掛毯 (TPR) 2006 Q4 法說會逐字稿

Good day and welcome to the Coach conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations at Coach, Miss Andrea Shaw Resnick, you may begin.

Thank you Brenda. Good morning and 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 Devine, Coach's CFO.

Before we begin, we must point out that this conference call will involve certain forward-looking statements including projections for our business in the current or future quarters of fiscal year. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences or control costs. Please refer to our latest report on form 10-K for a complete list of these risk factors. Also please note that historical growth trends may not been 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 and speakers and topics for this conference call. Lew Frankfort will begin with an overall summary of our fourth quarter and fiscal 2006 results as well as our plans for the new fiscal year. Mike Devine will then follow with details on financial and operational highlights for the quarter and year as well as our outlook for the first quarter and full fiscal year 2007. Following Mike, we will hold a Q&A session that will complete by 9:30 a.m. I would now like to introduce Lew Frankfort, Coach's Chairman and CEO.

Thanks, Andrea, and welcome everyone. As we announce our fourth quarter results and the end of our fiscal year, we are very pleased with our performance and even more enthusiastic about the opportunities that lie ahead. We're confident that FY '07 will be another excellent year for Coach, with sales rising to at least $2.5 billion, or at least 19% ahead of last year. Historically, we have used a term accessible luxury to describe our marketplace positioning as a lane between the old world luxury brands and the more modern segments. Today Coach is credited as the primary catalyst in changing the way in which American women perceive accessories. In fact our average target consumer now buys four handbags a year, up from just two at the beginning of this decade. This has resulted in more than a doubling in the size of the category during the last five years. While our business in North America has tripled in the same period, our U.S. market share has only grown from 16% to about 25%.

Our strong fiscal 2006 performance speaks to our philosophy of operating Coach as a small business for large sales. FY '06 was highlighted by a 23% increase in revenues and a 38% increase in net income. It was a year of many accomplishments, including; first, the opening of 29 total net new stores in the U.S., 25 new retail stores, and four net new factory stores. Second, a 12% increase in full price North American comparable store sales for the year driven primarily by an increase in average transaction as well as modest gains and traffic and conversion. Third, over 20% gains for U.S. department and specialty stores at POS. And fourth, another excellent year for Coach Japan with sales at retail rose 22% and constant currency to over $415 million despite flat category sales for accessories in Japan. In fact, Coach continued to leverage its number two position in the market reaching over 9% share this year up from 8% last year. Finally, the repurchase of over $600 million of Coach common stock during the fiscal year. Most broadly, we once again effectively executing 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 1st, 2006 ahead of both out of our expectations and analyst estimates. Our net income and EPS rose 31% and 33% respectively from prior year levels as a 23% increase in sales combined with a significant improvement in margins continued to drive the bottom line. Some highlights of our fourth fiscal quarter were; first, net income rose 31% to $118 million, or $0.31 per fully diluted share compared with 90 million or $0.23 per share in the fourth quarter of fiscal year 2005. Second, net sales totalled $514 million verses 419 million a year ago, a gain of 23%. Third, directed consumer sales which, as you know now includes Coach Japan rose 23% to $419 million during the fourth quarter of $341 million in the comparable period of the prior year. And lastly, U.S. same store sales for the quarter rose 18.5% with retail stores up 10.9% and factory store sales up 29%.

During the quarter, as planned, we opened 12 retail stores bringing to 25 the number of new retail store openings in 2006. Last quarter's openings included our first stores at Omaha, Nebraska, Knoxville, Tennessee, and Fresno, California. We also opened three factory stores and closed one during the fourth quarter. Thus at the end of the period, there were 218 full price stores and 86 factory stores in operation. In addition, during the quarter, we expanded one full price store, North Park Mall in Dallas, Texas, bringing the total number of completed retail expansions to seven this year. We also expanded three factory stores in the quarter bringing the full-year total to five.

Indirect sales in the quarter rose 23% to $96 million verses 78 million a year ago driven primarily by substantial increases in international and U.S. wholesale shipments. While business to business contributed, as well. During the quarter in Japan, in addition to Kobe Flagship, we opened six other locations and closed one. While wholesale location at Narita Airport was opened, as well. This brought the total number of store openings to 16 net new locations, on target with our expansion plans. Thus at the end of the fourth quarter, we had a total of 122 locations in Japan with 20 full-price stores, including eight flagships, 87 shop and shops, 11 factory stores and four wholesale locations. We were particularly pleased with the continued momentum of our North American full-price 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 with comp sales running up over 20% last quarter and total sales up about 16% after accounting for the closure of locations as a result of the Federated May merger.

