掛毯 (TPR) 2004 Q4 法說會逐字稿

Good 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, Miss Andrea Shaw Resnick. You may begin.

Good morning. Thank you, Brenda and thank you all 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 that this conference call will involve certain forward-looking statements, including projections for our business and the [inaudible] future quarters of 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 cost. 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 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 presented future estimates at any time.

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 October 2003. Additionally, it should be noted that results for the fourth quarter and fiscal year ended July 3, 2004, included 14 and 53 weeks respectively, while the same periods in fiscal 2003 included 13 and 52 weeks respectively. All discussions of comparable store sales are calculated based on an equivalent number of weeks for each period.

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 2004 results as well as our strategies for 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 2005. Following Mike we will hold a Q&A session that will conclude by 9:30 A.M.

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

Thanks, Andrea and welcome, everyone.

As you know, we've just concluded our 16th quarter as a public company. A four-year period where we have consistently achieved excellent top-line and even stronger bottom-line growth while growing our market share rapidly.

During the IPO, I noted that we considered our journey as a public company a marathon, not a sprint, with each quarter a mile or lap along the journey. While we've had the wind at our back for most of the journey thus far, we remain ready to continue to move ahead swiftly, yet at a disciplined pace.

I should mention that given our excellent condition, we now see ourselves engaged in a 50-mile ultra marathon.

Our strong fiscal 2004 performance speaks to our philosophy of operating Coach as a small business with large sales, which we manage very actively. FY '04 was highlighted by a 39% increase in revenues, and a 79% increase in net income.

It was a year of many accomplishments including the opening of 19 new North American retail stores. A 22% increase and full price U.S. comparable store sales for the year, driven by accelerated traffic and higher average ticket.

Over 35% gains at TOF for U.S. department and specialty stores and another exceptional year for Coach Japan, where sales at retail rose 57% in U.S. dollars and 45% in constant currency to over $275 million despite lapped category sales for accessories in Japan.

In fact, Coach captured the number two position in the market with a nearly 6% share. Over the last two years, we have more than doubled our sales and share in Japan.

Most broadly, we once again effectively executed our growth plans and realized companywide performance that outpaced our stated goals. We remain confident in our ability to sustain our growth and deliver superior results over our planning horizon.

As you know, this morning we announced strong results for the fourth fiscal quarter ended July 3, 2004, ahead of both our expectations and analysts' estimates. Our net income and EPS more than doubled from prior year levels as a 46% 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 120% to $66 million or 34 cents per fully diluted share, compared with 30 million or 16 cents per share in the fourth quarter of fiscal year 2003.

Second, net sales totaled $338 million versus 232 million a year ago, a gain of 46%. Third, direct-to-consumer sales, which consists primarily of sales at U.S. Coach stores, rose 39% to $195 million during the fourth quarter from 140 million in the comparable period of the prior year.

And lastly, U.S. same-store sales for the quarter rose 17.7%, with retail stores up 20.1%, and factory store sales up 14.5%, with broad-based strength across regions and store types.

During the quarter, as planned, we opened seven retail stores, bringing to 19 the number of new retail store openings in 2004. Last quarter's openings included our first stores in Rochester, New York, Jacksonville, Florida and Toronto, Canada.

We also closed one factory store during the fourth quarter. Thus, at the end of the period, there are 174 full-priced and 76 factory stores in operation.

In addition, during the quarter, we expanded two full-price stores, Plaza Los Americas and Puerto Rico and Garden State Plaza in New Jersey, bringing the total number of expansions to nine this year.

Indirect sales in the quarter rose 57% to $144 million on a year-over-year basis, driven primarily by strong gains at Coach Japan while substantial increases in international wholesale, U.S. department stores and business to business contributed, as well.

During the quarter, in addition to the Marunouchi flagship, a shop-in-shop location was opened in Shinjuku Takashimaya. This brought the total to eight store openings for the year, on target with our expansion plans.

We were particularly delighted with the continued momentum of our U.S. full-priced business, which enjoyed increases in both traffic and average ticket in our own stores and significant increases in U.S. department store POS sales. Results continued to be driven by the monthly flow of fresh and relevant product, notably handbags and women's small leather goods.

Also, our U.S. factory store business surged due to substantially higher mall traffic and the strength of the Coach brand, despite a markedly reduced level of promotions. It's interesting to note that our U.S. sales across all channels are now nearly $1 billion, so, as a stand-alone company, our U.S. business is now larger in dollar size than the entire company business was just one year ago.

As mentioned in our press release, we were very pleased to see an unprecedented level of growth in the U.S.-branded women's accessory category this year. In fact, our analysis projects at least 20 to 25% growth in sales of premium handbags and women's' accessories in calendar 2004 to about 3.7 to $4 billion.

