掛毯 (TPR) 2008 Q3 法說會逐字稿

Good morning 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.

Thank you and good morning. We meet today to discuss our quarterly results with Lew Frankfort, Coach's Chairman and CEO and Mike Devine, Coach's CFO. Before we begin, we must point out this conference call will involve certain forward-looking statements, including projections for our business in the current or future quarters or fiscal years. These statements are based upon a number of continuing assumptions.

Future results may differ materially from our current expectations based upon risks and uncertainties, such as expected economic trends for our ability to anticipate consumer preferences. Refer to our latest annual report on Form 10-K for a complete list of risks factors. Also, please note that historical growth trends may not be indicative of future growth. We presently expect to update our estimate 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.

Let me outline the speakers and topics for this conference call. Lew Frankfort will give provide an overall summary of our third fiscal quarter 2008 results and discuss strategies going forward.

Mike Devine will continue with details on financial and operational highlights for the quarter, as well as outlook for the fourth fiscal quarter of 2008. We will hold a question-and-answer session that will end by 9:30 a.m.

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

Thanks, Andrea. And welcome, everyone.

We announced strong top line and bottom line growth of 19% respectively for the quarter just completed in line with our expectations. We were pleased with our performance, especially in light of the worsening retail climate in the U.S.

We also continued to be pleased with the strength of new stores, which are still coming online well ahead of expectations. Overall Coach's quarterly performance reflected the strength of the Coach franchise and the continued outperformance of the U.S. handbag and accessory category as compared to overall retail sales.

For the fourth quarter of the fiscal year ending in June, we are projecting sales of $780 million and EPS of $0.50, both up 20% from year ago levels taking the full year to about $3.18 billion with EPS of $2.06, each increasing 22%. It is worth mentioning that this EPS guidance has been in place throughout the fiscal year.

Given the continued uncertainties in the economic backdrop, we have decided to wait until the end of our fourth quarter to provide specific guidance for the next fiscal year. At the same time it is important to underscore the confidence we have in our ability to continue to drive significant top and bottom line growth through both distribution and productive gains.

In terms of distribution, given the compelling returns we have continuing to generate, we will execute our existing distribution plans in North America, including the opening of 40 new retail stores in the coming year.

Regarding productivity, our confidence stems first and foremost from our product, coupled with, one, the overall strength of the Coach proposition underscored by our key business and brand equities.

Two, our broad and loyal consumer franchise.

And, three, our innovative and consumer-centric nature.

While I will get into further detail about current conditions and the outlook for the category in our business shortly, I first want to take the time to review our quarter.

Some highlights of our third fiscal quarter were, first, earnings per share of 19% to $0.46, as compared to $0.39 in the prior year, while net income rose to $162 million from $147 million.

Second, net sales totalled $745 million versus $625 million a year ago. A gain of 19%.

Third, direct to consumer sales rose 20% to $578 million from $481 million in the prior year.

Fourth, North American same-store sales for the quarter rose 9%.

Finally, sales in Japan rose 12% in constant currency and 25% in dollars. During the quarter, Coach opened 5 North American retail stores, including one new market for Coach, Macon, Georgia.

We also opened 2 factory stores during the third quarter and expanded another. At the end of the period, there were 287 full priced and 101 factory stores in operation in North America.

In Japan, 2 new department store locations were opened while 2 retail stores were closed.

Also, 5 locations were expanded, at quarter end there were 147 total locations in Japan, with 21 full-priced stores, including 8 flagships, 106 shop-in-shops, 15 factory stores and 5 distributor operator locations.

In direct sales increased 15% to $166 million from $144 million in the same period last year. During the quarter POS sales at U.S. department sales grew at 5%, while international POS sales grew by more than 25%. During this same quarter, we estimate that the premium U.S. handbag and accessory category grew between 5% and 10%.

At the same time, Coach's bag sales rose 18% across all channels in North America.

As mentioned, we were pleased with our overall performance in North America this quarter against very difficult comparisons across all channels. Our total revenues in North America were up 15% with our directly operated stores generating a 20% gain driven by both distribution and an overall high single-digit comp.

