掛毯 (TPR) 2005 Q4 法說會逐字稿

Good day. 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 Reznik. You may begin.

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

Before we begin, we must point out 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 based upon a number of continuing assumptions, and 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 controlled costs. Please refer to our latest annual report on form 10-K for a complete list of these risk factors. Also 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 expectance of these estimates on a continuing basis. Coach may also choose to discontinue presenting future estimates at any time. Please note that all per share historical numbers that will be discussed have had been adjusted to give the effect of the Company's two-for-one stock split, effective in early April 2005.

Additionally, it should be noted that the results for the fourth quarter and fiscal year ending July 2, 2005, includes 13 and 52 weeks respectively, while the same period in fiscal 2004 included 14 and 53 weeks respectively. All discussions of comparable store sales are calculated based upon an equivalent number of weeks in 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 2005 results, as well as our strategy going forward. Mike Divine will follow with details and financial and operational highlights for the quarter and year, as well as our outlook for the first quarter and full fiscal year 2006. Following Mike, we will hold a Q&A session that will conclude by 9:30 a.m.

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

Thanks, Andrea, and good morning everyone. We just concluded our 20th quarter as a public company, a five-year journey where we have consistently excelled, achieving excellent top-line and even stronger bottom-line growth, while expanding our market share. During our IPO, we coined the term 'accessible luxury' to describe our marketplace positioning. Today, Coach is seen by many as a catalyst in changing the way consumers look at the accessories category in the U.S. Notwithstanding our performance, we believe we are not yet at the halfway point in our organic growth.

While our results have been dramatic, our U.S. market share in the last few years is up only modestly against extraordinary category growth in bags and accessories. During our planning horizon, we intend to continue to grow our top-line by driving double-digit distribution increases and improved productivity, with an increasing rate of profitability.

Our strong fiscal 2005 performance speaks to our philosophy of operating Coach as a small business with large sales. FY '05 was highlighted by a 29% increase in revenues, and a 48% increase in net income. It was a year of many accomplishments, including, first, the opening of 25 total net new stores in the U.S., 19 new retail stores, and 6 net new factory stores. Second, a 14% increase and full price U.S. comparable store sales for the year, driven by an increase in average transaction, primarily due to mix, as well as more modest gains in traffic and conversion.

Third, over 30% gains for U.S. department and specialty stores at POS, and fourth, another exceptional year for Coach Japan, where sales at retail rose 35% in U.S. dollars and 30% in constant currency to over $370 million, despite flat category sales for accessories in Japan. In fact, Coach continued to leverage its #2 position in the market, achieving a nearly 8% share this year. Finally, of course, the buyout of Sumitomo's interest in CJI at fiscal year-end. Most broadly, we once again effectively executed our growth plans and realized company-wide performance that outpaced our stated goals.

As you know, this morning we announced excellent results for the fourth fiscal quarter ended July 2, 2005, ahead of both our expectations and analyst estimates. Our net income and EPS rose nearly 49% from prior year levels as a 24% increase in sales, combined with an improvement in margins, continued to drive the bottom line. On a comparable 13-week basis, net income and EPS increased 58% on a 31% gain in sales.

Some highlights of our fourth fiscal quarter were first, net income rose 49% to $98 million, or $0.25 per fully diluted share, compared with $66 million, or $0.17 per share in the fourth quarter of fiscal year 2004. Second, net sales totaled $419 million versus $338 million a year ago, a gain of 24%. Third, direct to consumer sales, which consists primarily of sales at U.S. Coach stores rose 26% to $245 million during the fourth quarter, from 195 million in the comparable period of the prior year, and lastly, U.S. same-store sales for the quarter rose 22%, with retail stores up 13.6% and factory store sales up 34.7%, with broad-based strength across regions and store types.

During the quarter as planned, we opened 7 retail stores, bringing it to 19 the number of new retail store openings in 2005. Last quarter's openings included our first stores in Syracuse, New York and Toledo, Ohio. We also opened two factory stores during the fourth quarter, thus at the end of the period, there were 193 full-price and 82 factory stores in operation.

In addition, during the quarter we expanded a full price store, Ala Moana, in Hawaii, bringing the total number of completed retail expansions this year to 7 this year, with an additional 4 underway at quarter-end. We also completed the expansion of our highest volume factory store, located in Woodbury Commons, which is in Harriman, New York. Our second factory expansion this year, which a number of you had a chance to visit in June.

