掛毯 (TPR) 2005 Q1 法說會逐字稿

Good day and welcome to the Coach conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would 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, Brenda, and thank you all for joining us. With me today to discuss our quarterly results are Lew Frankfort, Coach's Chairman and CEO, Mike Devine, Coach's CFO, and Mike Tucci, President of North American Retail who is also joining us for the first time today. Welcome, Mike.

Before we begin, we must point out that this conference call will involve certain forward-looking statements including projections for our business in the current or future quarters, or fiscal years. These statements are made 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 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 presenting future estimates at any time.

Now let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our first fiscal quarter 2005 results and will also discuss our strategies going forward; Mike Tucci will review our key initiatives for the holiday season; and Mike Devine will conclude with details on financial and operational highlights for the quarter as well as our outlook for the second quarter and full fiscal year 2005.

Following Mike Devine we will hold a question and answer session that will end by 9 AM.

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

Thank you, Andrea, and welcome, everyone. As you know we've once again announced excellent topline growth and even stronger bottom-line results of 33 percent and 60 percent, respectively, for the quarter just completed. Our quarterly results are especially impressive when you consider that we have achieved strong double-digit sales growth in the first quarter of each of the last three years. Up 28 percent in '03, 34 percent in '04 and now up 33 percent in '05 for a three-year (indiscernible) of nearly 32 percent.

Our business and branch propositions are distinctive. We will stylish, recognizable, extremely well made products that are aspirational at affordable prices. During the last several years, we established a lane between the moderate segment and the luxury accessory brands, which we term accessible luxury.

This positioning reinforced by our brand and business equities is Coach's competitive advantage, yielding staying power, more predictable results and increasing productivity.

Some highlights of our first quarter were: first, net income rose 60 percent to $68 million or 35 cents per diluted share compared with $42 million or 22 cents per share in the first quarter of fiscal year 2004.

Second, net sales totaled $344 million versus $258 million a year ago. A gain of 33 percent.

Third, direct to consumer sales, which consist primarily of sales at U.S. Coach stores rose 30 percent to $175 million during the first quarter from $134 million in the comparable period of the prior year.

Fourth, U.S. chain store sales for the quarter rose 15.1 percent with retail stores up 16.8 percent and factory store sales up 13.5 percent.

It is worth mentioning that in U.S. retail we have achieved a double-digit comp in the first quarter in each of the last three fiscal years. 21 percent in '03, 29 percent in '04 and now 17 percent in '05.

On average, our stores are 80 percent more productive than they were just three years ago.

Finally, sales in Japan rose 30 percent in constant currency, driven by new stores, expansions, and retail comps as we continue to rapidly grow our market share in a flat accessory market.

During the quarter, we opened five U.S. retail stores including three in new markets for Coach. Des Moines, Sarasota, and Tucson. And we opened five factory stores which represent our whole complement of factory openings expected this year.

In addition, we relocated and expanded one U.S. full price store -- Palm Beach, FL. Thus at the end of the period there were 179 full price stores and 81 factory stores in operation.

Indirect sales in the quarter rose 36 percent to $169 million on a year-over-year basis, driven primarily by a 39 percent dollar increase in sales at Coach Japan. U.S. department store results continued to be excellent, both at POS and in shipment growth, while international wholesale also posted very strong results both on a shift (ph) in and sell through basis.

In Japan, four Coach locations were added while six locations were expanded. And three small shopping shops were closed. In August, we also opened our first flagship outside of Tokyo, in the city of Sapporo, to long lines of welcoming consumers who spent $300,000 in its first three days of operation.

At quarter end, there were 103 locations in Japan. Most broadly, we once again effectively executed our growth plans and realized Companywide performance that outpaced our stated goals. Not surprisingly, we've remained confident in our ability to sustain our growth and deliver excellent results over our planning horizons.

We were particularly delighted with the continued momentum of our U.S. full price business which enjoyed increases in average ticket and traffic 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 high mall traffic and the strength of the Coach brand, despite a sharply reduced level of promotions.