We would note that in full-price stores our weak traffic patterns from the second quarter continued, while conversion and average transaction size rose.

In factory, we continued to see increases across all three metrics. As noted in our press release, beginning this quarter, we're only providing aggregated comparable sale stores for our North American retail and factory stores, while less details, this measure fully reflects our brands retail performance in North America while still providing a consistent metric to gauge our results against prior periods and other luxury retailers. By aggregating comps, we're aligning the way we measure performance with the way we manage our retail business.

This will also provide the operational flexibility to respond to changes in market dynamics and run our business in the best long-term interests of our shareholders. Results in our full-price businesses across channels continues to be driven by the monthly flow of new product. Our U.S. factory store business remain very strong throughout this quarter given the vibrancy of the Coach brand, the strength of our proposition, and continued overall sales growth and premium factory malls.

In addition, our made-for-factory product continues to resonate with this dedicated consumer.

I also want to highlight another excellent quarter for Coach women's footwear. Our business in department stores, where we are now sold through about 800 locations rose about 24% at POS for the quarter.

We were also very pleased with the performance at Coach-Japan where sales rose 12% in yen and 25% in dollars. Growth in Japan was fueled primarily by distribution through both new stores and expansions as our market share further expanded against a continued weak category backdrop.

Mike divine will get into more detail on our financials a bit later.

Across all businesses, bags and women's' accessories continue to drive our business results, as a look at our sortment continues to evolve to reflect changing consumer preferences.

Consumers continued to embrace our new and innovative product this Spring, as part of our seasonal transition, we introduced our evolved Hamptons Collection in January, featuring the Madeline Tote. Offered in multiple sizes this silhouette performs very well, particularly in bold colors. In February, we launched our new Heritage Stripe collection, a group of coded canvas totes and bags and added an updated group of Signature Stripe bags and accessories later that month.

In March we introduced another silhouette, the Francine Satchel, the focus of our Spring advertising campaign. We were particularly pleased with the success of this $798 bag, which was available in all stores. In fact, it is worth mentioning that our over $400 handbag offering continued to grow in importance representing 22% of handbag sales in the quarter, versus 13% last year. And at the beginning of April, we brought back the popular SoHo Collection in softer, more feminine styles.

Later this week, we will be introducing our group of pleated Ergo Bags and Accessories, which will be our focus for Mother's Day.

In Japan, we've been conducting a presale of pleated Ergo in the millennium department store group, and have seen remarkable consumer response to date. So we're very optimistic about the importance of the this group.

Also on tap for Q4 our new version of our popular patchwork, a casual-washed cotton signature collection and an elegant floral applique group for our Signature Stripe bags.

I also wanted to briefly touch on the performance of our new retail stores, which has been well ahead of our internal projections. For a number of quarters, we talked about the strength that we've seen in new store opening volumes.

This trend has continued despite the economic backdrop, and in the 25 stores opened through January are running about 25% ahead of proformas with an average first-year annual volume of $2.3 million.

We recognize that in the period of weak consumer spending, it is especially important to provide a level of newness that will quite literally "wow" the consumer compelling her to purchase.

We touched some of our upcoming initiatives regarding our product, our stores and our merchandising in previous calls and conference webcasts this spring, and as we moved through fiscal '09, these initiatives will becoming increasingly evident. First and most importantly, we will be focusing on our product, the cornerstone of our brand. We're striving to compress multiple years of innovation in FY '09 to create a particularly compelling offering to further inspire and otherwise reticent consumer to spend.

Starting with our Fall collections, including Bleecker, Hamptons, Legacy and a new Soho handbag group, you will notice a shift in attitude reflecting a more sophisticated design aesthetic, including softer, drapier, silhouettes, lighter-weight leathers in new finishes such as patent, glazed and metallic and minimal hardware in some collections.