Indirect sales in the quarter rose 21% to $174 million on a year-over-year basis, driven primarily by strong gains at Coach Japan, while substantial increases in U.S. department store and international wholesale contributed significantly as well. During the quarter in Japan, in addition to the Nagoya flagship, a retail store opened in Yokohama, bringing the total number of store openings to 12 for the year, on target with our expansion plans.

We also closed 2 small stores during the quarter and closed 8 low-volume locations in total for the year, primarily due to the Mitsukoshi department store closings, thus at the end of the fourth quarter, we had a total of 106 locations in Japan, with 16 full-price stores, including 7 flagships, 76 shopping shops, 11 factory stores, and 3 wholesale locations.

We were particularly delighted with the continued momentum of our North American full-priced business, both the gains posted by our own stores, which continued to post double-digit comp gains and significant increases in U.S. department store POS sales, which rose over 30%. Results continue 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 the vitality of the factory channel, our unique positioning, the strength of the Coach brand and an improved merchandising strategy. In fact, we believe the factory opportunity of Coach is significant. As you well know, the discount sector continues to be the fastest-growing sector in retail. However, no one is positioned quite like Coach.

Since none of our accessories ever go on sale in Coach retail stores, the only place a consumer can purchase Coach with a discount from a comprehensive range of product is in Coach factory stores. While their assortment is entirely differentiated from full price retail stores, it's incredible value is appealing to the discount-oriented branded consumer. We know that we can grow this channel rapidly and faster than the market, but in a quality way that provides great service, operational efficiency and a product offering that our customer loves, all of which sets us up for significant future growth in our factory stores. The emergence of Coach factory is a significant growth opportunity for the Coach brand.

We were also very pleased with the performance of Coach Japan this quarter, where sales rose 29% in dollars, and 28% in yen, on the comparable 13-week basis, 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 new and expanded locations. Last quarter's performance was, again, especially noteworthy when you take into account the continued lackluster performance in Japan for imported luxury brands in general.

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 continued 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 want to touch on our product, the cornerstone of the Coach brand, as it is the primary driver of our growth. Throughout our business, consumers enthusiastically embraced our seasonal offerings across categories and collections. These included our April focus, Optic signature, offered for the first time in Soho Silhouettes, and a wearable white-on-white fabrication featured for Mother's Day.

Additional newness during the month included Straw Boxy totes offered in two sizes and the special edition Ladybug style. Also in April, we saw a continuation of strength in the newly expanded and updated Hampton's weekend collection, which debuted in March. In May, our popular shoulder totes returned with an all-store distribution in several colors and signature and leather fabrications. We also added limited edition Scribble, PBC, to flagship stores and our beautiful garden party scarf print totes in many Hobos fashion doors.

In June, we introduced the vintage Signature Metallic dye collections in denim, white, and pink in handbags and accessories, which was an immediate success. We also brought back the Signature Patchwork group, whose excellent sales exceed our plan. As you may know, due to the strong sell-through of our transitional offerings, we chose to bring in our July floor set early, notably our Soho Mini Signature leather and suede collection, across many sizes and shapes. This year the collection also includes a special edition group embellished with crystals and studding, and a new satchel and Demi flap style. This collection became an instant success and continues to perform remarkably well.

Also at the end of June, we launched the New Hampton's Weekend Edition offered in a new seasonal color pallet and a touch of velvet trim. This addition also includes a stunning Scarf print version. Lastly, we introduced a new Signature Patchwork group for fall, a fabric created using all scales of our iconic khaki logo pattern trimmed with the blue, green or pink snake skin, available in the Demi flap, Hobo and Satchel styles.

Going forward, we're excited about Chelsea, which is selling extremely well. It happens to be one of our key leather groups for fall. This collection is offered in rich, soft, pebbled leather and Nubuc, as well as our Optic Signature pattern, which was introduced last week. The drape of the bags, contrasting trim and pockets and signature turn-lock detailing all lent to the overall appeal of this collection.

In September, our Hamptons Collection will be updated with new silhouettes and these design details and a fresh array of fall colors, including peacock blue, deep red, and camel suede. The collection consists of both buc leather and suede offerings, enhanced by wearable, feminine styling and tailored detailing. Wristlets and scarfs complement this collection.

In addition, we will be adding a new Tweed group within our Soho assortment, trimmed with velvet and rhinestones, including a Hobo Demi Flap and satchel, the feature of our fall advertising campaign. We're also enthusiastic about our offering for the holiday quarter, which includes a stylish group of beaded gallery totes, a key group for us, with new details, colors and treatments, including fur trim.

