掛毯 (TPR) 2007 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. Ms. Andrea Shaw Resnick, you may begin.

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

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 quarter or 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. 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 (inaudible) of these estimates on a continuing basis. Coach may also choose to discontinue preventing future estimates at [any] time.

Now, let me outline the order of speakers and topics for this conference call. Lew Frankfort will begin with an overall summary of our fourth quarter and fiscal 2007 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 year fiscal 2008. Following Mike, we will hold a question and answer session that will conclude by 9:30 a.m.

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

Thanks, Andrea. And good morning, everyone. As we announce our fourth quarter results and the end of our fiscal year, we are very pleased with our excellent performance and are equally enthusiastic about our prospects. We're confident that FY '08 will be another great year for Coach with sales planned to rise to about $3.16 billion, 21% ahead of last year. We are seeing a continuation of about 20% growth in the premium handbag and accessory catagory in North America, and heightened interest in the category globally, as it takes hold in emerging markets for luxury goods, such as greater China. Given the strength of the coach brands and the resonance of the Coach proposition internationally, we are in position to capitalize on these opportunities both at home and abroad in the years ahead.

Our performance in FY '07 was highlighted by a 28% increase in revenues, a 37% increase in net income, and a 41% increase in EPS.

It was a year of many accomplishments, including, first, the opening of 48 total net new stores in North America, 41 new retail stores, and 7 net new factory stores.

Second, a 16% increase in North American full-price comparable store sales for the year driven primarily by increases in conversion and traffic with smaller gains in transaction size while our U.S. factory business posted a remarkable 30% comp gain for the year. At the same time, our internet business experienced mediocre growth with sales up 51%. We had 50 million unique visits with an average of 6 minutes spent on the site per visit.

Third, we achieved over 30% gains in U.S. department and specialty stores at POS.

Fourth, we also had an excellent year for Coach Japan. Retail sales rose 19% in constant currency and 16% in dollars to over $483 million, despite flat category sales of imported bags and accessories in Japan. Coach strengthened its number two position in this market, achieving a 10% share this year, up from 9% last year.

Finally, with our distributors, we successfully opened 8 net stores in mainland China as we strengthened our international leadership team. Our strong annual performance was capped off by an excellent fourth quarter as we announced the sales increase of 30% and a 43% increase in earnings per share for the quarter just completed. I'm pleased to report that this was the 22nd consecutive quarter that Coach achieved sales growth of at least 20%.

Some highlights of our fourth fiscal quarter were, first, net income rose 41% to $159 million or $0.42 per share compared with 113 million or $0.29 per share in the prior year. Second, net sales totalled $652 million verses 502 million a year ago, a gain of 30%. Third, direct to consumer sales rose 29% to $541 million from 419 million in the prior year. Fourth, North American same store sales for the quarter rose 20.2% with retail stores up 11.6% and factory stores up 31.2%. In addition, sales on the Coach internet site rose 44%. Finally, sales in Japan rose 23% in constant currency, driven by distribution growth and high-single digit overall comps.

During the quarter, Coach opened 15 North American retail stores in -- including three new markets for Coach, including Columbia, South Carolina and Buffalo, New York. In addition, we expanded 6 locations. Also, three new factory stores were opened. At the end of the period, there were 259 full price and 93 factory stores in operation in North America. In Japan, we opened 6 new locations, including one stand alone retail store, three shopping shops, and one factory store while a DFS location was opened at [Laredo] Airport. At quarter end, there were 142 total locations in Japan. This was a net increase of 20 locations from the 122 at year-end 2006. In addition, Coach expanded two location during the fourth quarter, bringing the year-end total to 9 expansions in Japan.

Indirect sales on a continuing basis increased 34% to $111 million from 83 million in the same period last year. POS sales at U.S. department stores sustained the torrid pace posted in recent quarters of over 30% growth while we also realized significant gains in international POS sales.