We're particularly enthusiastic about the launch of Madison, a new comprehensive lifestyle platform this October. The design of this collection is distinctively Coach with a pretty, more feminine and more sophisticated appeal. This collection will include a broad array of light-weight handbag silhouettes, wallets and accessories crafted in soft, rich, finished leathers. As part of Madison, we will also be introducing CC, a contemporary abstract take on our logo providing an entirely new platform for Coach. This graphic design lends a product a fresh modern allure.

Madison's design details include sheek pleating, a new horse and carriage iconic plaque and handbag charms, which adorn most styles. Also unique to this light-weight collection, several of the handbag styles are convertible and could be worn over-the-shoulder or carried in-hand meeting the need of the functional fashion consumer.

Second, you will also notice a number of initiatives targeting our in-store experience. They include new store formats such as Gallery, which is essentially a larger format Coach store targeted for the best and most strategic mall locations in the country. We're currently planning to pilot the gallery format in three upscale malls beginning with Short Hills, New Jersey, in June.

Gallery will create more room to showcase the entire world of Coach, including our broad assortment of handbag collections, and at the same time allow for flexibility within the store for new growth opportunities, such as fragrance, scarves, men's, small leather goods and jewelry, all against am elevated residential back drop like our Legacy store on Bleecker Street.

Third, we will also be implementing new merchandising strategies. That's most important, we are reducing the density of our handbag assortment by about 15% to 20%. This will enable us to be more directive, offering a stronger point of view in about 40 flagship locations. We will also be introducing a feature table concept as used in our Bleecker Street store, where we showcase the product in a less structured approachable manner.

You will also notice more presentations like color, which lends a different point of view to our assortment. And, finally, we're incorporating a range of additional decorative elements to further create a residential feel, including elevated artwork, plants, mannequins, and so forth.

And, finally, we have modified our tiered distribution strategy in order to enhance the cache of our flagships. We have selected about 40 of our current 75 flagship locations, which will be further elevated through limited edition offerings and pinnacle lifestyle product. They will also receive the enhanced merchandising fixtures and decorative elements that I just mentioned.

The remaining stores will then fall into the fashion segment. This three tiering will be in place by July, and many of the enhancements discussed earlier will also be rolled out to these fashion stores, as well.

Clearly, we continue to believe that our opportunities both in North America and internationally remain abundant. For perspective, we estimate the dressable handbag and accessory market in North America reached over $8 billion in calendar 2007 and this continuing to demonstrate growth despite the weakening economy. Thus, with a vibrancy of the Coach brand and a market expanding, the potential for Coach remains significant.

As most of you know, we have two primary sales drivers. First is distribution, as we expand our global network of store locations with an emphasis of North America, Japan, and greater China.

And, second, is productivity, which we drive across all geographies through the introduction of innovative and relevant product through a compelling store environment. To this end we have been implementing four key strategies that focus on sustaining growth within our global framework. Clearly, our largest opportunity during our planning horizon continues to be in North America.

First, we're building market share in the growing North American women's accessories market. As I already described, we are implementing a number of initiatives to accelerate the level of newness, elevate our offering and enhance the in-store experience. These plans will enable us to continue to strengthen our leadership position in the market.

Our second strategy is the continued growth in North American retail. As you know, given the compelling returns we're generating, we plan to add about 40 retail stores in North America in each of the next several years, including next year FY '09.

We will also continue to relocate and expand stores where appropriate. Based on the performance of our new stores and the large number of new consumers we're attracting to the franchise, we still believe the North American total can easily support about 500 retail stores, including up to 20 in Canada. And through the multi-store portfolio deals we are making with developers, we already have virtually all locations confirmed for next year.

And, third, outside the U.S. we're continuing to increase market share of the Japanese consumer by driving growth in Japan primarily by opening new retail locations and by expanding existing ones. And FY '09 and in each of the next several years, we plan to add about 10 net new locations in Japan and as has been our practice, we will continue to expand our most productive locations.

Our fourth strategy is to raise brand awareness in emerging markets to build the foundation for substantial sales in the future. Specifically, Greater China, Korea, and other such geographies are increasing in importance as a category is growing rapidly and Coach is taking hold. In FY '08, we're on target to open through distributors about 30 net new locations in total, including 8 in greater China.

