掛毯 (TPR) 2008 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 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. Before we begin, we must point out that (inaudible) involve certain forward-looking statements including projections for our business in the current and future quarters of the 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 (inaudible) unexpected 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 acceptance of these estimates on a continuing basis. Coach may also choose to discontinue presenting future estimates at any time.

Now, let me outline the order of speakers and topics for this conference call. Lew Frankfort will begin with an overall summary of our fourth quarter and fiscal 2008 results as well as our plans for the new fiscal year. Mike Devine will then follow with details on financial and operational highlights for the quarter and year as well as our outlook for the first quarter and full fiscal year 2009. Following Mike, we will hold a Q&A session that will conclude promptly by 9:30. I'd now like to introduce Lew Frankfort, Coach's Chairman and CEO.

Thank you, Andrea and welcome everyone. As we announce our fourth quarter and fiscal year end results, we are pleased with our performance and remain confident in our long-term prospects. We expect that the current consumer malaise which effects retail spending will remain in place well into 2009 significantly impacting our business. At the same time, we expect to generate profitable growth, although at a lower rate, as we continue to use promotional activity to drive our factory business and price select new product more sharply to deliver compelling value.

The opportunities both here at home in North America and abroad, notably in emerging markets, remain abundant. In fiscal 2009 we will invest notably in greater China and through merchandising initiatives, including what we call Collection. Our performance in FY '08 was highlighted by an increase of 22% in both revenues and EPS.

It was a year of many accomplishments including, first, the opening of 47 total net new stores in North America, 38 net new retail stores and nine new factory stores. Second, a 10% increase in North American comparable store sales for the year. Third, continued strong growth in our indirect businesses driven by both productivity and location growth notably in international wholesale. And, fourth, another excellent year for Coach Japan. Retail sales there rose 14% in constant currency and 23% in dollars to nearly $600 million despite flat category sales for imported bags and accessories in Japan. Coach strengthened its number two position in this market with an approximate 13% share this year, up from 11% last year. Finally, we announced the phased buy out of our retail businesses in greater China, along with our development strategy for the region.

Separately, I would add how pleased I am with the creation of the Coach Foundation with an initial grant of $20 million in keeping with our commitment to promote corporate philanthropy.

Our strong annual performance was capped off by a solid fourth quarter as we announced increases of 20% in both sales and earnings per share. Some highlights of our fourth fiscal quarter, excluding one-time items, were -- first, earnings per share rose 20% to $0.50 as compared to $0.42 in the prior year, while net income rose to $172 million from $159 million. Second, net sales totaled $782 million versus $652 million a year ago, a gain of 20%. Third, direct to consumer sales rose 22% to $659 million from $541 million in the prior year. Fourth, North American same store sales for the quarter rose 7%. Finally, sales in Japan rose 12% in constant currency and 30% in dollars.

During the quarter, Coach opened 12 North American retail stores including six in new markets for Coach, Melbourne, Florida; Shreveport, Louisiana; Edmonton and Alberta, Canada; McAllen, Texas; Wichita, Kansas and Springfield, Missouri. We also expanded an additional four locations and closed two others. In addition, one new factory store was opened and 11 were expanded. At the end of the period, there were 297 full price and 102 factory stores in operation in North America.

In Japan, we opened seven new locations. At quarter end there were 154 total locations in Japan. This was a net increase of 12 locations from the 142 at year end 2007. In addition, Coach expanded two locations during the fourth quarter, bringing the year end total to 11 expansions in Japan.

Indirect sales increased 11% to $123 million from $111 million in the same period last year. During the quarter, POS sales at US department stores were essentially even while international POS sales grew by more than 30%.

We estimate that the premium US hand bag and accessory category grew between 5 and 10% during the first half of calendar 2008. At the same time Coach's bag sales rose 15% across all channels in North America.

As mentioned, we were pleased with our overall performance in North America this quarter against difficult comparisons across all channels and a deteriorating economic backdrop which impacted traffic into malls and US department stores. Our total revenues in North America were up 18% with our directly operated stores generating a 22% 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 previous two quarters continued while conversion rose and average transaction size fell slightly.