The continued momentum of Coach in North American retail stores enabled us to achieve an excellent quarter in this channel, driven primarily by conversion with more modest gains in traffic and average transaction size. Results in our full-priced businesses, both Coach retail stores and U.S. department stores, continued to be driven by the monthly flow of distinctive and relevant new product, especially new lifestyle collections, such as Ergo. Our U.S. factory store business also continued to be exceptional this quarter driven by double-digit conversion and traffic gains with a small contribution from higher transaction size. Our strength in the factory channel reflects (audio difficulties) centers, most importantly, our sustained full-price and factory store sales growth reflects our ability to successfully operate two distinct store concepts attracting two distinctive consumer groups.

I also want to highlight another spectacular season and year for Coach women's footwear for both our license business in the wholesale channel and in the Coach stores where it is sold. First our business in department stores, where we are sold through nearly 700 locations, rose 90% at POS for the February through June season to date period. For the full-year, women's footwear in department stores also increased by about 90% to $145 million in sales. In the 55 Coach comp retail stores where footwear was sold, it represented 11% of sales last quarter, up 21% from the prior year. We also introduced a few key items to an all store distribution with great success.

Moving on to Coach Japan, we were extremely pleased with its performance this quarter where sales rose 23% in yen and 17% in dollars. Growth in Japan was fueled primarily by distribution through both new stores and expansions, augmented by high single digit comparable location sales as our market share continued to expand against the weak category backdrop. The acceleration in Japan was attributal in large part to the phenomenal success of Ergo, which appealed to the consumers' interest in lightweight close to the body shapes and minimal hardware.

Finally, as always, we were pleased with a significant improvement in operating margins. While Mike Devine will get into more detail in our financials, I wanted to give you a recap of Coach's excellent performance and touch on some of the product highlights of the fourth quarter. Across all businesses, handbags and women's accessories continue to propel our sales, as the look of our product continues to evolve and reflect changing consumer preferences. Earlier in the quarter, we saw excellent response to Ergo, our third new lifestyle platform for the year. For May, we launched a new summer program, featuring Legacy Cotton Signature, which was built on the success of last year's small capsule group.

In June, Patchwork, a perennial favorite, returned across a variety of Ergo silhouettes along new styles and fabrications and signature stripe. Our over $400 handbag offering continued to perform quite strongly during the fourth quarter. And comped at over 75% in Coach retail stores, representing over 17% of handbag sales in the period. Our business in July remains strong as we successfully introduced an expanded collection of Chelsea handbags, including novelty and limited edition styles. Our August floor set installed last week features [Champtons] anchored by our best-selling carry all updated with an outside pocket and turn lock and lightweight leathers and signature. It also contains Legacy in new shapes and colors. In September, we will be introducing a belted version of Ergo with hardware and a range of fabrications, including several sophisticated Patchwork styles inspired by early 20th century art. We're also excited to be launching an expanded jewelry offering with an all store distribution in early September.

During fiscal 2008, we will be introducing three major lifestyle platforms. The first, Bleecker, arrives in October and will offer consumers a fresh interpretation of bags and accessories inspired by our best-selling icons and anchored by our original double set first introduced in 1973. It's crafted from hand burnished leather and features our archival heritage logo, proprietary Coach hardware and a new [catasore] lining. Bleecker is lighter weight than our very successful legacy line, with sharper price points at about a 25% premium to our core handbag offering. And the second platform for FY '08 is the heritage stripe collection, an assortment of durable coated cotton canvas totes, bags, and accessories, which we expect to fully launch during early spring. And next April, we will relaunch Soho, a perennial favorite. It will return in new fabrications and silhouettes with reinterpreted proprietary detailing.

Technologically, we will also continue to innovate to improve efficiency in our stores and enhance the level of service we provide to our customers. In North America, first, we just introduced store pickup giving our consumers the option to buy online and pick up their merchandise at a Coach store two hours later. This service will support last-minute purchasing and drive many additional internet visitors into our stores.

Second, after a successful pilot in 19 stores last holiday, at the end of September, we will be rolling out E-Runner to nearly 100 stores. As you may know, this is a hand held device, which our sales associates on the floor use to capture the customers' order and transmit it electronically to the stock room, making the transaction at the cash rack more efficient by reducing wait time and allowing the customer to continue to browse.