As noted in our previous earnings call, the U.S. branded women's accessory categories is expensing an unprecedented level of growth this year, while our target customers continue to increase their handbag consumption. And as you know, consumers' most recent purchase behavior is the best predictor of future spending.

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

We were also very pleased with the performance of Coach Japan this quarter where sales rose 39 percent in dollars and 30 percent in yen as our market share continued to grow rapidly. Clearly, our emphasis on distribution growth is working, given the sales gains we are continuing to achieve while rapidly growing our footprint.

In total, we estimate that our sales to Japanese consumers worldwide rose about 40 percent this quarter, nearly 50 percent outside of Japan and 30 percent domestically.

These results are particularly noteworthy, when you take into account the flat performance of imported brands in Japan and our remarkable growth during the last few years. Last quarter, our growth in Japan was fueled by distribution as our total square footage grew in excess of 25 percent to both new stores and expansions augmented by mid-single digit, same retail location sales.

Finally, as always, we were particularly pleased with the significant improvement in operating margins. As you know, bottom-line results were driven both by an expansion in gross margin which speaks to the growth of our directly operated higher margin retail businesses, tiered merchandising strategies, and our dynamic supply chain management combined with our ability to continually leverage our expense base.

While Mike Devine will get into more detail on our financials, I wanted to give you this recap and tell you how pleased we are with Coach's first quarter performance.

As Andrea mentioned, Mike Tucci has joined us today to discuss our product performance for Q1 and our holiday sales initiative. Mike.

Thanks, Lew. As mentioned in our release, our transitional and fall offerings were remarkably successful across categories and collections. We opened the quarter with the SoHo Mini signature leather and suede collection which came in early at the end of June and was an instant success. In fact, SoHo continued to perform very well throughout the fall. Also at the end of June, we launched the new Vintage Signature collection, which gives consumers a more sophisticated option in our logo offering.

This collection was enhanced by the special addition Metallic Vintage Signature in September which was a feature of our fall ad campaign. Chelsea, our stylish new leather group for fall, came in during August, and sales for the group well outpaced our expectations.

September saw the arrival of our popular Hamptons collection updated with new silhouettes in designed details and a fresh array of key fall colors. Also in September, Signatures Stripe arrived, featuring suede stripes on classic Signature fabric handbags and was an immediate hit with consumers.

Overall for the quarter, we were thrilled with the ongoing success of our higher priced Limited Edition pieces from the SoHo Ocelot top handled bag at $598 to the Chelsea Zebra turn lock at $498. Both styles blew out and speak to the ongoing opportunity to selectively trade up our average retail and handbag.

Similarly, we were excited by the results of our Coach by Special Request program, which grew to 9 percent of full price sales compared with 5 percent last year. This growth was fueled by our new leather bound in-store guide, featuring Special Edition products.

Looking forward, we are excited about the 10 key concepts and items we have in place for holiday. Collectively, we estimate that they will represent over 50 percent of our business in the second fiscal quarter.

And they are, in order of importance first, duffels which launched on 10/1. Leading the list of these great new takes on the Legacy duffel, which are already selling well as our pilot predicted. our new duffels were inspired by iconic Coach styles and reinterpreted into modern sophisticated silhouettes.

Second, Demis. Our very important smaller bags will be available in new shapes such as the 168 Soft Demi as well as favorite existing silhouettes price from $138, which provides a sharp handbag entry price point to the franchise.

Third, SoHo's small Hobo and small flat Hobo. These best-selling bags will be offered in a range of fabrications and colors from many Signatures to suede.

Fourth, Gallery Coach which we also launched on 10/1. These are already a success. This year's Gallery Coach are being offered in our classic larger size impression fund signature wave styles and a new smaller size in suede with an innovative perforated design detail.

Fifth, Madison, which launches on 11/1. This is Coach's first lifestyle evening collection which will include handbags, accessories, hats, scarves, gloves, shoes and outerwear and will feature rich satins and pave rhinestone buckles.