You may have already heard me say in prior conference calls that our target consumer is now buying 3.5 handbags a year, up from the 3.1 bags she purchased in 2002, and the 2.4 she bought in 2000. And as you know, consumers most recent purchase behavior as the best predictor of future spending.

This trend points to a new, higher, and most importantly, sustainable level of category spending and provides Coach with an excellent opportunity to capitalize on this development in the years ahead, given our leadership position.

We were also very pleased with our performance at Coach Japan this quarter, where sales rose 46% in dollars and 34% in yen as our market share continued to grow rapidly. Our growth in Japan was fueled primarily by distribution, augmented by mid-single digit same-location sales, as we continued to focus on growing the overall market primarily through our store base.

Last quarter's performance was especially noteworthy when you take into account the weakened performance in Japan for imported luxury brands in general. This softening was due to a dramatic surge in international travel during the spring, which resulted in the doubling of Coach sales to Japanese consumers outside of Japan.

Finally, we were particularly pleased with the significant improvement in operating margins, as our stable pricing and supply chain improvements in combination with efficiency initiatives and leveraged spending continues 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. I also wanted to touch on our product the cornerstone of the Coach brand, as it is clearly one of the primary drivers of our growth.

Throughout our business, consumers enthusiastically embraced our seasonal offerings across categories and collections. These included new styles and trims in our popular straw basket totes, which were our Mother's Day feature. Also in April, our pastel optics Signature group premiered and sold through briskly.

In May, our special edition soft cinched tote returned 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 had a front table change in our stores, introducing the Beach group, which features two new styles to Coach, the beach bucket bag in two sizes as well as the Soho small hobo in clutch shapes.

In June, we introduced a series of Signature Patchwork and Signature Stripes styles which sold very well. As many of you know, due to the strong sell-through of our transitional offering, we chose to bring in a portion of our July floorset early, notably our Soho mini Signature leather and suede collection, in order to fill out the store assortment. It was an instant success and continues to perform remarkably well ahead of our expectations.

Finally, at the end of June, we launched Vintage Signature, a lifestyle collection that will carry through the fall. This collection features the iconic Signature C fabric, infused with unique vintage leather and suede, giving consumers a more sophisticated option in our logo offering.

Going forward, there will be a new introduction of Signature in each month, either as a collection, such as Vintage, or as a fabrication choice within the collection, such as in Hamptons or Soho or in Gallery totes.

For example, Chelsea just introduced and selling extremely well as Coach's new leather group for fall. The collection is offered in luxurious soft, pebbled leather and Nubuck as well as our Optic C pattern, which was very successful this spring.

The draped, contrasting trims and pockets and Signature turnlock detailing all lent to the overall appeal of this new collection. Even though it's early days, this group is already generating nearly 10% of sales in our Coach retail stores.

In September, our popular Hamptons collection will be updated with new silhouettes and design details and the pressure ray of key fall colors. This collection consists of both buck leather and suede offerings, enhanced by wearable feminine styling and tailored detail. Wristlets and suede hats compliment this collection.

In addition, in September we will be adding a new bronze metallic group within our Vintage Signature collection, the feature of our fall campaign. Also in September, we will be introducing Signature Stripe, featuring suede stripes on classic Signature fabric handbags as well as a new version of our best-selling entry price point style, the demi zip bag.

We're also enthusiastic about our offering for the holiday quarter, which includes a stylish group of gallery totes, a key collection last holiday with exciting new details, colors and treatments. In addition, the introduction of the newly-updated and always popular duffels in October will be very significant to our business, especially in the new East/West horizontal-shaped style, offered across multiple core fabrications. Our views were reinforced by a very successful pilot in July.

Also for holiday, building upon the success of last year's abbreviated evening group, we will be broadening our offering by introducing Madison, an expanded evening collection, including handbags, accessories, hats, scarves, gloves, shoes, and outerwear featuring rich satins and Pave rhinestone buckles. Coach's relaxed interpretation of our inaugural evening collection enables our consumer to carry these bags from dressy to occasional occasions, giving her the flexibility she's come to expect from Coach.

In addition, also new for our holiday quarter, is quilted Signature, a subtle interpretation of the iconic C. Available in select hobo shapes and wristlets, these pieces have a soft, relaxed feeling, some with fur trim that adds an element of fashion.

Finally, given the success of our Resort Pilot and last year's holiday season, we will be introducing Resort product to all stores in early December, where we estimate it could reach nearly 10% of that month's sales. Clearly, the vitality of the brand is driven by the strength of our product offering and our full-on holiday assortment is powerful, underscoring our optimism about the seasons ahead.

