掛毯 (TPR) 2009 Q3 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 and Corporate Communications at Coach, Ms. Andrea Shaw Resnik. You may begin.

Good morning and thank you for joining us. With me today to discuss our quarterly results are Lew Frankfort, Coach's Chairman and CEO and Mike Devine, Coach's CFO. Before we begin, we must point out that this conference call will involve certain forward-looking statements, including projections for our business in the current or future quarters of fiscal years. These statements are based on a number of continuing assumptions. Future results may differ materially from our current expectations based upon risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences or control costs. Please refer to our latest annual report on form 10K for a complete list of these risk factors. Also, please note that historical growth trends may not be indicative of future growth.

Now, let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our third fiscal quarter 2009 results and will also discuss our strategies going forward. Mike Devine will continue with details on financial and operational highlights of the quarter, following that we will hold a question-and-answer session that will end shortly before 9:30 a.m. Lew will then conclude with some brief summary comments. I would now like to introduce, Lew Frankfort, Coach's Chairman and CEO.

Thank you, Andrea and good morning everyone. As noted in our release, we were pleased to generate sales that were essentially even with prior year and encouraged by the stabilization of our comparable store sales to pre-Christmas levels in North America. Importantly, we enhanced the vibrancy of our franchise by providing our consumers with innovative, relevant product at a compelling value without going on sale in our full price stores. Our third quarter results demonstrate our continued resilience, resolve and ability to navigate through this challenging environment. In addition, the steps that we have taken to reduce our expense structure will help position Coach to improve our profitability. While we remain cautious about the near term, we are very positive on our longer term outlook, underscored by our initiation of a dividend, which we just announced this morning. As you know, we have a business model that generates significant cash flow and are in a position to take advantage of profitable growth opportunities, while continuing to return capital to shareholders. This action reflects our financial strength and confidence in our business outlook. While I will get into further detail about current conditions in the outlook for the categories and our business shortly, I did want to take the time to review our quarter first.

Some key metrics of our third fiscal quarter were, first, net sales totaled $740 million versus $745 million a year ago. A slight decline of 1%. Second, earnings per share, excluding one-time charges, totaled $0.38, compared with $0.46 in the prior year, a 17% decrease. Third, direct-to-consumer sales rose 9% to $634 million from $582 million in the prior year on a comparable basis. Fourth, North American same-store sales for the quarter declined 4%. And fifth, sales in Japan rose 1% in constant currency and 14% in dollars. In addition, we are continuing to generate very strong sales and comps in China where we just concluded the acquisition of our retail businesses on the mainland.

During the quarter, we opened two North American retail stores, Youngstown, Ohio, a new market for Coach and Temecula, California, between LA and San Diego, as well as three factory stores. We also closed two retail locations. In addition, one retail store and one factory store were expanded. Thus at the end of the period, there were 324 full-priced and 109 factory stores in operation in North America.

Moving to Japan, one location was added and one expanded. At quarter end, there were 161 total locations in Japan, with 20 full-priced stores, including eight flagships, 114 shopping shops, 22 factory stores and five distributor-operated locations. Indirect sales, which for context, represent less than 20% of Coach's sales on an annualized basis decreased 35% to $106 million from $162 million in the same period last year. This decline was primarily due to reduced shipments into US department stores. We continue to tightly manage inventories into the channel, given lower demand with sales declining 30% for the quarter, as discounting continued at high levels and Coach was generally excluded from these promotions. International retail sales rose modestly in the period, driven by distribution, while shipments also declined, as we closely managed inventories in this channel as well.

We estimate that the addressable US handbag and accessory category declined 10% to 15% during the first quarter of calendar 2009. At the same time, Coach's bag sales declined 2% across all channels in North America. Our total revenues in North America were down 5%, with our directly operated stores up 7%, as distribution growth offset the negative comp performance. As noted, same-store sales, which were down 4% stabilized to preblack Friday levels. On an aggregate basis, the biggest difference on the holiday quarter trend was traffic, which improved from 2Q comp levels in both channels. We would note that in full-price stores our weak traffic pattern from the previous quarter improved while conversion and average transaction size both declined modestly from prior year.

In factory, where we continue to leverage the flexibility inherent in our business model to drive sales through pricing, we continue to see solid increases in traffic and conversion, while tickets were flat. It should be noted that month-to-date April comparable store sales are consistent with our third quarter experience after adjusting for the holiday shift.