You'll see the collection supported by the mid-November four-panel insert in five important fashion magazines.

On the accessory front, No. 6. Classic and Mini Signature Wallets. Offered in multiple colors. A great item for gift or self purchase.

7, wrist list, offered in core and novelty fabrications at a wide range of price points.

8, watches, which will feature the popular Gallery interchangeable bezel model.

And lastly, No. 9, scarves and cold weather, which we offer in a range of colors and great fabrications and (indiscernible) gloves, with contrast stitching and proprietary hardware such as the SoHo buckle which we see as the perfect cold weather gift.

As always, our holiday floor set will be installed on the Monday before Thanksgiving, with special attention given to clean and bold presentations of the 10 key holiday statements and items.

Again, given the success of last year's resort pilot and 20 warm weather stores, our resort collection will be introduced to all stores on 12/6 with certain key warm weather markets and flagships receiving it next week.

Finally, a front table change in all stores will take place in mid-December to freshen our stores and drive traffic.

On the marketing front, our holiday catalog, featuring the world of Coach, will be in home in early November with a re-mail featuring our Resort Collection in early December. We will also have a new innovative 16-page gift guide, focusing on the 10 key statements in stores pre-Thanksgiving.

This piece is an important selling tool for our store teams and also will be put in each consumer's shopping bag with her purchase during the holiday season.

And finally on the in-store experience, as you know, Coach service is an initiative we began implementing in the first quarter, which is intended to enhance our consumers' in-store experience and drive conversion. Holiday 2004 is also the first holiday season in which our stores will have the new point-of-sale system fully in place.

Together, the Coach service initiative in combination with the new POS system will deliver an elevated service experience enhanced by improved operational efficiency. Coach service during holiday includes the following in-store elements.

First, a service leader position to manage the service and selling environment. Second, both the product running system and full price stores and a similar product replenishment role in factory to get product into the customers' hands as quickly as possible. Third, dedicated line management and phone service roles. And lastly, support tools such as the daily coverage forms and service check list to help managers during peak business hours.

Simply put, our objective this holiday is to marry our POS transaction speed with improved operating standards to move the lines through the store faster. Naturally many of these initiatives, which we introduce for holiday, will continue into the second half of FY '05.

With that, I will return the discussion to Lew, who will continue with our overarching strategies.

Thanks, Mike. Clearly the vitality of the brand is driven by the strength of our innovative and diversified product offerings. As Mike describes our offcoming assortment and initiatives are powerful, underscoring our optimism about the important holiday season.

Further, based on the increasing vibrancy and strength of the Coach brand and a 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, exceptional brand and business equities, and expanding market share.

At the same time, our diversified distribution model, multiple product platforms, monthly product flow, and consumer-centric nature help us mitigate risks.

Against this backdrop, as most of you know, we have been implementing four key strategies that focus on sustaining accelerated growth.

First, we are 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 are emphasizing new usage occasions such as weekend or evening and offering items at a broader range of prices as well as Mike just described.

Our second strategy is to continue 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 priced markets for Coach.

In keeping with our strategy to expand our most productive locations, we will also be expanding at least nine retail stores in FY '05 including some of our most productive locations such as Alamojuana (ph) in Hawaii, Copley (ph) in Boston, South Coast Plaza in Southern California and 79 Fifth Avenue, here in lower Manhattan, to name a few. These expansions will add a total of nearly 14,000 additional square feet and add over 3 percent to our total full price retail space.

We're also very pleased to announce today the expansion of our most productive U.S. retail location -- our flagship store on 57th Street and Madison in New York. It will be closing in January for a complete remodel and expansion which will be adding over 2,000 square feet bringing the total store to 8750 square feet.

The new design will restore the space to its original landmark heritage while providing a modern, classic, store environment to enhance the brand and showcase our pinnacle product. It will reopen next summer.

