掛毯 (TPR) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, 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 and Corporate Communications 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; Mike Devine, Coach's CFO; and Mike Tucci, President of North America Retail, will also be joining us.

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. Future results may differ materially from our current expectations based upon risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences or control costs. Please refer to our latest annual report on Form 10-K for a complete list of these risk factors. Also please note that historical growth trends may not be indicative of future growth.

We presently expect to update our estimates each quarter only, however, the failure to update this information should not be taken as Coach's acceptance of these estimates on a continuing basis. Coach may also choose to discontinue presenting future estimates at any time.

Now let me outline the order of speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our first fiscal 2006 results, and we'll also discuss our strategies, going forward. Mike Tucci will review our key initiatives for the holiday season, Mike Devine will conclude with details on financial and operational highlights for the quarter as well as our outlook for the second quarter and full fiscal year 2006. Following that, we will hold a question-and-answer session that will end by 9:30 a.m.

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

Thanks, Andrea, and good morning, everyone. As you know, we have once again announced excellent top-line growth and even stronger bottom-line results of 30% and about 50%, respectively, for the quarter just completed.

Our quarterly results are especially impressive when you consider that we have achieved exceptional double-digit sales growth in the first quarter of each of the last four years -- up 28% in '03, up 34% in '04, up 33% last year, and now up 30% in '06 for a four-year CAGR of over 31%, as sales have tripled.

As most of you know, during the last several years, we have established a lane between the moderate segment and the old luxury accessory brands, which we termed "accessible luxury." This positioning coupled with our brand and business equities is Coach's competitive advantage yielding staying power, more predictable results, and increasing productivity.

Some highlights of our first fiscal quarter were -- first, net income rose 48% to $100 million, or $0.26 per share compared with $68 million, or $0.17 per share in the prior year. Including the impact of stock option expense, net income rose 53% to $94 million, or $0.24 per share compared with $61 million, or $0.16 per share in the prior year.

Second, net sales totaled $449 million versus $344 million a year ago, a gain of 30%.

Third, direct-to-consumer sales, which now include sales generated by Coach Japan rose 29% to $315 million from $244 million in the prior year.

Fourth, U.S. same-store sales for the quarter rose 25.1% with retail stores up 14.4% and factory stores up 35.8%.

It is worth mentioning that in U.S. retail we have achieved a double-digit comp in the first quarter in each of the last four fiscal years -- 21% in '03, 29% in '04, 17% in '05, and now 14% in '06. On average, our retail stores are twice as productive than they were just four years ago.

Finally, sales in Japan rose 24% in constant currency driven by new stores, expansions, and mid-single-digit retail comps as we continue to rapidly grow our market share.

During the quarter we opened six U.S. retail stores including two in new markets for Coach -- Wilmington, Delaware, and Memphis, Tennessee, as well as three factory stores. In addition, we expanded three U.S. full-price stores -- Copley Place in Boston, White Plains in Westchester, and a store in Scottsdale, Arizona. Thus, at the end of the period, there were 199 full-price and 85 factory stores in operation.

In Japan four locations were added while one was expanded. At quarter-end there were 110 total locations in Japan. Indirect sales, which now exclude sales generated by Coach Japan increased 34% to $134 million from $100 million in the same period last year. Results were primarily driven by strong gains in U.S. department store and international wholesale sales. In fact, U.S. department store results at PoS continued to be excellent despite continued sluggish overall channel sales, running up about 30% at PoS last quarter.

Most broadly, we once again effectively executed our growth plans and realized company-wide performance that outpaced our stated goals. Not surprisingly, we remain confident in our ability to sustain our growth and deliver excellent results over our planning horizon.

We were particularly delighted with the continued momentum of Coach U.S. retail stores, which enjoyed increases in average ticket and traffic. Results are now full-price businesses, both Coach retail stores and U.S. department stores continued to be driven by the monthly flow of fresh and relevant product, notably handbags and women's small leather goods. Our U.S. factory store business remained remarkably strong this quarter, even in the wake of higher gasoline prices given the vibrancy of the Coach brand, the appeal of the Coach product, our exceptional value, and the continued relative strength of premium factory centers.

We were also very pleased with the performance of Coach Japan this quarter, its first as a wholly owned subsidiary where sales rose 23% in dollars and 24% in yen as our market share continued to grow rapidly. Clearly, this emphasis on distribution growth is working given the sales gains we are continuing to achieve while rapidly growing our footprint. Last quarter our growth in Japan was fueled primarily by distribution through both new stores and expansions augmented by mid-single-digit, same-retail location sales gains.

