掛毯 (TPR) 2005 Q2 法說會逐字稿

Welcome to the Coach conference call. This 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 and thank you for joining us. With me today to discuss our quarterly results are Lew Frankfort, Coach's Chairman and CEO; and Mike Devine, Coach's CFO. Mike Tucci, President of North American retail is also joining us. 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 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 costs. Please refer to our latest annual report on form 10-K for a complete list of these risk factors. Also please note that historical growth trends may not be indicative of future growth. We presently expect to update our estimate 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 (inaudible) future estimates at anytime.

Now let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our second fiscal quarter 2005 results and will also discuss our strategies going forward. Mike Tucci will review the holiday season from a U.S. retail perspective and discuss key initiatives for the spring season ahead. Mike Devine will conclude with details on financial and operational highlights for the quarter as well as our outlook for the second half and full year fiscal 2005. Following Mike Devine we will hold a Q&A session that will end by 9:30 AM.

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

Thanks, Andrea, and good morning everyone. I'm happy to be speaking with you today about another excellent Coach holiday performance that reflects the vibrancy of our brand for both gifting and self purchase. As you know, this morning we announced outstanding quarterly results ahead of our recently revised guidance and analyst estimates. Our net income and EPS increased about 40 percent versus prior levels, as a 29 percent increase in sales combined with an improvement in margins, continued to drive the bottom line.

The highlights of our second fiscal quarter were, first, net income rose 41 percent to $134 million or 69 cents per diluted share. This compared to 95 million or 50 cents per share in the year ago period. The recently revised consensus estimate for the quarter was 68 cents per share.

Second, net sales totaled $532 million, up 29 percent. Third, directed consumer sales which consists primarily of sales at U.S. Coach stores rose 30 percent to $307 million during the second quarter. Fourth, comp store sales in the U.S. rose 16.5 percent with retail stores up 13.9 percent, and factory stores up 20.7 percent.

And finally, Japan's sales rose 35 percent in local currency, driven by new stores, expansions and high single-digit comps. During this quarter we opened six U.S. Coach retail stores, including a 5100 square foot flagship store located within the new addition of the Forum shops at Caesars Palace in Las Vegas. This store which a few of you had a chance to visit last week was an immediate success. Consistent with our strategies to enlarge our most productive locations, we expanded our South Coast Plaza location in Southern California during the quarter, as well as four other retail stores around the country, including our 16th Street and Fifth Avenue location here in New York. Finally, we expanded our Woodberry Commons factory store in Harriman, New York.

At the end of the fiscal quarter there were 185 Coach retail stores and 81 factory stores in operation in North America. Indirect sales rose 29 percent to $225 million from 174 million in the same period last year, all in direct businesses including Coach Japan, U.S. department stores, international wholesale and B2B contributed to this significant increase. To date in this fiscal year we have opened eight new, full-priced locations in Japan including four during the holiday quarter.

As we have announced earlier, the second quarter openings included two flagships Osaka and Sendai, both the first flagship stores in those cities. We've also expanded seven locations to date including one in the second quarter, Nuabashi Nukoshi (ph). At the end of the second quarter we had a total of 107 locations in Japan. In U.S. retail our 14 percent comps primarily reflected increases in average transaction size and modest gains in traffic while conversion was essentially flat. Average transaction size gains were driven primarily by the increased penetration of handbags.

In factory stores we experienced extraordinary comp store sales, truly reflecting brand strength as our promotional activity was down from year ago levels. Most importantly, factory results were driven by a successful and substantially improved merchandising offering with an increased level of factory exclusives tailored for the more classic factory consumer. In addition, our sales also benefited from the overall strength of the factory channel.

As we often noted, there is little crossover between the full price in factory consumer as they are each dedicated to their respective channels, spending over 80 percent of their dollars in their preferred environment. We also experienced significant increases in sales at U.S. department stores which reflected both market share gains and continued strong growth in the overall accessories category which we estimate grew at a low double-digit pace in the department store channel. In fact, during the holiday quarter Coach's sales at POS rose over 30 percent.