Third, we are aggressively expanding market share with the Japanese consumer from about 6 percent this past year to at least 10 percent during the next few years. We will continue to open select new retail locations, including flagships. This year, we are expecting to open at least 10 new locations in Japan.

It should be noted that all three of this year's flagships, including Sapporo, which opened last quarter and Umada (ph) in the city of Osaka and our flagship in Tendai (ph) are slated for this holiday season -- all three in markets outside of the Tokyo area. Similar to the U.S. we plan to expand about 15 of our most productive shops -- in shops in FY '05 adding nearly 14,000 square feet or 11 percent to our retail base.

Overall, we expect sales in Japan to grow at least an additional 25 percent this calendar year in a market that we expect to continue to be sluggish. As such, we estimate that our market share is now moving toward 7.5 percent. For the full fiscal year, we expect CJI sales to grow to at least $355 million, up over 25 percent in constant currency.

Finally, our fourth strategy is to continue to drive operating margin higher, through both gross margin expansion and by leveraging our expense base. These strategies and actions are designed to enable us to achieve continued outstanding financial results through our plan and horizon.

I will now turn it over to Mike Devine, our CFO, for further details on our financials. Mike.

Thanks, Lew. Lew and Mike have just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our first quarter results.

As mentioned, our quarterly revenues increased by 33 percent with direct to consumer up 30 percent and indirect up 36 percent.

In the first quarter, our gross profit margin expanded by 230 basis points over the comparable period of the prior year, from 72.7 percent to 75 percent of sales.

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

Selling, general, and administrative expense ratio continued to decline, down 240 basis points in the quarter and represented 42.6 percent of sales versus 45 percent for the year-earlier period. This decline in the quarterly rate was the result of achieving leverage in all aspects of our business. All selling businesses taken together so their year-over-year spending rates declined as we also continued to leverage the topline volume in all of our centralized functions.

As an example, the finance and accounting function provided more than 50 basis points of leverage this quarter.

Our operating income rose 56 percent to $111 million in the first quarter versus the same period last year. Operating margin in the quarter was 32.4 percent, compared to 27.7 percent in the year ago quarter.

Net income for the quarter increased 60 percent to $68 million or 35 cents per share as compared to $42 million or 22 cents per share in the year ago period. Results for the fourth quarter were ahead of the consensus estimate of 33 cents per share. Inventory levels at October 2nd, 2004, were $204 million, up about 28 million but less than 16 percent above prior year levels as our supply chain improvements an inventory management program allowed us to support 21 net new U.S. stores, seven net new locations in Japan, and substantially increased sales levels with minimal additional inventory investment.

Accounts receivable balances rose approximately $26 million or 43 percent, driven by the strength of our U.S. wholesale businesses where our balances remain current. The remaining increase was attributable to the growth of Coach Japan. In fact at quarter's end, our day sells outstanding were actually down to 32 days from 38 days last year's first quarter.

At the end of the first quarter, our cash and marketable securities position stood at $549 million, more than double prior year levels of $255 million, as a result of free cash flow driven by significantly higher net income and option exercises.

The balance sheet remains essentially debt free, with only CJI's revolver borrowing of 23 million on the consolidated balance sheet at quarter's end.

As a reminder and as noted in our fiscal year end conference call, we changed our investment strategy to include securities with longer term maturities, in order to generate higher levels of investment income. We will 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 $442 million at the end of the quarter and a separate line for long-term investments which totaled 108 million.

As you know, the Company repurchased and retired 2.4 million shares of common stock at an average cost of $39.06 during the first fiscal quarter. At this time, approximately $170 million remains available for future repurchases under the recently expanded program which expires in August of 2007.

Net cash from operating activities in the first quarter was $58 million, compared to $28 million last year during Q1. Free cash flow in the first quarter was an inflow of $41 million versus an inflow of $14.2 million in the same period last year, primarily due to higher net income.