Results continue to be driven by the monthly flow of fresh and relevant products which have positively impacted all key selling metrics. For the factory channel, about two-thirds of our comp gains for both the quarter and the year came from a combination of conversion and ticket increases, which points to our strengthened merchandise offering, while the remaining third coming from increased traffic was in large part driven by new consumers to our data base. We were also pleased with the performance of Coach Japan this quarter where sales rose 12% in dollars and 20% in yen as our market share continued to grow rapidly. Our growth in Japan was fueled primarily by distribution, augmented by mid single digit same location sales as we continue to focus on growing the overall market primarily through our new and expanded locations. Last quarter's performance is again, especially note worthy 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 efficiency initiatives and leveraged spending in combination with our priced cost initiatives and product mix improvements continued to drive our bottom line results. While Mike will get into more detail in our financials, I wanted to give you this recap and tell you how happy we are with Coach's fourth quarter and year-end performance. I also wanted to touch on our product, the Hallmark of the Coach brand as it is the primary driver of our growth. Throughout the spring season, well-received new product continued to drive our business beginning in April with Optic Signature offered and several key handbags silhouettes as well as accessories and footwear. In May, the key item shoulder tote offered in multiple fabrications was a big win. And in June, our Signature Patchwork offering, a perennial favorite was also very strong.

During 2007, we will be introducing three new major lifestyle platforms, which we are especially excited about after a year spent successfully evolving established collections. As you know Coach is known for innovation, and we understand the distinctive newness is key to driving our business. The first new platform is our Signature Stripe collection. Introduced at the beginning of July, it was an immediate success and continues to exceed our expectations, currently representing about 14% of sales in retail stores in the U.S. and Japan. This tote-based assortment offered in our Signature pattern is casual, lightweight, and functional. The totes are reversible offering two bags in one and can be monogrammed allowing the consumer to personalize her purchase. An offering of accessories, footwear, and wearables completes this lifestyle collection and broadens our penetration of the casual weekend segment. Next quarter, we will update this group with new color and style offerings.

We're particularly enthusiastic about the pending launch of the new Legacy collection in late September, our second new major lifestyle platform for 2007. Inspired by our archives, this collection will support our 65th anniversary and will be the center of our fall advertising campaign. The collection will also be featured in its entirety in our fall catalog, dedicated solely to Legacy. A range of styles will be available in burnished vintage leather, suede, and Classic Signature. It's classic modern styling is enhanced by iconic hardware such as turn locks, buckles, or clip closures and colorful proprietary lining, making this group distinctively Coach. A selection of wallets, cosmetic cases, wristlets, wearables, footwear, watches and scarves will complement the collection. It's also worth mentioning that we recently piloted the Legacy collection both in the U.S. and Japan with great success and broad consumer appeal. And finally, the relaunch of Ergo coming this spring with soft styles and a sophisticated appeal will round out our major new initiatives for 2007. The original Ergo group, which was only handbags represented 13% in its key selling period four years ago.

Of course, we will also continue to evolve our established collections, as well. Starting with the Soho collection in leather and Signature which we introduced in July. This year, the collection is anchored with the key item satchel, which was an immediate hit. The group also includes Hobos and totes, perfect for business. The new introduction of vintage leather across all styles is being well-received. And a limited edition of bags with lacing and other embellishment completes this group. In July, Soho ran north of 25% of U.S. retail store sales. And just last week, we introduced our updated classic Chelsea collection offered in pebbled leather, nubuc, and Optic Signature. The key item satchel is new to the collection and is doing quite well. A range of classic Hobos is also being offered. The attitude of the bags including contrasting handles and proprietary turn lock detail which all led to Chelsea's overall appeal.