Finally, as always, we were particularly pleased with the significant improvement in operating margins. While Mike Devine will get into more detail on our financials, I wanted to give you this recap and tell you how pleased we are with Coach's first quarter performance.

As you know, I've asked Mike Tucci to also join us today to discuss our product performance for Q1 and our holiday sales initiatives. Mike.

Thanks, Lew. As mentioned in our release, our transitional and fall offerings were remarkably successful across all categories and collections. We began the quarter with Hampton's Weekend offered in a new fall palette, which also featured a great signature scarf print version for the first time. Also in July we brought back an updated Soho collection in leather, suede, and mini signature, which included novelty studded and ocelot styles. In August, the Chelsea handbag group, offered in leather, Nubuc, and Optic signature was very well received. In September, our popular Hamptons collection returned for a sixth season and performed strongly across all fabrications -- leather, suede, and signature as well as a stripe application on our classic signature fabric. This fall the collection also included a stylish update on the carryall, which was particularly successful, actually selling out in certain sizes and colors.

Throughout the quarter we were extremely pleased with consumers' response to our more sophisticated Silhouette and luxurious materials, as Limited Edition styles sold extremely well at higher price points. Examples of Limited Edition styles, which blew out and speaks to the ongoing opportunity to selectively trade up our average retail in handbags include the Optic signature chenille tote at $598, the signature python striped satchel, and the Soho studded flap satchel, both at $498. More broadly, a key driver of our success in Q1 was a planned shift in color selling from brights; that is, pinks and greens, to more neutral shades such as warm browns and khakis.

For holiday, building on this shift in the marketplace, you will see a broad range of neutrals complemented by pops of reds as well as a stronger patchwork statement. In addition, many of our items will offer stylish embellishments such as metallics, fur, and beading, which are particularly suitable for holiday gift-giving.

We are excited about the 10 key concepts and items that we will have in place for holiday. Collectively, we estimate that they will represent over 60% of our business in the second fiscal quarter. They are -- one, duffels, launched on 10/1. Leading the list, these great new takes on the duffel were inspired by iconic Coach styles and reinterpreted into modern, sophisticated Silhouettes. They are offered across multiple core fabrications with new hardware detailing and include a Special Edition patchwork and Limited Edition shearling version.

Two, gallery totes, also launched on 10/1 -- already a success, this group also includes stylish beaded series in classic signature and suede, which have new details, colors, and treatments, including fur trim.

Three, holiday patchwork, which is launching later this week -- a perennial favorite, this year's sophisticated take on patchwork will include touches of metallic and ocelot, will be available across a range of handbag silhouettes, including totes, duffels, demis, and in a wristlet as well.

Four, Madison, also launching this week -- Coach's lifestyle evening collection will return after its successful debut last year. It includes handbags, accessories, hats, scarves, gloves, shoes, and outerwear. This collection will be fabricated in satin, chenille, Lurex, and mink with some styles accented with crystal and velvet details.

Five, ski, coming later this week as well -- made of a quilted satin fabric with a subtle interpretation of the iconic C, these bags will be available in select hobo silhouettes and wristlets and have a soft, relaxed feeling with fur trim that adds an element of luxury.

Six, Soho small hobo and small-flap hobo -- these consumer favorites are among our best-selling bags and will be offered in a range of fabrications and colors from mini signature to metallic.

And on the accessory front, seven wristlets offered in core and novelty fabrications at a wide range of price points.

Eight -- wallets offered in multiple colors and fabrications including metallic. A great item for gift or self purchase.

Nine -- watches, which feature the popular gallery interchangeable bezel model, along with new watches, which offer diamond accents or alligator and lizard straps.

And, 10, cold weather, including scarves offered in a range of colors and great novelties and gloves in neutrals and brights featuring proprietary hardware such as the Soho buckle and grommets, the perfect cold-weather gift.

A great group of novelty accessories will complement our key items for holiday including letter charms and iPod cases. Already introduced, these were instant successes. Beyond our key 10 holiday statements, we are capitalizing on seasonal and niche opportunities through our Resort and Coach Baby offerings, which will launch in December, and which will also be featured in our gift guide.

First, Resort will feature appliquéd signature carryalls and suede-trimmed duffels, a new edited tote and accessory group featuring a whimsical bubble print and learning from last year's assortment, which identified an opportunity for leather within Resort will offer a leather and suede group of soft hobos offered in metallic and soft pastels.

And, second, Coach Baby is a niche offering, which includes 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.