In addition, the introduction of the newly updated and best-selling duffels in October will be important to our business. They will be offered across multiple core fabrications, with new hardware, detailing, and a special edition Patchwork Unlimited Sherling version. Also, for holiday, and building upon the success of last year's Signature Quilted group, we're introducing a capsule collection called Ski, which is made of a quilted fabric with a subtle interpretation of the iconic C, available in select Hobo silhouettes and wristlets, these pieces have a soft, relaxed feeling with fur trim, that adds an element of luxury.

The Madison Evening collection will also return this holiday across broader attitudes and price point,s and includes handbags, accessories, hats, scarfs, gloves, shoes and outerwear. This collection will be fabricated in satin, chenille, Lurex, and mink with some styles accented with crystal and velvet details.

Finally, we will be introducing resort product to all stores in early December, featuring appliqued Signature Carry-alls and suede trim duffels, a new edited tote and accessory group featuring a whimsical bubble print. And for the first time, a leather and suede group of soft Hobos will also be offered in metallic and soft pastels. Our special accessories for fall and holiday include our leather ID charms, allowing our consumers to personalize their bags and totes, as well as iPOD cases.

We will also introduce a niche offering of Coach Baby, including baby bags, photo frames, a brag book, and a capsule group of baby accessories. And we have an adorable Coach teddy bear, which will round out the assortment.

Clearly, the vitality of the brand is driven by the strength of our product offering, and our fall and holiday assortment is powerful, underscoring our optimism about the seasons ahead. Our formula for success has remained constant, despite a changing environment. We have five unvarying elements that separate us from the competition, our distinctive brand, our leadership position, our loyal consumer base, our multichannel international distribution, and our focus on innovation and the consumer.

And the engine that drives these elements is our strong and seasoned management team, fueled by innovative, exciting product and supported by an adaptive dynamic, global sourcing and supply chain. Our brand has never been stronger, nor has our proposition ever been more vibrant. We believe that we are well positioned to capitalize on the myriad of opportunities ahead of us and have the vision, strategies and tactics in place to realize our long-term growth plans what confidence, that these growth strategies will allow us to achieve continued financial momentum during our planning horizon.

To this point, as most of you know, we have been implementing four key strategies that focus on sustaining accelerated growth. First, most generally we're building market share in the growing North American women's accessories market, by leveraging our unique position as an accessible luxury life-style brand. As part of the strategy, we're emphasizing new usage indications, such as weekend or evening, and offering novelty and limited edition products to heighten our cache, especially with our top-tier customers.

Our second strategy is the continued acceleration of growth in North America retail. We plan to add 100 retail stores in North America over the next four to five years, bringing the retail store base to at least 300. During FY '06, we intend to open about 25 new retail stores, which will include 6 new full-priced markets for Coach, Wilmington, Delaware, Memphis, Tennessee, Naples, Florida, Oklahoma City, in Oklahoma, Reno, Nevada, and Omaha, Nebraska.

In addition, we're excited about our first flagship on Rodeo Drive in Beverly Hills, scheduled to open in time for holiday. In keeping with our strategy to expand our most productive locations, we will be expanding at least 7 retail stores in FY '06. They include some of our most productive locations, such as Copley in Boston, and White Plains in Westchester, New York, both of which successfully reopened last month, as well as in Vancouver, and of course 595 Madison Avenue, here in New York City. These seven expansions will add a total of nearly 9000 additional square feet, or about 2% to our total full-priced retail space.

In addition, we are also planning on opening at least five factory stores, and expanding at least one outlet in St. Augustine, Florida, given the tremendous success we're experiencing at our Woodbury Commons store, which was just expanded. And third, outside the U.S., we're continuing to aggressively expand market share with the Japanese consumer, from about 8% this past year to a goal of 15% during the next four to five years.

As I mentioned, we're obviously very pleased with the acquisition of the 50% minority interest in CJI from Sumitomo. We complete our development plan well ahead of schedule and owning our business completely will provide an excellent opportunity for us to drive the next phase of Coach's growth in Japan. This phase will include opening new retail locations, including flagship stores, which we now believe could reach 15, double the current number.

Overall, we expect that we could eventually have a total of at least 140 Coach locations in Japan, across the same multichannel distribution model that we have established in North America. FY '06, we expect to open at least ten new locations in Japan, and are currently in negotiations to open at least one more flagship. Similar to the U.S., we plan to expand about ten of our most productive shopping shops in FY '06, adding nearly 7000 square feet, or about 4% to our retail base in Japan.