We are especially pleased with our performance in Japan as sales rose nearly 35 percent in yen terms and 40 percent in dollars despite the continuing sluggish environment for imported accessory (indiscernible). As you know, we continue to focus on rapidly growing our market share, primarily through increased distribution. New flagships and retail store openings plus selected expansions in combination with high single digit, same location sales was the key driver of our growth this quarter.

Our two new flagship Osaka and Sendai were instantly successful and performed extremely well. Finally, as always, we were particularly pleased with the significant improvement in operating margins. As you know bottom line results were driven by both an expansion in gross margin, which speaks to the growth of our directly operated higher margin retail businesses, (indiscernible) 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.

As you also know, we have asked Mike Tucci, our President of North American retail to join us today to discuss our product performance, the last quarter and our retail initiatives for this (inaudible). Mike.

Thanks, Lou. As mentioned in our release, our holiday offerings were remarkably successful across categories and collections. Overall our holiday sales were driven by handbags and women's accessories in addition to stylish business totes while wristlets and key fobs were great lower-priced items. Important trends were color, shine, fur trims and embellishments as was evident in our evening collection as well as special edition and limited edition product. Specifically, our key item investment strategy was a success.

As you know, we merchandised 10 key items and statements with the objective of representing 50 percent of our sales. We bought these items aggressively, positioned them in store with a point of view and featured them in our holiday advertising campaigns. Taken together, they actually represented slightly more than the 50 percent forecast.

We opened the quarter with the Legacy soft double group, which was our key handbag initiative for the holiday season and performed exceptionally well throughout the quarter. This season's Gallery Totes were also instantly embraced playing into the continuing trend of stylish business totes replacing more traditional women's briefcases. We are very pleased with the performance in Madison; our first evening collection spanned many categories, reinforcing our belief that this is a year-round opportunity for Coach. In addition, the quilted signature group of handbags did quite well, expressing our logo in a new, fun and stylish way.

Finally, our resort group which was offered in all stores for the first time this December performed well. Overall for the quarter we were delighted with the ongoing success of our higher priced limited edition pieces, including the coyote trimmed duffel and Madison framed mink and feather bag all at $698. These styles blew out and speak to the ongoing opportunity to more effectively target the top tier of our customer base and to selectively trade up our average retail and handbags.

Similarly we were very pleased by the results of our Coach by special request program which doubled in dollar sales volume and grew to 7 percent of full price sales come paired with 4 percent last year. Before moving on to Spring, I thought I would touch on some of the learnings from our Coach service initiatives, which was in place for holiday. And also discuss some of the exciting happenings in the factory arena.

First, Coach service including our greeter program elevated our in-store experience this holiday. The new POS system played a major role in expediting customers through the store quicker than ever, and also gave us the ability to service customers on items that may have been out of stock in a specific location through a process called "found." The benefits of the new system in combination with new labor scheduling strategies were most apparent in our retail flagships as well as our factory stores. As you may know, factory stores are even more productive than our retail stores overall, and due to higher convergent levels tend to experience the highest level of consumer bottlenecks during holiday.

Conversion rate improvement was most significant, and retail flagships and factory stores driven by our POS system, operating efficiency and targeted payroll investments. The key learnings from both channels on how to best marry service and labor scheduling with our improved systems will carry over to our non-peak Christmas holidays, such as Valentine's Day and Mother's Day and provide us with execution opportunities in the seasons ahead.

Second, I wanted to talk about the incredible success of our factory stores this quarter. While our results clearly benefited from overall channel strength in the vitality of the Coach brand, we purposefully target improving the performance of these already highly productive stores this holiday through the service and system strategies I just discussed, as well as through an improved and targeted merchandise offering designed to appeal to the classic factory store shopper.

As you know, the primary factory consumer is loyal to this channel. She is older, loves brand and is clearly more value conscious than her full price counterpart. She comes in more to shop and less to browse as she usually has to travel a fair distance to get to the mall. Our made for factory offering, which represented about three-quarters of our sales in this channel which was in line with last year, however, comprised of significantly more factory exclusives this holiday. This is new and distinctive product created for this channel. And the factory customer is responding very positively to this newness.