CapEx spending, primarily, for new stores and renovations was $17 million versus $14 million in the same quarter a year ago. We now expect CapEx spending to rise to over 85 million in fiscal year '05 as we look to capitalize on some outstanding real estate opportunities, both here and in Japan. This includes the three announced flagships. New CapEx guidance also includes the expansion of 595 Madison Avenue which Lew discussed earlier on the call. We also have a number of other high-profile opportunities for both new locations and expansions in the U.S., including the Rodeo Drive which is expected to open early in fiscal year '06.

As noted for the full year, we will be opening at least 25 new U.S. stores and continuing our store expansion programs.

Now I'd like to provide you with some of our goals for fiscal '05. For the second fiscal quarter we are targeting net sales of at least $505 million representing a year-on-year increase of at least 23 percent with U.S. comparable stores sales gains in the low teens. Operating income, up more then 28 percent year-over-year; and earnings per share of at least 64 cents, an increase of at least 28 percent.

Our current goals for the full fiscal year 2005 are: net sales growth of at least 21 percent to about 1.6 billion with at least 10 percent comparable store sales gains in the U.S. during the second half of the fiscal year. And a total sales increase in Japan of over 25 percent in constant currency, which would translate to sales of at least $355 million, driven primarily by distribution growth through new store openings and expansions combined with mid single digit, same location sales growth. An operating margin that is about 200 basis points above prior year's levels resulting in operating income dollar growth of at least 28 percent in FY '05 over FY '04.

A minority interest payment to our CJI joint venture partner will help our EPS growth as we expect to be slightly below prior year levels, at just about $17 million as a result of higher sales at Coach Japan offset by price increases Coach Inc will take on the shipment's into CJI. 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 second, a higher tax rate rising to about 38 percent, 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 31 percent, which would produce earnings per share of at least $1.78 compared with the analyst consensus of $1.73. Therefore, we expect secondhand EPS of at least 79 cents a share and we would expect the quarters to be roughly equal.

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, Mike, Andrea and I will take some questions.

(OPERATOR INSTRUCTIONS). Mr. Bob Drbul.

Lehman Brothers. Lew, I'd like to start with just a little bit of a focus on the Japanese market. There is a lot of investor focus there and I wondered if you could maybe give us a little bit more color around the type of markets? How you're feeling there, where do you think your gains are still coming from in that market?

Sure, Bob. Well, first, we believe our results in Japan are exceptional by any standard particularly when you take into account our meteoric growth over the last few years and the reality that the market is absolutely flat to slightly down. We are the only important brand that is growing and as we grow, our 25 to 30 percent this year our market share grows 25 to 30 percent and what is most gratifying to us is our acceptance in new markets. We have long lines of consumers waiting when we open stores. They are thankful that Coach, a New York-based brand, is there and they can get the real product from Coach in Japan. But we're also also extremely pleased about our repurchase rates among consumers that shows that our brand has sustainability and growth. As I mentioned before, we have created a new lane. And that is accessible luxury. And quite frankly, I believe the market in Japan is going to continue to be sluggish until other competitors, offering consumers better value than they do today, become more important in the market.

Another question. On the U.S. wholesale market can you elaborate a little bit more about the business there and the trends that you are seeing and expect for the holiday season in that market?

For Coach or in general?

For Coach.

Well, we expect to continue very strong and as all of us indicated we have raised our guidance on second quarter, our momentum has continued through October. We are very bullish on the category growth in the United States within accessories is going to continue. Our U.S. wholesale business for example, was up, over 30 percent at POS last quarter and continues at those levels through October.

We have every reason to believe that we are going to have an outstanding holiday season.

Dana Telsey.

Bear Stearns. Good morning and congratulations on the terrific results, everyone.

Can you talk a little bit about the complexion of the top growth price increase vs. traffic average transaction and conversion rate? And also it sounds like the premium priced pinnacle merchandise is doing very well. What should we see there going forward?