As noted, we posted a 1% gain in local currency in Japan and a 14% gain in dollars. Business in Japan continued to be fueled primarily by distribution through both new stores and expansions. As our market share further expanded against a weakening category backdrop. In fact, preliminary estimates for calendar year 2008 suggest that Coach now holds a 14% share of the Japanese imported accessories market, where our accessible luxury proposition is resonating with a more independent, less status-oriented Japanese consumer.

I also wanted to call out China, which, of course, represents only a very small portion of our total sales to date. I just visited the region the other week and was truly amazed by the rapid market development and how the Coach brand is taking hold with consumers, both domestically and mainland China and with millions of Chinese who are traveling notably to Hong Kong and globally. We have been especially pleased with the transition of our first 10 locations in Hong Kong and Macau last September, where we have seen a significant positive impact resulting from Coach's direct operation of these stores.

Similarly, we are looking forward to the seamless integration of the mainland China locations which we have just transitioned on April 1st. Our business performance in the region to date, including double digit comparable store sales growth demonstrates that Coach has significant potential with this emerging and very important consumer group. We have now built an on-the-ground team and deepened our insights into the Chinese consumer through substantive market research. This experience and market knowledge, together with our financial strength, multiple distribution channels and grand positioning provide a solid foundation for Coach's expansion in the Chinese market where the opportunity is large. In fact, to date, among target consumers in mainland China, our brand awareness remains very underdeveloped at only 6% on an unaided basis, compared to 63% in Japan and 70% in the US.

While Mike Devine will get the into more details on our financials and, of course, I will discuss our outlook in some detail, I wanted to give you this recap of the quarter and touch on some of the product initiatives.

During the quarter, we maintained a high level of product innovation and distinctive newness. Beginning on December 26th, we transition to spring with the introduction of the Penelope collection offered in Leather, our classic Signature, and OP ART across multiple silhouettes and anchored by our shoppers style. This was followed by an updated Heritage Stripe group in February and a new Parka collection in March. With it's soft feminine pleats and twisted straps, Parka represents another significant design evolution for Coach. It was supported by our spring ad campaign and it's two key styles, the shoulder bag and hippie, represented 12% of sales in March.

Earlier this month, we introduced a collection of bags and accessories inspired by our Bonnie (inaudible) and Archives. While the whimsical prints and bright color have captured the attention of many, the best selling styles are the convertible foldover bags offered in Leather and Signature. And this coming Friday, we'll compliment our assortment with the introduction of Cricket, a spectator carry-all based item group in a broad range of colors. Cricket, along with our strong Madison collection updated in a beautiful spring pallette across multiple fabrications, are the key statements for Mother's Day. Perhaps most exciting in our upcoming product introductions is the Poppy collection, a new attitude for Coach arriving in July. Poppy is youthful in appeal, offering a variety of fresh silhouettes, vibrant colors and particularly accessible price points. Our new poppy logo is inspired by notebook graffiti and invokes a playful energy that rings throughout the collection. And we have just finalized the robust marketing plan to support the launch which will utilize several new elements for Coach, including social networking websites such as Facebook and fashion blogs to get the word out along with an interactive global online campaign entitled "Are You Poppy"?

Moving to our stores. As you know, now we have incorporated the discussion of new store performance as part of our quarterly recap for more than a year now. So, I want to touch on these metrics. We opened 30 stores in the first nine months of FY 2009 and I'm pleased to note that they continue to perform well, essentially in line with pro forma volumes. These new stores are very profitable and operate at high levels of productivity.

We also wish to note the planned closure of four retail stores, which are underperforming. They include Greenwich, Connecticut, which closed on the last day of the quarter, along with Work Avenue in Palm Beach, Green Valley Ranch in Henderson, Nevada and Embarcadero in downtown San Francisco. These remaining stores will close by the end of June.

An important area of strategic focus in FY 2010 is the price positioning of handbags and accessories. Building on our FY 2009 product initiatives, we will rebalance our assortment within our current range, by increasing the proportion of bags introduced at prices below $300. Beginning in Q1, about 50% of our handbag choices or about 70 SKUs in an average store will be at retails between $200 and $300, as compared to an average of 30% in FY 2009. This reweighting of our assortment will result in an average unit retail reduction in bags and accessories of 10% to 15% next year.