Third, we will be piloting a realtime in store inventory system in select factory stores with the intention of improving inventory accuracy and operational efficiency. And in Japan, we have just launched a noncommerce informational website, which we expect will drive internet visitors into our stores. And in addition, we completed the rollout of a POS system to Coach Japan this spring where we are now planning to introduce many of the same improvements that are part of our North American store environments.

Along with these investments in technology, we are, of course also investing and further developing our greatest asset, which is the talented team who work in our stores. I just attended our annual North American Store Managers conference, which took place in Boca Raton. The theme of the conference was leadership, and was focussed on building the skills of our leadership team through customized training programs. As always, I was struck by the passion and commitment of the Coach retail team. As you may know, we have low turnover for our industry and promote 2/3 of our store managers from within. I had the chance to talk with many of the attendees who were blown away by our performance, especially in single store and secondary markets, markets like Milwaukee, Tucson, and Portland. In fact, it is these markets and success stories that make us confident in our ability to successfully double our North American retail store count to about 500 over the next several years.

Our new stores fall into three categories. First, existing markets. These are markets where we have several stores, but our current store trends show that we are still underdeveloped. Houston, Texas, a $33 million market for Coach last year is a perfect example. Our newest stores in this market Baybrook and La Cantera, generated first year sales well ahead of pro formas and posted huge first-year comps. Our newest entrant in the market's First Colony, which just opened in March is running at a $2.5 million annual clip, nearly 60% ahead of our expectations. It's particularly noteworthy that our Houston comp was 49% in FY '07, which represented an acceleration from the prior two years.

Developing markets is a second category for us. These are markets such as Milwaukee, Tucson, or Portland that have opened in the last few years that we had previously considered a single-store market. But early successes warranted the opening of second and third stores. Portland, Oregon is an example of a market where we have three stores today, which together generated $8.5 million in sales last year and comped at 30%. The newest Bridgeport Village opened in September 2005 and generated sales of $1.4 million in its first 12 months and is now comping at 37%.

And lastly, new markets. These are markets where we did not consider opening stores just a few years ago. However, given the much higher than expected new store productivity levels we're achieving in our deals with mall developers, we are opening them today with great success. They include such markets as El Paso, Texas, which generated first-year sales of $3 million, well ahead of its pro forma. Similar to the way we have looked at our store fleet with an eye toward evolving them from core to fashion to flagship, we are looking at cities and markets as potential candidates for upgrading. Clearly, our franchise is building as a consumer trades up into Coach and we also capture a larger share of our existing consumers growing accessories wardrobe. With the accessories market rapidly expanding and the Coach brand so vibrant, the potential for Coach and its current concept is far greater than we ever thought possible.

As most of you know, we have two primary sales growth drivers. Each planned to achieve about 10 points of growth. First, is distribution, as we expand our global network of store locations with an emphasis on North America. And second, it's productivity, which we drive globally through the introduction of innovative relevant product, offering excellent value. We have been implementing five key strategies that focus on sustaining growth within our global framework. Clearly our largest opportunity continues to be in North America.

First, most generally, we're building market share in the rapidly growing North American women's accessories market by leveraging our leadership position as a top of mind and preferred brand for self-purchase and gifts. As part of this strategy, we've been emphasizing new usage occasions within our handbag offering and developing new flanker categories such as jewelry and fragrance. There is also a continuing opportunity to elevate our handbag offering, given the strength of our $400 plus segment. Although we expect to see this AUR increase to be partially offset by the growth of categories, which have lower overall price points.

Our second strategy is the continued rapid growth in North American retail. We plan to add about 40 retail stores in North America in each of the next several years. Based on the continued rapid growth of the market, the performance of our new stores, and the greater numbers of new consumers we're attracting, we believe that North America in total can easily support about 500 retail stores, including up to 20 in Canada. This road map for expansion is based upon a buildup of individual malls and locations to meet our demographic requirements and economic hurdles.

During FY '08, we expect to open about 40 new North American retail stores, including 15 from the first quarter. These new openings will include 11 completely new markets, such as Augusta, Georgia, and Nashua, New Hampshire, which opened last month. And we expect to open at least 6 new factory locations with 3 opening in the current quarter. In addition, we will be expanding at least 10 retail stores and several factory stores. Taken together, we would expect total square footage to grow by about 18% in FY '08, similar to last year.