Overall, in FY '06, we expect CJI sales to grow to at least $445 million, assuming a constant yen, an increase of at least 20% from FY '05, as we continue to gain share rapidly. Our gains will primarily come from distribution growth, as we accelerate our new opening plans, taking advantage of real estate opportunities in the market. Also, we're continuing to target at least mid-single-digit comps for the year.

And lastly, of course, we continue to have an overall focus on improving our rate of profitability, so that our bottom line results continue to well outpace top-line performance. These strategies and actions are designed to enable us to achieve excellent financial results through our planning horizon.

I will now turn it over to Mike Divine, 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 24%, with direct-to-consumer up 26%, and indirect up 21%. For the year, revenues rose 29%. Direct-to-consumer gained 29%, and indirect was up 30%. Excluding the impact of the 53rd week in the year-ago quarter, which added about $20 million in revenues, sales would have been up 31% for both the quarter and the year.

In the fourth quarter, gross margin increased by 90 basis points on a year-over-year basis, from 76.7% to 77.6%, bringing the year to 76.6%, a 170-basis point increase. There are two primary contributors to the quarterly expansion. First, the positive impact of product mix, driven by increased penetration of higher-margin mixed material collections, and special product offerings. And second, sourcing cost initiatives throughout our supply chain.

As expected, Q4 SG&A expenses, as a percentage of net sales, were level with prior year, and represented 43.8% of sales. We achieved SG&A leverage in all non-Japan businesses during the quarter. However, a number of one-time expenses at CJI, including those associated with the 'Play for Peace' concert, and the buyout of Sumitomo's interest offset this leverage. For the full year, SG&A expenses as a percentage of net sales declined 100 basis points to 40.3% from 41.3% a year ago. All selling businesses, excluding CJI, and of course our centralized functions, saw their year-over-year spending rates decline, as we continued to leverage our top-line volume growth.

Our operating income rose 27% to $141 million in the fourth quarter versus the same period last year, and was up 35% on a 13-week versus 13-week basis. Operating margin in the quarter was 33.8%, compared to 32.9% in the year-ago quarter. For the fiscal year, operating income rose 40% to $622 million from the prior year, or 42% on a 52-week versus 52-week basis.

Operating margin for the year on this basis rose to 36.4% from 33.6%, well ahead of our expectations. As mentioned in the press release, the buyout of our joint venture partner in Coach Japan at fiscal year-end, allowed us to capture foreign tax benefit for the year. The FY '05 benefit was recorded entirely in the fourth quarter, and brought the full year to the lower effective appropriate annual rate. This benefit is ongoing, due to the tax structure of profits recorded and reinvested in Japan. This lower tax structure in Japan should allow us to hold the consolidated rate to about 38% in FY '06.

As I mentioned earlier, there were a number of one-time costs in Japan during the quarter, which had the effect of sharply reducing income at CJI, and thereby, minority interest. Clearly, we were delighted to report such strong consolidated income growth, despite these nonrecurring costs in Japan. This leaves us well positioned to maximize our profitability from Japan going forward, all of which will accrue to Coach shareholders. In total, net income for the quarter increased 49% to $98 million, or $0.25 per share as compared to 66 million, or $0.17 per share in the year-ago period. Results for the fourth quarter were ahead of the consensus estimate of $0.24 per share.

Net income for the year rose to $389 million from 262 million, up 49%. On an apples-to-apples basis using 13 and 52-week compares, net income was up 58% for the quarter and 51% for the year, while EPS rose 58% for the quarter and 49% for the year.

Moving to the balance sheet, inventory levels at year-end were $184 million, up about 22 million from $162 million, or less than 14% above prior year levels. As our supply chain improvements and inventory management program allowed us to support 25 net new U.S. stores, 4 net new locations in Japan, and substantially increased sales levels, with modest additional inventory investment. Accounts receivable balances rose only $8 million, or 15%, as day sales outstanding continued to drop from last year's 33 days to 31 days in FY '05.

During the fourth quarter, we completed the buyout of the remaining interest in CJI from Sumitomo for $225 million, plus undistributed profits and paid-in capital of 75 million. This cash use was partially offset by free cash flow, driven by significantly higher net income and option exercises. Therefore, we only experienced a $189 million decline in cash and marketable securities for the quarter, ending the period at $505 million.