In September, we will evolve our Hampton's collection. This group is feminine, refined, and classic. Our new group of Hobos in multiple sizes and the book tote will compliment our classic carryalls. The collection will be available in soft pebbled leather, Signature patterns, and an introduction of embossed Signature on leather. The pallette is neutral-based and sophisticated, functional accessories footwear and scarves will complete this lifestyle collection. The holiday, our business will be supported by updates to the foundation we're building in this quarter. In addition to fresh groups of duffels, gallery totes, and our popular Patchwork. Duffels will feature vintage styling, and additional functionality like adjustable straps of all sizes as asked by our consumers, often at compelling price points. Gallery totes will be in multiple fabrications, including rich patent leather and embossed signature suede with beading. We're also looking forward to offering a large selection of holiday gifts under $100. Such as the important $98 key item wallet, as well as wristlets, scarves, cosmetic cases, and the new zodiac charms. An adorable selection of pet -- pet accessories, such as collars, leashes, and coats will be available, as well. Clearly the vitality of the brand is driven by the strength of our product and our fall and holiday assortment is powerful, underscoring our optimism about the seasons ahead.

Our formular 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 multi-channel, 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 products, 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 are well-positioned to continue to capitalize on the many opportunities available to us and have the vision, strategy, and tactics in place to realize our long-term growth plans.

Our overall arching goal is to continue to expand our market share in handbags and small leather goods by delivering accessible luxury accessories to a broad, loyal, and consumer base. To this end, we're focussed on two primary growth drivers. First, increasing our own retail distribution internationally, with an emphasis in North America and Japan, and second, driving productivity, giving consumers more reasons to visit our stores and purchase while she's there. In terms of distribution, our primary focus is the continued acceleration of growth in North American retail given the doubling of the premium accessory category to $5 billion in recent years and it's continued more than 10% growth during the first part of 2006. We plan to add about 100 new U.S. retail stores over the next three years bringing the retail store base to just over 300, while we now believe that North America, including Canada could comfortably support, at least 400 stores. During FY '07, we intend to open at least 30 new retail stores, 20 in the first half alone, which will include seven new full-priced stores for Coach. We're also pleased to tell you that our first opening of the new fiscal year at the Mohegan Sun Casino in Connecticut has been an instant success and is on plan to generate $7 million in sales in it's first year. In addition we expect to add about five new factory stores in FY '07 and already closed one store for a net of four new stores. We expect new stores to add at least 100,000 square feet or by 12% to our U.S. total retail square footage in FY '07.

In keeping with our strategy to expand our most productive locations, we will also be expanding at least eight retail stores in FY '07 mostly in the second half of the year. This includes some of our most productive locations such as Roosevelt field here in Long Island and both Chestnut Hill and South Shore in the Boston area. In addition, we're also planning on expanding at least four factory outlets, taking together expansions in both channels are expected to add about 13,000 square feet or about 1.5% to our base. And outside the U.S., we're continuing to aggressively expand market share with the Japanese consumer from about 9% this past year to a goal of 15% during the next few years, primarily through new stores and expansions. Overall, we expect that we could eventually have a total of at least 180 Coach locations in Japan across the same multi-channel distribution model that we have established in the U.S. In FY '07, we expect to open between 15 and 20 net new locations in Japan. And net increase of at least 25,000 square feet, or at least 13% to the store base. Similar to the U.S. We also plan to expand about 20 of our most productive retail and factory locations in FY '07 adding about 10,000 square feet, or about 5% to our retail base. Overall in FY '07, we expect CJI sales to grow about 20% in constant currency from FY '06 as we continue to gain share rapidly. Our gains will primarily come from distribution growth as we accelerate our new store opening plans taking advantage of the many real estate opportunities in this market. Also we're continuing to target mid single digit comps for the year.

As noted in the third quarter call, the opportunities outside of our core markets of North America and Japan are plentiful. Notably in east Asia, especially in greater China, we are intensifying our efforts to build awareness by creating a presence that will position us for meaningful sales in the future as we recognize the mainland China will become an important market for luxury brands during the next several years. It's our intention to open at least 10 locations in major cities on the mainland during the next two to three years while also continuing to expand our retail store base in Hong Kong where we recently and successfully opened a major retail store in Canton Road, our 13th Hong Kong location. While it's early days, this store is tracking to do at least $5 million in it's first 12 months. To this point, we have already secured four locations in mainland China for FY '07 openings, including stores in the important cities of [Shenzhen and Zion Shiote] as well as additional locations in Shanghai and Beijing.

The other important sales driver will continue to be improving the productivity of our existing locations. First and most generally, we're continuing to build market share in the rapidly growing North American women's accessories market by leveraging our unique position as an accessible, luxury lifestyle brand. As part of this strategy, we're emphasizing new usage occasions, such as weekend, exemplified by our recent introduction of Signature Stripe and offering limited addition products to heighten our cache, especially with our top tier customers.