A few highlights of our upcoming international openings this Spring are worth mentioning.

First, we're very excited about our global flagship store in Queens Road Central in Hong Kong scheduled to open during late May. We're especially pleased about it because of the rapid growth we're experiencing in East Asia and Greater China and believe that this will raise awareness and enhance our brands throughout Greater China.

Clearly, Greater China has the potential during the next few years to become the third major market for Coach following North America and Japan. While we have no investor relation activities planned for the opening, please let Andrea know if you're going to be in the region in late May so you can join us at this occasion.

In addition, we're also enthusiastic about two new international markets we're entering this quarter. Greece with two stores in Athens, and Russia, we are opening our first location.

As we mentioned last quarter, we expect to open at least 15 Coach locations in Russia over a five-year period, initially concentrating development in Moscow and St. Petersburg.

In summary, we're well positioned to continue the capitalize on the many opportunities available to us and have the strategies in place to realize our long-term growth plans, irrespective of the near-term environment.

At this time, I will turn it over to Mike Devine, our CFO, for further detail on our financials. Mike.

Thank you, Lew.

Lew has taken you through the highlights and strategies. Let me now take you through some of the important financial details of our third-quarter results.

As mentioned, our quarterly revenues increased 19%. With direct-to-consumer up 20% and indirect up 15. Earnings per share for the quarter increased 19% to $0.46, as compared to $0.39 in the year-ago period. As net income rose to $162 million, from $147 million.

Our operating income rose 13% to $257 million in the third quarter. Versus $227 million in the same period last year. Operating margin in the quarter was 34.5%, compared to 36.2% in the year-ago quarter. The strengthening of the yen impacted all lines of our P&L, giving consolidation of CJI's income statement. Adjusting for the currency impact this quarter, we would have seen 16% increase in sales. Three points lower than reported, but a 17% increase in operating income, four points higher than reported, as our operating margin would have been essentially even year-to-year.

In the third quarter gross profit rose 15% to $558 million, up from $486 million a year ago. Gross margin was 75% flat, versus 77.8% last year. Impacted by the unanticipated sharp rise in the yen versus the dollar, along with the expected effect of the promotional environment and channel mix.

In fact, this dramatic and unanticipated move in the yen reduced our gross margin rate by over 190 basis points. SG&A expenses as a percentage of sales improved 100 basis points from prior-year levels during the quarter. And represented 40.5% of sales, versus 41.5%, as we achieved leverage in all three of our spending categories.

First, we saw leverage on what we like to refer to as our semi-fixed corporate functions.

Second, CJI provided leverage to its own P&L and the corporate income statement.

And, finally, given the high single-digit comp rate our North American retail businesses were also availability provide leverage, both to its own business unit P&L and to the consolidated corporate P&L, as well.

Moving to the balance sheet, inventory levels at quarter end were $320 million, 28% above prior-year levels. Adjusting for the impact of the stronger yen, inventories would have been up 22%. Also, looking at inventories on a two-year basis to smooth last year's Q3 shipment timing related low levels, our two-year inventory tagger is actually four points below our sales growth.

Most importantly, at quarter-end our inventories were cleaned allowing us to move forward in good shape for Spring. It should be noted this inventory level allows us to support 54 net new U.S. stores, 11 net new locates in Japan, and substantially increase sales levels.

I'll also note accounts receivable balances rose 19% in line with sales. Cash and short term investments stood at $616 million as compared with $936 million a year ago. Despite the repurchase of nearly $1.2 billion worth of stock in the interim 12 months.

Net cash from operating activities in the third quarter was $85 million compared to $97 million last year during Q3. Negatively impacted by a $62 million increase in cash tax payments during the quarter versus last year.

On a year-to-date basis through 3Q, net cash from operating activities was $600 million, up $78 million from 3Q year-to-date of '07. Free cash flow in the third quarter was in-flow of $52 million, versus $73 million in the same period last year. Also impacted by the large tax payment and CapEx spending, primarily for new stores and renovation, which was $33 million versus $25 million in the same quarter a year ago. Year-to-date free cash flow at the end of the third quarter was $56 million above last year's levels.