Based on the increasing vibrancy and strength of the Coach brand and the growing U.S. premium accessories category, we have never felt more positive than we do today about our prospects for future organic growth. We have a clearly articulated vision, which rests on our distinctive proposition, strong brand and business equities, and expanding market share.

At the same time, I would diversify distribution model, multiple product platforms, monthly product flow and consumer centric nature help us mitigate risk. Against this backdrop, as most of you know, we have been implementing four key strategies that focus on sustaining accelerated growth.

First, we're building market share in a growing U.S. women's' accessories market by leveraging our unique position as an accessible luxury lifestyle brand. As part of this strategy, we're emphasizing new usage occasions, such as weekends or evening. And offering items at a broader range of prices, as well.

We're also enhancing our marketing programs to create a more satisfying shopping experience. This quarter we rolled out our Coach by Special Request program. An in-store selling program that's aided by 11 bound guides which features an assortment of special edition, classic favorites, business and travel and Signature product that is not available in most of our stores.

We're already seeing excellent results from the program, which has only been in all stores a few weeks. Through last week, actually, sales from this program represented about 9% of full-priced sales versus 3% during the same period last year for our prior program.

Coach Service is another initiative which is intended to elevate our consumers' store visits by enhancing her in-store experience.

Phase I of this program, which is being implemented now, is focused on consumer engagement. We are using simple, powerful techniques, like the greet, interactive selling through advanced product knowledge, and how we thank customers and communicate after they leave the store.

We want to be as well-known for excellent service as we are for great product. Great service builds loyalty and loyalty drives sales. While we pride ourselves on today's service levels, we realize that a programmatic approach, reinforced by training and performance standards will enhance, further, our customers' shopping experience.

In U.S. department stores, we've also fine tuned our strategy to increase productivity and drive volume. Simply put, we want to make small doors bigger and big doors larger. We have been enhancing our wholesale presentation, primarily through the creation of more shop-in-shops and introducing case line enhancements with propriety Coach fixtures.

During this fiscal year, we expect to increase the number of department store shops-in-shops to 200 from 120 today, while the new Case Lines fixtures will be expanding by about 450 to nearly 600 doors this year. In essence, we will have touched about 80% of our wholesale doors by the end of fiscal '05.

Also, in U.S. department and specialty stores, we have further customed, tailoring assortments to better match the attributes of our department store consumers locally.

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 four to five years, bringing the retail store base to at least 275.

During FY '05, we intend to open 20 new retail stores, which will include six new full-price stores for Coach, such as Des Moines, Iowa, Sarasota, Florida, Syracuse, New York, Palm Beach, California, Tucson, Arizona, Annapolis, Maryland, and a flagship on Rodeo Drive in Beverly Hills.

In keeping with our strategy to expand our most productive locations, we will also be expanding at least nine retail stores this year, including some of our most productive locations such as Almawana in Hawaii, Copley in Boston, Southcoast Plaza, in Southern California, and 79 Fifth Avenue at 16th Street here in New York to name a new few. These nine expansions will add a total of nearly 14,000 additional square feet and add over 3% to our total full-price retail space.

Third, we're aggressively expanding market share with the Japanese consumer, from about 6% today to at least 10% during the next few years. Our strategy is primarily focused on distribution growth.

We will open select new retail locations, including flagships. This year we are expecting to open at least 10 new locations in Japan, including 3 additional Japan flagships, including our first flagships in the City of Osaka, Sapporo and Sendai.

Similar to the U.S., we plan to expand about 15 of our most productive shop-in-shops during the year, adding nearly 14,000 square feet or 11% to our retail base. Overall, in FY '05, we expect Coach Japan sales to grow at least, to at least $355 million, assuming a flat yen up at least 28% from FY '04.

We also expect Japanese international travel to grow rapidly over the next several months, compared with the prior year which will result in a greater share of Japanese spend on luxury goods occurring outside Japan. As a result, we are now targeting at least mid-single digit comps for the year.

Our fourth strategy is to continue to drive margin higher, primarily by leveraging our expense base while channel mix will continue to drive gross margin. 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 fourth quarter and year-end results.

As mentioned, our quarterly revenues increased by 46%, with direct-to-consumer up 39%, and indirect up 57%. For the year, revenues rose 39%, direct to consumer gained 30%, and indirect was up 51%.

Excluding the impact of the 53rd week, which contributed about $20 million to the top-line, sales would have been up 38% for the quarter, and 37% for the year.

In the fourth quarter, our gross profit margin expanded by 350 basis points over the comparable period of the prior year, from 73.2% to 76.7% of sales, bringing the year in at 74.9%. There are three primarily contributors to this quarterly improvement, all approximately equal in size.