As always, our holiday floor set will be installed on the Monday before Thanksgiving with special attention given to clean and bold presentations of the key item holiday statements and items. A front table change in all stores will take place in early December to coincide with the launch of Resort.

On the marketing front, our expanded holiday catalog featuring the World of Coach, will be in home in early November and will include our Resort collection. We are also very excited about our expanded gift guide, which goes from 16 pages last year to 24 pages this holiday. It will be in-store before Thanksgiving and will include mail distribution as well, a change from the prior year. This piece is an important selling tool for our store teams and also will be put in each consumer's shopping bag with her purchase. As always, it will highlight the key concepts and items we have in place for holiday.

And, finally, on the in-store experience, as you know, Coach services and initiative we began implementing last year -- it is intended to enhance our consumers' in-store experience and ultimately drive conversion. This comprehensive training program teaches interactive selling and engagement techniques to our sales associates. For FY06 the program has evolved focusing on new opportunities to deliver consistent customer service.

In Q1, we introduced Client Track, essentially the next phase of Coach service. This automated online journal keeps track of customers and their profiles including contact information, bag style and color preferences as well as special requests. Client Track also helps the store manager facilitate the timely follow-up of customer request, such as new items in store, arrival of out-of-stock items, in-store events, and gift-giving occasions, enabling the store manager to monitor customer requests and reach out to her beyond the four walls of the store.

This fall we introduced Smart Scheduling to aid store managers in identifying key traffic opportunities we call "peak days" and "power hours," and effectively scheduling the right sales associates on the selling floor at these peak selling times. Essentially, this means that our store managers will be getting more detailed sales and labor forecasts as well as projected traffic patterns earlier in the season than in prior years, allowing them to hire for each store's holiday staffing requirements up front, and for the first time using our new Shopper Track system during the holiday season, store managers can access real-time hourly sales, traffic, and conversion data to better impact labor allocation during shifts.

For holiday, we'll take key Coach service learnings and operational best practices from last year to improve upon our customer-centered and operationally efficient in-store experience. These include, one, an enhanced service leader role and use of daily coverage tools to support Smart Scheduling; two, the use of Client Track to support gift-giving through customer follow-up and in-store wish listing; and, finally, three, the introduction of our multiple gifting initiative as part of our Coach By Special Request program to better service our customer purchasing multiple quantities.

Simply put, our objective this holiday is to leverage our PoS transaction speed with improved service and operating standards to move the lines through the store faster. Naturally, many of these initiatives introduced for holiday will continue afterwards.

With that, I will return the discussion to Lew with our over-arching strategies. Lew.

Thank you, Mike. Within an ever-changing environment, Coach remains true to our proven formula for success. We continue to stand apart from the competition based upon our five touchstones -- distinctive brand, leadership position, loyal consumer base, multi-channel international distribution, and our focus on innovation and the consumer. Our strong and seasoned management team, relevant and exciting product supported by our dynamic global supply chain continues to sustain our unique position in the marketplace.

The Coach brand has never been stronger nor has our proposition ever been more vibrant, thus positioning us to capitalize on the abundant growth opportunities ahead of us and to achieve continued excellent financial results in the years ahead.

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

Our second strategy is the continued rapid growth in U.S. retail. We plan to add 100 U.S. retail stores over the next four to five years, bringing the retail store base to at least 300. During FY06 we intend to open about 25 new retail stores, which will include eight new full-priced markets for Coach -- Wilmington, Delaware, and Memphis, Tennessee -- two stores we opened already in the first quarter. The other six will be stores in Oklahoma City; Naples, Florida; Albany, New York; Reno, Nevada; Fresno, California; and Omaha, Nebraska. In keeping with our strategy to expand our most productive locations, we will be expanding at least six U.S. retail stores in FY06. These expansions will add a total of about 9,000 additional square feet, or about 2% to our total full-price retail space.

In addition, we are also planning on opening three more factory stores in FY06 and expanding five outlets given the tremendous success we have experienced through our Woodbury Commons store expansion, which we discussed during our last conference call.

Separately, I wanted to mention how excited we are about the two flagship openings coming up in November -- Rodeo Drive in Beverly Hills and the new 595 Madison Avenue store here in New York. As you know, we view our flagships as grand statements or beacons for the brand conveying the essence of Coach in the lifestyle environment. We appreciate that flagships actually advance consumers thinking about the brand by allowing us to showcase the entire world of Coach.

These two high-profile flagships convey a strong sense of American luxury. We've used a combination of natural and raw materials to create a sophisticated yet inviting and unique environment. And, third, outside the U.S., we are continuing to rapidly grow market share with the Japanese consumer from about 8% this past year to a goal of 15% during the next four to five years. We are driving growth in Japan primarily by opening new retail locations and by expanding existing ones.