As noted in the press release during the third quarter, we repurchased and retired 11.3 million shares of our common stock at an average price of $28.85. Spending a total of 327 million. At the end of the period 333 million was available under the Company's current repurchase authorization, which we put in place in November.

Now, I'd like to provide you with some of our updated goals for fiscal 2008. For the fourth quarter, we are targeting net sales of about $780 million representing a year-on-year increase of about 20%. While we expect to continue the leverage our expenses, this improvement will not fully offset the projected contraction in gross margin rate, which we would expect to land at similar levels to Q3 due to the continuing promotional environment in the U.S. notably in factory and negative impact of channel mix. Yielding an operating margin of about 35% and earnings per share of $0.50, an increase of 20%.

Therefore, our goals for the full fiscal year are net sales growth of about 22% to about 3.18 billion, and we're targeting an operating margin of nearly 37%. Operating income dollar growth of about 18%, above FY '07.

Interest income of about $44 million will add the pretax income, while net income will continue to be somewhat offset by a higher tax rate this year versus last, at about 39% due to the fact that incremental taxable income is being taxed at higher rates.

Including these factors, we expect to generate EPS growth of 22%, which will produce earnings per share of $2.06, consistent with our prior guidance. For FY '08, we're still planning to spend about $200 million on CapEx, primarily for new stores and expansions both in North America and internationally.

While these are our 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 obligations to update these targets as the year progresses. In summary, we are confident that our growth strategies will enable us to continue to gain share in the large and growing local market for fine accessories and gifts. Thank you all for your attention and now Lew, Andrea and I would be happy to take some questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Bob Durval. You may ask your question. Please state your company name.

Lehman Brothers. Good morning.

Good morning.

Good morning.

Lew, I guess I have two questions for you.

I understand not giving FY '09 guidance at this point, but I guess, could you maybe give us a little bit of color on your expectations in terms of double-digit topline, et cetera. And the second question that I have, just wondering if you can elaborate on your decision to, you know, essentially decrease the transparency of the business by not providing your normal comp rate down, which we've all found to be pretty helpful over the years.

Sure.

Well, first, as I said just a few minutes ago, we're confident that we're going to continue in FY '09 and beyond to achieve significant top and bottom line growth.

The reason we're not providing guidance at this time is because we think it would require a level of false precision. Our distribution levers are in place.

We are going to continue to open new stores, as we indicated, and expand our--and expand others. In addition, I'll also expect to achieve productivity gains around the world, including here in the United States. So we do look forward to a good year with double-digit gains on the top and bottom line.

In terms of our decision to provide consolidated comps, it is really a result of our internal thinking that we need to align the way in which we run our business with the way in which we reported.

As you know, we have a diversified business model, it is multi-channel and international. We're not solely dependent on any one channel in geography and our growth is driven by both productivity and as I said before, distribution gains.

In North America our retail business consists of one brand with two platforms, full price and factory. And our franchise as you know is built a one set of brand equities that actually transcend an individual store concept of venue. And because of this, when we think about our business, we first start with our retail stores. And as you know, we do not go on sale in our retail stores.

And we want to be able to leverage the opportunities that our dual-platform provides us, so during challenging times focusing on one metric enables us to maximize brand building activities in our lead full-price channel, while using promotional activity in other marketing levels in factory to drive very profitable overall growth.

And at the end of the day, you need to judge us on our overall performance and on the strength of the brand and this is the way we look at it.

Okay. Thank you very much, Lew, good luck.

Thank you.

Thank you. Our next question comes from Michelle Clark. You may ask your question and state your company name.

Morgan Stanley. Thanks, good morning, everyone. Two questions for Mike Devine.

Mike, the first is on the gross margin. The hit to gross margin, if you can detail the basis point impact. One, from promotional activity, and, two, from the channel mix shift.

And then the second question relates to inventories. Your inventory per square foot rose close to 24% year-over-year. Can you just detail for me one more time the impact of the timing shift that you discussed on the call? Thank you.

