掛毯 (TPR) 2008 Q1 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 Senior Vice President of Investor Relations at Coach, Ms. Andrea Shaw Resnick. You may begin.

Good morning and thank you for joining us. With me today to discuss our quarterly results are Lew Frankfort, Coach's Chairman and CEO and Mike Devine, Coach's CFO. Mike Tucci, President of North American Retail is also joining us. Before we begin, we must point out that this conference call will involve certain forward-looking statements including projections to 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 retail costs. Please refer to our latest annual report on form 10-K for a complete list of each risk factor. 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 continue to discontinue future estimates at any time.

Now let me outline speakers and topics for this conference call. Lew Frankfort will provide an overall summary for our first fiscal quarter 2008 results and will also discuss our strategies going forward. Mike will review our initiatives for the Holiday season and 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 2008. Following that, we will hold a Q & A session that will end by 9:30 a.m. I'd now like to introduce Lew Frankfort, Coach's Chairman and CEO.

Thanks, Andrea, and welcome everyone. As you know, we have once again announced excellent top line growth and even stronger bottom line results of 28% and 34% respectively for the quarter just completed. We were extremely pleased with our performance, especially in light of the weakening retail climate in the U.S. As our innovative and relevant product clearly resonated with consumers across channels and geographies. We were also encouraged with the continued strength of new stores, which are coming online well ahead of expectations.

As you know, in today's press release we moderated our guidance for North American retail same-store sales for the balance of the year. At the same time, we underscored our continuing positive outlook, including the delivery of a 20% revenue gain this holiday season. Given the vitality of the Coach brand, category strength and our diversified multi-channel international business model, we're confident that the sales and earnings guidance for the year originally provided in July can still be achieved. In addition, our ability to act quickly and nimbly to curb spending during a period of uncertain sales trends will insure continued expense leverage.

While I would get into pertinent detail about current conditions and the outlook for the category in our business shortly, I did want to take the time to review our quarter first. Some highlights of our first fiscal quarter were: First, earnings per share rose 32% to $0.41 compared with $0.31 in the prior year as net income rose 34% to $155 million. Second, net sales totaled $677 million, versus $529 million a year ago, a gain of 28%. Third, direct-to-consumer sales rose 26% to $508 million from 404 million in the prior year. Fourth, North American same-store sales for the quarter rose 19.3% with retail stores up 10.8% and factory stores up 27.3%. Finally, sales in Japan rose 17% in constant currency driven by new stores and expansions augmented by low single digit retail comps as we continue to grow our market share.

During the quarter, we opened 13 U.S. retail stores including four in new Markets for Coach. Rochester, Minnesota, Augusta, Georgia, Nashua, New Hampshire, and Jensen Beach, Florida as well as three factory stores. In addition, nine retail stores and all factory stores are expanded, thus at the end of the period, there were 272 full priced and 96 factory stores in operation in North America. In Japan, four locations were added while one was expanded. At quarter end, there were 146 total locations in Japan with 23 full-price stores including eight flagships and 104 shop-in-shops, 14 factory stores and five distributor-operated locations. Indirect sales increased 35% to $169 million from $125 million in the same period last year.

Results were driven by strong POS gains in the U.S. and internationally. In fact, U.S. Department Store performance at POS continued to be excellent, running up about 20% last quarter on the same location basis. We were very pleased with the performance in Coach U.S. Retail stores, which enjoyed strong increases in conversion and average transaction size while traffic slowed most notably at the end of the period.

Results in our full price businesses, both Coach retail stores and U.S. Department Stores continued to be driven by the monthly flow of new product. Our U.S. Factory store business remained remarkably strong throughout the quarter given the vibrancy of the Coach brand, the strength of our proposition and continued sales growth in premium factory malls. Finally, our internet business rose 23% in total including an 11% increase at Coach.com while sales through the introduction of Coach to the Macy's and Dillard's websites which were not in place in the year ago quarter contributed the balance.