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 mixed material collections.

The selling, general and administrative expense ratio declined 750 basis points in the quarter and represented 43.8% of sales versus 51.3% for the year-earlier period. For the full year, SG&A as a percent of sales declined to 41.3% of sales from 45.5% in FY '03. The decline in the quarterly rate was the result of achieving leverage throughout our business.

All selling businesses saw their year-over-year spending rates decline as we continue to leverage the top-line volume in all of our centralized functions as well. Distribution, for example, actually saw our cost per unit shipped decline to $2.12 from $2.40 in FY '03, a decrease of 12%.

Our operating income rose 119% to $111 million in the fourth quarter versus the same period last year. Operating margin in the quarter was 32.9%, compared to 21.9 in the year-ago quarter, up 1100 basis points.

For the fiscal year, operating income rose 82% to $444 million from the prior year. Operating margins for the year rose to 33.6%, up from 25.6% a year ago, well ahead of our expectations.

Net income for the quarter increased 120% to $66 million, or 34 cents per share, as compared to 30 million or 16 cents per share in the year-ago period. Results for the fourth quarter were ahead of the consensus estimate of 31 cents per share. Net income for the year rose to $262 million from 147 million, up 79%.

Inventory levels at July 3, 2004, were $162 million, up about 18 million from $144 million, less than 13% above prior year levels as our supply chain improvements and inventory management program allowed us to support 18 net new U.S. stores, seven net new locations in Japan, and substantially increase sales levels with minimal additional inventory investment.

Accounts receivable balances rose approximately $20 million or 57%. More than half of that growth, attributable to Coach Japan.

The remaining increase was driven by the strength of our domestic wholesale businesses where our balances remain very current. In fact, day sales outstanding are actually down from 37 days last year to 33 this year.

During the fourth quarter we strengthened our cash and marketable securities position by approximately $119 million to 564 million, as a result of free cash flow driven by significantly higher net income and option exercises. The balance sheet was essentially debt-free at year-end as Coach Japan paid down their line of credit by nearly $25 million during the fiscal year.

Separately, it should be noted that we have changed our investment strategy to include securities with longer term maturities in order to generate higher levels of investment income. We continue to invest in high quality instruments to minimize risk.

The balance sheet included in our press release now shows a line for cash, cash equivalents and short-term investments, which totaled $434 million at the end of the year, and a separate line for long-term investments, which totaled $180 million.

Net cash from operating activities in the fourth quarter was $146 million, compared to $57 million last year during Q4. Free cash flow in the fourth quarter was an inflow of $120 million versus 39 million in the same period last year, primarily due to higher net income.

Cap Ex spending, primarily for new stores and renovations, was $26 million versus 18 million in the same quarter a year ago. For all of fiscal year 2004, net cash from operating activities was $449 million, compared to 222 million a year ago.

Free cash flow in fiscal year '04 was an inflow of $381 million versus 165 million in fiscal year '03. We expect Cap Ex to rise slightly to over 75 million in fiscal year '05, with the uptick from the 68 million in '04 primarily due to our capitalizing on certain premier real estate opportunities both here and in Japan.

As discussed previously, we will open three flagships in Japan and one in the U.S. in Beverly Hills. We also have a number of other high profile opportunities for new locations and expansions in the U.S.

As Lew noted, we'll be opening approximately 20 new U.S. retail stores, a few factory stores and we will be continuing our expansion programs. In Japan, we will be opening approximately 10 new locations, including the three flagships we announced last month.

Now I'd like to provide you with some of our goals for fiscal '05.

For the first fiscal quarter, we are targeting net sales of at least $330 million, representing a year-on-year increase of at least 27%, with U.S. comparable store sales gains of at least in the low teens, driven by full-price retail stores. Operating income, up more than 33% year-over-year, and earnings per share of at least 30 cents, an increase of at least 36%.

Our current goals for the full fiscal year 2005 are: Net sales growth of at least 20% to about 1.6 billion, with at least 10% comparable store sales gains in the U.S., and a total sales increase in Japan of at least 28% in constant currency, which would translate the sales of at least $355 million, driven primarily by distribution growth through new store openings and expansions of select shop-in-shops, combined with mid-single digit same-location sales growth; an operating margin that is at least 100 basis points above prior year levels, resulting in operating income dollar growth of at least 24% in FY '05 over FY '04.

A minority interest payment to our Coach Japan joint venture partner will help our EPS growth as we expect to stay at prior year levels of about $18 million, as a result of higher sales at Coach Japan, offset by price increases, Coach, Inc. will take on the shipments into Coach Japan. This will increase the Coach consolidated profitability on our business in Japan, but will compress the CJI stand-alone margin and lower minority interest as a percent of sales.