As an example, our Hamptons plaid and herringbone collection, a factory exclusive, represented about 5 percent of total factory sales in the month of December. Our innovative and relative product in factory stores reflects our strength in sourcing and design. This was the first holiday with the design team dedicated completely to factory stores. We've also developed stronger support in production and sourcing with teams in place across categories to fulfill the increasing requirement for newness in factory. In addition, we're evolving visual merchandising at the store level.

Now looking forward to our second half, we are excited about our transitional and Spring product which is already off to a great start. Dot was our lead collection in full price stores in January arriving in-store on 12/26 and comping last year's Soho floral suede group. This fun group of totes, demis and accessories from footwear to a card case, immediately signaled the beginning of Spring to our consumer. Hamptons and pebbled leather long with new shapes and tone on tone colors and our classic signature rounded out our new styles for the month. Coming in later this week will be Soho in beautiful pastel shades and Gallery Totes in our popular signature pattern.

Perhaps most exciting this spring will be the March introduction of the significantly expanded and updated Hamptons weekend collection that will include Hoboes, bag packs and satchels. As part of this collection we will be adding Hamptons Scribble, a chic, whimsical and colorful interpretation of our signature logo. We are currently piloting Hamptons weekend in a cross-section of retail stores with initial excellent reception.

In summary, we are excited about our Spring opportunities both in product flow and our continued focus on Coach service. With that, I will return the discussion to Lew to continue with our overarching strategies.

Thanks, Mike. Clearly the vitality of the brand is driven by the strength of our relative and innovative product offerings. As Mike described our Spring assortments are powerful, underscoring our continuing competence. Further, based on the 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 as an acceptable luxury brand with exceptional brand and business equities and expanding market share. At the same time our diversified business model, multiple product platforms, monthly product flow and consumer centric orientation help us mitigate risk.

Against this backdrop as almost all of you know, we have been implementing four key strategies that focus on sustaining accelerated growth. First, we're building market share in the 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.

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 nearly 300 locations. During the second half of FY '05 we will add up to 9 additional retail stores. This will bring our full year openings to about 20, including 6 new full priced markets for Coach. In keeping with our strategy to expand our most productive locations, we'll also be expanding at least 9 retail stores this year, including some of our most productive locations, such as, Alamawada, (ph) in Hawaii, Kafli (ph) in Boston and White Plains here in New York, all coming this Spring. These expansions will add about 15,000 square feet and over 3 percent to our total full price retail space.

The expansion of our most productive U.S. retail location which is our flagship store at 57th Street on Madison Avenue in New York is about to begin. It closed last week for a complete remodel and expansion which will now be adding over 3000 square feet, bringing the total store to 9700 square feet. The new design will restore this 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 in time for the 2005 holiday season. We found an interim location at 3 West 57th Street just off Fifth Avenue which opened last Thursday to a strong reception and which will be available to us to throughout the flagship's renovation.

Third, we are aggressively expanding market share with a Japanese consumer from about 7 percent during calendar 2004, to at least 10 to 12 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 4 of this year's flagships, including Sapporo which opened in the fall and Umeda in Osaka and Sendai which opened just before the holidays and Nagoya announced for this Spring are opening in markets outside of the Tokyo area.

We are especially excited about that Nagoya opening as it will be heralded by a number of (indiscernible) along with a huge concert by Mandy Moore who will play for peace in Tokyo in early April. It should provide an excellent opportunity to showcase the Coach brand and strength our cachet with stylish Japanese consumers. Perhaps a few of you can join in the celebration.

We are also delighted to announce our first department store flagship, Ohtsu-Dori which is expected to open in mid-March; it will be 3600 square foot shop with projected annualized sales of over $10 million. Similar to the U.S., we plan to expand about 15 of our most productive shop in shops in FY '05, adding nearly 14,000 square feet or 11 percent to our retail base in Japan. Overall we expect sales in Japan to grow about 30 percent this fiscal year in a market that we expect to continue to be sluggish.