And third, outside the U.S., we're continuing to increase market share with a Japanese consumer, driving growth in Japan primarily by opening new retail locations and by expanding existing ones. For FY '08 we plan to open about 10 to 15 net new retail locations, as well as a few factory outlets as this channel becomes more important to Japanese consumers. We will also continue to expand key occasions. Overall, we expect to increase our square footage in Japan at a slightly lower rate in FY '08 than we did last year. Also, we're continuing to target overall constant currency sales growth of 10 to15% for both the first quarter and full-year in Japan driven primarily by distribution growth and low-single digit comps.

Our fourth strategy is to raise brand awareness in emerging markets to build the foundation for substantial sales in the future. Greater China, Korea, and other such geographies are increasing in importance as the category is growing rapidly and Coach is taking hold. During the fourth quarter, 15 new Coach locations opened internationally, excluding Japan. Most of them were in Asia, including four in mainland China. In FY '08, we will open through distributors, about 30 net new locations focused on greater China, Southeast Asia, and the Middle East. We also plan to open at least 5 more locations in major cities in mainland China this year bringing our total to 16.

In addition, underscoring our commitment to the region, we recently announced the new president for greater China, Thibault Villet, who will be establishing our on the ground presence. He's responsible for the strategic leadership and operating results of Coach greater China, including mainland China, Hong Kong/Macau and Taiwan. Thibault will be partnering with Coach's regional distributors to develop, implement, and execute the Company's greater China strategy, focused on rapidly growing distribution, raising brand awareness, and building consumer loyalty.

And lastly, of course, we continued to have an overall focus on improving the rate of profitability so that our bottom line results continue to outpace top line performance.

At Coach, our formula for success has remained constant despite a changing environment. Our distinctive brand, our leadership position, our loyal consumer base, our multi-channel, international distribution, and our focus on innovation and the consumer never varied and set us apart from the competition. And the engine that drives these elements is our strong and seasoned management team, fueled by innovative compelling product and supported by an adaptive, dynamic , global sourcing and supply chain. Our brand has never been stronger nor has our proposition ever been more vibrant. We are well-positioned to continue to capitalize on the abundant opportunities available to us and have the vision, strategies, and tactics in place to realize our long-term growth plans.

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

Thank you, Lew. And good morning, everyone. Lew has just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our fourth quarter and year-end results.

As Lew mentioned, our quarterly revenues increased 30%, with sales of our direct businesses up 29% and the indirect business up 34%. For the year, total revenues rose 28% with sales generated by our direct channel rising 30% while our indirect revenues were up 20%. Net income for the quarter increased 41% to $159 million, and EPS rose 43% to $0.42 per share, as compared to 113 million or $0.29 per share in the year ago period. Net income rose to $637 million in FY '07, up 37% from the 464 million earned in the prior year. Diluted earnings per share rose 41% to $1.69 verses $1.19 a year ago.

Our operating income rose 43% to $245 million in the fourth quarter verses $172 million in the same period last year. Operating margin in the quarter was 37.6% compared to 34.3% in the year ago quarter. A 330 basis point improvement. For the fiscal year, operating income rose to $993 million, a 39% increase, and operating margin for the year rose to 38% even from 35.1% a year ago, up 290 basis points.

In the fourth quarter, gross profit rose 29% to 509 million from 394 million a year ago. And gross margin continued at its exceptionally high levels, finishing at 78.1% verses 78.5 in the prior year. During the year, gross profit rose 28% to $2.02 billion as compared to $1.58 billion a year ago, while gross margin was 77.4% verses 77.7 last year.

As expected, SG&A expenses as a percentage of net sales were substantially below prior year levels in the fourth quarter and represented 40.5% of sales verses 44.1% a year ago. A 360 basis point decline. For the full year, SG&A expenses as a percentage of net sales declined 320 basis points, 39.4% from 42.6% last year. All selling businesses saw their year-over-year spending rates decline. And we also continued to leverage top line volume across all of our centralized functions.