I also want to highlight another spectacular quarter for Coach women's footwear. Our business in department stores where we are now sold through about 800 locations rose about 75% at POS for the quarter. We were also very pleased with the performance of Coach Japan this quarter, where sales rose 17% in Yen and 15% in dollars, as our market share continued to grow rapidly. Last quarter, our growth in Japan was fueled primarily by distribution through both new stores and expansions augmented by low single digit comparable location sales. Finally, we were particularly pleased with the significant improvement in operating margins. While Mike Devine will get into more detail on our financials and of course I will discuss our outlook in some detail, I wanted to give you this recap.

As you've heard, Mike Tucci is with 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 successful across all categories and collections. Each of our monthly introductions was well received starting in July with Chelsea and a tiered offering including novelty and limited edition styles. This was followed by Hamptons and Legacy in August and by a fresh group of belted Ergo silhouettes in September. Also in September, our jewelry assortment was expanded and introduced into an all store distribution. Once again it's important to note the strength of our $400 and over handbag offering in the quarter which doubled, representing 25% of our North American retail store hand bag sales.

To open October, we introduced Bleecker, our first new major lifestyle collection of fiscal 2008. This collection, which was inspired by Coach's heritage, is anchored by a new version of our iconic duffel sack, and has been well received. Our Bleecker collection is a key focus and major investment for holiday, and as always we're excited about our key items and concepts for holiday offered at a range of compelling price points.

First, in handbags beginning with Carley, this was first introduced in January and an important key item style with broad consumer appeal and has consistently represented over 10% of business since its debut. Second, Bleecker duffels, inspired by our heritage and introduced earlier this month, this updated silhouette is performing very well. The convertible strap, great capacity and opening price point of $298 makes it particularly compelling. Third, the Bleecker Flap starting at $348. This iconic style was also introduced this month and the adjustable strap and exterior pockets add to its functionality. Finally, handbags over $400. As I mentioned earlier, this category continues to be our fastest growing, and we are well positioned for holiday in this price segment of our offering. A few examples include the new Bleecker Elisa duffel at $748, the Hamptons Miranda satchel, priced between $798 and $1,200, and the Legacy Lead shoulder bag priced from $598 to $798.

In other categories, gifts under $100, whether an add-on item or an introduction to the brand, she will find a range of great gifts at sharp price points. Included our fragrance and body location introduced this year, the best selling new capacity wristlet offered in a range of fabrics and mini skinnies in over 20 fabric and color choices just to name a few. Also, jewelry. The updated holiday assortment includes a range of bangle bracelets priced from $68 to $148, leather boyfriend necklaces and bracelets with charms at $88 and $98 and the Daphne collection, a glass inflated metal group of rings, earrings, necklaces and bracelets at opening price points of $98.

Our holiday gifting floor set will be installed on the Monday before Thanksgiving with a focus on our key holiday statements and items. The floor set will be refreshed to coincide with the launch of Resort on December 3rd, a capsule collection of best selling Bleecker silhouettes offered in a spring signature pallette and complimented of metallic woven leather handbags and accessories. Our holiday catalog in home in mid November has been expanded to include our new categories as well as the resort collection. We're also looking forward to introducing our special holiday gift guide, which will be used as an in store selling tool, focused on our key items.

And finally on the in store experience, Coach service is an initiative we implemented three years ago to enhance our consumer shopping experience and ultimately drive conversion. As you know, this comprehensive training program teaches interactive selling and engagement techniques to our sales associates. For FY '08, the program has evolved providing enhanced leadership skills to our store managers enabling them to develop our teams more effectively.

Technology initiatives will be important this quarter and they include first, time and attendance. A new time and attendance system is being implemented in advance of holiday. The system gives store leadership visibility to individual service leader productivity, specifically, it allows us to be more targeted in scheduling our most effective service leaders during peak times and then measuring their effectiveness. Second, E-Runner. During the first quarter, we rolled out our enhanced line management and check out process to an additional 75 high volume stores, taking us to 98 stores for the holiday season. This system reduces transaction time and improves throughput. Third, web store pick up. We expect that this initiative launched in July will be very popular with our holiday shoppers. Stores will be ready-to-serve these customers quickly and efficiently as they visit our stores to pick up purchases and do some additional shopping.

