retail. We plan to add 100 U.S. retail stores over the next 4 to 5 years, bringing the retail store base to at least 275.

During the fourth quarter, we are adding a total of 7 retail stores including our first store in Rochester, which successfully opened 2 1/2 weeks ago. Another store -- our first in Jacksonville, Florida, and Toronto, Canada -- our first as well later this quarter. In keeping with our strategy to expand our most productive locations we will be expanding two retail stores in this quarter as well.

Our high performing store in Garden State Plaza in northern New Jersey and Plaza Los America in Puerto Rico bringing this year's total to 9 expansions for a total of 15,000 additional square feet or by 4 percent to our total retail space.

Third, we are aggressively expanding market share with the Japanese consumer from about 5 percent today to over 8 percent during the next few years. Our strategy is threefold.

First we will open select new retail locations including flagships. Next year, we are expecting to open at least three additional Japan flagships, bringing our total number of flagships to at least six. Similar to the U.S., we will also drive sales to improve store productivity by continuing to target double-digit comps in Japan. And, finally, we planned to expand 12 of our most productive shop in shops in FY '05.

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.

Thank you, Lew. Lew has just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our third-quarter results.

As Lew mentioned our quarterly revenues increased by 42 percent, with direct to consumer up 32 percent and indirect up 55 percent. In the third quarter, our gross profit margin expanded by 340 basis points over the comparable period of the prior year from 72.5 percent to 75.9 percent.

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, sourcing cost initiatives, and third, the positive impact of product mix, driven by increased penetration of higher margin, mix material collections.

Selling, general, and administrative expenses as a percent of sales declined in the quarter to 43.6 percent, a 500 basis point decrease from the 48.6 percent reported in the year ago quarter. This reduction was primarily due to operating leverage, gained in all operating businesses due to strong top line growth with the exception of Coach Japan, which continued to build infrastructure during the quarter.

Due to the combination of sales growth and profitability improvements, our operating income rose 91 percent to $100.9 million in the third quarter versus the same period last year. Operating margins in the quarter hit 32.2 percent compared to 23.9 percent in the year ago quarter, up a total of 830 basis points.

Net income for the quarter increased 83 percent to $58.3 million or 30 cents per diluted share as compared to $31.9 million or 17 cents per share in the year ago period. And we are ahead of the recently revised consensus estimates of 27 cents per share.

Moving to the balance sheet, inventory levels at quarter end were $153.8 million, 17.8 million or only 13.1 percent above prior year levels. We're pleased that we were able to support the 42 percent increase in quarterly sales. The 19 net U.S. stores and 8 net new Japan locations, which opened in the last 12 months, with this modest increase in inventory.

Accounts receivable balances rose approximately $32 million, driven by sales gains in the indirect channel. Day sales outstanding for trade receivables at quarter end actually improved from 39 -- to 39 days versus year ago levels of 41 days.

We ended the third quarter with $445 million in cash. Only Coach Japan's revolver borrowings of $13.3 million remains on the consolidated balance sheet, which is down about $20 million from year ago levels. The Company did not repurchase any shares in the third quarter and at the end of the quarter, $65 million remained available for future repurchases under Coach's authorized repurchase program, which expires in January of '06.

Net cash from operating activities in the third quarter was $99.6 million compared to $38.1 million generated last year during Q3. Free cash flow in the third quarter was $88 million versus 26 million in the same period last year, primarily due to increased earnings.

Coach spending mainly for new stores and renovations was $11.5 million versus 12.1 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. For the quarter ending July 3rd, 2004, we are targeting sales growth of over 42 percent so at least $330 million including the U.S. comp store sales increase of at least low teens, led by gains in retail stores and continued double-digit same location sales increases in Japan; an operating margin for the quarter which will be about 800 basis points above the year ago level with gross margins increasing significantly, and SG&A as a percentage of sales declining sharply.