In factory, we continued to see increases across all three metrics. For the full year, we experienced 20% growth in North America including a 22% sales increase generated by our stores. I also want to highlight another strong season for Coach women's footwear as our business in US department stores, where we have sold through nearly 900 locations, rose 21% for the most recent quarter.

While Mike Devine will get into more detail on our financials, I wanted to give you a recap of Coach's performance and touch on some of the product highlights of the fourth quarter. Across all channels, handbags and women's accessories continue to drive our business as the look of our product continued to evolve reflecting changing consumer preferences. The consumer responded well to our innovative spring and summer offerings, most notably our Pleated Ergo collection led by the framed satchel, a particularly popular style. Other successors included the introduction of our evolved Soho collection. In addition, our over $400 handbag offering continued to perform strongly.

Innovation will be a critical factor for success in FY '09 as the consumer remains reluctant to purchase. Thus, as mentioned last quarter, we're compressing multiple years of innovation into FY '09 to create a particularly compelling offering to further inspire our customers to spend. This will, of course, also provide a new foundation for us to build upon in future seasons and years.

Last quarter, we also touched on four main areas we're focusing on -- product, the in-store experience, merchandising and stores. First, product, which is the foundation of our brand. We're enthusiastic about our evolved lifestyle platforms that we're launching this year which present a fresh face for Coach. You will notice a significant shift, notably in handbag attitude, to be more feminine, featuring lighter weight leathers in new finishes and refined hardware in many collections. In addition, we're offering a more robust assortment of small accessories at attractive prices.

As mentioned in my opening remarks, we're also pricing select new products which feature more sophisticated materials and makes to deliver particularly compelling value at a time when the consumer is less willing to spend. Starting with July, we introduced an expanded collection of Bleecker hand bags, including the new tote style which is already a best seller. We just installed our August floor set the other day featuring Hamptons, which is anchored by our popular carryall. This collection has been reinterpreted with a softer, more feminine aesthetic.

Next month in September, we'll be introducing the Zoe handbag group, a softer, rounded version of our immensely popular Carly bag and a new, chic Legacy collection. At the same time we're also looking forward to our second Coach fragrance, Legacy, which will be available in Coach stores this fall.

We're particularly enthusiastic about the launch of Madison this October, a key focus for holiday. This collection includes a broad array of light weight handbag silhouettes including satchels, wallets and accessories. By the way, we've been piloting Madison in ten retail stores here in the states and have been very encouraged with the initial results.

Making its debut of the Madison collection is Coach Op Art, a new visually compelling logo treatment inspired by the mid-20th century Op Art Movement. This abstract, geometric pattern is an example of the continued evolution of Coach energizing the look, feel and attitude of every style in the collection. Moreover, it provides us with an entirely new logo platform for use in future groups and collections. In addition, this holiday we will significantly intensify the amount of new product offered during November and December to match the repeated visits of our customers throughout the holiday season.

Second, we have just begun to implement new initiatives targeting our in-store experience. They include new store formats such as gallery, which we are piloting in Short Hills, New Jersey. I know at least a few of you have visited the new store which opened in early June where we have already gleaned many learnings. The larger format enables us to showcase the entire world of Coach, including our broad assortment of handbag collections and, at the same time, allow some flexibility within the store for new growth opportunities such as fragrance, scarves, small leather goods and jewelry, all against an elevated residential backdrop like our Legacy store on Bleecker Street.

Consumer response has been very favorable, particularly around the elevated assortment, enhanced presentations and the evolved service offerings. In addition, we're enjoying a nice uptick in sales trends in this new location.

Third, we will be implementing new merchandising strategies. We're currently reducing the density of our handbag assortment by about 15 to 20%. This enables us to be more directive offering a stronger point of view. In about 40 flagship locations globally, we've begun to introduce a feature table concept as used in our Bleecker Street store where we showcased the product in a less structured and more approachable manner.