At year-end, cash and short-term investments stood at about $1.2 billion as compared with 538 million a year ago. Inventory levels were $291 million, up about 25% above prior year levels, below our 30% sales growth. As our supply chain improvements and inventory management programs allowed us to support 48 net new U.S. stores, 20 net new locations in Japan and substantially increase sales levels with moderate additional inventory investment.

Accounts receivable balances rose $23 million or about 28%. Net cash from operating activities in the fourth quarter was $257 million compared to 195 million last year during Q4. Free cash flow in the fourth quarter was an inflow of $214 million verses $161 million in the same period last year. Mainly due to higher net income.

Our CapEx spending, primarily for new stores and renovations was $43 million verses 34 million in the same quarter a year ago. For all of fiscal year 2007, net cash from operating activities was $779 million compared to $597 million last year. Free cash flow in fiscal year '07 was an inflow of $638 million verses $463 million in fiscal year '06, while CapEx spending totalled $141 million, again primarily for new stores and expansions as well as investments in corporate infrastructure.

Now I'd like to provide you with some of our updated goals for fiscal 2008. Looking for net sales growth of about 21% to at least $3.16 billion, driven by distribution growth and productivity gains. We expect to open at least 46 new stores in North America, 15 to 20 new locations in Japan, and about 30 new international locations, while we continue to expand select highly productive locations globally. And we expect to achieve at least 10% comparable store sales gains in both the North American retail and factory channels and low single-digit comp location sales gains in Japan.

With our continued focus on profitability, pretax income dollar growth of about 28 -- 26% above FY '07 levels. Two factors will somewhat moderate that growth on the EPS line in 2008. First, the higher share count, brought about by option exercises. And secondly, a higher tax rate, rising to about 39% due to the fact that incremental taxable income is being taxed at our maximum rates. This, taken together, would produce net income growth of about 25%, and earnings per share of at least $2.06, up over 22% from the $1.69 we just reported for FY '07.

Moving to the first fiscal quarter of 2008, we are targeting net sales of about $655 million, representing a year-on-year increase of over 23%. For the quarter we expect to open about 18 stores in North America, 5 in Japan, and 5 international wholesale locations. With several expansions across these geographies. All augmented by U.S. comparable store gains of at least 10% in the retail channel and mid teens in the factory channel with low single digit comp location increases for Japan. We're looking for operating income to be up at least 25% year-over-year, and earnings per share of at least $0.39 , an increase of more than 25%.

For FY '08, we expect CapEx to rise to about $200 million, primarily for new stores and expansions, both here and in Japan as discussed. In addition, we will be expanding our distribution center in Jacksonville by about 50% or 280,000 square feet to support Coach's projected sales growth over the next 5 years. While we upgraded the technology at this facility a year ago, we've now decided that a physical expansion is necessary to accommodate the faster than expected growth of our business. This will require CapEx of about 12 to $15 million in FY'08.

While these are our current goals, our actual results may vary from these targets based upon a number of factors, including those discussed under the business of Coach Inc. and risk factors in our annual report on Form 10-K. Coach also does not assume any obligation to update these targets as the year progresses. In summary, we're confident that our growth strategies will enable us to continue to gain share in the large and growing global market for fine accessories and gifts.

Thank you everyone for your attention. And now Lew, Andrea, and I will be happy to take some

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Bob Drbul of Lehman Brothers. Your line is open, sir.

Hi, good morning.

Good morning, Bob.

Lew, the question that I have regarding Japan, when you look at the high single digit comp in Japan, do you think that marks a significant improvement or change in the environment? How about maybe just Coach's success in Japan, do you think this is an inflection point?

Good question, Bob. We actually believe that it has a lot to do with the strength of the collections we introduced last spring. Ergo was a phenomenal success. It actually generated 30% of sales during its launch month, much higher than we thought. And as a result, we benefited, particularly and we're taking those learnings forward as we introduce new Ergo groups, both in September and next June. Overall, we believe that the improvement is really within the range of variability. So, we're still forecasting 10 to 15% overall growth.

Great. Thank you.

You're welcome.

Thank you. Our next question comes from Margaret Mager of Goldman Sachs. Your line is open.

Hi, it's Margaret. And congratulations on 22 excellent quarters.

Thank you, and welcome. (laughter)

Thank you.