Staying on the topic of Coach.Com for a minute, as mentioned during our analyst day presentation, we are excited about two new web-based initiatives. First, the very recent launch of Coach.com in Canada, and second, in early November, we will be rolling out an online exclusive Coach.com gift registry just in time for holiday. Simply put, our objective this Holiday is to leverage our improved systems and operating standards to move the lines through the store faster while providing additional web service options for our internet shoppers. Naturally, many of these initiatives introduced for holiday will continue beyond.

Before I turn it over to Lew, I wanted to briefly touch on the performance of our new stores, which has been truly exceptional and well ahead of our internal projections. During our Analyst day presentation we talked about the out performance of stores opened in the first three quarters of 2007. The good news is that the stores open in the fourth quarter for which we now have revised annual volumes are running at $2.4 million versus our expectation of $1.7 million. 40% ahead of plan. And the four stores opened early enough in the first quarter to have been revised including two in new markets and two in developing markets are running at volumes of $2 million on average versus pro forma volumes of $1.4 million. Clearly, these results speak to the vibrancy of the brand and our ability to attract new consumers both in new and existing markets. With that I will return the discussion to Lew to continue with our overarching strategies.

Thanks, Mike. During the last five years, we have seen same-store traffic increase by 50% in our North American retail stores. At the same time, we generated double digit same-store sales gains in each of these five holiday seasons, capped by last year's comp of 20.8% of which about half came from higher traffic. While we had initially expected that we could deliver another double digit holiday season at retail, the recent deceleration in traffic and moderation in category growth from the torrid 20% growth levels we have seen since 2003 to a rate closer to 10% this fall has led us to be more conservative in our outlook.

At this point, for planning purposes, we also think it's prudent to project that the category will grow at a 10% level for the remainder of our fiscal year. With that said, we remain confident in our long term strategies and our prospects remain intact. Our results, both top and bottom line determined by a multitude of factors, even with more modest north American retail comps, our significant growth in U.S. department stores and Coach factory stores along with Japan and other international markets in combination with strong new store performance will allow us to continue to achieve excellent revenue gains. In addition, our strict financial controls will enable us to achieve superior earnings growth as well.

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, Japan, and Greater China, and second, is productivity which we drive across all geographies 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 growing North American women's accessories market by leveraging our leadership position as a top of mind and preferred brand to self-purchase and gifts. As part of the strategy, we've been emphasizing new usage occasions within our hand bag offering and developing new blanket categories such as jewelry an fragrance. There is also a continuing opportunity to elevate our hand bag offering as we have seen the so-called white space between our price points and those in the European luxury brands continue to widen. Our first Legacy boutique opening this Friday on Bleecker Street, here in New York will feature a more elevated product assortment, including an exclusive group of bags and accessories. This still will allow us to test merchandising, service, and product initiatives.

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 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 build up of individual malls and locations that meet our demographic requirements and economic hurdles. Specifically during FY '08, we expect to open about 40 new North American retail stores, including the 13 already opened in the first quarter. The new openings will include 11 completely new markets and we expect to open at least six new factory locations, including the three opened in the first quarter. In addition, we will be expanding at least 10 retail stores and several factory stores. Taken together, we expect total square footage to grow at about 20% in FY '08, a bit above last year.

And third, outside the U.S, We're continuing to increase market share with the Japanese consumer, driving growth in Japan primarily by opening new retail locations and by expanding existing ones. 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 locations. Overall, we expect to increase our square footage in Japan at a slightly lower rate at FY 08 than we did last year. Also, we're continuing to target overall constant currency sales growth of between 10and 15% for the balance of the 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 a foundation of substantial sales in the future, specifically greater China, Korea, and other such geographies that are increasing in importance as a category is growing rapidly and Coach is taking hold. During the first quarter, eight new Coach locations opened internationally, excluding Japan, including three in greater China, and in FY '08 we will open through distributors about 30 net new locations focused on Greater China, Southeast Asia and the Middle East. We plan to open at least three more locations in major cities in mainland China later this year bringing our total to 16.