Overall, we expect that we could eventually have a total of at least 140 Coach locations in Japan across the same multi-channel distribution model that we have established in the U.S. During this fiscal year, we now expect to open about 12 new locations in Japan, including one flagship located in Kobe, which we currently plan to open late in the fourth quarter. Also, we plan to expand about 10 of our most productive shop-in-shops adding nearly 7,000 square feet, or about 4%, to our retail base. Overall, in FY06, we expect CJI constant currency sales to increase at least 20% from FY05 as we continue to gain share.

Our increases will primarily come from distribution growth with mid-single-digit comps expected for the year.

And, lastly, of course, we continue to have an overall focus on improving the rate of profitability so that our bottom line results continue to 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 Devine, our CFO, for further detail on our financials. Mike.

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

As mentioned, our quarterly revenues increased by 30%, direct-to-consumer, which now includes CJI and represents about three-quarters of our business was up 29%, and our indirect segment was up 34%. Net income for the quarter before option expense increased 48% to $100 million, or $0.26 per share as compared to $68 million, or $0.17 per share in the year-ago period. Results for the first quarter were ahead of the consensus estimate of $0.25 per share. Including after-tax option expense of about $7 million in both periods, net income for the quarter increased 53% to $94 million from $61 million a year ago.

It should be noted that option expense on a per-share basis in both quarters was flat at just under $0.02.

Our operating income before option expense rose 40% to $156 million in the first quarter versus the same period last year. Operating margin on this basis in the quarter was 34.8% of sales compared to 32.5% in the year-ago quarter. Including option expense in both periods, operating income rose 44% year-over-year, and the operating margin expanded 310 basis points from 29.2% of sales to 32.3%.

In the first quarter our gross profit margin expanded by 100 basis points over the comparable period of the prior year, from 75.0% to 76.0% of sales. There are two primary contributors to this quarterly improvement. First, the positive impact of product mix driven by increased penetration of higher margin, Limited Edition, and mixed material collections and, second, our sourcing cost initiatives.

Selling, general, and administrative expense ratio before option expense declined 130 basis points in the quarter and represented 41.3% of sales versus 42.6% for the year-earlier period.

The decline in the quarterly rate was the result of achieving leverage in all aspects of our business. All selling units taken together saw their year-over-year spending rates decline as we continued to leverage the top line in our centralized functions. Including option expense of about $11 million pretax both this year and last year, the SG&A expense ratio declined 210 basis points to 43.7% of sales from 45.8% in the year-earlier period.

Inventory levels at October 1, 2005, were $215 million, up about $11 million from $204 million or about 5% above prior-year levels. As our supply chain improvements and inventory management program allowed us to support 24 net new North American stores, six net new CJI locations, and substantially increased sales levels with minimal additional inventory investment.

Accounts receivable balances rose approximately $19 million, or 23%, driven by the strength of our U.S. wholesale business. Our balances continued current and day sales outstanding remain very well controlled at 34 or about flat to last year.

At the end of the first quarter, our cash and marketable securities position stood at $539 million, about the same as prior-year levels as a result of free cash flow driven by significantly higher net income and option exercises. This was offset by substantial stock buybacks and the cash used to buy out Sumitomo's interest in Coach Japan, which, together, totaled about $500 million.

Our balance sheet remains essentially debt-free at quarter's end.

As we mentioned in our press release, the company repurchased and retired 921,000 shares of common stock at an average cost of $32.54 during the first fiscal quarter. At this time, approximately $220 million remains available for future repurchases under the recently expanded program, which expires in May of 2007.

Net cash from operating activities in the first quarter was $54 million compared to $43 million last year during Q1. Free cash flow in the first quarter was an inflow of $32 million versus an inflow of $27 million in the same period last year, primarily due to higher net income. Capex spending, primarily for new stores and renovations, was $22 million versus $17 million in the same quarter a year ago.

Now I'd like to provide you with some of our goals for fiscal 2006. For the second fiscal quarter we are targeting net sales of at least $645 million, representing a year-on-year increase of at least 21% with comparable store sales gains of at least 10% in both the U.S. retail and factory channels and mid-single-digit comparable location sales growth in Japan. Operating income, both before and after option expense, up at least 24% year-over-year. Option expense in the second quarter is expected to total about $0.02 per share yielding earnings per share of at least $0.45 before option expense versus the analyst consensus of $0.44 a share and at least $0.43 after option expense, an increase of at least 32% both before and after option expense.