I will take the second part of your question first to say that we're very pleased with our higher priced offering and our tiered merchandising strategy. Special Edition, Limited Edition product approached 10 percent penetrations for the quarter in Q1. And our targets in Q2 are slightly higher than that and that will be supported by the very strong offering across flagship, fashion and core stores.

On the comp drivers, we really continue to see traffic at very healthy rates in our stores. We are capitalizing on traffic through pricing, average ticket was up 10 percent in the quarter, and conversion was slightly off. But we really see that as an ongoing opportunity. And with our Coach service initiative and the opportunities to go after the service experience in our stores for Q2, we see conversion as an opportunity in Q2.

And Mike, can you just talk about the potential for continued growth margin expansion and SG&A leverage especially at CJI?

Sure. We are very optimistic about how we can continue to drive rates profitability even at accelerated levels to our topline growth and on the gross margin line in particular, we are excited about what channel mix is bringing to us, CJI continues to grow at a faster pace than the business as a whole in that channel, especially with the new price increases into Coach Japan is the highest margin channel with the premium at retail there. And in Mike Tucci's business, full price retail carries his highest gross margins and it is growing most quickly. So channel mix will continue to contribute. The special and pinnacle product Mike spoke to earlier is going to also drive gross margin rates as we have slightly higher margin rates on those collections vs. our other collections as a whole. And within factory the dramatic production in our promotional activity is driving higher gross margin there. So we are very optimistic that the gross margin rates will continue to expand.

And with the type of topline growth that we're seeing, both in the U.S. and Japan, we will continue to deliver SG&A leverage as well, and drive income rates for the year to levels above 35 percent.

Margaret Mager.

Margaret from Goldman Sachs. I want to ask a couple of questions. First of all, can you just talk about your new markets and remind us some of the new markets that have opened up over the past twelve months and how those markets are performing relative to more established markets? So that kind of gets to the question of new store productivity and I also --

I'm sorry, Margaret, just to ask. Are we talking about new markets within established countries?

Yes. The U.S. -- in the U.S. where you have opened up new markets you mentioned three. Sarasota, Des Moines and Tucson. But I know you've opened up other new markets and I just wanted to touch base on how those are performing, especially relative to the base of the business. So are new markets opening up at the same level or does it take time to build up?

Sure. Why don't we take the first one.

On some of our newer stores, it is early to say how those stores are maturing. However, they are opening up at or above our expectations for what the new store performance would be. And I am going to use examples such as Rochester, Des Moines -- two stores which recently opened Rochester in the spring and Des Moines this fall. What we're also very encouraged by is new store performance now that we're starting to get into our first comp year in new stores; and we are starting to see those stores mature in their 13th, 14th, and 15th months at very high rates. And so we do believe we are doing a very good job of entering at new markets, capturing customers and then getting them to come in a year later and repeat.

If I could ask about the mix of your average ticket being up 10 percent. How much of that is from absolute price increases across a line vs. an upgrading of the price point? So a mix up to a higher ticket.

Well first about half of it comes from the increase in Special Edition and Pinnacle product. Another third comes from a mix change. An absolute mix change. The rate of handbags has increased by about 8 percent. That is the penetration of handbags year over year and lastly, the rest is a more sophisticated product. There has been no price increases taken this year.

And last question. Just would like to if possible focus a little bit more on the topic of conversion. I know this has been something that has been out there for you to work on, that your traffic is rising at such great levels that the conversion doesn't sort of keep pace with the level of traffic increase. Is there any kind of metric that you could share with us regarding conversion, where it is now, and what the goal is in the future?

Well to answer it most generally our goal is always to improve conversion. The reality is that when we have increased traffic, we have higher levels of browsers and people less qualified to purchase. Both young people like jeans as well as people just visiting us as if we are their local Starbucks -- just browsing. So as the rate of traffic increases decelerate we expect conversion opportunities to grow. Conversion improvement opportunities and that is what Mike was talking about.

Right. Didn't know if you were willing to share any more specifics. Most companies don't, but --. One last question, Lew. Would you mind commenting on the competition? How you feel about it, has it improved dramatically in your view and what do you think the impact of better competition is on your business in particular?