Welcome. Couple questions. Could you just talk about why the factory outlet channel is performing double the pace of the full price channel? I know you said conversion and traffic were up double digit in factory outlet. But could you give us more color as to why that is occuring? Is it marketing that you're doing?

I'm with you.

Okay. That's one question. On CapEx, even if we take out the distribution expansion, it's still up 31% year-over-year. Why is that? If you could elaborate. And then lastly, going forward, your points of leverage in your business model, what can we expect, or how should we think about how you'll create further leverage and push your operating margins up even further above already truly excellent levels?

Thanks for keeping it to one question, Margaret?

Sorry. If you want to answer one that's fine and you can -- (laughter)

Mike, why don't you take the CapEx and the margin expansion questions first.

Sure. Margaret, you may recall that we guided to FY '07 CapEx spending earlier in the year, I think on the last call, to about 160 million and we came in at about 140 million. That's purely timing of projects and settling up of invoices, if you will. So the way I think about it, if you look across the two years and you move the 20 million of timing out of '07 and into '08 and layer on the spend to Jacksonville, you're roughly, from our '07 guidance of 160, you get in the neighborhood of the 200. So it really does not represent any significant change in strategy from our thinking for '07. And we feel it's relatively consistent. It's more about timing other than the [Jacks] issue.

So in talking about operating margins, obviously we saw another great quarter of SG&A leverage where, overall, we drove total increase in our operating rate improvement by 360 basis points, another great year -- I'm sorry, 330 driven by SG&A leverage of 360. Another great year where we got the operating margin up the 38%, 290 basis points above where it was for the full year. All of this happened, we think consistent with our guidance for the year on flattish gross margin rate, down slightly from last year, largely driven by channel mix and incredible SG&A leverage. And as we said many times, we believe that there is much leverage behind that for '08 and beyond.

If we can continue to grow our top line in the neighborhood of 20%, you'll see us create great leverage in our centralized functions whether it's the Jacksonville distribution center or advertising our design and finance teams, everything that we have here in New York. And if we can continue to comp at 5 to 7% in [Lake Toochie] North American retail business, that business will continue to deliver leverage, as well. And we're now seeing leverage coming out of Coach Japan. So, much leverage to come and we're optimistic that we'll continue to see operating margins grow into the future.

Thank you.

With regard to our factory store outlet performance, there's a lot I can say about the channel. And I'll just provide some headlines in relationship to Coach. First, for Coach, our factory store channels is equivalent to our diffusion brands. We never go on sale in our full price and our accessories concept. If someone wants to buy Coach on sale, they need to go to a factory store outlet. (no audio) 80% of sales in North America we estimate are purchased on discount. And in Coach, we have an extremely loyal factory store, (no audio) wants the Coach brand, but only wants to buy it at a discount. We do no external marketing whatsoever. It's entirely a pull strategy. Which means that consumers are just are coming in increasing numbers because they're satisfied with what they realize. What we have done, as you know, is improve the merchandise offering, and I do think that's attracting consumers, as well. And so despite the higher gasoline price and concerns that some people have about consumer confidence, we're not seeing it at all in our factory store business or in our other channels.

Is there any risk you're pulling traffic away from full price into factory outlet?

We measure it consistently, and the answer is no.

Okay. Thank you.

Thank you. Our next question comes from Jeff Edelman of UBS. Your line is open.

Thank you, good morning. And, Lew, very insightful discussion earlier.

Thank you.

My question relates to price points in the U.S. stores. Given the 17% increase in the handbags over $400, are we seeing a shift in mix as you're pulling more customers up into the lower end price points? And just a follow-up on that. Given the new product flow, what can we look at for average selling price in the first and second quarters? Thank you.

Just a clarification, Jeff. Handbags over $400 actually increased 75% to 17% of handbag sales.

Right. I'm sorry.

In our own stores. And in department stores increased from 2% to 9% in the same period. So what we're finding is that consumers are attracted to the bags that have greater make. At the same time having a very broad and diversified consumer base, we are mindful of maintaining sharp price points. And we have also seen an increase in sales of our smallest across the body bags, as well. So we're finding that there's growth on both ends. And we do have a good assortment in the middle, as well. Our overall handbag price during the fourth quarter in Coach stores actually only increased about 4% to about $280 from slightly under $270. The average handbag price actually only went up about 4%.