Our current goals for the full fiscal year 2006 are -- net sales growth of about 23% to $2.1 billion with at least 10% comparable store sales gains in both the U.S. retail and factory channels in all quarters and a total sales increase in Japan of at least 20% in constant currency, which would translate to sales of at least 47.5 billion yen; Japan sales are expected to be driven primarily by distribution growth through new store openings and expansions augmented by mid-single-digit same-location sales growth; and operating margin of well over 37% before option expense or about 34.5% including option expense as compared to 33.5 on the same basis in fiscal year '05; operating income dollar growth of at least 26% from FY05 levels both before option expense and including it; interest income of about $28 million will add to EPS this year.

However, two factors will somewhat moderate that 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 38% due to the fact that incremental taxable income is being taxed at higher rates.

Including all of these factors, we expect to generate EPS growth of at least 28%, which will produce earnings per share, before option expense, of at least $1.28 compared with the analyst consensus estimate of $1.26. Including option expense of about a dime, similar to the percentage impact in FY05, we are projecting EPS of $1.18 per share, up at least 28% from the $0.92 per share reported on the same basis in fiscal year '05.

Separately, as mentioned on our August earnings call, we expect capex to rise to about $120 million in FY06 with the increase from the $95 million in '05 primarily due to our capitalizing on some outstanding new-store real estate opportunities. We will also be investing in our New York corporate facilities where we have a long-term lease as well as in our distribution center in Jacksonville, Florida.

We will be opening approximately 30 new U.S. retail and factory stores and continuing our North American expansion program. In Japan, we will be opening an estimated 12 new locations including a flagship location in Kobe.

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, everyone, for your attention. And now Lew, Mike, Andrea, and I will be happy to take questions.

[OPERATOR INSTRUCTIONS]

Bob Drbul from Lehman Brothers.

A couple of questions. First, Lew, as you look at the macro environment heading into holiday, do you have any concerns that you guys are really focused on throughout the different channels that you participate in?

First, Bob, as you know, we offer everyday excellent value, and we work hard to provide a diversified range of product at all price points so that even the value-oriented consumer can have an opportunity to enter the Coach franchise or purchase of product. So we think we're extremely well positioned for the holiday in all of our channels.

And, Lew, when you look at average ticket this past quarter -- traffic trends, this past quarter -- can you talk about that a little bit and what your expectations are in the outlet channel as well as the full-price channel for the holiday season?

Sure. As we indicated, our same-store sales were driven by a combination of higher-ticket and higher traffic, that's in full price, and we believe that will continue for the holiday season. Similarly, in factory, the trends that we had in the fall are continuing this quarter where we are enjoying higher traffic, higher ticket, and we think that, again, these trends will not change.

Dana Telsey from Bear Stearns.

Good morning and congratulations, everyone. Can you talk a little bit about Special Edition products, Limited Edition product -- where is it now as a percent of sales? Where do you see it going? And do you see any of the price points changing there? And also can you talk a little bit about Japan, and you had mentioned earlier about business processes, given the hiring of the COO, how is that doing and what do you see average pricing doing in Japan also? And then just, lastly, can you talk a little bit about the factory outlet channel and differentiated product there -- how that's performing and what you're seeing in average price? Thank you.

Okay, let me ask Mike Tucci to answer the first and last part, the first part being around special product, and the last part being around factory and what we're seeing there.

Sure. Good morning, Dana. Special Edition, we actually had a very strong quarter in Q1. When we look at Special Edition across handbag and women's accessories, where we focused on developing that product, it represented about 16% of our total sales versus 10 from a year ago, slightly higher than where we had planned it. And within that, Limited Edition, which really speaks to the higher price point handbag opportunity at 498 and 598, was 4.6% this year versus 1.3 last year -- so a very strong performance there in the Limited Edition portion.

On the factory side, we really feel good about our product assortment there. We hit, in terms of the composition of inventory there, we hit 70% of our total sales in what we call "made for factory" product and about a third of that was in what we would call "made for factory" exclusive; that is, styles that have been designed specifically for the factory channel and, clearly, that 70% overall number drove comp, ticket, as well as significant margin improvement in the factory channel. You know, we were less promotional there this quarter than we had been last year.

Great, and then Japan?

First, in terms of our prices in Japan, prices on average -- the average transaction is up about mid-single-digits. We are tracking well there, and, as we indicated, our business is quite strong in Japan and just as an aside, Dana, the one thing that's also very encouraging in Japan, which we've noticed in our first quarter is a list in overall luxury sales and accessories, and we're hopeful that that trend is going to continue because it would mean that the category will begin to become more resilient, which will offer us an opportunity to grow within a growing category as opposed to just taking market share. So we're hopeful there.