Two factors will somewhat moderate that growth on the EPS line in 2005. First, a higher share count brought about by option exercises, and secondly, a higher tax rate, rising to about 38%, due in part 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 23%, which would produce earnings per share of at least $1.68, compared with the analysts' consensus estimate of $1.64.

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. And now Lew, Andrea and I will be happy to take some questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one. You will be prompted to record your name. To withdraw your request, press star two. One moment, please, for the first question. Our first question comes from Mr. Bob Drbul. Please state your company name.

Lehman Brothers. Good morning.

Good morning, Bob.

Hi, Bob.

Two questions. The first one would be on Japan, Lew.

Yeah.

Are you seeing any signs of cannibalization, you know, around that, you know, just given some of the color that you gave with the mid-single digit performance and the guidance for the next year in the mid-single digit range?

Well, Bob, for context, our business outside Japan in the quarter more than doubled and if we had included our sales outside Japan without, in our total, from a comp perspective, in terms of repatriation of sales in Japan, our comps would have been up strong double digits. So, the headline is that our business is as strong as it's ever been with the Japanese consumer. Not an issue.

With regard to cannibalization, naturally when we open a location in the same proximity to another location, there is some trade-off that occurs and what we have found in Japan last quarter, for example, in those markets where there was, where there were no expansions or new stores, we were up significant double digits.

Okay. And in I guess a similar question in the U.S. You know, with some of your expansion in the U.S., are you seeing any cannibalization there? And I guess, can you elaborate a little bit more on the traffic and the ticket, you know, ASP trends?

Well, you know, first we have never seen less cannibalization than we have this year. There's always some trade-offs when you open an additional store within an existing market, but we've been benefiting from the incredible growth in the overall women's accessory category.

So, for example, when we opened our Westside store at the new Time Warner project, our comps were running in the 20s at our store at 57th and Madison, less than a half a mile away, as well as higher than 20s, 84th and Broadway, and we saw no reduction in the rate of growth subsequent to the opening and that's because of the incredible growth in the category and the saliency of the Coach brand.

In terms of traffic and conversion, our average ticket was up somewhat over 10%. The traffic was up at double-digit rates, offset somewhat by lower conversion, which resulted in our 20% comps.

Great. And when you look forward to, you know, the next fiscal year, Lew, in terms of traffic and the conversion and the ticket, can you talk about just for full year perspective, you know, where your expectations are now?

Sure. As Mike indicated, we're looking for at least 10% growth in full-price sales. We believe that the average ticket will be up at least mid-single digits and we think that we're going to also benefit from some levels of increased traffic and we're looking to hold conversion at this year's levels.

Great, thank you.

Bob, if I could just build on the comment about Coach Japan. I wanted to make sure we reminded you that the sell-in to Coach Japan includes that second tier of margins. So, we view very favorably the growth in Japan, the 28% we're pointing to in FY '05 will grow units substantially. And with our new higher pricing from Coach, Inc. to Coach Japan, Coach Japan remains our most profitable channel.

Great, thank you.

Thank you. Thank you. Our next question comes from Mr. Jeffrey Edelman. Thank you. You may ask your question and please state your company name.

Thank you, UBS. Good morning.

Good morning, Jeff.

Hi, Jeff.

Hi. Another question on Japan. Looking at your cash buildup and realizing that you've got the potential to buy CGI back in '07 and the fact that you're obviously holding back margins for CJI while you're getting more profit here, is there any incentive for the partner to sell out to you sooner? And could you sort of discuss that because we're getting close to when we should start thinking about that in our estimates?

It's really, Jeff, very difficult for us to speculate on what our partner is thinking or may do. We are bound by a contracted relationship between the two of us. As you point out, we have an opportunity at the end of '07 to take a stronger ownership position in Coach Japan, and we would absolutely see, making good on that opportunity.

But as it is for fiscal year '05, it's business as usual, if you will operating the joint venture with Sumi Tomo, looking to grow profitability and capitalizing on our price positioning from Coach New York to Coach Japan.

Okay. Thank you. And just one follow-up. Could you talk about traffic trends and average ticket in Japan and how that differs from the U.S.?

I believe I'm going to need to get back to you on, with that information. Clearly the average ticket is materially higher because of our global pricing policy. Andrea, do you want to add something?

Yeah, I just wanted to add something, Jeff. The reason that we do not have the kind of data is because 80 out of 100 units are department store. And as a result, it's very difficult to obviously come up any traffic numbers, conversion numbers on those units. So, with 80% department stores 10%, factory only 10% of our units are retail units. So, we have a very small sample base and we have not provided that data yet. As our store base matures and we have more in the sample, then we're going to be able to collect that data better.