Net cash from operating activities in the fourth quarter was $159 million, compared to $146 million last year during Q4. Free cash flow in the fourth quarter was an in-flow of $128 million versus $120 million in the same period last year, mainly due to higher net income. CapEx spending, primarily for new stores and renovations, was $31 million versus 26 million in the same quarter a year ago. For all of fiscal year 2005, net cash from operating activities was $567 million compared to $449 million last year. Free cash flow in fiscal year '05 was an in-flow of $462 million versus 381 million in fiscal year '04, while CapEx spending totaled $95 million, again primarily for new stores and expansions.

Before I discuss our 2006 financial targets, I wanted to share with you an update on FAS 123R, the expensing of stock-based compensation, which we will be adopting in the first quarter of fiscal 2006. First, we thought it might be helpful to note that the percent impact to EPS in FY '05 will come in at about 8% of earnings, well below FY '04s 9.1% level, and while there are a number of factors we are evaluating with regard to implementation of FAS 123R, at this juncture, it looks like the impact to FY '06 EPS should be somewhat below our experience in FY '05.

Now I'd like to provide you with some of our goals for fiscal '06, which do exclude any impact from expensing of stock options. For the first fiscal quarter, we're targeting net sales of 440 to $445 million, representing a year-on-year increase of at least 28%, with U.S. comparable store sales gains of at least low teens, led by the factory channel. Operating income, up at least 33% year-over-year, and earnings per share of at least $0.24, an increase of at least 40%.

Our current goals for the full fiscal year 2006 are, net sales growth of about 22% to nearly 2.1 billion, with at least 10% comparable store sales gain in both the U.S. retail and factory channels, and a total sales increase in Japan of at least 20% in constant currency, which would translate to sales of at least $445 million, assuming a flat exchange rate. Driven primarily by distribution growth through new store openings and expansions, augmented by mid-single digit same location sales growth.

An operating margin of over 37%, resulting in operating income dollar growth of at least 25% over FY '05 levels. Interest income of about $20 million will add to EPS this year. However, two factors will somewhat moderate the growth on the EPS line in 2006. First, a higher share count brought about by option exercises, and secondly, a higher tax rate, rising to about 38%, due to the fact that incremental taxable income will be taxed at our highest rates. Including these factors, we expect to generate EPS growth of at least 24%, which will produce earnings per share of at least $1.24 compared with the analyst consensus estimate of $1.21.

Separately, we expect CapEx to rise to about 120 million in FY '06 with the increase from the 95 million in '05, primarily due to our capitalizing on some outstanding real estate opportunities, both here and Japan. We will also be investing in our corporate facilities here in New York, where we have a long-term lease, as well as our distribution center in Jacksonville.

As Lew noted, we'll be opening approximately 30 new U.S. retail and factory stores, and continuing our North American expansion programs. In Japan, we will be opening more than 10 new locations, potentially including at least one flagship.

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 the 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 all, for your attention, and now Lew, Andrea and I will be happy to take some questions.

We will now begin the question and answer session of today's call. [OPERATOR INSTRUCTIONS] Our first question comes from Bob Drbul of Lehman Brothers. Please go ahead.

Good morning.

Good morning, Bob.

Good morning, Mike. Two questions. First one, Lew, can you talk a little bit more, elaborate more on the, some of the geographical differences that you're seeing, on how the consumer is responding to your product, you know, specifically Japan versus what we're seeing here in the U.S.?

Well, first, in Japan, we're experiencing a broad-based growth in all markets, and as you know, we're primarily focused on market share. So we've had very substantial increases in real estate and where we have experienced the increases in real estate, we've had the most outstanding growth.

In the U.S., where the market is more developed, what we found during the spring and actually into the summer as well is that the strongest regions, not surprisingly, are Midwest, Texas, Northwest, and the South for us, and these markets are relatively underdeveloped, compared to the rest of our market and also are the fastest growing markets in the U.S.

Okay, and then one quick question on the-- now that the CJI transaction is completed, Lew, what are some of the initial changes that you have made or are making, that you expect to have an impact starting this year?

Well, I think it's going to be less transparent to investors than it will be to us here at Coach. First, we're focusing on organizational infrastructure and only because of the purchase of the remaining 50% of Sumitomo's share that is, Sumitomo's share, were we able to bring in a Chief Operating Officer, as an example and our intention is to build our business processes organization and decision-making capabilities in Japan, to support our goal of doubling the business over the next three to four years.