These factors taken together should result in earnings per share up more than 85 percent versus last year of at least 30 cents. Compared with analyst consensus estimates of 26 cents. All of which translates for the full fiscal year to net sales growth, of at least 37 percent to over 1.3 billion with double-digit comparable store sales gains in both U.S. Coach stores and Japanese locations. A gross margin of nearly 75 percent versus 71.1 reported in FY '03. A significant improvement of about 370 basis points in SG&A expenses as a percentage of sales on the year-over-year basis, resulting in a 700 basis point improvement in our operating margin to about 33 percent. Therefore, operating income is expected to grow by more than 77 percent in FY '04 versus FY '03 resulting in earnings per share of at least $1.32 cents compared with analyst consensus estimates of $1.25 per share.

Our preliminary goals for the full fiscal year 2005 are as follows. Net sales growth of at least 19 percent to at least $1.55 billion with at least high single digit U.S. comparable store sales gains led by retail stores and a continuation of double-digit complication gains in Japan. An operating margin improvement of at least 100 basis points above FY '04 levels. And as a result, operating income is expected to grow by at least 23 percent in FY '05 over FY '04.

Our minority interest payment to our CJI (ph) joint venture partner should no longer be a drag on our EPS growth. It will stay approximately equal to '04 levels as higher sales and expense leverage at Coach Japan will be offset by price increases Coach Inc. will take on shipments to coach Japan. This will increase the Coach consolidated profitability of our business in Japan, but will compress the CJI standalone margin and lower minority interest as a percent of sales.

Two factors will somewhat moderate our op (ph) income growth on the EPS line in 2005. First, a higher share count brought about by option exercises and, secondly, a higher tax rate broadened to about 38 percent due in to the fact that incremental taxable income is being taxed at higher rates.

Including these factors, we expect to generate EPS growth of at least 21 percent which would produce earnings per share of at least $1.60 compared with analyst consensus estimates of $1.51.

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.

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

+++ q-and-a.

(OPERATOR INSTRUCTIONS)

Bob Drbul.

Lehman Brothers. Two questions. The first one is on pricing. Have you guys discussed whether or not you would plan on price increases in next fiscal year in the U.S. and then, can you give us a quantification of the price increases that you will be passing on in Japan to CJI?

Sure, first, Bob, as you know since newness represents most of our offering, we determine pricing based upon the materials and make of our products. This year on average in FY '04 our prices are about 10 percent higher than they were the prior year. On the preliminary basis we believe the product offering will average about 8 percent higher next year than it is on this year.

In terms of Japan, our joint venture Coach Japan prices the product independently of us, relative to what they believe the market can support. In general, they strive to maintain or improve margins year on year so my suspicion is that their average price points will grow by 8 percent as well next year.

And then a follow-up question. In terms of, can you give us an update on penetration rates for the mixed material of the bags this quarter or where you expect it to shake out this year?

Sure. They're roughly equal to what they were last year and I believe leather represents about -- I actually am being handed some numbers here -- I will give you some more exact numbers. Leather represented about 28 percent of leather -- I am sorry, leather represented 28 percent of handbag sales in the third quarter with non leather about 72 percent. That's about fairly consistent with last year and what we would expect.

Thank you very much.

Dana Telsey.

Bear Stearns. Good morning, everyone, and congratulations. On the gross margin side you mention the -- that some of the reasons for the increased highest margin channels growing fast is source and cost initiative and product mix. What's happening on the sourcing cost side and what are the sourcing costs (indiscernible) are less now that you're anniversarying some of the improvements? And, also, on the point of sales system that you're implementing, how is that doing? What are you seeing? And, lastly, the product flow was 6 floor sets versus 5. Any adjustments to products floor sets going forward in terms of any changes you'll be making? Thank you.

Let me take the third question burst. On floor changes, I think we're going to continue to evolve the way in which we merchandise our stores. One of the decisions we just made in the last few weeks is to offer selectively the tiers of floor sets, floor set modifications based upon the product that's being offered. So for example, flagship and fashion stores might have a slightly modified window presentation and key table presentations depending on the assortment. In addition, we are going to practically make intra month product flow changes on as circumstances warrant. As we mentioned we are doing one post Mother's Day.

Beyond that, come the holiday season we are going to be introducing to all Coach stores a significant resort group on December 1st and we're still finalizing our floor set rhythm for the first half of next fiscal year. But we do believe there will be additional changes over this year. Mike?