Sure, so let me go to gross margins first, Michelle.

Let me say that other than the unanticipated movement of the yen, generally we're pleased with where we're at gross margin landed for the quarter. In other words, it basically did hit the expectation and the guidance that we had.

In fact, we slightly exceeded our expectation and I do just want to point out initially that the supply chain we really feel has done a terrific job. Our design teams, merchandising sourcing, et cetera, have continued to drive organic gross margin rate improvement.

If in fact, our indirect channels actually were up modestly during the quarter from the year ago period.

So there are a number of good things going on and happening within the gross margin line. Unfortunately those organic improvements were not enough to offset both the channel mix and promotional activity.

So the two of those combined, channel mix and promotional, offset by some sourcing good news, came to about a 90 basis-point decline year-over-year, and you may recall on our last call we guided down to 100 or 110. So ever so slightly better than that. And then unfortunately, with the dramatic change in the yen, the yen hasn't moved this much in a single quarter since 1999. And we didn't see it coming, and that whacked us almost 200 basis points through the gross margin rate line. That is kind of the gross margin story.

In terms of the inventories, the yen got us there, as well, Michelle, as of course, in Japan we hold our inventories in yen, and then when we consolidate our financial statements it is a pure translation back, and that accounted for about six points of growth on the inventory year-over-year.

In other words, if we went back and restated our inventory at last year's effects rate, the growth would have declined about 600 basis points. And then last year, we had a shipment timing issue where we were very light on receipts. Right at the end of March and reported a bit of an artificially low ending balance at the end of Q3. So if you actually went back and smoothed it over two years, what we would have seen is an inventory tagger building off of '06 to Q3 '08 of just over 20%. During that time our sales tagger has approached 25. So we still feel very good and most importantly, as I said in the prepared remarks, what really matters is that our inventories are clean and we're in good shape going into the Spring, and we think the compares at June will fall back in line as we don't have so much noise.

Right. Thanks and best of luck in the fourth quarter.

Thank you.

Next question comes from Jeff Edelman. You may ask your question and please state your company name.

Thank you, good morning.

Lew, my first question is for you. If we think about the initiatives you mentioned, product, store environment, more elevated and sophisticated look, are we seeing somewhat of a shift in strategy, and maybe that's why -- that might also be contributing to the decision in comps as your apparently maybe moving your retail stores further upscale and then looking for the big volume growth to come from the factory stores with a different mix of merchandise?

It is not the case, Jeff.

I mean, even though my remarks focussed on innovative newness, you are going to see actually a greater proportion of our mix this Fall and Holiday at sharper price points both in bags and accessories, and we believe the critical balance is essential. And we're not looking to focus in a distorted way on any particular consumer group.

What is occurring in reality is that women, whether they're aspirational consumers who are trading up into Coach or fashion consumers, their tastes are evolving rapidly. And during a challenging economic times, we need to have a particularly compelling offering to -- for her to purchase. And that's really the intention.

Further, in terms of America, and we can use Short Hills as an example of a very upscale mall in North America where we compete directly with the European luxury brands, we do need to showcase our store in a manner that is appropriate for the consumer who shops in Short Hills.

Conversely, in a more mainstream mall, you will continue to see a prototype, yes, more advanced, but that is more in keeping with the shopper in that mall.

So no change in strategy, no defocus on away from a full price.

Okay. Just a short follow-up before I go to Mike.

The sharper price point, is this styling into and designing into a sharper price point, or is this reflecting a lower gross margin?

It is designing into a sharper price point.

Okay. Great. Thanks.

And, Mike, the FX impact, I understand how it hits the inventory given the fact that you've -- the profit sits on the CGI balance sheet. Is that lost profit or does this come around and help you further down the road? Can you give us a sense of how this plays out?

Sure, good question, Jeff.

The piece that really whips all us all this quarter is really driven by the FX, and so the FX rate, the yen, in other words, will have to weaken again to have the opposite impact on the gross margin impact.