To this point, we believe all three components of comp growth are still available to us. One, transaction increases to [inaudible] merchandise offering, including higher limited edition penetration, along with driving units per transaction with a broader assortment of add on items in new categories such as jewelery, and fragrance, which we plan to introduce during calendar 2007. Two, conversion, we just returned from our annual U.S. store managers conference, the focus of which was our new coaching initiative. This evolved method of reinforced selling and service behaviors, including engaging multiple customers simultaneously is expected to drive conversion and customer loyalty. In addition to being well known for great product, we are striving to be well known for great service. The next step in the Coach service initiative has been enthusias -- enthusiastically embraced by our retail field team, and we are optimistic about the results it will bring. And finally, three, driving traffic. Compelling presentations, excellent service, laser focussed marketing techniques, sophisticated advertising campaigns, a dynamic website, and clienteling all will continue to bring our consumer into our stores. These strategies and actions are designed to enable us to achieve superior financial results through our planning horizon.

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

Thank you, Lew. Lew was just taking 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 23%, with sales for both our direct and indirect channels matching this gain. For the full year, total revenues also rose 23%, as did sales generated by our direct channel while our indirect revenues rose24%. Excluding the negative impact of the weaker yen, total sales rose 25% for the quarter and 26% for the year. Net income for the quarter increased 31% to $118 million or $0.31 per share as compared to 90 million or $0.23 per share in the year ago period. This was ahead of the analyst consensus estimate of $0.29 fore the quarter. Net income rose to $494 million in FY '06, up 38% from the 359 million earned in the prior year. Diluted earnings per share rose 38% to $1.27 verses $0.92 a year ago and ahead of analyst consensus estimates of $1.25. Our operating income rose 41% to $180 million in the fourth quarter verses $128 million in the same period last year. Operating margin in the quarter was 35% compared to 30.6% in the year ago quarter, a 440 basis point improvement.

For the fiscal year, operating income rose to $765 million from the 573 million posted in the prior year, a 34% increase. Operating margin for the year rose to 36.2% from 33.5 a year ago up 270 basis points. In the fourth quarter, gross margin increased by 80 basis points on a year-over-year basis from 77.6% to 78.4. Bringing the full year to 77.6%, a 100 basis point increase. For the year, as in the quarter, gains from product mix and supply chain initiatives drove this improvement. As we expected, SG&A expenses as a percentage of net sales was substantially below prior year levels in the fourth quarter. And represented 43.3% of sales verses 47% a year ago. For the full-year, SG&A expenses as a percentage of net sales declined 180 basis points, 41.4% from 43.2 a year ago. All selling businesses sold their year-over-year spending rates decline as we also continued to leverage the top line volume throughout all of our centralized functions.

Inventory levels at year-end were $233 million, up about 49 million from 184 million last year and we're about 27% above those prior year levels. And consistent with our top line constant currency sales growth, as our supply chain improvements and inventory management programs allowed us to support 29 net new U.S. stores, 16 net new locations in Japan, and substantially increase sales levels with only this moderate additional inventory investment. Cash and short-term investments stood at $538 million as compared with 505 million a year ago. It should be noted that the [206] fiscal year-end cash balance reflects the repurchase of over $600 million of Coach common stock during the fiscal year. Accounts receivable balance rose $19 million or 29% while days sales outstanding remain constant at only 33 days. Net cash from operating activities in the fourth quarter was $195 million, compared to 132 million last year during Q4. Free cash flow in the fourth quarter was an inflow of $161 million verses 101 million in the same period last year primarily driven by higher net income.

Our CapEx spending, primarily for new stores and renovations, was $34 million verses 31 million in the fourth quarter a year ago. For all of fiscal year 2006, net cash from operating activities was $597 million compared to $476 million a year ago. Free cash flow in fiscal year '06 was an inflow of $463 million verses 381 in fiscal year '05. While CapEx spending totalled $134 million, again, primarily for new stores and expansions.