You'll also notice more presentations by color, which lends a different point of view to our product assortment. And lastly, we are incorporating a range of additional decorative elements to further create a residential feeling, including elevated artwork, plants, manikins and so forth.

Finally, we have modified our tiered distribution strategy in order to enhance the cache of our North American flagships. We selected about 40 of our current 75 flagship locations which will be elevated through limited edition offerings and pinnacle lifestyle of product. They will also receive the enhanced pictures and decorative elements that I just mentioned. The remaining stores will then fall into the fashion segment. The retiering is now in place and many of the enhancements discussed earlier will be rolled out to these stores as well.

We're also investing in further developing the talented team who work in our stores. I just attended our annual store manager's conference which took place in Orlando. The theme of the conference was evolution and it focused on our product innovation and building the sales competencies of our field teams. As always, I was struck by the passion and commitment of the Coach retail field team. As some of you may know, we have the lowest turnover in the industry and promote a significant majority of our store managers from within.

Looking ahead, as we've discussed, we have two sales drivers. 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 and relevant product in a compelling store environment. To this end, we've been implementing four key strategies that focus on sustaining growth within our global framework.

Our largest opportunity during our planning horizon continues to be in North America. First, we're building share in the $8.7 billion North American women's accessories market. As I have already described, we're implementing a number of initiatives to accelerate product innovation, elevate our offerings 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. Given the compelling returns we are continuing to generate, we plan to add about 40 retail stores in North America in each of the next several years, including this year, FY '09. During this year, our new openings will include 14 new markets for Coach, such as Bakersfield, California and Fort Myers, Florida as well as Calgary and Ottawa in Canada.

Prior to holiday, we expect to have open a total of 28 full price stores. We will also continue to relocate and expand stores where appropriate. Based on the performance of our new stores, which have consistently outpaced their pro formas by about 20% this year, we believe that North America in total can easily support 500 retail stores including 20 in Canada.

And third, outside the US, we're continuing to increase market share with the Japanese consumer, driving growth in Japan primarily by opening new locations and by expanding existing ones. In FY '09 and in each of the next few years, we plan to add about ten net new locations in Japan and, as has been our practice, we will also 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 geographies are increasing in importance as the category is growing rapidly and Coach is taking hold. In FY '09 we're on target to open through distributors at least 20 net new wholesale locations in total, while in greater China, we expect to open five new locations, four on the mainland and one in Hong Kong.

As we've announced in late May, we have -- we're in the midst of acquiring our greater China retail businesses in Hong Kong, Macau, and the mainland from ImagineX in a phased buyout. At the same time we shared our strategy for greater China as over the next five years we expect to open 50 net new locations, aggressively growing our sales and market share in this rapidly expanding region. Our goal was to be one of the top three imported handbag and accessory brands.

With the investments we plan to make in stores, marketing, organization and infrastructure, we're striving to replicate our success formula in Japan since taking control of the business there seven years ago in 2001. This acquisition will be slightly dilutive to Coach's consolidated financial results in the near term which Mike will discuss more in just a moment. However, taking control of brand building and distribution at this critical juncture will lay the foundation for a substantial contribution of these businesses in the future.

Beyond these four key growth strategies, and as noted in the press release, FY '09 will be a year of investment as we strengthen the foundation for long-term growth. This spring we announced a new business initiative known internally as Collection to drive brand creativity and reinforce our goal to be known as a great American design house. It will encompass all women's categories with a focus on bags, women's accessories, footwear and jewelry. This new venture will serve as an incubator for fast track, leading edge, exclusive product that will create a halo effect by providing additional design inspiration to our broader offering.

I think it's important to note that while we will plan cautiously, until we see a clear signal that the consumer is strengthening, we will also continue to invest in our future as we manage the business for the long term. We remain well positioned to continue to capitalize on the many opportunities available to us and have the strategies in place to realize our long-term growth plans regardless of the near term environment. At this time I'd like to turn it over to Mike, our CFO, for further detail on our financials. Mike.