Great. Thanks, Lew.

You're welcome.

Thank you. Dana Telsey of Bear Stearns, you may ask your question.

Good morning. Congratulations, everyone.

Thank you.

Thank you.

Can you talk a little bit about the complexion of the comp traffic, conversion, what you saw average transaction size, and how you are doing with the Special Edition and Limited Edition product, where that goes, and also on the minority interest, that was a little bit lower than expected. Was that due to anything with the timing of Sumitomo or how did it all work? Thank you.

Mike, why don't you take the second part first.

Okay, yes, on the minority interest, Dana, as you know we had guided to levels lower than FY '04, largely driven by the 'Play for Peace' concert that we undertook this year, and did not have a comparable in the prior year.

In addition to that, there were certain one-time expenses associated with the buyout that we did move into Q4 expenses, which also caused the minority interest to come to just basically very close to flat, at about 100K positive.

With regard to the complexion of our same-store sales, we were very pleased, again, in Q4. What we found was it was led by ADT, but strongly followed by improvements in conversion with our traffic at approximately the prior year's level. So very healthy growth in same-store sales.

Relative to special product, under the broad definitions which we use, which includes novelty and Limited Edition product, we experienced very substantial growth. Special product totaled about 16% compared with 7% in the like period for the prior year.

But on a more subtle basis, and we're going to be actually focusing more on what we're referring to as Special Edition product, which is product that is at least priced 30% higher than the like product that we offer, it increased from about 1.5% to 3%. We think there's a very large opportunity, particularly among our top tier customers, to grow this higher-priced product assortment, and, again, these products, while 30% higher than our average assortment, are markedly lower than the like product offered by the European luxury brand, so still representing great value.

And number of store expansions in fiscal '06 compared to '05?

I believe it's about equal. Mike--

Essentially flat.

We had four carry-overs.

Okay.

From FY '05 to FY '06, Dana, which Lew enumerated.

Just lastly, factory stores did awesome, when do you anniversary the exclusive design team that came to factory stores, and what are you seeing there, anything different from factory stores versus full-priced stores?

In terms of what-- in terms of designing category teams, they have been in place actually for about 18 to 24 months, and as you know, it takes 6 to 12 months to work ideas through the system.

What we're most excited about is that 75% of the product that we make exclusively for factory is doing extremely well, and it takes two parts, about 25% is product that is remanufactured for factory, and the other 50% is product that is exclusive to factory and that product is doing extremely well, and as we said earlier in our press release, the momentum throughout all of our businesses, including factory, continues through July. So we're experiencing higher, substantially higher traffic, higher ADT, and excellent conversion.

Thank you.

Thank you. Your next question comes from Margaret Mager, Goldman Sachs, your question please.

Hi. I think that was Margaret Mager.

Can you hear me?

Yes, Margaret, we can.

All right. Can you-- you talk about Lew, the factory outlets being a significant growth opportunity.

Yes.

Can you just talk about what you see as ultimate potential for store count in the factory outlet channel, and how do you see the growth unfolding there, is it really just a same-store sales story, or is there a significant square footage opportunity, or unit opportunity? Just if you could frame that a little better looking out forward.

And then did you comment on how you see your average selling prices shaping up for FY '06, and how that compared to whatever increase you got in AFPs in FY '05? Lastly, a clarification question. Mike, did I hear you say that same-store sales, as you reported them for 4Q, did not reflect the 53rd week, but the total revenue obviously does. Can you clarify that, thanks?

Very quickly, that's exactly right, Margaret. The comps were done on a 13 to 13 basis, but total dollars were of course were 14 to 13.

Okay. So that would explain why the spread looks the way it does.

Exactly right.

Okay, thanks.

First, broadly speaking with regard to factory stores, we see the opportunity largely within our existing centers, and of course you led a group to visit Woodbury Commons, and you saw what we can do, when we expand an extremely high performing location. So we expect over the next few years for relocate or expand in place, a significant number of our approximate 80 factory stores.

In terms of new locations, I think our formal plans show about 15 more locations over the next three years and we think, we think that the account should be about 100 three years from now, but with regard to square footage expansion, I think you'll see a greater increase in square footage expansion.

For us, the biggest opportunity is to leverage the vibrancy of the channel, the strength of the Coach brand, the marketing and merchandising initiatives that we have under way, and as you well know, the factory store consumer is a discount-oriented consumer. She is truly different than a full-priced consumer. She's ten years older on average. She has the same household income, but much less discretionary income, because she has on average over two children, and she's primarily a professional mom now, and that value-oriented consumer continues to seek us, out and as I said, the discount sector is really growing rapidly and it's our equivalent of a diffusion brand.