As such, we estimate that our market share is now moving towards 8 to 9 percent. And further we are continuing to drive gross margin higher and leverage our expense base. The strategies and actions I have just outlined build on the strength of our core brand and business equities. They are designed to reinforce Coach's leadership position as an American classic lifestyle accessories brand offering, accessible luxury to our consumers worldwide. Now I will turn it over to Mike Devine, our CFO.

Thank you, 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 second-quarter results. As mentioned, our quarterly revenues increased by 29 percent with direct to consumer up 30 percent and indirect up 29 percent. In the second quarter our gross profit margin expanded by 160 basis points over the comparable period of the prior year from 74.2 percent to 75.8 percent of sales. There are three primary contributors to this quarterly improvement.

First, the positive impact of product mix driven by increased penetration of higher margin mixed material collections and limited and special edition product. Second, channel mix as our highest gross margin channels grew faster than the business as a whole and third, sourcing cost initiatives. The selling, general and administrative expense ratio declined 130 basis points in the quarter and represented 33.8 percent of sales versus 35.1 percent for the earlier period. The decline in the quarterly rate was the result of achieving leverage in all aspects of our business.

All selling businesses taken together saw their year-over-year spending rates decline and we also continue to leverage the top line volume in all of our centralized functions. Our operating income rose 39 percent to $223 million in the second quarter versus the same period last year. Operating margin in the quarter was 42 percent, our highest ever quarterly operating margin compared to 39.1 percent in the year ago quarter.

Net income for the quarter increased 41 percent to $134 million or 69 cents per share as compared to 95 million or 50 cents per share in the year ago period. Inventory levels at January 1, 2005 were $191 million, up about 34 million from $157 million, 21 percent above prior year levels. As our supply chain improvements and inventory management program allowed us to support 24 net new U.S. stores, 8 net new locations in Japan and nearly 30 percent higher sales levels with lower proportional additional inventory investment.

Accounts receivable balances rose approximately $27 million or 29 percent driven by the strength of our Coach Japan and U.S. wholesale businesses. In fact, days sales outstanding are actually down from 37 days last year to 31 this year. At the end of the first quarter our cash and short and long-term marketable securities position stood at $802 million, more than double prior year levels as a result of free cash flow driven by significantly higher net income and option exercises.

The balance sheet is essentially debt free with only Coach Japan's revolver borrowing of $50 million remaining on the consolidated balance sheet at quarter's end. The balance sheet included in our press release now shows a line for cash, cash equivalents and short-term investments which totaled $527 million at the end of the quarter and a separate line for long-term investments, which totaled $275 million.

Net cash from operating activities in the second quarter was $235 million, up more than 60 million compared to 174 million generated last year during Q2. Free cash flow in the second quarter was an inflow of $205 million versus 158 million in the same period last year, primarily due to higher net income. CapEx spending mainly for new stores and renovations was $30 million versus $16 million in the same quarter a year ago. We now expect CapEx spending to rise to approximately $95 million in FY '05 with the uptick from prior guidance primarily due to our taking advantage of some outstanding real estate opportunities both here and in Japan. This includes the two Japanese flagships now expected to open in the second half.

In addition, the new CapEx guidance also includes a larger flagship at both 595 Madison Avenue and Rodeo Drive than originally envisioned. We also plan to increase our IT CapEx spend in the second half to further enhance both our store and supply chain productivity. In particular, the store network installed during our POS implementation will allow us to become more sophisticated in the areas of labor, planning and traffic monitoring.

Now I would like to provide you with some of our goals for fiscal '05. For the second half we are targeting net sales of at least $790 million, representing a year on year increase of at least 21 percent with U.S. comparable store sales gains of at least 10 percent in each channel. Sales in Japan rising at least 27 percent in constant currency with mid single digit same location sales growth. Net income up more than 33 percent and earnings per share of at least 83 cents, an increase of at least 30 percent with the third and fourth quarters roughly equal.