Thanks, Lew. 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 mentioned, our quarterly revenues increased 20% with sales of our direct business up 22% and the indirect business, as expected, up 11%. For the year, total revenues rose 22%, with sales generated by our direct channel rising 21% while our indirect revenues rose by 25%.

Excluding the impact of certain one-time items which I will touch on in a moment, earnings per share for the quarter increased 20% to $0.50 as compared to $0.42 in the year ago period as net income rose to $172 million from $159 million. For the full fiscal year, earnings per share rose 22%, $2.06 as compared to $1.69 posted in FY '07 s net income rose to $742 million from $637 million. On the same basis, our operating income rose 14% to $281 million in the fourth quarter versus $245 million in the same period last year. Operating margin in the quarter was 35.9%, compared to 37.6% in the year ago quarter. For the full fiscal year, operating income rose to nearly $1.2 billion, a 19% increase. Operating margin for the year was 37.1% compared with 38% even a year ago.

In the fourth quarter, gross profit rose 16% to $593 million from $509 million a year ago. And gross margin was 75.9% versus 78.1% in the prior year. During the year, gross profit rose 19% to $2.41 billion as compared to $2.02 billion a year ago, while gross margin rate was 75.7% versus last year's 77.4%. Most of you I'm sure will remember in our third quarter, due to the unprecedented single quarter move in the yen, we experienced a significant gross margin hit when we marked to market our yen inventory [ship in] margin elimination. At that time we also provided guidance to our fourth quarter gross margin of 75% flat, and we assumed that the yen would end the quarter also flat at around 100 to the dollar.

As the yen actually weakened over the period, ending at about 106, we had a benefit to gross margin of about 80 basis points. Before one-time items, and as expected, SG&A expenses as a percentage of net sales were below prior year levels in the fourth quarter and represented 40% of sales versus 40.5% a year ago, a 50 basis point improvement. For the full year, SG&A expenses as a percentage of net sales improved 80 basis points to 38.6% from 39.4% a year ago.

As mentioned in our press release, during the quarter we recorded several one-time items. These consisted of tax adjustments related primarily to the favorable settlement of a tax return examination which decreased Coach's provision for taxes by $50 million and increased net interest income by $10.7 million. In addition, as Lew mentioned, we created a charitable foundation which increased expenses by $20 million. And finally, the resultant higher net income led to a $12.1 million increase in variable expenses.

Collectively, these one-time items increased earnings by $41 million after tax. At year end, cash and short-term investments stood at about $700 million as compared with $1.2 billion a year ago. Reflecting the repurchase of over $1.3 billion worth of Coach common stock during the fiscal year. Inventory levels were $345 million, up about 19% above prior year levels, but below our 22% sales growth as our supply chain improvements and inventory management programs allowed us to support 47 net new US stores, 12 net new locations in Japan and substantially increased sales levels with moderate additional inventory investment.

Accounts receivable balances were essentially unchanged as DSO fell to 31 days versus 36 days last year. Net cash from operating activities in the fourth quarter was $323 million compared to $258 million last year during Q4. Precash flow in the fourth quarter was an inflow of $268 million versus $216 million in the same period last year, primarily due to higher net income. CapEx spending, primarily for new stores and renovations, was $55 million versus $42 million in the same quarter a year ago. For all of fiscal year 2008, net cash from operating activities was $923 million compared to $781 million a year ago. Free cash flow in fiscal year '08 was an inflow of $749 million versus $641 million in fiscal year '07 while CapEx spending totaled $175 million, again primarily for new stores and expansions as well as technology and corporate infrastructure investments.

As noted in the press release, during the fourth fiscal quarter, we repurchased and retired over 4.8 million shares of common stock at an average cost of $35.18, spending a total of $170 million. For all of FY '08, we repurchased and retired nearly 39.7 million shares of common stock at an average cost of $33.68, spending a total of over $1.3 billion. At the end of the period, $163 million was available under our current repurchase authorization which was put in place in November of 2007.