Our goal is to provide our consumer with more choices at prices she is willing to spend or is able to afford. We are exploiting this opportunity by designing into this price point, engineering collections that can provide this excellent value and still generate strong margins. We believe this will drive our handbag penetrations higher, thereby improving mix, increasing average transaction size and ultimately improving productivity.

As we have discussed many times, we have two drivers of long-term growth. First is distribution, as we expand our global network of store locations with an emphasis on North America and China. And second, as productivity, which we drive across all geographies through the introduction of innovative and relevant product in a compelling store environment.

The current macro economic backdrop does not change our long-term focus. Although we have sharpened our focus on distribution, putting more emphasis on the largest opportunities, both in North America and abroad. We will continue to build market share here in North America and grow our store base although at a slower pace in FY 2010 due to the challenging environment. Given our strong productivity metrics and our brand proposition, we are a highly desirable tenant and as such, have ample real estate opportunities to choose from. However, our primary focus is on restoring productivity to our existing full-price store base. Thus, we're limiting our new North American retail store openings to 20 locations rather than the 40 we have opened for each of the last two years. In addition, we'll focus on those store segments where we have seen the best relative performance, notably Canada, with six openings planned for next year, and new US markets. A total of 13 of our new store openings for next year are targeted for new North American markets for Coach. In addition, we have decided to suspend retail expansion activity.

We have been slowing the pace of square footage growth in Japan, given the economic environment by reducing the number of new openings and stemming expansion activity. In FY 2010 we expect to open a net of seven new locations, while in FY 2009, we will open a net of five new locations. And as I have mentioned, we will continue to develop the emerging market potential, particularly in China, where we have seen excellent results as I have mentioned to you.

In FY 2010, we expect to open about 10 new locations in China and looking further out, over the next five years, we expect to open a total of over 50 new locations, aggressively growing our sales and market share in this rapidly expanding region. In fact, our market research indicates that by 2013, the China, Hong Kong and Macau premium handbag and accessories market will likely exceed $2.5 billion, a significant increase from its current size of about $1.6 billion.

Our goal is to become one of the top three imported handbag and accessory brands with sales of over $250 million and a market share of at least 10% by fiscal 2013, up from about $50 million and 3% to date. With the investments we will make in stores, marketing, organization and infrastructure, we are well positioned to replicate our success formula in Japan since taking control of the business there in 2001.

In addition to China, there are several other international growth markets that we will focus on over the next few years. In Asian markets such as Korea, Taiwan and Singapore, the Coach brand is among the top five brands with good head room for further strong growth. We also have made significant headway in the Middle East and expect to continued strong performance.

Finally, as we grow our brand awareness across new markets, global travelers will increasingly represent a significant growth opportunity for Coach. At about $4 billion in global sales for fashion and accessories, we believe we can double our share of the global travel retail market over the next three to five years, both through new locations and improved productivity. In FY 2010, we expect to open more than 30 new locations in what we call our international wholesale markets, increasing our store base to about 190 locations. In summary, we're encouraged by the stabilization of our business and we remain unshakable in our resolve to not only weather this storm, but to emerge a stronger company for it. 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 just 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 declined 1% with direct-to-consumer, which represents over 80% of our business, up 9%, and indirect down 35%. Primarily due to lower shipments to US department stores. Excluding the impact of certain one-time items, which I will touch on in a moment, earnings per share for the quarter declined 17% to $0.38, as compared to $0.46 in the year ago period, as net income totaled $123 million, down from $162 million.

On the same basis, our operating income declined 23% to $199 million in the third quarter, versus $257 million in the same period last year. Operating margin in the quarter was 26.9%, compared to 34.5%.

In the third quarter, gross profit declined 6% to $525 million, from $558 million a year ago. And gross margin rate was 71% versus 75% in the prior year. As planned, we maintained a high level of promotional activity in factory stores which was the primary driver of our lower gross margin rate. Channel mix and the sharper pricing initiative in our full-price divisions also dampened margin. We anticipate delivering similarly high rates of gross margin in the coming quarters.

Adjusted for one-time charges, our SG&A expenses as a percentage of sales rose from prior year levels as expected. In the third quarter, and representing 44.1% of sales versus 40.5%. As a result of our recent actions, we believe our expense spending strikes the right balance between driving growth opportunities and operating efficiently while overall top line growth remains challenged.