So just to give you a sense, we had anticipated and I think the banks were calling for a yen to be at about 112 for the balance of the calendar year when we gave our projects on our last call, and it closed the quarter at 99-3. So 13% swing.

So what happens there is that we need to mark the yen inventory up based on the stronger -- stronger yen, and that inventory in Japan includes our wholesales shipping margin, and as a result that margin is left on the balance sheet and doesn't come back to the P&L. So the FX would have to move for it to come back to us.

What I will say is that it is creating good news for us in the coming months and quarters in that the product that CJI is buying from Coach - New York now they're paying for with a much stronger yen, and as that product sells through it will have a positive impact on our gross margin rates going forward.

Great. Thank you.

Thank you, our next question comes from Christine Chen. You may ask your question. Please state your company name.

Needham & Company. Thank you very much. Good morning.

Good morning, Christine.

Good morning Christine.

Two questions. Wondering if you have seen any patterns and performance across your different store types, flagship, fashion and core, as well as, geography? And then the second question is, as you continue to grow your own store base, is there a thought to maybe cut back on the number of doors in the department stores? Thank you.

First, Christine, our performance across store type has not changed, the pattern continues. Where we continue to see fluctuations is geographically.

So in North America consistent with the holiday quarter, our business in California and southern Florida has been very soft. Conversely, our business in the midwest and Texas, as examples, continue very strong.

With regard to our department stores, we actually several years ago rationalized the number of locations when we went down from about 1500 locations to about 900 today, And we're actually opening new locations now selectively, partnering with the leadership of Macy's in particular, to do so.

Thank you. And good luck for the fourth quarter.

Thank you.

Thank you and next question comes from Erwan Rambourg. You may ask your question. Please state your company name.

Hi. HSBC. Good morning.

Good morning.

Three questions, if I can. Several of the European companies we cover have mentioned that traffic in the U.S. was okay in January and February, but was quite severely down in March. Is this an evolution that you've seen in the quarter in the U.S. concerning your businesses? Then maybe I'll ask the other two.

The second question is on Japan. We've seen a run rate of 16%, 17%. You're still growing significantly on a faster pace than the European players at 12%. However, you know, going from 17 to 12, is this linked to a sub in sluggishness in the Japanese market or can it be linked to some of the European brands are now addressing a sort of entry price point in that market?

And then, finally, looking at combined comps in the U.S., you've had 7% in Q2, where I think you spoke of an emotional recession. Now in Q3 you have a 9% combined comp in with some people consider as being a real recession .

How do you think about the macro resistance of the brand and do you see the micro environment worsening or is it reasonable to factor in sort of, you know, mid to high single digit combined comps going forward.

Thank

Let me -- obviously I'll take them one at a time. Traffic in the United States for Coach was consistent throughout the quarter. We didn't see a falloff during March. Year on year traffic traffic in the same stores has been weak. Our overall traffic because we've opened up many new locations obviously has been higher than prior years. In terms of the 12% growth in Japan versus 17, that's within noise levels.

We're aware our business is very strong in Japan. We see no signs of slowdown whatsoever for Coach. We actually welcome the entry price points from the European luxury brands that are closer to ours, because we're hopeful it will stimulate more interest in the category. So the overall category will begin to grow.

In terms of the macro environment, it is a very tough call. Clearly, the environment has weakened. Consumers are more pessimistic, and our response to that is to be--is to be more nimble and to compress several years of innovation into one year and to utilize our factory channel, which is a promotional channel to help us drive very profitable sales until the economy stabilizes.

We think it is going to be a rough go throughout the entire calendar year on a macro basis.

Right. Okay.

And just going back to Japan, can you give us an idea of where your market share stands on a sort of calendar '07 basis, if you have that?

It is about 12%.

Okay. Thank you very much.

You're welcome.

Our next question comes from Kimberly Greenberger, you may ask your question. Please state your company name.

Great, thank you. Good morning. Citigroup.

Good morning, Kimberly.

Kimberly.

Lew, I was hoping if not providing quantitative measures, maybe you could just qualitatively address the improvement in your total consolidated comp.