Well, first in the U.S. we do have better competition and we welcome it because it leads to market growth and there's a lot of great brands out there that are doing terrific. And the accessories market is one of the only sparkling markets within department and specialty stores. So we welcome competition that can really stimulate consumer interest, fresh competition. We are looking forward to that to occur in Japan as well and some day it will occur, but until then we have to deal with a sluggish market. So we are growing market share there.

Eric Beder.

JB Hanauer. Could you talk a little bit about kids, I know that was a big piece last year. I don't think you mentioned that (indiscernible) tapping that for Christmas.

Sure we will launch our kids collection with our 11/1 floor set next Monday. And we've done two things in kids. One, we focused our all-store assortment in kids on a very strong accessory offer, which is anchored with our quilted seat (ph) signature which also launches in adults on Monday. And then from a flagship and fashion store standpoint, we have layered in wearables and some very very pinnacle and special products that we think will appeal to our flagship consumer on a giftgiving and also on a sales purchase basis.

Has the number of stores going to carry kids significantly increased from last year?

It's all stores this year.

All stores this year. What is square footage at quarter end?

Just give us a second to look up the stats.

Yes. I'll send you my usual sheet, Eric, on that. Square footage at quarter end was 443934 for full price, 251046 for factory, 694980 total for a total square footage growth of 11.7 percent, broken down to 14 9 in full price in six foreign factories.

Again I will send out my normal quarterly square footage chart to you after the call.

Great. And for the (indiscernible) Mike, could you -- can go into -- how much -- what is the average ticket going to be on the new higher endline for Madison in terms of the handbags? How much higher is it going to be than kind of the average ticket for you?

Madison average ticket in Madison will be 20 to 30 percent higher than our core offer.

And that is specifically driven in handbags.

(OPERATOR INSTRUCTIONS)

Janet Kloppenberg (ph).

JPQ (ph) Research. Good morning, everyone, and congratulations. Nice job.

Couple of questions. Andrea, last quarter, you did a great job of talking to us about the Japanese travel trends, what was happening there, and relating a bit to the trends in the Hawaii stores. And I was wondering if you could talk a little bit about that right now?

Sure. The Japanese -- travel increased outside Japan this year versus last year, but on a decreasing rate. Our own business continues to thrive in travel markets particularly fueled by the Japanese consumer. Interestingly, what they're finding, though, is that the Japanese are not spending in Japan at the rates many people thought when they -- when they would not be -- when they would be traveling less. To say it in other words, we had expected, with the lower levels of international travel, for the Japanese business to pick up in Japan -- overall Rolf Japanese business. But it did not. Of course, Coach business ran 30 percent ahead of last year.

And in fact, in our own stores, we achieved again double-digit comps in those markets in Japan where we did not have any development.

And can you comment about the performance of the Hawaii stores? Were they benefited by Japanese travel even though it increased at a decreasing rate?

The answer is yes. Our numbers were materially up in Hawaii.

On the price point mix I think that this distinguished the limited edition from the fact that the mix also, just a -- the mix of product is going to a higher price tag, some of the top latch bags, et cetera. And I am wondering, I know the limited edition assortment mix is rising as a percent of sales and I am wondering what is happening with overall price points -- overall price point mix, as well, going forward?

In terms of overall price mix, our price on -- we have not taken price increases on like products and core products. What we're getting pricing advantage on, is by tiering our product assortment and this specifically in handbag and women's small leather goods so that we are skewing a higher penetration of Limited and Special Edition products across our three store groups.

So for example, where we have in flagship stores for Q2 where we have a higher level of Special Edition and Limited Addition product we anticipate that those categories will contribute as much as 15 percent of our total business. And the price points there are 15 to 30 percent higher than our core offer.

So it is really being driven by mix.

Right so the mix of higher price points, the mix of higher price point bags will go higher? Do you see that continuing throughout the fiscal '05 year?