Our current goals for the full fiscal year 2005 are net sales growth of at least 26 percent to over 1.66 billion, total sales increase in Japan of about 30 percent in constant currency which would translate to sales of about $375 million and operating margin that is about 250 basis points above prior year levels. Keep in mind that our minority interest payment to our CJI joint venture partner will help our EPS growth. As we expect it 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. has taken on the shipments 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 the growth on the EPS line in 2005.

First, the higher share count brought about by higher share price and option exercises, and second the higher tax rate rising to 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 37 percent, which would produce earnings per share of at least $1.87 compared with the analyst consensus estimate of $1.84. 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 are 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 be happy to take some questions.

(OPERATOR INSTRUCTIONS) Robert Drbul of Lehman Brothers.

Good morning. Congratulations on terrific numbers. Lew, I guess can we focus on Japan for a second? In terms of when you look at the Japanese comp store sales numbers that you reported this quarter versus the first quarter, can you just talk a little bit more about some of the factors that led to the reacceleration of that comp number?

Sure, Bob. But the context, power sales were up in constant yen, I believe overall 35 percent this quarter compared with 29 percent last quarter, and we reported high single-digit comps versus mid single-digit comps. But from our point of view the results in both quarters are stellar, and we don't really see it as a reacceleration. We see it as a continuation of a very strong business that we've been experiencing for years in Japan. We basically don't see the differences as significant.

In terms of the tourism numbers, was there any major changes from what you saw recently as well?

Yes, although not unpredicted. We saw tourism outside Japan continuing to increase but at a slower rate than it did in prior quarters.

Okay.

In essence we are expecting to see a leveling off in calendar '05 compared to the calendar '03 period.

Dana Telsey of Bear Stearns.

Good morning everyone, congratulations. Sales spent has been very successful, a lot of it driven by the product refresh program that you've had. Any other flow adjustments that we should be aware of for the balance of the year or as you are planning the next fiscal year? And then on the minority interest line, which came in at almost 6.4 million this quarter, the balance due I think Mike you mentioned 17 million for the year. Can you -- how does that work exactly, and any other price increases that we should be noting for Japan going forward? Thank you.

I will take the first part on flow. Our flow calendar for the balance of this year is very much comparable to last year taking into account a couple of factors like an earlier Easter this year where Easter falls two weeks earlier so we will be modifying some of our flow to take advantage of traffic shifts around Easter. We will look at midmonth opportunities to refresh the front of the store, for example we are putting Soho out this Friday and then we will do an update to Soho which will feature Valentine's Day product right before the Valentine's Day period in midmonth in February. So it is really monitoring it monthly with some small adjustments based on cadence and calendar but essentially the flowlines are very similar to last year.

I will take the question on the minority interest and the decline in the second half of the year versus the first half and you nailed the major reason behind that, and that is now the sell through of the product that took into account the price increase that was taken early in the year. The first half we were still selling through primarily product that shipped during fiscal year '04 and achieving higher margin rates and higher rates of profitability at Coach Japan. In the second half all the product selling through will be at the higher pricing to Coach Japan and suppress their profitability. There are some other issues in there as well. We mentioned the Many Moore play for peace conference, so we have a onetime step-up in some expenses, etc. but it is largely driven by the pricing phenomenon as you suspected.

Great. Thank you.

Mark Friedman of Merrill Lynch.

Thank you. Good morning everybody. Nice job. I was wondering if you could give us an update on the customer mix, what you are seeing from sales from new customers versus loyal customers and also any kind of breakdown in customers, younger customer, older customer, other kind of demographic data that might be useful in understanding your continued growth.

First, as you know, Mark, we have a very diversified consumer base, and being as strong as we are we do look to attract and are successful in bringing into our franchise consumers of all ages and all incomes. We have not seen any discernible changes in the patterns of this year with the possible exception of a leveling off of very young consumers, which we think it is a good thing. We are talking about consumers that are younger than our target of 18 years of age. We also see ourselves attract a more luxury oriented consumer, a consumer who is really looking for special edition products. And I think that is one of the reasons why our special edition product rose to 9 percent of our sales in full price stores compared with 2 percent last year during the holiday quarter.

Great. Thank you.