Okay, then would you sort of talk sales increases, your store base? And your shops within shops?

I'm sorry, one more time?

Could you define the sales increase between your stores and the shop-in-shops in the department stores? Are those increases comparable? Are you showing better increases in your own stores?

That's a good question. Taking a 12-month perspective, the increases are comparable, between the shops-in-shops and our own freestanding flagship stores and part of the reason for that is that our flagship stores in year one are getting a real bounce from our marketing and then we need to anniversary that.

Over time we would like to think that all of our stores, whether it's shops-in-shops or flagships, will grow at the same rate and that's because department stores are a much more important channel within Japan, as you know, and we are renovating and enhancing all of our shops within shops.

Great, thank you.

Thank you. Our next question comes from Dana Telsey. Please state your company name.

Good morning. Bear Stearns. Congratulations!

Thank you.

Can you talk a little bit about the potential for continued growth margin expansion and SG&A leverage? How do you see that working out especially with CJI? And with CJI, how much are you rising the prices in response to the sourcing costs? And also, can you talk a little bit about the expansions that you've done? We just saw Century City yesterday, it looks terrific, and how those are doing? Thank you.

Thanks, Dana. Why don't I first take the increased op margin leverage opportunities we have available to us as we see in '05. As we talked about in the prepared remarks, we remain optimistic that we'll continue to see our operating margins expand, we finished the year with very strong op income rates.

We see opportunities in the gross margin line, primarily through channel mix, as Coach Japan and U.S. full price retail, our two highest gross margin channels, grow faster than the business as a whole. And as we continue to grow the top-line at rates in excess of 20%, we'll continue to deliver additional SG&A leverage, going forward, most notably through our centralized functions.

I cited in the prepared remarks an example of what we did in the distribution facility this past year, but other opportunities abound for SG&A leverage, whether it's our advertising spend, which is relatively fixed year-over-year as the top-line grows, et cetera. So, with the opportunities in both gross margin and SG&A, we feel very comfortable that we can continue to expand our operating margins.

With regard to performance of stores that we have expanded, we couldn't be more pleased. We expand stores for a variety of reasons, one is because they no longer have the capacity to handle the, our visitors even on a normal Saturday, and we also expand stores because they have evolved into a different level store, where we may have opened a store as a core store at 1500 or 2000 square feet, but the customer base has grown and we require more space and the performance is phenomenal.

We have a store, and I invite you to visit it, just here outside Manhattan, Garden State Plaza, which we just relocated and expanded and as an example, it's running 45% ahead. We expanded a store in Houston, which ran 85% ahead of last year.

The productivity is phenomenal and the most exciting thing is that our consumers are so enthusiastic when they come in, they thank us for expanding the stores and providing the full range of Coach products.

And how are the shoe and watch categories doing at retail and in the department stores? What have you seen there?

First, they're behaving predictably. As I said at a prior conference call, our future is tied to our ability to grow the accessories market, and our handbags and accessories, for example, grew to about 75% of our sales for the year, up from about 70%.

Shoes and watches played an important role, but it's a focused role. Watches I believe, ran, for example, at 2 to 3% in our own retail stores consisted with prior year levels and actually did better than Movado expected in department stores.

Our footwear ran about 10% in those stores, often at about 8% for our overall chain and we are actually going to be reducing the number of stores that offer our women's footwear so that we can use this space in the door, in those doors that are going to be freed for the much more productive and high, maintained margin women's handbags and accessories. So, I think this fall we're going to go down to about 50 locations, Andrea?

Correct.

And we were about 8, about 80 or 90 locations.

And just lastly on the premium-priced product, how is that doing? And for this year is it still around an average 8% price increase that you're looking at?

I said earlier that we expect the average ticket to be up at least mid-single digits and it's really not a price increase, it's really a function of the way in which we purchase the broader assortment of product and we are very focused on maintaining our shop entry price points, I did mention, for example, we're reintroducing our demi in another silhouette.

Consumers are embracing our $300-plus price points. We have expanded our mix of fashion in flagship stores so that they now represent close to 70% of our volume and I believe 60% of our locations. And we feel really good about our ability to deliver more sophisticated product that has a higher make and greater labor contents.

Thank you very much.

You're welcome.

Thank you. Our next question comes from Margaret Mager. You may ask your question and please state your company name.

Hi, good morning. It's Margaret Mager from Goldman Sachs. How are you?

Hey, Margaret.

Hi.

Can you just let us know at this point, maybe at the end of the year, what is the penetration of Signature or mixed material bags, however you want to relay that to us this year versus last year at this time?