Now, I would like to provide you with some of our goals for fiscal 2007. Our current goals for the full fiscal year are net sales growth of at least 19% to at least 2.5 billion, with at least 10% comparable store sales gains in both the U.S. retail and factory channels. And a total sales increase in Japan of about 20% in constant currency, which would translate to sales of about $500 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 nearly 37%, which will result in operating income dollar growth of over 20% above FY '06 levels. Interest income of about $35 million, about flat to FY '06 will add to pretax income. While net income will be somewhat offset by a higher tax rate, rising to about 38.5% due to the fact that incremental taxable income is being taxed at higher rates. Including these factors, we expect to generate EPS growth of at least 22%, which will produce earnings per share of at least $1.55 compared with the analyst estimate of $1.53. For FY '07, we expect CapEx to rise to about $150 million, primarily for new stores and expansions, both here and Japan. As Lew noted, we'll be opening about 35 new U.S. retail and factory stores and continuing our North American expansion programs. In Japan, we'll be opening about 15 to 20 net new locations. For the first fiscal quarter of FY '07, we're targeting net sales of about $535 million, representing a year on year increase of at least 19% with U.S. comparable store sales gains of at least 10% in the retail channel and mid teens in the factory channel. Operating income up at least 21%, year-over-year. And earnings per share of at least $0.30 an increase of about 25%. While these are our current goals, actual results may vary based upon a number of factors, including those discussed under the business of Coach Inc. and risk factors 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 everyone for your attention, and now Lew, Andrea, and I would be happy to take some questions.

Operator, let's open it up for questions. Please note that we'll allow one question each per analyst and if necessary, a clarifying follow-up. Thanks, let's open it up.

[OPERATOR INSTRUCTIONS] Bob Drbul, Lehman Brothers.

Thanks, good morning.

Good morning.

I guess the first question that I have, Lew, is have you seen anywhere within your business in -- in either the full-price or the factory, any change in traffic trends throughout the quarter up to where we are today based on sort of the macro environment that's out there with gas prices et cetera?

Good question. First on the full price side, interestingly we've seen an acceleration in same store sales -- same store traffic during July. And traffic was running modestly ahead during the fourth quarter and it's -- it's running ahead, somewhat higher traffic, that is. In terms of full price traffic, which has been running substantially ahead of last year during FY '06, that trend continues through July on the factory side.

Okay. And then just --

So basically note if anything, strengthening of -- strengthening of same store traffic on the full price side and same excellent traffic increases on the factory side.

Okay, and then just, one clarifier from -- from Mike. Can you give a little bit more color on the inventory levels maybe by channel and where you are with that?

Sure. What -- a few of the metrics I like to look at. And we didn't include it in the prepared remarks. Inventory levels are especially clean coming out of Q4. One, again, a metric that I like to look at is what percentage of sell through in the factory channel was discontinued full price merchandise verses merchandise manufactured for factory. And we actually hit a record high in Q4 on that metric of 81%, so I think that's the single most important thing that I look at to see how clean the inventories are. We are going in very well positioned having built for a full selling, some timing of receipts we got in early this year verses last, but the inventories are exceptionally clean right now.

Great. Thank you.

Margaret Mager, Goldman Sachs

Hi. Congrats on another great year.

Thank you, Margaret.

I just wanted to ask about the outlook for next year, in particular your -- your goal of achieving 10% same store sales in both channels of distribution. Can you just talk about what gives you confidence that you can achieve that over the course of four quarters and the fact that, you been doing very well for so long the comparisons are not easy, is that -- is there a price component traffic, what are you doing to build those comps into the next fiscal year? And then I have a question on your -- your leveraging of your marketing expense. Can you just go over what's going on there? Particularly as you talked about one of the keys that building traffic is marketing. How do you balance on the spend on marketing against that objective to build traffic? Thanks.

Well, first, Margaret, Coach continues to be fortunate in that we're participating in a rapidly growing market. I commented that sales in ac -- in premium accessories grew by at least 10% in the first half of calendar 2006. And while we've been able to outpace the growth, we're nevertheless are participating in a -- in a significant growth category. Second, we're benefiting from a very strong consumer franchise that's very loyal, that visits our stores very regularly, and as I commented in -- in the earlier question, our traffic in same store sales -- same store traffic continues to rise. More generally on the product front, the three new lifestyle platforms are very significant, and as we indicated we have not introduced a new -- a new lifestyle platform in more than a year and this year we're introducing three, the first one Signature Stripe is off to a fantastic start. And we think there's going to be -- we're looking to see growth in -- in comp store sales coming from all three key metrics. We're looking for inc -- traffic to continue to run ahead of last year. We're looking for conversion to come in at a higher rate. And we are also looking at an average ticket that is higher than last year, driven in -- to some extent by UPTs, some extent by limited edition product, and so on. So we're very bullish. Mike?