Sure. Dana, let me take the question on gross margin improvements on sourcing cost initiatives. First, it really is primarily the blocking and tackling that our very talented supply chain organization has achieved rolling through to the bottom line this quarter. So it's things like counter sourcing, hardware buckle zippers, the like. And also working hard on worldwide logistics to lower freight expense as we move product around the world which rolls into our cost of goods sold. And also leveraging our volume as we deal with all of our vendors, be it raw materials or the finished good assembly factories located throughout the world. So it's really primarily hard work and blocking and tackling from our supply chain group.

If I could then talk to the POS. That project continues to go exceptionally well. In fact, we are anticipating that by the end of this calendar month, the roll out will be complete. And we're continuing to enjoy the benefits that we had planned to reap from the new POS system including faster processing time, more efficiency, and fulfilling orders as we are able to move them across stores and back and forth to our D.C. where appropriate -- or Distribution Center. It's also proven to be a our real help to us, as we add new stores and add new sales associates, the ease of training versus the old system is remarkable.

So we are really on track and looking forward to completing the project by the end of this month and then building on the new POS infrastructure to further enhance productivity and see RM initiatives in the stores in the years to come.

Any sense of timing when you expect to leverage the benefit from CJI?

Are we talking, Dana, about our spending rate?

Exactly. Exactly.

We actually, we will see that next year. I should let you know that on their own P&L their spending rates grew more slowly in Q3 than their own top line did. But of course, their growth is outpacing Coach Inc. as a whole. So they were still a bit of a drag on our SG&A rates. But the infrastructure build and the leverage therein -- we're still confident that we will achieve next year.

Margaret Mager.

Good morning and congratulations on another great quarter. First of all, could you talk about, Lew, what was the range on the same store sales for your full price stores and if there was any pattern that may be worth highlighting like stores open a year are getting the best -- just a year are getting the best comps or is it older stores or regional? Any kind of highlights within the range of same-store sales on your full price stores in the U.S. to give us a bit more insight would be interesting? And, I would also like to ask about the new store productivity and how your new stores are opening up in terms of how they are comparing to the base level? And what kind of maturity you're looking at for your new stores and then, lastly, if I could just ask clarification on the 8 percent price increase that you're looking at for '05 at the wholesale level in Japan? That's understood. Would you expect that, then, to translate into more than 8 percent per retail price increases in Japan? And is that incorporated already into your double-digit comps store assumption for Japan?

Let me take the third one first, Margaret. When we talk about a price increase, I was careful to say that the average price offered would be 8 percent higher. We're not taking price increases but we're introducing product with more make and product that's more sophisticated with our higher cost materials. In terms of wholesale to retail, an 8 percent higher wholesale price will generally translate to an 8 to 10 higher retail price and, yes, we do take that into account in saying that our comps will be in our projections of double-digit comps in Japan next year.

In terms of the insights on performance last night, I was actually going through the performance by geography to see what I could point out from a disparity perspective. But the reality is that every single district in the United States grew double digits versus the prior year. And I think what was most remarkable was the evenness of the level of growth that we experienced across the entire United States. And as I mentioned in my comments, markets like Boston, as an example of mature market performs it as well as newer markets like Los Angeles.

In terms of productivity of new stores, as you know we only open stores that will provide at least a 30 percent ROI and we look at new stores against our hurdles and every store that we are opening is either meeting or beating our plans north of $1 million in its first 12 months of sales. I believe, while I don't have a statem (ph) at my fingertips, on average, the productivity of the new store runs about 60 percent of the productivity of an average store and it takes about three years for it to come to maturity.

Just quickly. Did I hear you say CapEx was lower this year in the quarter than last year by a few hundred thousand?

Yes, there were virtually just some timing around store openings and the like, Margaret, no significant differences this year to last.

What's the total CapEx for the year? Again?

We still project a number that will be around the $70 million, 70 to 75 million. It will depend on timing of projects and how much will get done, largely for early '05 openings and how much gets billed out before we close the fiscal year. So a number of $70 to $72 million is probably a pretty good placeholder.

And last year was?

Last year was lower than that, closer to $60 million.

Thank you, Mike.