In terms of business process, as you know, we are looking to elevate our business processes in Japan to the level that they are in the United States. So we are working rapidly to implement, over the course of this fiscal year, a point-of-sale system in our stores, a new planning and allocation system, and other stops that may not be that visible to us outside of Coach but will enable us to run our business a lot more efficiently.

Margaret Mager from Goldman Sachs.

A couple of questions -- first of all, with regard to the factory outlet channel, just wondering what is the goal there in terms of total numbers of stores, and then could you talk about just the average handbag price? What is it running now versus a year ago, considering that you're factoring in more Limited Edition special type of bags? And then, lastly, if you could talk about the gross margin outlook. It was up 100 basis points. I think most people are starting to think that your gross margins can't keep going up -- if you would talk about your outlook there. I actually have another one -- marketing expenses -- what percentage are they running and what kind of leverage are you getting on your marketing expenses, and then just a general, broad question -- traffic in the malls, Lew. I know your traffic is up in your stores, which is a tremendous accomplishment, given what we're hearing about traffic trends, generally speaking. If you could just talk about the environment that you're working in and how you're attracting more traffic to your stores than we're generally hearing. Thanks.

Sure, well, we'll divide the questions.

Why don't I take the first two.

Hit it.

I think you have five there, Margaret, so I'm going to take the first two.

I actually have a couple more. I'll come back at the end.

I'm sure. Okay, on the factory side, we see two things happening. One, we are targeting about 100 locations in factory over our planning horizon. We're going to be very, very measured there in terms of new-store opportunities. We know the channel very well. We do believe that within our current mix of 85 or so stores, there are significant opportunities to reposition within the best factory centers in a more dominant format, similar to what we've done up in Woodbury. So we're focusing in factory on really maximizing productivity in our best locations that exist and selectively going after new opportunities in the marketplace to about 100.

And then on the handbag side in full price, we're seeing handbag retails hitting about the 255-range at this point in Q1 versus 233 from a year ago -- about a 9% increase. As you know, our handbags business is a driver, it was a primary driver of our comp and productivity increases in Q1, and we do feel like we have a balanced assortment, going forward, for Q2, both at the opening price points, those gift-giving and entry-level price points as well as continuing to find opportunity at the more pinnacle price points that we've spoken to.

Yeah, I'll take the one, Margaret, on gross margin, and while we were very excited about the year-over-year improvement of 100 basis points on that line, we're even more excited about the total margin expansion of about 240 basis points on the operating margin line. And I think it speaks to the overall operating efficiency of the business, I think factory can play a major role in that. On the gross margin line we talked about product mix and sourcing initiatives helping, but below that line, the SG&A leverage that was achieved, even though factory's gross margins somewhat offset the total growth in the quarter, they really helped to drive and deliver total profitability on the operating margin line, which was something we are very excited about.

In terms of the follow-up question, or the second question in the financial area around them, our market spend, we did see leverage there on essentially very similar dollar-spend levels year-over-year in the quarter. We actually picked up significant leverage on what we call our "corporate communications line," which includes our media spend and our outreach to consumers, and I would add while we got leverage spending slightly less dollars, we actually increased our consumer contacts by more than 50% as we used a much more efficient delivery vehicle by using e-mails along the Internet to supplement our mailed creative that we send to consumers in hard copy. So we're very pleased with what happened on that line as well.

Thank you, Mike. Lastly, your fifth thought, Margaret, in terms of traffic and malls, nationally, during the first two weeks in September, there was a fall-off in traffic of about 5% from the rate that it had been trending. We also experienced a relative similar decline, although we were trending positively, so it impacted us much less.

What we experienced since the first two weeks in full prices that our traffic levels have bounced back to the prior levels. However, more generally, mall traffic has not fully recovered nationally. On the factory side, we basically divide the malls into two sides -- two categories. One is premium malls, where we play, and the others. On the premium malls, which are largely malls run by Tanger and selectively Chelsea, what we've noticed is that traffic is still trending positively. They're doing somewhat better than the full-price malls, low single digits. We, of course, are trending materially higher than that.

Okay, thanks, Lew, and congratulations on a great quarter to you and everyone at Coach.

Thank you.

Neely Tamminga from Piper Jaffray.