Margaret Mager of Goldman Sachs.

I have a couple questions. First of all, can you talk about in Japan the concentration of your current sales in the Tokyo area and how that may be changing with the development of non Tokyo markets? So I am just wondering is -- how much of your business are you doing in Tokyo and how is it going to change? Secondly, what is going to take to get your conversion rate to go up instead -- I know they are flat. I think they have been down in the past as a function of traffic. But I believe this is a strategic focus for you, and I am just wondering what it is going to take to move it into the positive column. And then lastly, I guess the ASPs in the second half of '05, are you still thinking of 8 to 10 percent, and is there any preliminary thoughts for F '06 on ASPs at this juncture?

Let me take the first part. First, we don't have at our fingertips the exact sale numbers in the Tokyo area and the rest of Japan, but I can say most generally that within a 100-mile radius of Tokyo, about 45 percent of the country's spending occurs, and at this point our sales within that radios is somewhat higher than that 45 percent. We believe there are disproportionate opportunities in the underdeveloped segments of both on the north side of Japan and on the South, including the islands. It is very similar to the situation in the U.S. where we first developed in the Northeast Midwest quadrant and now are developing in the rest of the countries. Mike, with regard to conversion?

Sure, Margaret. A couple of things, one for context; Q2 as you know is our most developed quarter with most significant pressure on traffic. If you look at our growth rate, we are seeing about a 57 percent growth rate over a 3-year period, and in the past couple of years, significant increase in traffic. So the fact that we were able to put a strong effort behind conversion and get conversion to flat from a trend that was weaker than that in earlier quarters, I think gets us going in the right direction.

A couple of big takeaways on conversion and service opportunities for us going forward that I'd like to speak to. And, in fact, we just had our entire multi-manager organization in town for 3 days post the holiday season to retrain and do a postmortem. And 3 major takeaways on wins and opportunities going forward, number 1, the role of the service leader in store, which is a new position for us and a new responsibility across all stores proves to be a key driver in elevating service and getting the conversion needle to move. We are retraining that position and redoubling our efforts on that going forward.

Additionally, we spend time on two programs around labor management, one that we call smart scheduling which is getting the right people doing the right things in the store. A second called power hours, which is putting more emphasis on key selling hours in the store. And then third, focusing on our back-office operations with our runner system as well as performing duties like gift wrapping off the floor, which we'll continue to do at Valentine's Day, Mother's Day, and for any gifting opportunities that come across. So we feel good about our efforts and we think we are headed in the right direction. It will continue to be a significant focus for us in U.S. retail.

Mike, I just want to add one thing that we are, as you know, that we're beginning to try to measure. Margaret, what we are experiencing is an increasing number, I think, increasing frequency of visits among our customers. And what they are telling us is they are coming into browse; that we're part of their monthly visit to the mall. And as consumers come in more often and spend more money, in aggregate they will be buying less often each time. We think it is a healthy thing for people to visit us to browse and for us to be top-of-mind.

What we are looking to do in our current research is to disaggregate the intentions of our consumers to see how big a phenomenon it is. But it is happening, and it is a reality we feel actually quite good about, our people visiting us just to browse.

And then lastly on AUR increases, we are still targeting in the second half mid to high single-digit improvements in AUR. And really at this point, we are planning FY '06 and we won't comment on what our direction will be in '06 till further down.

Thanks so much.

Neely Tamminga of Piper Jaffray.

Just a couple questions here looking ahead to spring. Could you give us a sense of -- you said that your Hamptons weekend is going to be significantly expanded. Can you give us a sense of a metric, you know, how many more styles or increased penetration versus the assortment? That would be helpful as well as a sense of where your non handbag categories are going to go with respect to percentage of sales for the Spring.

I am sorry, non handbag categories?

Right, the sunglasses and scarves and what have you, and then also with respect to your strategy for your loyal customer, what are you doing for this loyal customer, what are you going to do this spring? Is it changing, can you give us a sense there, too?