Marnie (ph) Shapiro.

Merrill Lynch. Congratulations on a great quarter. Could you talk about international outside Japan and any key highlights in Europe or anyplace else for that matter? And then looking forward, any markets that you are focusing on for growth? Or any changes happening outside of Canada and the U.S. that we should be updated on?

Sure. First, as you may know, Marnie, when we talk about business outside the United States and Japan, we talk about business primarily in East Asia when it comes to Coach and the other luxury brands. So Coach, we have decided to limit travel locations that are dependent upon international travelers to no more than 10 percent of our overall sales so that we are not subject from a shareholder perspective to a dramatic reduction in earnings should international tourism decline. So first headline is that travel locations are being controlled in terms of future growth. Second, we are experiencing good growth among our local consumer basis in both Korea and Taiwan, where emerging middle-class populations are providing us with an opportunity for meaningful growth in the years ahead. Third, with regard to our Mainland China, where I and Keith Monder (ph) and Peter Emerson and other colleagues just returned, we opened our second freestanding store which happens to be in Beijing. We have one open in Shanghai.

And, second, the market in China, we believe it is important to establish a foothold there, to build awareness but we will not be material to Coach's growth over the next several years.

With regard to Europe, we have had a pilot in the UK which we had on shared with you, even if it was a significant venture for us it would only represent 1 percent of our sales in three to five years. That has not worked out. And we are sharpening our focus by withdrawing from that market actually.

So we continue to be focused on the very fertile U.S. and Japanese consumer basis which, together, represent over 70 percent of the world's luxury spend and offer us unlimited potential.

David Schick.

Legg Mason. First, can you talk about how you're thinking about the building cash balance? What that might mean? And how you might end up using it? And, secondly, when you entered the quarter and you gave robust guidance, you've obviously beaten very robust guidance quite nicely. Could you talk about where it surprised you internally? Whether it was a product line new introduction sort of where was the upside versus your own thoughts either the guidance that you shared going into the quarter or your own sort of internal thoughts going into the quarter. That would be helpful.

Second question first, David, we're not dependent on any particular monthly product introduction. As you know we have several platforms of products, simultaneously, in the stores and they ebb and flow. And we introduce new products each month but we are heavily reliant on the pre-existing products. So no individual collection is going to determine whether or not our business is strong. What will determine whether our business is strong will be overall product offering and the saliency of the brand. What did surprise us this quarter in the United States is the incredible surge in traffic.

We did not anticipate that our traffic would be growing as much as it has been growing. This spring, when we surveyed consumers, what we find among existing users is they are visiting us more frequently and we're finding larger numbers of new consumers visiting us. And so it's traffic that has surprised us. And in the U.S. department store arena, our POS sales rose a dramatic 40 percent this quarter, past quarter as well. What we are experiencing is a very -- experienced vigorous growth driven by the saliency of the brand, strength of the franchise.

The only other surprise I mentioned earlier is the incredible consistency across the entire United States and a full price retail store relative to their growth rates. Pretty amazingly consistent.

David. I'll take the question on our cash position. Firstly, we are fortunate enough to be in a position to have many available avenues for us to grow the brand organically. And we are investing in those opportunities, largely in new stores. Both here and in Japan and also expanding the stores where we feel like it's appropriate that we can earn good returns and as we talked about we will do nine of those this year. We will do 12 in Japan next year for example. The other thing that we're spending on where it makes sense is efficiency initiatives. We spent a moment talking about the POS update and will continue to invest in those type of project. The other thing as we mentioned we do have $65 million available to us still for a stock repurchase program. But all of those taken together, there is no question that with the business operating as well as it is today we are in a cash build mode and, frankly, Coach management is okay with that for this point in time. We are building powder dry money for opportunities that may present themselves to us down the road.

Mark Friedman.

Merrill Lynch. Good morning, everybody, great quarter. Two questions, Lew. One, was wondering if you could talk about some of the other segments in the business? How they were performing? Any new initiatives to them in particular, certainly, something like shoes? And then what kind of feedback can you give us as to the performance of new customers versus existing customers in either your sales data or consumer research? Thank you.