As mentioned in our press release, during the quarter, we recorded three one-time charges. These consisted of expenses related to the reduction of corporate staffing levels in the US, the planned closure of four North American retail stores and the closure of the Company's sample-making facility in Italy. Collectively, these actions increased the Company's SG&A expense by $13 million in the period and negatively impacted earnings by $8 million after-tax.

The actions taken will help the balance of FY 2009 in a modest way and position us well for FY 2010. Combined with other key measures previously implemented, such as the elimination of merit-based salary increase and a hiring freeze outside of critical growth areas, we now expect to capture over $50 million in total pretax savings next year.

Inventory levels at quarter-end were $358 million, up about 23% from prior year on a comparable basis. This compares favorably to the dollar inventory growth level of 39% reported at the end of Q2. On a unit basis, inventory was up 10%. This differential reflects our higher average unit costs. Our inventory increase allows us to support 45 net new North American stores, 14 net new locations at Coach Japan from the year ago period, as well as our 27 Coach China stores.

Cash and short-term investments stood at $551 million, as compared with $660 million a year ago. During third quarter, we repurchased and retired 3.6 million shares of our common stock at an average cost of $13.98. Spending a total of $50 million. As of the end of the period, $710 million was available under the current repurchase authorization. Net cash from operating activities in the third quarter was $207 million, compared to $85 million last year during Q3. Free cash flow in the third quarter was an in-flow of $180 million, versus $52 million in the same period last year.

Our CAPEX spending was $27 million versus $33 million in the same quarter a year ago. The main drivers for the year-over-year cash flow improvement are a near $60 million swing in timing of holiday receivable collections and substantially lower cash tax payments this year versus last.

We currently anticipate CAPEX in FY 2009 to come in at about $165 million, excluding the purchase of our headquarters building earlier this year. That is about $15 million lower than we projected at the end of the second quarter, primarily due to the elimination of additional long-term payback initiatives as well as negotiated savings for ongoing projects. It's important to note that based on our current plans for FY 2010, we would now expect a CAPEX for next year will be down substantially and will be in the area of $110 million.

Before we open it up for Q&A, I wanted to reiterate Lew's earlier comments. Our third quarter results demonstrate our ability to navigate through the challenging environment. In addition, the steps that we have taken to reduce our expense structure will help position Coach to improve our profitability. Thank you for your attention and now Lew, Andrea and I will take some questions, which will be followed by a brief summary by Lew.

Thank you. (Operator Instructions) Our first question comes from Bob Drbul. You may ask your question. Please state your company name.

Barclays Capital. Good morning.

Good morning, Bob.

Lew, can you address the timing of your decision to initiate a dividend? Why did you choose to do this today? And I guess the second question that I have is, when you talk about the pricing strategy that you are undertaking, do you believe you have found the appropriate level with the SKUs and the timing of it and is the product that you are talking about, is that the product that will be designed for those price points between $200 and $300?

Let me take your second question first, Bob. The answer is, yes, to both. We understand through our pilots and our consumer research that there's a sweet spot in the $200 to $300 range that -- where we have been under represented in the last year or two and it is that area which we are looking to distort by rebalancing our assortment and are putting at least 50% of our SKUs in handbags at those price points. And what we understand from consumers, in addition to great products, they want exceptional value. And they need to really feel when they pick up the product, in addition to feeling great about it, that it represents a great value. And from our testing and our experience, we believe that that is the right place to be.

In terms of our FY 2010, starting with our Poppy, we have engineered our collections into these price points. We are excited to see Poppy's arrival at the end of the June and we do believe it's going to be a very successful introduction. I might add one other thing, we are in the midst of a pilot with Poppy and it's -- it's actually running at about 16% in pilot, which we feel really good about because it's one of the highest results we've achieved in the pilot.

Getting to the timing with the dividend, we felt -- we thought that there was no better time than during a period of great economic uncertainty to send a clear and strong signal to investors that our business model is healthy, vibrant, and we feel excellent about our prospects for the future.

Thank you.

Bob, if I could just build on Lew's comment too for the financial modelers out there, around the price points, because it may seem a bit counterintuitive, but this ultimately is designed to improve productivity. What we have seen over recent quarters, as the consumer spending has been challenged is our handbag penetration has declined over time. And as a result, it's negatively impacted average ticket. So this change is designed to drive handbag conversion, increasing penetration and although a lower average price for handbags, drive actually a higher ticket and productivity and improvement in operating income dollars into the stores.

Thanks, Mike.

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

Thanks. Good morning. It's CitiGroup.