Let me begin. First, with regard to Hamptons, we are basically doubling the number of styles from approximately 4 to 8 but more significantly than that we are expanding the range of styles to include flat bags, tote bags which were there before, Hoboes which we believe will do very well based on our pilots. We are adding more color. We are adding of course Scribble, which is piloting very well and accessories as well, as footwear within Hamptons. We think it is going to be extraordinary, and based on the incredible results in our pilot worldwide we're going back to ramp up additional production.

In terms of non handbags, consistent with our general approach as the brand continues its growth, we expect handbags and women's accessories to be the two fastest-growing categories and they have the highest productivity. So we continue to allocate additional real estate to these categories. At the same time, different classifications such as sunwear we're enthusiastic about, and it does play a role and provides an additional reason for consumers to purchase. Mike, in terms of strategy for loyalty programs?

Obviously we spent a lot of time looking at how our customer behaves and analyzing how she shops from information that we can get from our database. We're doing a couple of things. One, we're really continuing with our thank you note program. We believe that it is an important opportunity for us to differentiate ourselves from other people in the mall who are not necessarily taking the time to recognize their customers and treat them with a level of graciousness that we think they deserve. So that program will continue. We are literally sending out thousands of thank you notes that are handwritten by our associates every month. We will build on that. We also gain from that a relationship with the consumer. Additionally, we are looking at selected in store events including trunk shows and special events in store that we will do. Again, as part of an opportunity to seed more of our most loyal customers.

And then, the last piece of it is we will be looking at our POS system and looking at opportunities to layer in additional functionality that will allow us to form the basis for what we will call Coach client telling (ph) or Coach contact and give us a more automated way to keep track of communication with our consumers. And that work is just beginning. We will pilot it. We will vet it out, and then as we gain more confidence and learning from that, that will be a big focus in evolving the Coach service initiative going forward.

Thanks, Mike.

Christine Chen of Pacific Growth Equities.

Congratulations on another great quarter, guys. And Andrea, too. I wanted to ask your sales to Japanese customers, maybe I missed that on the conference call. Is there a number out there including sales outside of Japan?

Our growth of about 35 percent in Japan is consistent with our growth outside of Japan and it is basically consistent with our worldwide growth including our growth in the United States.

Okay. And with respect to your factory stores versus retail stores, you had mentioned that there is more factory exclusive product in there. As far as the product that is going from your retail stores to factory stores, has that gone down then?

Actually that number is about level year-over-year and as I said earlier, about 75 percent of our mix in factory stores is product that is made for factory. Now what has changed which is driven both a visible difference in our stores to the consumer and a change I think in trend is that within that 75 percent a higher portion of our sales and merchandising efforts and investment is in made-for-factory exclusives. And these are products that we design specifically for the factory channel and we've seen great success with that.

The only thing I would add is that if I wanted to remind everyone that when Lew created the factory channel many years ago it was created almost exclusively as a disposition strategy for full price. So we are thrilled that 75 percent of what we are selling through in factory is in fact produced for factory.

With respect to minority interest, is there some thought going forward that perhaps you will buy out your partner?

We have a contract with Sumitomo, our joint venture partner that allows for us to take our ownership position up at the end of fiscal year '07 and again at the end of fiscal year 10. We would anticipate taking advantage of that and really at this time that is all we're prepared to discuss.

Okay. Congratulations on a fabulous quarter.

Eric Beder of JB Hanauer.

A few quick questions. How did the kids line do for holiday, and looking going forward, looking at the level exclusives, what is the level exclusives that you think is best to maximize what you want to do?

Are we talking full price?

Full price exclusives.

I will take both, first on this second question, it is empirical exclusives are what we might call our limited edition product. We are basically still in a learning stage. What we do know is that whatever we produce is sold out quickly, so we know the appetite is great. And we are not even beginning to satisfy part of that. So we expect it to grow significantly over the years ahead.

In terms of our kids during its peak it was about 2 percent of our sales in line with our expectations.

How did the watches do, the new watch rollouts you had and some of the exclusives, excuse me, some of the limited editions you had there?

Watches are a very unpredictable business for us; it is basically a staple. Overall performance was about 2 percent within watches and a Bezel watch did extremely well.