Sure. In terms of leveraging our marketing expense, Margaret, for another year in FY '06, we saw very small increases in absolute spending in our marketing. And got leverage of about 20 basis points both for the quarter and the year. We really continue to execute our catalog, our website, and our media spend consistent year-over-year and it's just is becoming increasingly more and more efficient.

Okay. Thank you.

You're welcome.

Jeffrey Edelman UBS

Thank you, good morning. Great job. One, Mike, could you discuss with us the profile of -- of the new stores that -- that you're opening in terms, it looks like the average size about 3300 square feet, in terms of sales productivity, and what type of [fourwall] contribution you're -- you're realizing as you start to branch out in -- in -- into some smaller markets. And then secondly, is there further to go in -- in terms of sourcing efficiencies and mix to aid gross margins into the new year? Thank you.

Let me just jump in first -- first, just for clarification. When we talked about the store base growing by at least 100,000 feet, Jeff that also included factory stores.

Oh, okay.

It wasn't just the 30 full price stores and it also included expansions. So on the full-price side, we are still averaging somewhere between 23 and 2500 square feet for a full price store. I think the factory side store --

Factory side is larger. Yes, it's 3500, 3500, right.

So the -- so the store size doesn't -- is not increasing. The model we have is working extremely well.

Yes, Jeff, as you -- as you well know, our new stores are about as productive and profitable, I think, as any in retail with our full price new store openings paying back on a cash basis in less than -- well less than two years and our factories in under a full year. In fact I just looked this morning in prep for the call, and our sales per square feet across the full chain actually were up above -- full price retail chain were up above $1200 per square foot in FY '06 for the first time ever. And above an even higher level than that, up above $2,000 per square foot in the factory channel for the new year. So as we continue to -- to drive comp through the existing stores and add productive new stores to the base, we're seeing our average square footage continue to increase. So we're very pleased with our new store and their performance.

If I can go back to your questions around profitability, we are confident and feel very good about our continued growth of our operating margins. We, as you know, as we just talked about we saw 440 basis point improvement this quarter alone in operating margins with an assist from gross margin and we continue to leverage SG&A very nicely. So we are thrilled with our gross margin rates, they're extraordinary, and most importantly sustainable. And we'll continue to drive operating income growth through that line and through SG&A leverage.

Great. Thank you.

You're welcome.

Paul Lejuez, Credit Suisse First Boston

Hi guys.

Hi Paul.

Seeing the gross margin, it seemed to come in above plan, maybe just slightly, just wondering how that happened since factory, which drags margin down, also, you know, the comps in the factory really came in, I would imagine above plans. I'm just wondering if -- where the -- where the incremental margin came from, is there perhaps an even greater opportunity to expand margin on the -- on the factory side than originally thought?

Sure, Paul, I think the primary driver is that each business unit within its own should market year-over-year improvement including factory up more than 100 basis points against itself a quarter earlier. And a couple other things -- I'm sorry, a year earlier. A couple of other things worked nicely in our favor, our hedge contracts were effective, so the negative impact of currency in Japan came in better than our expectations and our supply chain continues to do an outstanding job as we realized some working cost benefits above our own expectations. So all of those things taken together allowed us to beat our gross margin rate against our projections.

Have you. And just a quick one. Can you tell us when your share repurchase window closed during the quarter and when it opens again? Or no?

Closed on Friday June 15th, and it will open -- reopen this Thursday.

Thanks, guys, good luck.

Thank you.

Lorraine Maikis, Merrill Lynch

Thank you, good morning.

Good morning, Lorraine.

Could you talk about your expectations for free cash flow in 2007 and walk us through your priorities on how to use it?

Sure. We -- we expect another robust year for free cash flow. We're going to continue to drive higher net income, obviously with the increase in our earnings per share. And our primary use for that cash will be to enable us to continue to drive the growth in the business through CapEx investments for new stores and expansions and also technology gains where we can apply them to increase our efficiency and leverage, our SG&A. As you know, we've also been aggressive buyers of our own stock at the appropriate levels. As we just talked about we just did $600 million last fiscal year. So I would anticipate that that will be another primary use for our cash in FY '07.

Thanks, and just a quick follow-up on Japan. You spoke about some rapid market share gains. Can you just talk about who you think you're taking the market share from?