I'd now like to provide you our initial goals for fiscal 2009. As Lew mentioned, it will be an investment year for Coach as we build the foundation for profitable growth in greater China and implement key merchandising initiatives, most notably Collection. Together we expect that our investment activities will impact EPS by about $0.05 to $0.06 for the year, including about $0.03 to $0.04 attributable to greater China and $0.02 for other initiatives.

Coupled with these investments, it is our intention to plan cautiously until we see evidence of a turn in the economy and retail spending. Please keep in mind that this guidance, notably the comparisons to FY '08, is based on an operating metrics prior to the one-time items from Q4 that I mentioned earlier.

First, we are looking for net sales growth of at least 13% to over $3.6 billion driven, as always, by both distribution growth, which will contribute about 10 points of growth, and more modest productivity gains, which will contribute the remaining 3 to 4 points. We expect to open at least 45 new stores in North America, including about 40 full-price stores and about a half a dozen factory stores, 10 to 15 net new locations in Japan and about five new locations in greater China; at least 20 net new international wholesale locations while we continue to expand select highly productive locations globally. In Japan, we expect to achieve constant currency growth of about 5 to 10%.

While we continue to focus on profitability, we would expect gross margin to see an impact from both ongoing promotional activity, notably in factory, as well as the shorter margins we will take on select new product in our full-price business in order to deliver exceptional value to our consumers. As a result, we are projecting a gross margin rate of about 34% for the year -- 74% for the year, apologize. Similarly, given the investment spending we've outlined, we're anticipating an SG&A expense ratio of about 40% for '09.

Therefore, we're targeting an operating margin of about 34 to 34.5% resulting in more modest operating income growth of about 5% for the year. In addition, lower interest income due to lower rates and a lower cash balance due to repurchases will also impact net income. While our tax rate in FY '09 should be 38.25%. Taken together, we expect EPS of at least $2.25 for the year or up about 10%.

Moving to the first fiscal quarter of '09 which, as you know, is our toughest compare of the fiscal year. We're targeting net sales of over $765 million representing a year on year increase of about 13%. For the quarter we expect to open about 22 stores in North America, four in Japan, two in greater China and three international wholesale locations with several expansions across these geographies. A gross margin of about 74% and an SG&A rate of about 43% given the expected impact of the first tranch of our greater China phased buy out and our other investment activity.

All of this taken together will result in operating income that will be about flat year over year with an operating margin of 31 to 31.5%, and earnings per share of at least $0.44, an 8% increase over last year's first quarter, which again was the strongest of FY '08.

For FY '09, we expect CapEx to rise to about $200 million dollars primarily for new stores and expansions both here, in Japan and also in greater China as discussed. This projection excludes the recently announced $128 million deal to purchase our corporate headquarter building here in New York as the exact timing of that closing remains uncertain.

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 glad to take some questions.

(Operator Instructions) Robert Drbul.

Lehman Brothers. Good morning.

Good morning, Bob.

Lew, the question that I have is, can you clarify exactly what you meant when you talked about sharply pricing new product? Are you actually taking prices down or will you be bringing out more product at entry price points?

First, we're not taking any prices down. What we're referring to is a strategy to deliver much more compelling value to consumers at a time when they're reluctant to spend. And as you know, this year, we're introducing a wide range of new collections and platforms which have an array of new materials as well as much greater make. And what we typically do is we look for a certain margin based upon what the cost of these collections are and we decided that we would take a shorter margin so that we can price them more sharply so that the consumer, who's otherwise hesitant to spend, will find it to be an exceptional value.

Okay. And then, Mike, a question on the inventory. In terms of the amount of inventory that was made for full-price North American stores, how much of it has been sort of sold in the factory outlet? How much are you sort of converting over and selling in the factory that was actually originally full-price product?

Bob, good question. We're very pleased with where we came out of the quarter inventory-wise. The metric that you've heard us use many times in the past is kind of the flip side of that and what percentage that sold through in the factory channel was actually made for factory and that percentage stayed very constant in the June quarter at 75%. So our sell throughs in full price are right where we wanted them to be and factory likewise. And as you saw, we came out of the quarter with inventory balances up less than sales and, in fact, the yen actually hurts us in that compare year over year. So if you actually put it on a constant currency basis, that compare would look even better.