Great, thanks, and let me add my congrats to the whole team. Hey, Mike Tucci, I have a question for you, and thanks so much for the rundown for the upcoming holiday. That's very helpful. Can you give us a sense in terms of the number of four sets and the timing of them heading into holiday. Are we comparable to last year or do you have something maybe up your sleeve for the extra Saturday pre-Christmas this year for December versus last year? I just have one follow-up.

Okay, it's a good question. We look at it very, very carefully. Within the quarter, you know there's so much activity at retail. We compact a lot of business into December. We all know that post-Christmas has become more important. Our schedule today is very similar to last year. We are advancing our November floor set, which we had planned to do on Monday, the 31st, a week from yesterday to Friday of this week. As I mentioned in our product lineup, we feel like we have an opportunity to catch the weekend here, get our stores set, and go into November very well positioned. We also feel like there's product opportunity with some of the novelty items that are showing in the November floor set. We will do a floor set refresh pre-Thanksgiving. Resort will come in, to be exact, on the 5th of December, and where we have flexibility is we'll always look at how the business is running going into December 26th, and if we have to call an audible and pull goods in early to take advantage of sell-throughs that may be coming in, we will absolutely do that.

We will also refresh the front of the store mid-month in December, which is really not driven with new product, necessarily, but is more of a hard-hitting gifting message that we do on our front table in mid-December, just to put a veneer on the store and freshen up the store.

So, one, we've built in a lot of flexibility to move. We have that flexibility built into our supply chain from a delivery standpoint. Two, it's about equal to last year, and we will do whatever it takes to meet the demand that the consumer puts out there.

Great, and then I just have one quick follow-up for you, Mike, and then a question for Andrea. First, for you -- in terms of the 10 categories that you listed, where would the electronics-related items fall in that. I'm just wondering kind of what your commitment is to the iPod covers, et cetera, for this year.

And then, Andrea, if you can comment on -- have you discussed with First Call what presentation Coach will be having in terms of the numbers? Are you going to be doing including or excluding the options expensing? Thanks.

Okay, on iPod cases -- that's actually a business that I didn't include in the 60% key item target. It is a new business for us in that we are putting iPod cases out in a more meaningful way. We have about 16 customer choices in the store right now for the mini and the original iPod as well as the Shuffle. We've projected it to be possibly a 2% idea with some upside, and we feel good about where that's going early in October. It is a business that we'll build as we get closer to gift-giving.

I also mentioned that we've built in capability into our service commitment around what we're calling "multiple gifting," and the idea there is to take some of these small category items like iPod cases, charms, key fobs, where we see people coming in and requesting multiple units on that. Take that burden off of the store and actually execute that sale through Coach by Special Request, gift-wrapped and sent from Jacksonville, and we believe that iPod cases, charms, small accessories, lanyards, and the like, are perfect opportunities with our gifting strategy.

In terms of First Call, Neely, right now, these seem to be taking the lead with the analysts and 21 out of our 24 covering analysts are reporting pre-option expense. So they have been using those numbers, the pre-option expense, to calculate First Call consensus. My expectation is, as you guys move towards it, and it shifts, they will move to post-option expense, certainly, the first of the year if not before then. So until then, we are going to be guiding you both ways with an emphasis on looking at post-option expense, as that's the way the world is going.

And just as a clarification, Andrea, you guys have not changed your options value model, correct? I mean, the options expense from last year.

[crosstalk] [inaudible]

Jeff Edelman from UBS Securities.

A question on Japan -- how much of the sales now are being generated from comp store sales versus last year? Or how many stores are included in that comp base versus last year? Because, as I remember, there were very few in there last year.

I think it was a significant majority last year, but someone is looking up the --

We're looking it up, Jeff. The number is in the neighborhood of 70 to 80 but give us a moment, and we'll come up with that.

My question is -- what has been the pattern of the store openings? Very, very high volume and then trailing off or high volume, leveling, because just sort of playing devil's advocate here, if one is expanding your store base rapidly, that usually generates above-average comp store sales. Are you getting the same kind of handbag penetration as you are in the U.S. and what's happening to the average selling price of the handbags there?

Okay, well, let me answer the easiest parts first. In terms of our handbag penetration, handbag penetration is running roughly equal to the level in the United States and somewhat higher than on the level in Coach retail stores. It's running about -- close to about 70% in Japan, and that's for new stores and existing stores.

In terms of sales in year two, Jeff, it depends on the nature of the store. If it's a flagship store, we tend to have a stronger first year than we do second year because of the noise and activity around the opening. And then in year three, we recover to the first-year levels. If it's a retail store, non-flagship, or shop-in-shop, it starts at its level and in year two comps very favorably, and it continues to. So it depends on the nature of the store itself in terms of what happens in year two. Mike, do you have some numbers?