First, not surprising to us as the saliency of our brand increases, we find that consumers are attracted to handbags and women's accessories. And this quarter, for example, our overall handbag and accessories grew from about 70 to 75 percent of our total sales. And so the emphasis, our emphasis, continues to be on handbags and women's accessories. That's where the heart of our franchise lies and that's where consumers spend most regularly.

In terms of segments within the world of Coach, one area that we just reintroduced is Hampton's Weekend, which as you know is a sporty group of totes which is doing extremely well on meeting our forecast and it provides a product for different usage occasions to travel and weekend.

Shoes are performing consistently with last year's levels about I believe -- about 8 percent last quarter in stores that were housing them. As we move forward next fall, we plan to introduce an evening collection which I think is going to resonate extremely well with our consumers. These will be bags that can be used for special occasions, that will range from silk to lurex to leather as well as an accessory line related. Beyond that we are expanding our kids offering. And for the first time we will be introducing what we're calling a quilted signature group of handbags in the holiday quarter and I think that offers enormous potential. And we will be introducing that group in a small number of styles.

Relative to our customers, what we're finding consistent with what we found last year is that consumers who are new to the franchise are spending more in their first 12 months than consumers who were new one year ago or two years ago. So, clearly, the propensity to spend, willingness to purchase our products, has not abated and new consumers are as prone to spend as much as existing users. And by every metric that we have, our franchise has never been stronger. Nearly 90 percent of consumers who own a Coach product stress a positive intention to repurchase. Among certain consumer segments such as younger more stylish consumers we seem to be out, filling their wardrobes.

Jeffrey Edelman.

UBS. Good morning. A question on Japan. It appears as if you increased market share there at a faster rate than I think maybe we all would have thought. At the same time, your -- it appears as if you're stepping up expansion not only of flagship stores but also expanding expanding locations in some of in-store shops at your own stores. Would you kind of walk us through where you see your square footage growth in Japan over the next several years and what kind of market share that could equate to?

Let me -- I'm not sure we are going to be able to -- I think we will maybe get back to you on exact square footage. Andrea is checking it as I talk more generally. Having just returned from Japan last week, and reviewing the market the competitive milieu Coach's performance looks very clear to us that we have an opportunity in the next few years to strive to, again, double our market share to 10 percent. And we do believe our proposition resonates extremely well for the consumers there, we're finding incredible success when we expand locations. When we double our space in the location in Japan and also relocate that particular shop to a more prime location within the main floor that we're able to more than double our sales. And the appetite for Coach continues unabated in Japan. What we're finding, when we ask consumers what attracts them about Coach, they like our style, they like our accessibility from a price perspective, they like our service, they like the new monthly product flow, they like the surprise. And we do believe that we have a unique proposition of being priced at only 50 percent of the price of our competitors in Japan. So we're going for it. (MULTIPLE SPEAKERS) will have get back to you on the square footage.

Jeff, one way, perhaps, to think about the square footage is a bit of a proxy but we are in 100 stores in Japan today and our plan is going forward to open approximately 10 new doors a year with as we talked about earlier larger mix of flagships -- three, in fact, next year. Those will typically be larger than our current store base. And we've talked about expanding some of those existing stores so, clearly, we're talking about square footage growth well in excess of 10 percent that the 10 new doors would represent as a total door count.

Okay now, secondly, if you've increased, I believe you said you decreased your gross margin a little bit on the sales to CJI. Does this alter the dynamics of the potential buying the other 50 percent in '07 and in and is that predicated on a certain level of sales at a certain level of profitability?

No, Jeff, there's really no impact on the contract between our sales and our joint venture partners Sumitomo. We're still defined by contract, when we can step in and buy the next slug (ph) of that remaining 50 percent. And so the change in pricing really doesn't change those contractual terms.

What's the drive of the other pricing. Is it sales or profitability or both?

It's profitability, really, is what's driving it, Jeff. This is -- what we've done and I tried to allude to it in the prepared remarks. What we've done is we've increased Coach Inc.'s overall profitability in Japan by pricing higher from Coach Inc.. -- Coach New York, if you will -- to Coach Japan. That's relative to our prices at retail in Japan. So they will have a decline in gross margin on their P&L but our P&L will more than offset that with it following through on a lower minority interest line as a percentage of sales.