It's a -- it's a good question, Lorraine. We prefer not to mention specific competitors on -- on -- there are some on the brands that are growing and there are some brands that are slowing, and on average, the market is flat and we're up 20%. We prefer not to be more specific than that.

Okay. Thank you.

You're welcome.

Christine Chen, Pacific Growth Equities

Thank you, congratulations on another great quarter.

Thank you, Christine.

Wanted to -- maybe I missed it, but I think in the past you had given metrics on how much average, ticket or average transaction was up and then the percentage of limited edition verses the year before. I'm just wondering if I could get those numbers?

What -- what we have done is provide directional numbers. And as I said earlier, our average ticket was primarily -- I'm sorry, our average -- our average ticket was driven by a combination of factors. In part driven by increase in UPTs, in part by limited edition product rises, and lastly by higher prices due to more sophisticated make. Mike can we --?

Yes. Yes, what we talk -- what we talked about is ticket was high single digits and then we got to 10.9, also by being helped by conversion, modest improvements in conversion and traffic. But the biggest driver, again, in Q4 was our AUR. And that was driven in part by an increase year-over-year in Limited Edition where we grew from --- to about 4% of our full price sales up from 3%. But also very importantly our middle tier of product offering, our novelty product offering was up significantly by, I think, more than 20 points of penetration year-over-year, and that also helped us to drive the high single digit increase in AUR.

Okay. Great, thank you so much.

You're welcome.

[Irwin Rembura, HSBC]

Yes, hi, good morning, and congratulations. I had a question regarding the P&L. The SG&A leverage, which was strong during the year and even stronger during Q4. Is there a way of splitting it out between the outperformance of factory verses full price retail and also the contribution of Japan, I know you've made a lot of efforts there following the integration of CGI. How much is linked to that? And how much can we expect in this current year?

Sure. The primary drivers of the SG&A leverage in Q4 were firstly Coach Japan for the quarter had tremendous SG&A leverage driven by top line sales growth, but also the fact that we did not anniversary a significant marketing effort in last year's Q4 where we spent about $5 million on a "Play for Peace" concert that again did not get anniversaried. Secondly, you're right on point, the tremendous leverage that the factory channel is providing with it's 29% comp and plus 30% overall growth also drove significant SG&A leverage, as well as all of our centralized activities, our distribution functions, the marketing that Margaret asked about earlier. So we really had it all come together for us nicely in Q4.

Can you just remind us of the guidance of the gross margin on [SGLA] -- SG&A level for -- for this year?

Our guidance for FY '07 is to continue to expand operating margin. Up somewhere in the neighborhood of about 50 basis points year-over-year, sustaining our extraordinary gross margin rates and gaining leverage through our SG&A.

Thank you.

You're welcome.

John Rouleau, Wachovia Securities

Hi guys. Wondering with the launch of three new platforms this year, will you actually be increasing the number of platforms that you're delivering kind of year-over-year? Will you begin to scale something else back? And what's happening on the skew side? Terms of the new platforms?

Excellent question. Actually, we do expect to see some modest increase in -- in -- in skew count, but since we have fixed real estate, we try to make everything work extremely productively. So part of the -- part of our notion, for example, this fall with the Legacy launch is to actually reduce the amount of space that we devote to men's products, especially in a select number of -- of our flagship stores in order so that we can create Legacy shops. Second, we're going to take a sharper look at the number of styles and skews we offer in the -- in the established platforms in order to narrow them to make shelf space for the new collections. What we will probably do in FY '08, assuming success of these established platforms, is look for ways to integrate perhaps two of the -- two of the platforms into one. That is an existing one, for example Hampton's Weekend and Signature Stripe might very well been integrated in the following fiscal year taking the best of both.

Have it. And then just as kind of a follow-up or clarification, does that mean the number of deliveries will actually -- on the handbag side increase in fiscal '07 or will we get shorter intervals between deliveries?

Deliveries will remain constant. We do basically -- we do 12 major floor sets a year and that will continue. We do -- we also do 12 deliveries as you know.

Thanks, keep up the good work.

Thank you.

David Glick, Buckingham Research Group

Thank you. Good morning. And another congratulations. Any change during the quarter, Lew, in terms of the customer cross shopping between full price stores in the U.S. and the factory channel? Is that still hovering around 20%, any delta there?