Great. Thank you.

Jennifer Black of Jennifer Black and Associates.

Let me add my congratulations. Just a couple follow-up questions. I wanted to know how much room do you feel you have on price points, and is there a direct correlation with your higher price points and most loyal customers? Are you looking at that when you're looking at the loyalty program? And I know that you're looking at the number of times she visits the store.

Secondly, with the Scribble do you feel that you have enough of the Scribble, and it is the best offering I think I've seen that you've ever done, and I'm curious to know if you feel you have enough.

Okay, first in terms of room for higher price points, I think as I said before to Eric, we don't know how high is up. We do know that a good part of our franchise is prepared to spend more. What is critical for us is to have a balanced assortment so that we can still maintain attractive price points. So that we can have compelling product for the more value-oriented consumer within our franchise.

Your question, Jennifer, around most loyal consumers, it is an interesting subtle question. Generally speaking the consumers who spend the most with us in any period are the consumers who are most willing to buy limited edition product. They are the most committed, dedicated consumers and in many homes we even satisfy three generations. So there is a direct correlation between loyalty and willingness to spend more for individual products. In terms of Scribble, candidly Jennifer I think we will be chasing it into calendar year '05 and '06. Sorry, '06 is what I meant.

Paul (indiscernible) from Credit Suisse First Boston.

Thank you and congratulations. Lew I think you made a comment in the past that the overall Japan market was likely to stay sluggish until competitors offer better value. Are you seeing any changes in the pricing structure in Japan amongst competitors or do you foresee that in the future?

Good question. I first we are not seeing any discernible changes among the established older European brands. Some of this, a few of the smaller brands such as Hurler (ph) and Long Chops (ph) as we mentioned earlier which do offer accessible luxury brand price points are growing rapidly, and we look forward to our established European competitors giving consumers an opportunity to purchase their products at a more affordable rate because we think the whole market will grow and all of us will benefit.

Thanks. And then second, can you talk about any differences that you're seeing between mall stores and non mall in the U.S. and then perhaps in Japan, department store versus flagship or even if you could break it down a little bit further, department store versus department store?

I think the differences that have existed -- first in the U.S. the differences that existed continue to exist with a few subtle changes. Our non mall stores, which I will call our freestanding downtown stores, they tend to attract a more premier consumer. Some of them are local neighborhood consumers. Others are commuters. What we have seen however in the malls is a great effort on the part of developers to improve the quality of the malls. And they are doing a terrific job in elevating the entire customer visit by improving housekeeping, offering better amenities in terms of food, entertainment. And we believe that malls are going to increasively selectively become more vibrant.

With regard to Japan, which is really way behind the United States in terms of the development of specialty stores, we are finding that freestanding specialty stores where younger consumers under the age of 30 like to shop. Japan doesn't have very many established malls yet so the department stores tend to fit in adjacencies to our freestanding stores and they are taking market share from the department stores.

John Rilieu (ph) of Wachovia Securities.

In the factory outlet channel, I'm wondering if you are taking prices up and seeing similar trends in the ASP side there or if you're hitting any resistant levels in the factory stores. And then second question is we have been on an increasing trend using more fabrications in the bag and less leather I guess, do you see any trend perhaps back to an all leather or mostly leather type bag? Thanks.

Okay, John. On a first part in terms of pricing the key component to pricing in factory has been in fact to reduce the level of promotional activity. Our average retails are relatively constant there. We have really made an effort to promote less and expand margins in factories. On the second piece, I am not sure that we can say at this point where we want to go.

What we do Mike, of course, is we always have a balance. Leather is going to continue to play a significant role particularly with the older and more classic consumer, it plays a more significant role seasonally and of course on holiday. We do believe there will be some growth in our leather business during FY '06 compared to '05. And of course, leather is a much more important material in factory than mixed materials because the consumer tends to be more classic and older.

Thank you everyone. It is 9:32 and that concludes our second quarter conference call. As always we will be available for your questions in our offices afterwards. Thank you.

Thank you, everybody.