Okay, fair enough. Thank you.

Nealy Tamingo (ph).

Piper Jaffray and congratulations on a fantastic job. So first here on department stores. Obviously your strength is very strong. Lew, do you have a sense for the category, the handbag and small leather goods category, how much that's expanded here at the first calendar quarter? I believe you said it was up about 10 percent during holiday. Has it changed markedly since ...?

Yes. We are excited by the growth in accessories. Handbags in the first quarter appear to be up between 30 and 40 percent, nationally, while overall department stores sales seem to be up between 5 and 10 percent. So what we are experiencing is a lift in overall accessory sales. And it bodes well for the future.

Great and then with respect to entering into evening wear as well as resort type accessories for next year. Are there changes in your advertising plan looking out into the first half of next year? Are you looking to add more dollars there?

The short answer is no. We have held our media budget constant for the last five years. The best form of advertising we think we have comes from the 25 million people who visit our stores each year in the United States and see our new products.

Todd Slater.

Lazard. Question on the trends that you see towards the strength and color continuing through the fall. If you see, what you say in terms of the mix in casual and dressy. Just if you could address that a little bit. And then my second question is sort of a follow-up on the sourcing because you mentioned leveraging a whole bunch of categories. And I'm just curious as to the trend and if you can quantify for a little bit the trend in your cost per unit, if that's been going down, sounds like or up? Given that you must have a bit of work in progress for '05, deliveries, you know, what you're sort of, what you see through your sourcing trends, your transportation costs so on and so forth in '05? Thank you.

First I commented just a moment ago that this is really the year of the accessory and it is a year for accessories and with the surge in the accessories arena color is playing a more and more important role and what we found this spring, we're going to build upon as we as we have already completed our buys for the fall and holiday season. You're going to see continued color from Coach with black playing a relatively subordinate role. Mike.

Sure. In taking the question on gross margin, I want to go back and remind us that there were three factors that drove the remarkable gross margin improvement during the quarter. And the largest, by far, was the channel mix growth. The sourcing cost initiatives were contributors but we're relatively small and the way we talked about gross margin in the past is that, going forward, largely the gains that we will reap on the gross margin line are going to be driven by that channel mix benefit as Coach Japan with its highest gross margin rate in U.S. retail stores was second highest. Or growing faster than the business as a whole. So looking out, we will continue to enjoy gross margin expansion but at a much reduced rate in '05 and beyond. And it will be driven largely by channel mix gains as opposed to sourcing cost initiatives and product mix.

Are you -- getting back to the unit cost question or can you at least probably give us by (MULTIPLE SPEAKERS)

What I can tell you is that during the third quarter, our average costs were down almost 5 percent, average cost per unit was down almost 5 percent, while our average unit retail was up modest single digit. So there was an impact on the cost side driving the gross margin gains.

(indiscernible)

J.P. Morgan. I am interested to know a little bit more about your U.S. expansion plan over the next few years and what kind of locations are you looking at to add those 100 stores that you're planning over the next five or six or whatever years? Can you give us a little bit of a little bit of detail on that? Thanks.

Sure. I think what you're asking about is our expansion plans over the next few years, am I correct?

Yes in the U.S. market in particular.

Thank you. As I mentioned earlier, we are planning to open 20 at least 20 full price retail stores a year. Most of those stores we open are in existing markets and perhaps 25 percent are in new markets. Next year we plan to open a store in Las Vegas during our next calendar year. We're not sure quite yet whether it will occur during the fiscal year. And you'll see us opening additional stores in key markets, such as Seattle. The Phoenix portion of Arizona, Los Angeles, as well as in new markets like Des Moines which is of course in the middle of our country, Sarasota on the West Coast of Florida will realize its first full price store. And as we are experiencing this year wherever we're opening stores we're having no cannibalization on adjacent stores. And the immediate community embraces us and we're very pleased with all of our stores' performance.

Thank you very much.

Thank you, everyone. It is now 9:31. We're going to conclude the call. As always, please feel free to give us a buzz and if you have any follow-up. Thanks, everyone, have a good day.