Great. Thank you very much.

Kimberly Greenberger.

Great. Thank you. Good morning. It's Citigroup.

Good morning.

Hi, Kimberly.

Mike, my first question is for you. Could you give us the basis points associated with the gross margin change versus last year, how much was channel mix? I think you gave us the yen impact at 80 basis points. And then if you have any color on the SG&A line as well, that would be really helpful.

Sure. Yeah. As we suspected, we landed the gross margin rate adjusted for the yen impact at the 75.9% level after having guided the 75. So we got 80 basis point good guys I mentioned from the yen, so we actually outperformed, if you will, our own expectations by about 10 bips. The majority, though -- so that was still down about 220 basis points over last year's Q4. The majority of that negative movement was driven by increased channel mix as factory continued to do exceptionally well, as we continued to present great value to that consumer both in the US and in Japan.

The next largest impact was the level of promotional activity. While we were able to drive consumers into the factory channel, we were -- kept our price points there very sharp as well to make sure we took advantage of the traffic and got the conversion, so that was the second largest impact -- promotional activity, primarily in our factory channels here and in Japan. So those were the two biggest drivers of the gross margin decline, offset by help from the yen.

In terms of SG&A, we also came in right where we anticipated with about 50 basis points of positive leverage, driven largely by leverage through our corporate functions, our distribution center in Jacksonville and our corporate functions here in New York. On the retail P&L, came in very consistently with the way we've talked about the business in the past. As you saw in the release, we had a 7% comp and, at a 7% comp, the retail division did break even on their SG&A line, so that's pretty consistent with the way we've always modeled it.

And CJI provided leverage to their own P&L, but because of the strengthening yen as it converted back into dollars, we had modest, negative leverage. But if you were to adjust for constant currency, they would have provided some nice leverage to the P&L. So all of those puts and takes we landed at about the 50 basis points of leverage that we had projected.

That's very helpful. Could you talk to us about product cost inflation and how you're thinking about higher costs out of China as we work our way through fiscal '09? That would be great. Thanks.

Sure. As we look forward into '09, there definitely are some inflationary pressures, Kimberly, most notably some minimum wage increases, the tax environment in China is also getting a little more negative. The good news, is, though, that the supply chain team here headed by [Angus McCray] and his group have a lot of counter sourcing alternatives available to them. We're also seeing, because of the overall macro economic back drop, leather is a little cheaper to us this year than it was last year.

So in terms of the organic price cost relationship, we're feeling reasonably good as we head into '09 that we have enough activities ongoing to offset the inflationary pressures. That being said, though, then what carries the day is what Lew spoke to about being more sharply priced on the select new introductions into '09 and that's where we're going to see some negative impact to the gross margin rate going forward, at least into '09.

Great. Thanks and good luck for the year.

Thank you.

Michelle Clark.

Good morning, guys, it's actually Chi Lee calling for Michelle. Mike, question for you. As we look to the leverage point on North American retail for next year, I believe previously you said it was about a 5 to 7% comp that you had leverage expenses. Is there opportunity to bring that number down?

There is some opportunity, although it is clearly our most variable channel in terms of driving SG&A as we see sales increases driven by percentage rent and by increased store wages, also as we add new stores, we add new adds to our occupancy line and to our head count. So Mike Tucci and his team are managing it exceptionally tightly, but at the 5 to 7% range, we feel pretty good about that being the leverage point.

And so as we're projecting to be a little under that, we will rely more heavily on FY '09 into managing our centralized expenses and trying to drive leverage through that portion of our SG&A spend and also notably going forward with CJI growing at 5 to 10% constant currency basis, we would also expect to get leverage from that part of our business as well as they will grow more slowly than the Company as a whole.

Okay. And as you look at the corporate expense base, can you talk about any buckets of opportunity there?