The short answer is no, we've done a lot of [deprobes], using a lot of different methods to -- to look at what the crossover is and is the rate changing. And the bottom line is that it's not changing. What we're finding, as I mentioned earlier, is that two-thirds of the increase in -- in comps is actually coming from increased conversion of the people who are visiting the stores as well as higher ticket. With the remaining one-third coming from people who are new to our data base, and a good portion of those consumers are new to the Coach franchise making their entry in -- in the factory sector, which doesn't surprise us since 85% of goods sold in America are sold on sale. It's not unusual since we don't go on sale on full price on some of the aspirational or value-oriented consumers would seek us out in factory.

Okay. Great. Thank you very much.

You're welcome.

Jim Hurley, Telsey Advisory Group

Good morning, and congratulations on a great quarter and year.

Thank you, Jim.

Two -- one question. The first question is about the SG&A leverage and in particular, how much would you say you're getting from new in store systems like the client track and smart scheduling?

It's a great question, Jim. And we don't -- I would have to say we don't just aggregate it to that level. But we are absolutely seeing a pick up in our store staff spending far less time on their administrative functions dealing back with corporate, dealing with maintenance of the store et cetera. So we haven't broken it down, but it's clearly a significant player in what's going on in the stores. We're able to do more with less. I'm sorry, I don't have a hard number for you.

No, that's fine. I guess if I could just -- is that only in place in the full price retail stores in [America]?

No, it's in factory, as well.

Okay. And then the second question was on UPT trends and how those met -- how they compare to your expectations, especially for Mother's Day?

All the UPTs, as we commented some time ago, was up for Mother's Day and it was up for the quarter. And we've been running higher -- at a higher level of UPTs for the last six or nine months and that trend we expect to continue during F -- FY '07. And certainly with a launch of jewelry and fragrance in the second half of FY '07 that's going to augment UPTs. And in addition these three lifestyle collections have incredibly powerful components of accessories, wallets, wristlets, scarves, wearables, footwear and the alike. And when we look at Signature Stipe running at about 15% of our sales in our full price stores, about 5% of that alone is accessories. And our intention with these other two collections, as I mentioned, is to have a full range of lifestyle accessories.

Operator, we can take one more question.

Thank you.

[Evryn Copelman JPMorgan]

Hi, it's Evryn Copelman for Brian. First question, as we're looking at the difference between the 23% growth in sales and the direct to consumer business and the 18.5% comp growth, and the 5% delta verses your double digit square footage growth, we're wondering why we're not getting more contribution from the double digit square footage growth? And secondly, if you can comment. Everybody is wondering, we've had such strong growth in the category of accessories over the last number of years. When will this cycle slow? What are the drivers of the growth in the category if you can comment on that? Thank you.

Let me -- let me do the second part first. It's an interesting question, and we ask consumers all of the time what they're thinking about relative to accessories. The reality is that we don't see this as a cycle chain -- as a cycle that is the increase in the role of accessories. This is the first time that accessories has really grown at a rate much faster than overall apparel spent. Women really see accessories as a much more important component of their wardrobing, and they'reusing accessories to update their wardrobe in the same way they used to purchase apparel. They tell us that and they behave that way. And what consumers tell us they're looking for is innovation, relevance, and value. And for example, even during a holiday period, when we ask consumers what they were considering in besides Coach. Whether they made a purchase of Coach or not. Very few people talked about other accessories, and no one talked about apparel. Candidly they talked about buying iPods and the new Nano, or the new -- or DVDs, days at the spa, and so on. And all of these products have in common innovation and relevance. And the other thing I'd like to say is that our -- in our FY '07 projections and beyond, we're only anticipating 3% to 5% category growth. So we're not expecting the category to continue to grow robust in our conservative planning, but the reality is that it's up over 10% in the first half of this calendar year, and we expect to see double digit growth continuing. Mike?

In terms of the difference in the spread between comp gains and DTC sales, I'm sure you real -- realize that there are several contributors to this spread between comps and DTC sales including the timing and contribution of new store openings as you suggested. There's seasonal factors, there's the performance of non bricks and mortar channels like the internet and of course, you have to remember that CJI is now included in DTC. So you have all sorts of other items, including currency fluctuations, and of course, CJI's comp that come into it.

Thank you.

That will conclude our conference call. As always, Mike and I will be available for call backs throughout the day today. I look forward to speaking with you. And have a great rest of the summer.

Thank you, everybody.

That does conclude today's conference call. Thank you for joining.