And lastly, of course, we continue to have an overall focus on improving the greater profitability so that our bottom line results continue to outpace top line performance. In summary, we're well positioned to continue to capitalize on the many opportunities available to us and have the vision, strategies and tactics in place to realize our long term growth plans, irrespective of the near term environment. I will now turn it over to Mike Devine, our CFO, for further details on our financials. Mike?

Thanks, Lew. Lew and Mike have just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our first quarter results. As mentioned, our quarterly revenues increased 28%, with direct-to-consumer, which represents over three quarters of our business, up 26% and indirect up 35%, driven by strong gains in U.S. department stores and international POS sales. Net income for the quarter increased 34% to $155 million or $0.41 per share as compared to $115 million or $0.31 per share in the year ago period. Our operating income rose 32% to $239 million in the first quarter versus $181 million in the same period last year. Operating margin in the quarter was 35.3% compared to 34.1% in the year ago quarter, a 120 basis point improvement.

In the first quarter, gross profit rose 28% to $518 million from $406 million a year ago. As our gross margins continued to be exceptionally high, essentially flat to last year at 76.6% versus 76.7 in the prior year. SG&A expense as a percentage of net sales were well below prior year levels in the first quarter representing 41.3% of sales versus 42.6% as we continued to deliver spending leverage against strong, top line growth. Inventory levels at quarter end were $363 million, and were well controlled, up only 21% from prior year levels but do include investments in key holiday initiatives which position us well for the season. Further, this inventory level allows us to support 51 net new U.S. stores, 15 net new locations in Japan and substantially increased sales levels from the year ago period.

Accounts Receivable balances also grew more slowly than sales, rising $31 million or 26%. Cash and short-term investments stood at $1.2 billion, as compared with $456 million a year ago. During the quarter, the Company repurchased 3 million shares of common stock at an average cost of $43.72 per share. At the end of the period, $368 million was available for repurchase under our current authorization. Net cash from operating activities in the first quarter was $129 million compared to $81 million last year during Q1. Free cash flow in the first quarter was an in flow of $90 million versus $44 million in the same period last year, mainly due to higher net income. CapEx spending primarily for new stores and renovations was $39 million versus $36 million in the same quarter a year ago.

Now I'd like to provide you with some of our updated goals for Fiscal 2008. For the second fiscal quarter, we are targeting net sales of about $970 million, representing a year on year increase of about 20%, with low single digit North American comparable store sales in the retail channel and at least midteens in the factory channel, with a low single digit comp gain at Coach Japan. Operating income will also be up over 20% year-over-year and an earnings per share target of $0.68. Our current goals for the full fiscal year are net sales growth of over 21% to over $3.17 billion, driven by distribution gains and productivity growth. As mentioned, 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.

Our second half sales expectations include mid single digit comparable store sales gains in North American retail stores and at least 10% comparable store sales gains in the factory channel, and a total sales increase in Japan of between 10 and 15% in constant currency, driven primarily by distribution growth through new store openings and expansions augmented by low single digit same location sales growth. We're targeting an operating margin of about 38.3% which assumes a gross margin close to last years extraordinary levels over the balance of FY '08 and further SG&A leverage.

Operating income dollar growth of over 22% above FY '07 levels, interest income of about $70 million will add to pre- tax income, while net income will be somewhat offset by both higher share count and a higher tax rate, rising to about 39% for the year due to the fact that incremental taxable income is being taxed at higher rates. Including these factors, we expect to generate EPS growth of about 22%, which will produce earnings per share of about $2.06, in line with previous guidance. For FY '08, we continue to expect CapEx to rise to about $200 million primarily for new stores and expansions, both here and in Japan as discussed.