Well, there's a number of them. We continue to, year over year, spend roughly the same amount in terms of our media outreach. We have one distribution center in Jacksonville, Florida, which we've recently expanded and now gives us an opportunity to gain leverage on that portion of our SG&A line. And then really the majority of the administrative functions here corporately, my own finance team, our technology group, are really not going to be growing in any material way and certainly not nearly at the 13% top line growth we're anticipating. So those back room functions are the ones that are really going to provide the leverage opportunity going forward.

Great. Thank you.

Christine Chen.

Hi, Needham & Company. This is Paula Torch for Christine. I just wanted to know what percentage of your sales is jewelry, which we think looks really great, and where would you like it to be long term? And also, how much are you going to increase the skew count for holiday?

Are we talking jewelry skew count?

Yes, jewelry please.

Got it. Okay. First, jewelry is running about 3 to 3.5% of our full price sales within our own stores and we believe we have great potential in jewelry and thank you for the compliment on the assortment. It's checking very well and longer term we believe it could comfortably approach or equal 10%. But again, that's a vision over the next few years until we get there, we won't be there. For this holiday season we're particularly focused on expanding our sterling group. It did remarkably well. We had first started -- we first introduced sterling in the limited number of stores and it checked extremely well and we have expanded it to many, many more locations and now we see it as a key group within our jewelry assortment.

Great. Thank you. Good luck.

Thank you.

Dana Telsey.

Hi, good morning, everyone.

Good morning.

Good morning. Can you talk a little bit about Japan, what you're expecting Japan's sales growth to be? And also, did their product assortment trend as it did in the US? Did you see the same things? And just lastly in the US on the wholesale side, how are they ordering differently this year than last year. Thank you.

First, in terms of Japan, as Mike just referenced on -- we're looking for growth between 5 and 10% on a constant currency basis. And Dana, as you know, the Japanese retail environment is extremely weak, it actually weakened during the last few months. And for us it continues to be a market share gain where we're -- market share this past year was 13% and we're expecting it to grow based upon a market that will not grow.

In terms of trends, the -- generally speaking, we have not seen the same trends as we've experienced in the United States, although accessory sales overall did increase somewhat because it was a sharp focus for us in Japan as it did in the United States.

What we're experiencing in Japan this summer is a very strong favorable reaction to our new Bleecker collection as we are in the States. So we feel real confident that the change in product is going to appeal particularly to the stylish Japanese consumer.

With regard to our US department stores, they still have great confidence in Coach. We obviously have trended ahead of the stores themselves. We are by far the number one accessories resource and they're planning us to be modestly up this year in an environment where they're planning their business not to grow.

And, also, can you just mention, what percent of sales came from handbags $400 and over and was there a difference between the high end and low end in terms of what you saw ticket performance and just acceptance of product? Thank you.

Sure.

Sure. Across all of our direct businesses, Dana, it was about 24%, up from 17% a year ago. And -- of handbag sales.

Yes, Dana, in terms of our lower priced bags, some of that occurred at the expense of lower sales in what we might call the lower-priced bags as consumers -- some consumers traded down to accessories.

Thank you very much.

You're welcome.

Antoine Belge.

Yes, good morning. It's Antoine Belge at HSBC. Two questions, the first relates to the performance of your full price network versus factory. Can you perhaps be more precise? What has been the [gross] in full price? Was it still negative and, if so, how are you planning full price versus factory going into FY '09? And second question relates to the diluted impact of the greater China integration. Can you talk us through the incremental sales and operating profit, i.e. explaining how you come up to the $0.03 to $0.04 per share dilution?

Okay. Antoine, I'll take the first question. As we've said in the past, we use the full-price channel to drive the brand forward. And during challenging economic times, since we do not go on sale in our full-price stores, we have more marketing flexibility in our factory stores which we utilize. We have a different consumer and as recently as last month we have -- when we measured -- when we bumped up our relative databases between full price and factory, we have seen no migration whatsoever of full price customers to factory. It's a discreet audience. And we're very comfortable with the way in which we're approaching our retail business which we manage as an entity.