With regard to AUR and ADT, we expect during this year, in general ADT to go up about 10% during the course of our FY '06.

And what was the FY '05 average selling price increase?

Approximately 10% for the full year.

So you layer 10 on top of 10?

Correct.

Okay. Not bad. One question on competitive environment, any changes of note from your perspective? I had a couple questions come in regarding Kate Spade, and the announcement that their new owner is going to back more store openings.

We don't see much difference in the landscape this fall than we did last fall, except that some of the brands that experienced very strong gains last fall, domestic brands, are having challenges anniversarying them.

Okay, good. Thanks, Lew.

You're welcome.

Thank you. Mark Friedman of Merrill Lynch, you may ask your question.

Thank you. Good morning, everybody. Great job on the quarter.

Thank you.

Lew, I was wondering, two things. One, rest of Asia, now that you have full control of Japan, any changes to your approach to expanding into Asia more aggressively? And I was just curious, beyond the strength in handbags and related items such as iPODs and charms, any other segments that you see as kind of accelerating in 2006, so that you'll be placing additional focus on? Thanks.

Well, first, in terms of Japan, as we've said before, we believe that our Japanese team has a lot to focus on. Our business tripled there over the last few years, and we're looking to double it again over the next four years. So the emphasis, as I said, before is to strengthen our infrastructure, business processes and decision-making capabilities within Japan. It will provide during the post LRP period, the opportunity to leverage the organization across Asia, but at the moment and during our LRP period, we plan for them to focus on Japan.

So no real changes in our thinking about Asia, except that we are looking at greater China in a more serious way, even though we think the opportunity, meaningful opportunity is post-2010.

Relative to product mix, our destiny lies in our ability to continue to grow our bags and accessories, and we've been doing that consistently. We enjoy the highest level of predictability from these categories, the highest level of consumer loyalty, highest amount of distinctiveness.

So I think you should not be surprised if we continue to see bags and accessories growing at a faster rate than the rest of our business, but having said that, we're enthusiastic about some of the peripheral product that we're offering, such as eyewear, scarfs, shoes, and the like.

Thank you. Our next question comes from Neely Tamminga of Piper Jaffray. You may go ahead.

Great, thanks. Just a couple questions for you, Lew, and a follow-up with Mike. Can you give us a sense in terms of special product for '06, what we should be looking for, if it went up to 16 versus 7 last year, what sort of penetration of special products should we be looking for in this next year, and maybe speak specifically to holiday.

Okay. Well, first, under the same definitions that we expect special products to rise to about 20%, and within our Limited Edition product, we expect that to rise to 5 or 6% from 3%.

In terms of our holiday, as I said during my remarks, we're excited about our entire offering, everything from the new duffels, to the beaded gallery totes, to our capsule collection, for baby, to the charms, to iPODs. We have a very robust offering and feel quite good about it.

Great, and, Lew, can you guys-- as much as you guys have been able to spend your cash and a very smart purchase to buy Sumitomo's interest, you're still amassing cash here. Any thoughts to what your priorities for this use of cash might be?

I'll take that one. First and foremost, it's to reinvest in the business and execute our proven strategies and, through store and distribution growth. Secondly, you heard me mention in the prepared remarks about CapEx spending. We're also looking to further invest in infrastructure in our corporate facilities and modernize them both here and in New York.

We're very excited about what we're planning to do in the distribution center in Jacksonville in the coming year where we are going to significantly increase capacity that will allow us to continue to operate in North America from one DC for the foreseeable future, so that's money very well spent.

Our next priority is to be an opportunitistic buyer of the stock. You all will recall that in May, the Board of Directors reauthorized another $250 million for a stock buyback plan, so we have that available to us.

So beyond that, though, the business is operating exceptionally well, and we're generating cash. We spent $265 million on that buyback program in fiscal '05, buying nearly 11 million shares at a price just over $24, a very nice investment for us. So we'll look to continue to do that going forward.

It's a high class problem to have, Mike. It's a high class problem to have, all that cash. And then can you follow up real quick on sourcing opportunities for '06, I mean that certainly has been benefiting you here in '05. What should we be looking for in '06 on the P&L?