Good morning.

Mike, I was hoping you could talk to us about the SG&A savings and any sort of guidance you might have on the SG&A growth rates you expect in the fourth quarter, given the addition of the China acquisition. And then if you could just comment on the nice improvement in your comp store sales here from the second quarter to the third quarter, was that driven more by a pickup in factory, retail or equally between both channels? Thanks.

Well, let me, Kimberly thank you. I will address the question on SG&A and kick it over to Lew for -- to answer on the comp question. But as you know, we've suspended giving specific guidance looking forward, but in terms of our SG&A rate, we feel very good about the actions that we have taken. As we said in the prepared remarks, we believe the steps we have taken will allow us to capture an additional $50 million SG&A reduction from our fixed overhead structure. Some of that will come back to us in Q4, no question, as the actions we are taking in this March-ending quarter. Not in as complete a way as you heard. Three of the four stores are still open. We will close them by end of the year and we haven't completely closed the Italy facility as yet. That will be an activity that will continue to evolve through the quarter, but also be complete by year-end. So the impact for Q4 will be helpful, but not nearly as impactful as what we would anticipate for next year, our FY 2010.

And now on the comp question?

On the comp question, as you know, Kimberly, we have a -- an integrated business model, where we look to use both channels in the most advantageous long term way possible and we're quite different than other companies in that things do not go on sale in our full-price stores and what we have done is used our factory stores as our diffusion of channel to drive higher sales at considerably profitable levels. And what we experienced in this last quarter is a stabilization at preholiday levels and -- and an improvement in our traffic levels in both channels. We don't wish to be more specific than that, because we actually are able to shape the comp by individual actions, in each of those channels, but we approach it as an integrated business.

Kimberly -- oh, I'm sorry to interrupt. Let me just follow-up, I recall now you asked about Coach China and its impact. You may recall at the outset of the year, we talked about China having about a $0.04 dilutive impact on FY 2009, as we build infrastructure in advance of capturing sales volumes. We are actually performing a little bit better than that, but directionally, I think that's still a good number to build into models.

Thanks so much, Mike.

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

Morgan Stanley. Thank you. Mike, the first question is for you. If I look at your SG&A performance in the third quarter, the expense you leveraged was a little bit bit greater than I would have expected on a negative four comp. So, I just wanted to drill into some detail and figure out what is going on in the expense line there. And then second question, SG&A outlook, for FY 2010, can you just give us a sense of what your new leverage point for FY 2010, given the announced cost reductions in that $50 million? Thank you.

Sure. Michelle, so to give you a little additional color on the quarter in the SG&A line, I think if you were to take a look at extracting the one-time events, if you also were to take out China, that we just spoke to, take out our investment in our new merchandising initiatives, what we're looking at really is an SG&A rate for the quarter of under 43%, about 42.9%, in that area, and so the deleveraging, as you call it, is much more modest when you look at it on that basis. So, against flat-top line revenue is essentially down a little more than half a point. To actually deliver SG&A within 250 basis points of the year ago quarter, we actually feel pretty good about. We are not done. We are not there yet, as we talked about, we have taken these steps. We continue to look at other opportunities and there are many that go beyond these three one-time actions in our blocking and tackling day-to-day. We are negotiating hard with vendors. As I mentioned, we have taken our CAPEX expectations down significantly. That will help us through the depreciation line. So, there are a number of other opportunities in addition to these one-time events. We feel good about driving our leverage point down. You remember, well, we used to talk about having mid to high teen top-line growth to achieve SG&A leverage. I think you will see us realize something significantly below that, both in Q4, but especially in FY 2010 and going forward.

And then just to follow up, the investment in new merchandising initiatives, how much longer is that going to continue?

So Michelle, we have some new collections in development. We plan to have those in our product offering into our foreseeable future. It's probably in an investment mode through FY 2010 and into FY 2011.

All right. Thank you.

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

Needham & Company. I was just curious if you could give us an update on how handbags in the higher price point category are performing and what they are as a percentage of sales in the $100 and up bags. (inaudible - recording breaking up)

Handbags over $400 in this last quarter performed at the same penetration levels as they did the prior year and representing about 12% of our total sales. The other question, Christine?

(inaudible) -- the customer base between factory and full-price, if that would mean constant, even in this environment?

It has. We continue to see growth in factory coming from three places. First is existing factory store buyers purchasing more, existing households. Second, our international travelers, and third, our consumers who are new to our database. These are consumers who we consider first-time users entering the franchise through factory.