In addition, as mentioned in our last call, we will be expanding our distribution center in Jacksonville, Florida by about 50% to support Coach's projected sales growth over the next five years. While we upgraded the technology to this facility a year ago, a physical expansion is now necessary to accommodate the 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 in the business of Coach Inc. and risk factors on 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, Mike, Andrea and I will be happy to take your questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Bob Drbul of Lehman Brothers. You may go ahead, sir.

Hi, good morning.

Good morning, Bob.

Lew, I guess just a couple of questions around your consumer, the Coach consumer. When you look at the trends that you're seeing, how concerned are you about your specific consumer and the high end and do you have the right quality of inventory to match the trends that you're seeing within your product offering?

First, we're confident that the luxury consumer as well as the accessible luxury consumer, which is our consumer, Bob, is continuing to spend. What we're experiencing in our stores, for example, is much higher levels of conversion and lower levels of traffic this year, so she is spending and based upon what she's buying, she's also responding very well to our elevated product offering. In addition, when we look at our stats in terms of our ongoing attitude consumer research from an attitude perspective, the Coach consumer has never been more vibrant than she is today. She has actually the highest levels of metrics in terms of her belief and confidence in Coach relative to ranking Coach as one of of her favorite brands, excellent value, a brand that she trusts, a brand that she would recommend, so we believe both the Coach consumer and more generally, the high end consumer is still out there and she spends when she shops.

All right, in terms of inventory position, Bob, we feel very good about our position going into the holiday season. Mike referenced key initiatives that he has planned into his business and our inventories are well positioned to support those initiatives. We feel very good about it.

Great. Thank you very much. Good luck.

Thank you.

Our next question comes from Margaret Mager. You may go ahead. One moment, please. Our next question comes from Paul Lejuez of Credit Suisse. Your line is open. You may go ahead.

Hi, this is Sarah Lewis on behalf of Paul. You highlight in your press release the ability to curb spending of uncertain sales trends. I was wondering if you can breakup some of the bigger buckets you've been able to cut back on and also where do you expect the spending to be curved going for war.

Mike?

Yeah, the areas where we are able to act most quickly in terms of adjusting SG&A is in Mike's business actually in the retail stores he talked about the investment we've made in the time and attendance system as the most recent investment in technology that we've put in place, so we are able to quickly match our store staffing levels with the traffic that we're seeing coming into the stores so that's one of the first levers that we're able to use so that we can optimize that relationship to drive conversion without over spending. Secondly, many of our stores in fact the vast majority of them are in a variable percentage rent scenario we've kicked above break points so as traffic and sales performance moderates so do our occupancy levels. Beyond that we've gone back into the business and are looking at all of our spending dollars and looking for those that do not have near term immediate paybacks as we ride out this near term decline in traffic, so there are many levers that we have available to us and we feel good about the financial controls and how nimble we are in our ability to react to continue to deliver SG&A leverage.

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

Thank you, good morning.

Good morning, Jeff.

Could Lew or Mike give us a little more color in terms of your recent traffic trends? Were there any geographical differences or ages to give us some sense whether or not it's really a weather end or economy issue that's resulting in the reduced store traffic and mall traffic?

Mike?

Sure. Jeff, we're seeing really at the tail end of September the early part of October and I want to ground you from the standpoint of where we are for the quarter. We've got over 90% of the quarter in front of us as a significant portion of our volume comes post-Thanksgiving, but what we're seeing in the immediate past few weeks is pressure in the Northeast, some pressure in parts of the South, specifically our Florida market, and pressure on the West Coast. We're actually very pleased with the continued relative success of our business in the Midwest, parts of the southwest, so there is some geography. I'm not going to get into weather because it's been well documented and that really is a factor that we have to manage through, so we're looking at some slight variation from a geographic standpoint and we're managing it very very closely across all stores. Age of store does not appear to be a factor at this stage in the game.

Okay, great, and then as a follow-up, could you discuss your average selling price and units per transaction and again whether there's any variation by geography there?