First of all, Margaret, I'm going to start with mixed material. Mixed material across all products, actually represented about 73% of sales in this last quarter, was up about a percent on a penetration basis on a year-over-year basis. And handbags it was about flat to prior year.

And in the fourth quarter, total Signature across all full-price channels represented 52% of our sales and that was actually dead flat, dead even with last year. We saw some shift in the product category penetration meaning, for example, Signature accessories were up on a year-over-year basis, handbags were essentially flat on a year-over-year basis, but the whole category, Signature and full-price sales represented 52% for the quarter and similar for the year.

It should be noted that for the year we actually had a higher penetration and in Signature, obviously we were already quite penetrated, if you look at the second half of fiscal '03. And that's exactly what we gave the guidance to.

So, and Andrea, I'd like to add, what's interesting and not surprising, because we planned it this way, for the first month, first four weeks in Coach stores, for example, Signature only represents about 40% of sales down from 54%, and that's due to the incredible strength of our Soho collection, which has increased our leather penetration for this quarter to about 37% of our total handbag sales. Last quarter, for example, I believe it was in the area of about 25%.

So that's for the first quarter of '05?

Yeah, for the first month of the quarter, but we expect this trend to continue.

Right. Okay. I thought in the gross margin improvement discussion you highlighted that you had product mix that benefited gross margins in 4Q, but it doesn't sound like the penetration of mixed materials was up all that much. Did I, am I not connecting the dots right here? Can you explain that further?

Yeah, I think, Margaret, total Signature may have been flat but our total mix materials were up slightly and we also, but with the acceptance of certain of the higher price point products we were also able to eek out a little more gross margin and we attribute that in the product mix line, as well.

Okay. That's helpful. Thanks. And on Japan, the total growth of the market was in line with where it's been in previous quarters, right around that 50% level, yet it seems like there's the message on comps was that they were mid-single digit whereas in the past I believe you've talked about business or comps being up double-digit in Japan. So, what has caused like the spread to narrow? It doesn't seem like there was an acceleration in store openings?

Yeah, Margaret, if we can be clear, on a, when we said that our sales to Japanese consumers were up 50%, that was worldwide sales to Japanese for the fourth quarter. And what occurred was a doubling in the amount of tourism on year-over-year. Last year in the spring, in spring calendar '03, the Iraq war was on and we had the SARS epidemic and Japanese tourism collapsed, and they came back last spring. So when we look at the combined business, we're up more than 50%, in fact we were up over 100% outside Japan.

Okay. What was Japan up by itself? Just Japan, excluding tourism?

Mike?

It was up in dollars 46%.

And in comps in yen?

In comps in yen that was 38.

Right. And that's what I mean. In the last quarter, I think it was up around 48 and the quarter before that around 48 or 50.

Correct.

So, it's pretty consistent --

So, the shift, the shift has to do with Japanese consumers traveling during the golden week period in this very strong spring and spending their luxury dollars abroad. And what I think you need to appreciate is that when we look at overall Japanese spend worldwide, in a non-crisis period, whether we go back to the year 2000, before 9/11, for example, 50% of the Japanese spend on luxury goods occurred outside Japan, and after 9/11 it fell to about 35%, and it was 35%, we estimate in the April through June period last year, and this year it's about 50% inside and 50% outside, going back to historic levels.

Where on your P&L do you capture the Japanese tourist spending? That would be in the U.S., correct?

We capture it in a variety of places. We capture it wherever it occurs. So, we capture it in what we call international wholesale, which would be sales in Hong Kong, Taiwan, Singapore and so forth. We also capture it in U.S. retail and that's sales in Nevada, the portion of sales in Nevada or Hawaii, as examples that are attributable to Japanese. And, in fact, in department stores, we measure all Japanese sales in any location where Coach is offered.

Okay. Thank you.

You're welcome.

Thank you. Our next question comes from Mark Friedman. Please state your company name.

Merrill Lynch. Good morning, everybody. Great job.

Thank you, Mark.

Thanks, Mark.

Thank you. Two questions. One, a little bit more on the international wholesale opportunity. Just wondering with that stepping up due to the Japanese travel, what do you see as opportunities there, especially should travel by the Japanese slow down at some point in the future? Do you think that's going to help you position yourself in some of these key markets or is most of this travel to Hawaii and other U.S. destinations where you did the business?

And secondly, I was just wondering if you could talk a little bit about holiday preparations? Conceptually, what are you doing, obviously it's your biggest quarter, you had tremendous traffic a year ago. As you look at that and try to drive business through such a peak period, what are some of the key objectives you're looking to kind of accomplish this year? Thanks.

Sure. Well first, with regard to travel sales of Japanese, we had mentioned some months ago that we're looking to manage our international travel sales to no more than 10% of our sales. And that enabled us to grow outside Japan by as much as we did during the year and in the quarter, which was very strong.