Yeah, on our comping store, Jeff, 89, actually, are in the comp of 107 including both full-price and factory stores in Japan.

And last year?

Last year was --

Well, it would have been 18.

Last year was 62 full price were in the base, and 9 factory in the base.

So 18 last year.

Right, okay, good. And just, secondly, again, playing devil's advocate, I assume your sales momentum has not slowed in October based on your comment in the press release?

As you know, Jeff, we don't give exact numbers. Our business is extremely strong, and we're running on plan to deliver an outstanding holiday season.

Okay, so, as usual, your run rate does not necessarily correlate with the at least expectations for the quarter?

We are fairly conservative planners, and you know the history of our actual results against guidance.

I know -- just kidding you. Thanks a lot, good luck.

Pauline Reader from Thomas Weisel Partners.

You commented this quarter and last quarter that most of the growth -- or the comp growth in Japan was coming from an increasingly average ticket. Can you just kind of back up and kind of tell us how that's trended before the last six months and then how you expect that to be for the rest of '06? And then also just your four- and five-year growth targets -- kind of where the comp is going to be coming from. Is it just a continuation of, again, that average ticket increase or are you going to see transaction growth as well?

Okay, well, first, we are seeing transaction growth, and we have in same stores as well as overall, of course. The average ticket is misleading, because unless you break it apart to take into account the shift towards a greater role of handbags relative to overall assortment, you don't really get at the full granularity. So when we talk about an average ticket increase, a very good part of that has to do -- in fact, the vast majority -- has to do with an increase in make as well as a Special Edition product as well as an assortment mix change to greater -- to more greatly emphasize bags.

Okay, so it's fair to say you're seeing a transaction growth in handbags is what you're seeing?

First, are we talking same-store sales?

Yeah, sorry, same-store sales.

Over any extended period, we are seeing an increase in handbags. One of the things in the number of units sold that's over a period of time. We don't look at it every single month. What you're going to notice, though, this holiday season, with the increase in our small giftable items such as lanyards, ID charms, and the like, is a lower level of increase in average ticket, and we're looking to also see an increase in the role that's small accessories play in our overall assortment. So, going forward, we don't expect handbags to increase as a percentage of the total mix.

Elizabeth Montgomery from SG Cowen.

Hi, everyone, congratulations on another great quarter. I have a question about your indirect results. They were a little bit stronger than what we were looking for now, since they don't include Coach Japan, and I wondered if you could parse out the difference between your sales into U.S. department stores and your international sales.

We haven't typically broken that previously. I think we said in our prepared remarks the overwhelming strength of the U.S. wholesale channel where, during the quarter, at PoS, our sales were up 30% over Q1 a year ago -- very strong performance, and that is really what's driving and is the biggest business within that indirect segment. So that is really the most important business unit in that channel. International, though, is exhibiting similar strong growth, both at the register PoS, and also in our shipments to our distributing partners around the world.

What is your share right now of the handbags and accessory sales in the department stores that you sell into?

It's about 20 to 22%.

Okay. My last question was can you just remind us what the key items, including the Resort, made up of Q2 sales last year?

Over 50%.

Over 50?

Yes.

Okay, another small question -- you guys didn't mention the footwear assortment at all. I wondered if there were any plans or any updates on that this quarter?

Just to highlight -- footwear, actually, in the stores that it's in, comped at about 13%. It was about 7% penetration. We feel like the driver behind that was absolutely the boot category, and we're well positioned for boots going into Q2 as well.

In addition, the footwear category -- footwear has performed very well in U.S. department stores also running up in the teens at PoS.

We have time for one more question -- I apologize, and I know I set up CQ all the sell-side analysts after the call. So let's proceed with one more.

Christine Chen from Pacific Growth Equity.

Congratulations on another great quarter. Maybe I missed this, but can you quantify how much average ticket was up?

Full price retail was up about 10%.

And then factory?

Factory slightly below 10%.

Okay, and then the overlap between your factory and retail customer base? I know it's pretty small. Has that changed overall -- changed at all over the last--?

It hasn't. We monitor it monthly, and the overlap continues to be just under 20%.

At this time, it is 9:38. We try to complete these conference calls before the market opens at 9:30. Of course, we'll take your follow-up questions. I believe, as I said, I am speaking to all of you after the call. Thanks for participating and have a great day.

Thank you, that concludes today's conference call. Thank you for your participation. You may disconnect at this time.