And the new product mix as it relates to the first half of the year?

We expect -- I believe the average handbag price to be up in mid to high single digits. However, it will be offset somewhat by increased penetration of lower priced categories such as jewelry and fragrance, which will be growing rapidly.

Just to add to the build off of what Lew said, we're looking for jewelry and fragrance to be about 4.5% of sales in '08 verses less than a point and a half in '07. That's going to hold down average ticket.

Great. Thank you.

Thank you. Our next question comes from Kimberly Greenberger of Citigroup. Your line is open.

Great. Thank you. I just had a quick question follow-up on Bob's question. When you indicated that Ergo was 30% of sales in its launch month.

In Japan.

Oh, that was in Japan.

Only Japan. That was a significant driver to the incredible 23% increase in quarters -- in the total quarter sales.

Terrific. Thanks for that clarification. And, Mike, could you just comment on the merchandise margin or gross margin trend within each channel? That would be helpful. And then, Lew, if you could just give us a quick comment on your outlook for the next two quarters in your indirect sales. I know it's -- you've seen 34 and 36% growth in the last couple of quarters. It looks like in the first and second quarter, you're up again 10 to 11% increases last year. Would you expect this trend rate to change? If you could just comment there, that would be great, thanks.

I think I'm going to answer the second part -- the second question first. I think what you're actually referring to when you say 10 to 11% is actually our shipments not our POS sales. The way we really look at our business is our POS sales. Let me answer it from a POS sales perspective. Our business out of the box in July in North American department stores has continued extremely strong both in our accessories world as well as footwear. And we have every reason to believe we will continue in the indirect businesses in North America to experience very strong POS increases year-on-year.

At the same time, our international wholesale business, especially our locations focused on the domestic consumer is doing extremely well. Year-on-year, we expect to see extremely strong results. Last year in the first half, I know we did some inventory balancing and our shipments did not keep pace intentionally with our POS sales. And I think we're in the better inventory position. So it's likely that we will see our POS sales more closely reflect -- I'm sorry our shipments more closely reflect our POS sales in the first half. Mike?

So, Kimberly, let me talk to gross margin a little bit. I can't do it, though, without first starting and saying that we believe the most important operative metric, of course, is to look at consolidated operating margins, and we're thrilled with the expansion we had in the quarter and the year. But moving back to gross margin rate. For the quarter, we continue to have excellent trends in our business unit, gross margins while on consolidated, we were off channel mix, the fact the factory grew more quickly than the business as a whole and CJI, our highest gross margin channel grew more slowly, hurt us almost 60 basis points. So, if you adjust out for channel mix, we actually saw organic gross margin rate improvement.

If I could just elevate it, the story, to look at the full year, for that time period, our gross margin year-over-year was down about 28 basis points. And if you look there, a channel mix and also the currency, the FX impact, we were actually off -- those two things were a drag of 82 basis points. So our organic margin actually was up more than 50 basis points year-over-year adjusting for those two factors with virtually every channel up year-over-year dramatically. In fact, ironically, the biggest improvement came from our factory store year-over-year gross margin rate improvement. We're very happy with the underlying trends in our gross margin rate. And particularly seeing that it's being driven the improvement year-over-year and factory is also very helpful.

Terrific. Thanks, and congratulations on a great year.

Thank you. Our next question comes from Liz Dunn of Thomas Weisel. Your line is open.

Thank you. Let me add my congratulations. My question relates to your mounting cash balance. Can you just sort of weigh in on what your plans are to what point you are comfortable buying back stock? And is there any potential that you would consider an acquisition of another luxury brand with sort of complementary categories? What are you just going to do with all this cash?

Mike?

Well, let me first start, maybe hold the question about the acquisition for Lew at the end, but let me lead off by saying that first and foremost, our primary use of our cash is to reinvest in our core business. And this is driven largely by investment in new stores and expansions globally. We're also looking at infrastructure improvements. Lew mentioned some in the prepared remarks, technology to further lower our SG&A rate, both in the in-store environments and in our centralized functions. I mentioned we're also going to invest and increase the size of Jacksonville to handle the continued accelerated growth of the business. And then as you mentioned, historically we've used our cash as part of a share buyback program. In fact, last year in about a 3.5 month period, we spent more than $650 million on buyback.