What we're looking at is a steady state of about 15 to 18 million Japanese consumers traveling a year of which about 45 to 50% are women and 80% of those women are in our target group. So, we're basically talking 4 to 5 million Japanese traveling a year, assuming that there is no international reason for them not travel. And we believe today, we are perfectly situated to capture those sales should the Japanese travel.

So, for example, Hawaii, illustratively was up in comps about over 50% this last quarter, it had a very strong year, but it surged because of the increase in travel. Next year, this quarter, this past quarter, it might only be 10 or 20%, if the Japanese are normalized. So, we do have the locations in the right places for Japanese travel and we feel very well covered.

With regard to holiday preparation, we're all over it, as you might expect. It covers a variety of initiatives. We talked a bit about our Coach Service, which Mike Tucci and his team are spearheading Coach retail stores. We feel excellent about our ability through a combination of techniques and marketing programs to maximize the holiday opportunities.

We do have a new POS system in place which is going to improve the throughput of our sales during transaction times, we are adding registers where we need to. We are having special shopping events during December, we will do as much as we can to move shopping forward during the month of December.

We're also introducing some new, what we might call scheduling models, so we can optimize the number of people in our stores, so that we have the right number during the time that we have peak travel. Peak visitors, rather. And we expect to roll that program out during the holiday and in the pilot last spring, we got great results, basically by rescheduling and adding just a bit of payroll dollars. So, we think there's a lot of opportunities for us during the holiday to improve the quality of the shopping experience in our stores as well as our business.

Thank you.

You're welcome.

Thank you. Our next question comes from Neely Tamminga. You may ask your question and please state your company name.

Great, thanks, Piper Jaffray. And let me add my congratulations.

Thank you.

Lew, we might need to go back to Coach 101 here. Can you remind us how you capture the Japanese consumers' shopping pattern behavior? Is it captured at the POS with the address?

Within our own stores and locations, yes, we take a, we do a couple methods so that we can cross-check ourselves. The primary one is the source, the form of tender that we can get electronically. So, we can tell how the sales transaction is recorded and whether it was purchased by a Japanese consumer from credit card data, but we also do keep track in a manual way, behind the register in all of our stores, the transactions that we make to Japanese tourists. So, it's bottoms up build up but we do do it two ways and to double check ourselves. So, we feel pretty good about our handle on it.

With regard to overall Japanese travel, these numbers are published by the Japanese National Tourist Organization, they're published monthly. We study these numbers and it helps us plan. And even though we had some early reads about what the surge would be in the April to June period, because of advanced bookings that Japanese make, there is a sudden spike in our reservations during the months of March and April and as the quarter went on, more and more people traveled abroad.

That's great. And just one quick follow-up. With respect to Coach Service, which sounds like a great program, I'm just kind of curious if you're compensating your shore people differently in the rollout of this program?

That's a good question. The method that we compensate our employees has to do with a team approach. We have a small environment and we work collegiately as a team in order to maximize the results.

We're not changing our overall approach to team performance, however, we are going to be introducing different metrics such as conversion, as one, to our measured success. We also have continuously, in operation, what we call anonymous shopper surveys and we use that as a tool in order to understand on how our staff is doing.

Great. Thank you and good luck.

You're welcome. Thank you. One more question, we'll take.

Thank you. Our next question comes from David Schick. You may ask your question and please state your company name.

Good morning, Legg Mason and I will add congratulations, as well.

Thank you, David.

Thank you.

My last question, actually. You mentioned non-promotional strengths at factory stores in the U.S. Were there any important product line introductions to those stores or anything that you can talk about on the merchandise side? Thanks.

Well, first, just to build on my earlier comments, there is a overall surge in the factory retail, the factory channel. Its sales are up. We estimate over 20% nationally this spring, perhaps somewhat higher, as there is a double-digit increase in the months of November and December.

So, retailers are doing better jobs in factory malls and mall developers are doing better jobs managing them. And we've benefited first from a surge in overall traffic.

Second, we benefited from a saliency of the brand. And third, once consumers came into our stores, they had an opportunity to see a more tailored assortment that is built upon our unique factory merchandising strategy.

About 25% of our sales came from what we would call factory exclusives where we made product for factory stores with a special design. Basically a less sophisticated version of what we were offering in full price.

Another 25% came from discontinued sales, and the remaining 50% came from capital production planning of styles that we have brought back from our archives or have kept active in factory because they sell so well.

That's helpful. Thanks.

Thank you.

Thank you, everybody. That concludes our prepared remarks. As always, Mike and I are available for questions after the call, you know my number and my contact information. Thanks and have a great day.

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