We see that continuing. And I also want to point out that our overall penetration of handbags is 59 percent versus 53 percent from a year ago in Q1. So our handbag category is growing at a faster rate than the total Company which is also driving the increase.

And is the same phenomenon going on in the factory stores?

Actually factory is a slightly different component. What we're doing in factory is driving the business. We have surging traffic there but we are driving the business there through margin expansion, which is to say that we are taking our product and gaining a higher retail on it because we are promoting and discounting it at a much shallower level.

My last question is on the 57th Street store in Manhattan. Are you increasing the square footage on Madison Avenue or on 57th Street?

We are increasing the first floor on 57th Street. And we are increasing the second floor of -- on both Madison and 57th Street.

So the store next-door to you on 57th Street is closing.

Yes but we all have to keep that secret.

(OPERATOR INSTRUCTIONS) Christine Chin.

Christine Chin with Pacific Growth Equity. Congratulations, everybody, on another great quarter. I wanted to -- I was recently in your new Forum store in Vegas. It is a very beautiful store and the holiday product is there already. Just wondering if you had an insight, I know it is early, on what has been popular so far for holiday and what you think will be your big hit there?

Well first, Mike and I and several of us had the waterfall opportunity of being there during the grand opening. And it was a real thrill for us to be there because the store is so special and for the first time we had -- we had the full world of Coach holiday calendar '04 available. And clearly the evening product is -- was embraced immediately, our outerwear arrangement did extremely well. Shoes, evening which we are only projecting to be I believe 3 percent during the holiday season is running at twice that level.

And our special product was actually sold out in a few styles just in two or three days. And more generally that is our second store within the same retail complex and we are looking to more than double our business there.

And just, lastly, because we are so enthusiastic (technical difficulty) over $300 in the store and that compares with about a $225 average and a $250 average ticket in flagships.

In terms of Las Vegas, I would assume that is also a very big jump in these markets and I'm just -- correct me if I'm wrong. Just wanted to see how the loss not the new store but the old store is done (MULTIPLE SPEAKERS) last year?

Interestingly it is not a very big Japanese business relatively speaking. 70 percent of our -- 70 percent of our sales are in fact due to domestic travelers.

Margaret Mager.

Actually, I wanted to ask about the factory outlet so that has been answered. Thank you.

Rebecca Valdi.

Rebecca Valdi from Lehman Brothers in London. I have a quick question on the U.S. market. You highlighted the trend specific for your Company. And I wanted to know if you can give us a little more of a general view on the U.S. market in general? And specifically if you expect the market to slow down even if we know actually expect acceleration during the holiday season? And the second question is, again, on the holiday season and basically it's the same as before. If you think the acceleration is going to exclusively come from your Company-specific initiative? Or is your optimism is also reflecting optimism about U.S. market in general?

Well first, with regard to the U.S. market are you referring to accessories?

Yes. In general, yes.

As I said, earlier, the accessories market is growing by 20 to 25 percent this calendar year. And it is the first year in my 25 years where I have seen the rate of growth be more than 10 or 12 percent. And this is a change that reflects the vitality of Coach and other accessory brands, in addition to the increased interest of that other brands -- luxury brands and more moderate brands as well as fashion brands have in this category. We expect the growth to continue through the first half of calendar '05 and begin to stabilize at a level that is probably going to be 40 to 50 percent higher than the level was 2, 2 1/2 years ago.

And it's a great opportunity for Coach as well as other accessible -- I think as well as other accessory brands. In terms of our overall optimism, the consumer is not feeling buoyant in general. I think people are concerned in the United States about Iraq, about the election, about creeping inflation, and the potential, of course, of higher tax rates. We don't expect for the economy in general for there to be a strong holiday season, although we do expect one in our category and, of course, a specialty for Coach.

Thank you, everybody, for joining us today. It is now 9 AM and we are concluding our call as always. We will be available for any questions you may have after the call. Thank you and have a wonderful day.