We'll continue to do the blocking and tackling throughout the supply chain. Opportunities exist in areas around potential counter-sourcing in things like hardware and fabric, but the fact of the matter is that the opportunities are modest, but moving forward we'll continue to do that blocking and tackling in the supply chain, and we'll continue to see some improvement there.

Our real margin expansion opportunity is going to come from the SG&A line, and one dynamic that we have, I thought would be worth talking about, is the rapid growth in the success of the factory channel that Lew was speaking to earlier, is going change the dynamics slightly on the P&L.

We're seeing increased profitability out of that channel, driving operating margin increase, but it will have an impact of lowering channel mix impact on gross margin, but drive overall operating margin improvement.

Great. Thanks. Great job, and good luck.

Thank you.

Thank you. Jeff Edelman of UBS. You may ask your question.

Thank you. A few follow-up questions on the average ticket. One, do you have enough data on your comparable stores now to give us a sense of what's happening to the average ticket in Japan?

Only in the most approximate way. I believe that the average ticket in Japan is up mid-single digits, as compared to close to 10% in North America, and that's because of, that's because of a dramatically increased penetration of small leather goods. As we get larger space and are able to devote more real estate to the very profitable range of money pieces, wristlets that we have. In addition, there's less limited product in Japan than there is in North America at the moment.

Okay, and then secondly, the factory outlets, are they seeing more than a 10% increase, or are they in-line with the full price stores?

It's in line with the full price stores.

Okay, and then finally, the outlook for the first calendar-- second calendar half of average price?

We-- it's about 10%.

Okay. Great. Thank you.

You're welcome.

Thank you. David Schick of Legg Mason, you may ask your question.

Hi, good morning.

Good morning.

Lew, you talked about new usage occasions, and you've talked about that in the past, and I think you've mentioned women's work bags as an opportunity. How does that look going into '06 and '07, where are new usage occasions, and that effort going to take you?

Good question. First, part of looking at new usage occasions is to look at getting our rightful share in certain areas, as well as to grow segments, so one significant opportunity for us is in the whole area of business totes, and what we're finding is that women in the workplace are increasingly migrating away from either no-name bags or traditional briefcases, looking for seasonal totes to accent their wardrobe, and we plan to be there for them and that's a very large opportunity for us.

I touched also earlier on Baby, certainly baby bags are an opportunity for us, and what we broadly envision for us ourselves, which is occurring, is that we see ourselves as a very strong destination location for target consumers who are looking for accessories.

So regardless of the usage, we see the consumer coming to us, whether she is looking for casual bag, and certainly with regard to evening with the strengthening of our Madison collection, we will have a much broader assortment of bags that are suitable for special occasions. So we see growth occurring in all segments.

Great. Thank you.

You're welcome.

Thank you. Christine Chen of Pacific Growth Equities, you may ask your question.

Congratulations on another great quarter. Most of my questions have been answered, but just some housekeeping. What was ending square footage and depreciation and CapEx?

Ending square footage for full price was 490,000 square feet. Factory was 252,279 square feet, for a total of about 742,000 square feet. And you asked about depreciation and amortization for the full year. That was 55.568 million, Christine.

13.9 for Q4.

And CapEx?

CapEx spend for the quarter was 31 million, and for the full year, about 95.

Okay, and just wondering if the Federated/May impact, merger has any impact on you guys one way or the other?

Diminimus.

Okay. Thank you.

You're welcome.

Thank you. Our next question comes from Pauline Reader of Thomas Weisel Partners. You may ask your question.

Hi. I was wondering if you could comment on the transaction growth for the lower price point bags, and how that compares to your, to the higher price point bags?

Well, first, in general, the lower price point bags that we're introducing light bags across all of our spectrum do enjoy more sophisticated make, a combination of more materials and workmanship, and as a consequence, the AUR is growing, but at a slower rate than the average, and more pointedly, we're focused on maintaining very strong entry price points for the aspirational consumer, or the very value-oriented consumer.

So when you visit a Coach store, you will still see Pouches and Demi bags at prices, that were available last year or the year before. There will just be fewer of them.

But-- sorry. How are the transactions growing? If we assume 10% is for the average ticket in '05 and the balance is for transactions, how does that look by price bucket?

I can only say approximately it would be the same.

Okay. Thank you.

No noticeably different trends.

Thanks.

Thank you, everyone. The market is now open, and it's our tradition to end the call once the market is open. As you know, I am available as well as Mike Divine for follow-up questions after the conference call ends. Thanks, everyone, and have a great day.

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