It was plus 7% in the second quarter, and here you're looking at plus 9%. Can we assume that both full price and factory saw improvement sequentially?

Kimberly, I wish we could do that, but we've made a decision that we're only going to provide consolidated comps, and at the same time provide some texture, and as I indicated before, traffic is full-price continues weak, while conversion and average ticket rose. The factory business continued very strong.

Okay. Lew, there was something you mentioned in the press release about striving to compress several years of product evolution into fiscal '09.

I was wondering if you could talk to us about the opportunities with doing that and also are there any challenges with the way that your product development cycle works that you might see? Thanks.

Sure.

First, the initiatives that we're talking about were actually conceived last Spring and last Summer. So we were -- we've been thinking now for more than a year that we wanted to compress several years of innovation within one year, and our supply chain from our design group through our merchants, our sourcing group, raw materials procurement group, and our operations and quality control people have been basically gearing up for a major change in the way in which our products are manufactured.

And when you see our product in our stores, and I think you've got a preview of some of the new collections when you visited here, you are going to find, as I said before, that they're softer, drapier, a lot of new materials. And this has been in works for a long time. So our supply chain management group has been able to do a remarkable job in meeting the requirements, and we're actually on track.

We measure deliveries every month, and we had a preview of what July and August looks like, and we have been assured the quality is consistent with Coach standards and, second, that 99% of the product will be on time.

Terrific. Thanks, Lew, and good luck here.

Thank you.

Thank you and next question comes from Dana Telsey. You may ask your question. State your company name.

Good everyone, T.A.G.. Can you talk about average ticket improvement in the quarter. Put color on there. Is there improvement on the core customer? Is there less trading down?

Regards to the promotional environment, last quarter some factory customers were incentivized to shop at full price. Did you see that this quarter? Lastly, on the progress of realignment on the product redevelopment organization that you mentioned last quarter. How is that moving along? Thank you.

Okay. Take them in order.

Our average ticket rose modestly during the quarter. What we discussed during the holiday quarter remained largely the same, although our handbag mix increased relative to the holiday quarter and even though it was lower than last year due to the increase -- due to the arrival of jewelry primarily.

In so, we haven't really seen any shift in consumers. With regard to of the -- our promotional activities focussed on driving factory consumers into full price, that pilot was very successful, and we do know that our factory consumer loves the Coach brand, but she's a value shopper. She only wants to buy it on sale.

Right now, we're monitoring the performance of the the factory consumer who purchased through one of our loyalty programs at full price to see whether we're able to attract her without a discounted full price.

Our general view is that we will not be very successful, that she will need to be promoted to come to our product -- our product will need to be promoted for her to come to full price.

Our margins are so good that we're very comfortable with the profitability from those promotions and we are actually conducting another loyalty event. I believe it is going to be next month, focussed on the factory store consumer purchasing in full price.

Okay. Great. Thank you.

You're welcome.

Our final question comes from Paul Lejuez. YOu may ask your question. Please state your company name.

Thanks. It is actually Tracy Kogan filling in for Paul from Credit Suisse.

Two questions to follow up on the last question on promotion. Do you expect to increase your level of promotions over the last couple of quarters? Secondly, can you give us a sense of what you're expecting for CapEx for next year? How that breaks out for new stores, remodels and IT? Thanks.

With regard to promotional activities. we don't think that is going to be necessary at all.

We expect promotional activities to remain at this level or decline over the next few quarters. In terms of CapEx, Tracy, I think we'll hold that guidance along with our full FY '09 guidance for our next call, but I would just say directionally, we don't anticipate anything materially different.

We're continuing our store expansion programs, investing in technology where it makes sense to drive earnings growth.

So for the modelers out there, I would anticipate '09 being similar to '08.

Thank you, good luck.

Thank you.

Thank you. It is now just after 9:30. The market is open and we're going to conclude this conference call.

We look forward to taking your questions throughout the day and this week. Thanks, everyone, for joining us.

Thank you, this does conclude the Coach earnings conference. We thank you for your participation.