Sure. One pocket of strength for us by the way recently has been Manhattan and that's been driven by what we see as a robust fashion market here in Manhattan, some increase in international and domestic tourism, and some pricing opportunity in what I would call our higher tiered stores. Some real important factors, one, AUR improvement in handbags in the quarter was up almost 8%, so in a challenging cycle in terms of footsteps, we're able to see significant improvement from a pricing standpoint and that will carry and help us tremendously as we go forward through the balance of the year. ADT was up modestly in total because some of that AUR improvement was mitigated or offset by the introduction of jewelry and fragrance and some of the sharper price items that we've put into the assortment and small accessories, so we continue to see pricing power in the brand. We also continue to see improved conversion levels on a lower index of traffic, and that allows us to continue to get comp growth albeit against a weaker backdrop from a traffic standpoint.

Okay, great. Thank you.

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

Great, thank you. I was hoping you could give us a little bit more color on your department store POS sales. Are there any in particular that you can call out as being stronger or by contrast weaker, and then Mike, I was hoping you could give us just some color on your merchandise margin by channel and if you're seeing continued gains in organic gross margin by channel. Thanks.

Well first, with regard to department stores, we actually have experienced good growth across-the-board during the first quarter. Interestingly, the greatest growth actually during the first quarter came from Dillard's, which as you know is a regional department store which ran about 35% ahead of POS.

So Kimberly, let me take the, I assume you're speaking to gross margin rate and it was our Q1 performance, we're once again very pleased within terms of organic gross margin rate. You saw that we were essentially flat, actually off 10 bps versus Q1 of a year ago and we were almost fully able to offset with organic gross margin rate improvement about 2 bps of dampening impact from channel mix and about 20 bps coming out of CJI as we sold through inventory that was purchased with a weaker Yen in Q1 of this year than Q1 of a year ago, so we had 40 bps if you will of bad news to overcome and we essentially did that by getting back to essentially flat with organic margin rate improvement.

Great.

Gross margin rate improvement.

Thanks and good luck with your holiday.

Thank you.

Thank you, our next question comes from Margaret Mager of Goldman Sachs. Your line is open. You may go ahead.

Hi, apologies on technical difficulty there but I hope I didn't miss too much, but the question that I'd like to hear you respond to is on the traffic, why do you think it's weaker and why has it weakened in the past several weeks in your opinion, and then as you look out to the second half of the year with your comp guidance going from low single digit back up to mid single digit, what do you see on the horizon that would encourage you to see it pick back up and then related, on the department store front, when you outline your expectations for the rest of the year, one of the things you called out as continuing to see strength is on the department stores. Given that the traffic issues seem to be broader based environmental across all of retail, wouldn't you expect your department store business to start to weaken as well and is that Incorporated into your outlook? Thanks.

Okay, let me take the second question first. In the department stores, which has not been a strong channel in terms of traffic year on year for several years now, Coach has outperformed our competitors and continues to grow as now very substantially in each period and the reason for that is that we deal with the less qualified consumer in department stores. When a consumer is looking to buy a bag in a department store, she might be loyal to Coach or she might not, but if she's looking for a bag, we have the opportunity to compete with the other resources and even though we have 30% market share in department stores, there's another 70% we don't have, so we have been fortunate that consumers continue to see our product and our offering is superior to our competitors and we believe that will continue so we're very confident in our estimates in department stores that we will out pace their performance an we will out pace the category's performance.

With regard to the retail environment, Mike touched on it earlier. The weather situation is well documented so we won't talk about that but the overall retail environment has been soft and particularly started to affect us in late September and that has continued through October and when we look at it, we also look at our comparison with last year, the reality is that our traffic was up 11% or so this past quarter, the quarter we're in now, and when we move into the second half of the year, our fiscal year, we're up against easier traffic comparisons and we also don't believe that the unusual retail environment influenced by whether it's going to continue at this level, consumers will be back shopping once weather it turns cooler on a sustained basis, consumers will remember that most of us do live in a temperate climate and there are seasons.

Okay, Lew, can you tell us what your building into your expectations for department stores as far as maybe where it has been and where you see it going in terms of rate of growth? If I recall correctly, I think that channel has been growing about 30% for you.