I think as most of you know, we have an authorization out there today that will allow us to go to the market and make a purchase of $500 million. The Board has always supported us when appropriate to take that number higher. We've not publicly said at what point we'll get into the market, but we've been opportunistic buyers and we would look to continue to execute that strategy.

As I also look out further for other uses of the cash, I could see at some point in the not too distant future using that cash to buy out one of our international wholesale distributors, in effect looking to replicate the CJI model that we have used so effectively to drive shareholder value. And then at the end of the day, we are in a position where we're building cash and we're comfortable building that cash balance. As Keith Monda, our Chief Operating Officer likes to talk about, to have powder dry money so we can further extend the growth of the story beyond our LRP period. Lew, do you want to talk to the acquisition?

Sure. First, we're not terribly enthusiastic about an acquisition in the foreseeable future, primarily because our opportunities as a [mono] brand continue to be boundless. We do have an articulated road map to double our business to $5 billion over the next 4 or 5 years. And feel that we're feel very confident that we can do that staying focused on the opportunities with Coach. So we're not looking at anything at the moment. And we'd be very cautious in this arena.

Any chance of any dividend?

There's always a chance of a dividend. We talk about it probably every three months. And we come up on balance saying, not for now.

Okay. Thank you very much.

You're welcome.

Thank you. Our next question comes from Randy Konik of Bear Stearns your line is open.

Hi, good morning. This is actually [Tepuche] [Berry] on behalf of Randy Konik. Just a quick question regarding your product mix. With the upcoming heritage stripeline plant for '08, how should we think about your mix of leather verses mixed material handbags? Specifically, with this line being coated canvas, could we expect to see a cyclical return to more nonleather bags in the next year or two? Thank you.

The short answer is that we're actually expecting on the contrary to see an increase in the world of leather plays within our handbag assortment in FY '08 driven in large part by Ergo as well as Bleecker. Looking in its entirety, we think there'll be a modest increase in the role that leather plays compared to prior year.

Great. Thank you.

You're welcome.

Thank you. Our next question comes from Christine Chen of Needham Company. Your line is open.

Thank you. Congrats on another amazing quarter.

Thank you.

I wanted to talk a little bit about international. You had mentioned that international wholesale was up. I was wondering if that was consistent across the different geographies in one area verses the other. And just also wanted to ask about the jewelry and the beauty business if you have any product introductions coming in, what we might see there?

I'm sorry, we're having some technical difficulties as they say. I'm sorry, I'm going to need to ask you to repeat that question.

Sure. About the --

One moment please. Christine, are you by chance on a headset?

Hello?

Hello?

Ms. Chen, go ahead, ma'am.

Just wanted to ask about the jewelry and the beauty business and what new product introductions we might be expecting from those going forward?

As Mike Devine indicated, we do expect jewelry and fragrance to account for --

About a 4.5 points of penetration in our full price channel.

Yes, so less than 1%?

Just under 1.5.

1.5% this year. So we do expect these new flanker categories to be important on the margins.

And then for international across the geographies is performance pretty consistent? Or are certain areas performing better than others?

Excellent question. First, what we're finding is that the locations that are focused on domestic consumers, markets like, major markets like Korea, greater China or Taiwan are performing remarkably well. As our brand takes hold with local consumers, we're experiencing great growth also in the Middle East and other Southeast Asian countries. Markets that are focused on the Japanese tourist have been suffering. As Japanese tourist levels of travel did not increase in '07 compared to our last year, and actually the Japanese consumers are spending less on gifting when she travels than she did prior year. So we are seeing a much greater increase in domestic locations. And our focus, of course, is in developing the indigenous populations in these developing countries.

Thank you. Good luck for the upcoming quarter.

Thank you.

At this point, it's 9:35, and we're going to close the floor to questions. Please feel free to call me or Mike later on today if you have any follow-up questions to the call. And thank you for joining us. Have a terrific day.

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