In terms of greater China, the real simple answer is that we're putting a team on the ground, an infrastructure in place in advance of significant revenues so that we can capture revenue growth down the road. But as you would imagine, while we're putting a modest regional team on the ground to manage the division there, as we transition to ownership of the stores, obviously we're going to pick up the lease cost, we're going to pick up the store associates and the store wages associated with that.

And as we've talked about a couple times now, the revenues are relatively modest this year. We do have a phased approach. We're taking over the Hong Kong and Macau stores here in the fall, but the mainland stores not until the spring and so we won't see a significant revenue pop in FY '09 as much of the year will still be on a wholesale shipment basis while we build a team on the ground there. So the net impact, we believe this year, will be diluted to about that $0.04 to $0.05 -- $0.03 to $0.04.

Thanks.

Thank you.

(Operator Instructions) Adrianne Shapira.

Thank you. Goldman Sachs. Lew, following up on the trends in the full line channel, you talked about traffic being down. Perhaps qualitatively give us a sense where traffic has been trending sequentially. And then following on that, just talk about -- you've had some efforts to try and -- obviously with the product innovation to jump start traffic, talk about some of the promotions in the full line. How is that trending as you try and graduate some of those factory customers to the full line channel? Thanks.

First, with regard to traffic, as -- it's been fairly consistent from one focus to the next. And our focus, Adrianne, is primarily on conversion. We at this point believe the biggest opportunity for us is to generate satisfied consumers by giving them a great product when they get to the malls. Now, clearly we have a very vibrant internet available to us where we have over 1 million visitors per week and the internet is a principle communication vehicle to introduce new collections and we're doing that through substantial targeted mailings.

Also, this holiday season we're going to be conducting, for the first time in recent years, a substantial number of trunk shows across the United States where we will be inviting our best customers to preview our new collections. Lastly, we're looking forward to a substantial increase in the level of editorial that we're getting, particularly in selling magazines this holiday as reporters and fashion editors have gravitated quite positively towards our new looks, particularly the Madison collection which we're launching in October.

Great. Thanks. Perhaps give us an update on that promotion, the invitation to the factory stores to full line, how that has been trending.

First, it's significantly profitable for us. What we're finding -- first, it's too short a time for us to measure the amount -- in a reliable way how much future business we're getting from these consumers in full price, but what we are able to measure is their spend in factory. So the people that we have invited to full price who are exclusive factory buyers have responded well to our offers in full price and are spending at the same levels that they did previously in factory, which means that we're getting substantial net plus business from them. In terms of converting them to full price without a promotion, that's a much harder chore because these consumers are very value oriented.

Thank you.

We have time for one more question.

Paul Lejuez.

Hey, thanks. Credit Suisse. Lew, given the consumer environment, do you expect any changes in consumer shopping behavior in terms of when they buy? Maybe in other words do you think you've become more reliant on your second quarter sales and earnings? Also wondering if you're seeing any changes in the buying patterns of your core customer? And, Mike, just quick, what are the expenses, the $12 million of expenses associated with the one-time item, if you could just let us know what that's all about?

Thanks for keeping that to one question, Paul.

First, in terms of shopping cadence in general, consumers are spending much closer to the moment, that's been a trend over the last several years and we expect that to continue. Second, we do believe that the holiday quarter on a relative basis might do somewhat better this year because of the strength of the Madison Collection, but in general, we expect our seasonal spread to remain consistent.

Paul, in terms of the variable expense associated with the one-time items, it's compensation related, it's the formulaic result of our bonus programs and based on the higher net income delivered and the other financial metrics, the outcome was $12.1 million. What I will pass along as well, though, based on Lew's recommendations and our Board's agreement, the top 13 senior members of management, what we call the operating group here at Coach, did not participate in the step up and bonus programs driven by the one-time good guys.

Thank you all for joining us today. We look forward to taking your questions through the day. Have a good one.

Thank you.

This does conclude Coach earnings conference call. We thank you for your participation.