We're very comfortable with our 20% plus growth expected during the rest of the fiscal year at POS in department stores.

Okay, thanks and good luck.

Thank you.

Okay.

Thank you. Our next question comes from Randy Connick of Bear Stearns. Your line is open.

Great. Thank you very much. Lew, you talk a lot about in your comments around the cyclical downturn in traffic and reduced category growth cyclicality for the remainder of the year. Can you just talk in balance of cyclical versus secular, how do you think about the longer term secular prospects for the industry and what makes you still confident there, and how long do you see the cycle? Is your cycle forecast just for a weaker back half picking up into the next year of calendar '08?

Randy, first, for context, we don't really see this as a cyclical shift. The reality is that handbags during the course of these last several years has become an ever increasing important component of women's wardrobes. You know the drill, she's now buying over four handbags a year compared with our just two several years ago. The reality is that accessories remain very important to our consumers. She's extremely loyal to them and we have every reason to believe that she's going to continue to purchase them at levels equal to if not higher than she has in the past. The reality is that we have experienced over 20% growth in the category since the second half of 2003.

We expected it to slowdown. We just didn't know when it would occur. It seems to have occurred this fall and we're looking for the category to continue to grow at about a 10% level, naturally it could pick up or it could slow somewhat, but our assumptions of going forward are built upon 5% growth although we're planning the category to grow about 10%. The other thing that we need to keep in mind is that overall retail spending has declined and we don't know to what extent the category, the drop in growth rate from 20% to between 10 and 15% is a factor of the sudden decline in retail spending. Anything else, Randy?

I'm fine, thank you.

Thank you. Our next question comes from Michelle Clark of Morgan Stanley. Your line is open. You may go ahead.

Thank you. Mike, do you still need about a 5% comp growth at North America retail to leverage SG&A or will that decline as you roll out these new technologies? And then secondly, you gave us POS department store POS at Dillard's. Can you also give it to us for both Nordstrom as well as Macy's? Thank you.

This is Mike. I'll take the question on the comps and then Lew maybe can take the question on department store POS. I don't think typically we've given that level of granularity across-the-board but in terms of the comp basis, we've talked to a 5 to 7% comp rate leading to leverage to the retail P & L in quarters passed, we still feel good about that, to answer your specific question, assumed in that guidance from quarters past was continued investment in technology and continuing ability to leverage our spend and become more efficient over time, so that had always been in our thoughts and guidance.

And then the other question on POS department stores?

Just actually, we're looking.

Oh, okay, thank you.

We're looking for the numbers but what we're going to need to do is get back to you separately on the other numbers. We don't have them available.

Okay, great and then just one last question on the traffic weakness. Are you seeing that both on your off mall standalone stores as well as at your in mall retail stores?

In general, we are.

Okay, thank you.

Thank you. Our next question comes from Erwan Rambourg of HSBC. Your line is open. You may go ahead.

Hi, good morning and I'm Erwan Rambourg from HSBC in London. Coming back to traffic, if the traffic levels remain slow, could this theoretically affect your store network expansion plans, i.e. could you cut your plans or on the contrary accelerate openings to compensate for this weaker traffic?

It's highly theoretical at the moment. Clearly, there's a change over a number of years or over a much longer period, things could change but the reality is we're talking about a very short-term trend that we believe is going to correct itself as we move into the holiday season and we have no reason to believe otherwise, and so we're very confident and comfortable with our rollout strategies and our plans. Our new stores as we said are performing exceptionally well, 30, 40% ahead of our pro formas.

And then just as a reminder, Erwan, I think many of you have seen our prepared materials, at our more conservative pro forma levels, we're getting cash paybacks on these store openings of a year and a half and so when we're outperforming by 20 to 40%, you can do the math. These are outstanding investments so we would not consider slowing.

Okay, thanks. Just a follow-up question on the comp level for full priced retail because actually the figure was close to 11% for the quarter, you were mentioning weakness at the end of the quarter. Can you confirm that the comp level was still positive or can you give a bit of flavor on the differences between the beginning of quarter and end of quarter?

The only, the way that we look at it obviously within the quarter on the 11 comp primarily driven by conversion and a modest improvement in tickets, we did see a slowdown in traffic at the end of the very end of the quarter, but the traffic in total was down slightly for the quarter.

Okay, and then just maybe a last quick question. It seems that the Coach consumer is much more resilient at the higher price points. Is this, is it fair to say that if it is the case, will you accelerate focus on these higher price points?

Let me just jump in here and first say that our factory business, on the contrary to our full price traffic, that is our traffic in our factory stores continues to run extremely high year on year comparisons and we're seeing no slowdown at all in her spend in the factory arena and in fact we think that the unusual warm weather of course has contributed to a pattern where our factory shoppers are behaving like it's still summer, for weekend jaunts on the regional malls and tourist areas so we have seen no slowdown in spending at our factory stores and again our most price sensitive of the channel. With regard to full price, we find, we see that consumers are buying at all price points. The challenge that we're experiencing in the first part of this quarter as we said a number of times now is our traffic levels, but once she's in the store, she's buying at a significantly higher level than she did last year.

Okay, thank you.

Thank you. Our next question comes from Dana Telsey of Telsey Advisory Group. You may go ahead.

Good morning, everyone. Can you talk a little bit about inventory planning, given the lower comp expectations, how you're planning inventory going forward and also, any update on Japan both either your own retail stores or in Department Stores in terms of what you're seeing there? Thank you.

Well, let me answer the first part, the second part first , which is Japan. Our October business continues strong in Japan and the trends that we were experiencing in the first quarter continue unabated. So Dana, to speak to inventory planning, you know us well and you've heard us talk and come to understand our supply chain and how nimble it is so yes as we've moderated our expectations around top line growth, we've gone into a small degree moderated our production plans as well. You know our operating model and inventory is just a non- issue at Coach. The flexibility of the factory channel at all will allow us to keep inventory very well controlled, so as I talked about , the Q1 inventory levels were actually up much less than sales growth was up, so we feel very good about inventory levels and production planning and we'll be nimble and react to the business

Thank you.

Thank you. Our next question comes from Christine Chen of Needham & Company. You may go ahead.

Thank you. Wanted to follow-up on the question about traffic. You spoke a little bit about differences in geography. Has there been any difference between your fashion, flagship versus core stores and then I have a follow-up question on how jewelry has been performing.

I actually, when I mentioned the question earlier was around age of store and we have not seen any significant difference in age of store and when we look across attributes, core fashion flagship, the band on variation is very very slight. There's really not a difference.

Yes, let me add, Christine. We have no evidence to believe that this is a Coach specific issue. We believe that it's a function of the overall retail environment based on all of the diagnostics that we've undertaken.

And then with respect to jewelry now that it's in all stores, I know it's early. How has performance been?

We're actually very pleased with jewelry. It's going to be an important element of our gifting strategy for Q2. Operating above or on plan in all the stores it has rolled out to, percent contribution levels between 2.5-3.5% depending on the store type and the assortment and the difference there is we have a capsule group for flagship, select flagship stores of a Sterling line that's been excellent which has been driving some penetration, we're actually looking at reacting to that to be in a good inventory position for holiday an add a few stores as we have inventory capacity available to do so, so we'll take a nice category for us and generating a lot of interest in the stores.

And then on the non-Japan international front maybe I missed it, could you possibly comment on how much that was up, because it blended into the wholesale category or indirect category?

We're just checking the numbers. At POS, I believe our sales were up, Andrea do you have the numbers? It was up double digits, I was looking for the exact number.

And in terms of impact to our financial statement, the net sales or shipments are in that 35% indirect number so we had a very good quarter to our international distribution partners as well.

Okay, great. Thank you. Good luck for the holidays.

Thank you.

It's now 9:32. The market is open and we're going to conclude this conference call. As always we'll be available for questions throughout the day and the week. Thanks, everybody for joining us and have a fabulous day.

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