And then the promotions that you (inaudible) to your best factory consumers to try and get them to cross over to full-price. Are there any things you can share with us anecdotally on the success of that?

On -- it's -- let me answer it in a few different parts. First, the people who are -- the consumers who are primarily our factory store consumers appreciate a great buy. So when we invite them to purchase at full-price, as a preferred customer, they respond extremely well. We're measuring their willingness to then convert to a full-price buyer without a special offering and we're finding that not that many are willing to do that. That they are really looking for a great value.

I guess that's why your overlap has remained very consistent over the years.

It has been consistent.

Thank you so much. Good-bye.

You're welcome.

Thank you. Our next question comes from Todd Slater and please state your company name.

Lazard Capital Markets. Thank you very much. Kudos on managing through the quarter.

Thank you.

Can you provide a little more color on the store closings which are in some of the most likely concentrated wealth markets in the world? I'm wondering how much and in what ways they were underperforming what does it say about the brand's possible relevance to the upscale consumer? And then also, if you could give us some guidance on the cost of goods line going forward, especially as it relates to some of the decreases we are seeing in leather and raw material costs and deflation on other input costs? I'm just wondering when we might start to see the benefits of that, thanks.

For just for context, Todd, we have a fleet -- a full-priced fleet, as you know, more than 300 stores. So, these 4 locations represent just 1% of our stores. You are correct that they are in the toney Greenwich Avenue and Worth Avenue, and are in the toniest areas and the reality is that the rents are the highest in these areas as well. And what we have found is that in high street locations, our performance has been most affected because of lower traffic. And these stores are very expensive stores to operate and we decided that this was the right time to rationalize our approach to them. We took two locations, Greenwich and Worth Avenue and we decided it was time to leave those locations.

In terms of gross margin rates, we also feel very good about the -- delivering the 71% in the quarter while we were working through some of the inventory challenges and the progress we made there. Todd, you are absolutely right to call out some of our -- the raw material costs actually working their way downward in our supply chain group headed by Angus McCray and others who worked very aggressively. We are going to capture those savings and they will be built into our FY 2010 product costs. So, that is the good news and we will need that good news to help us offset the more aggressive sharper pricing initiatives of Poppy and other collections that Lew spoke to. So, I think you can anticipate to continue to see gross margin rates staying high in the level of 70% to 72% for the coming quarters.

Okay. Great. Thank you.

Thank you. Our next question comes from Liz Dunn. You may ask your question and please state your company name.

Hi. Good morning. Thomas Weisel. I guess relative to store closures, are there other stores that are being considered for closure? And then I just wanted to get your -- get some comments from you on your sort of longer term strategy as it relates to US department stores and growth or what you plan to do with your cash, given that the growth doesn't look so fruitful?

Well, first, Liz, it's actually coincidental to this -- to the timing of these closures for this quarter, because every year in the spring, post-holiday, we go through a complete portfolio review of all of our locations and we have completed that review now for this year and we don't contemplate any additional closings during the next -- the course of the next year. And, again, the four closings represent just a little bit over 1% of our fleet. Relative to our US department stores, they are an important channel, although for context, they represent only about 10% of our sales and we do have a loyal Coach consumer who primarily shops in North American department stores. And so we continue to see them as an important part of our franchise and we're looking for that business to stabilize on -- once on the promotional environment improvements, which I know the stores are working on today. In terms of our -- in terms of use of cash, I know that there was a question. Mike, do you want to answer that?

Sure. I think firstly, let's start with the good news is that in spite of our challenges to the topline, we feel very good about the business' ability to generate significant free cash flow, which is why, as Lew mentioned at the outset, we have elected at this point to return additional capital to shareholders through a dividend program. We also, once again, during the quarter, bought back our stock at these accretive levels and as we mentioned, we still have $710 million available to us under the buyback program, but first and foremost, the cash flow generation gives us the ability to continue to grow the business, both domestically and with an increasing focus internationally. We stepped up this year and bought out our China distribution partner, so we could take control of that robust market and it it was great to be able to have the free cash flow to be able to do that. I think down the road, we will look for similar opportunities to drive top-line and bottom-line growth and we have the cash position to allow us to do so.

And, Mike, just to build on the international part very briefly, we are an international company. We are not yet a global business. And as evident by our successes in East Asia, the Middle East and now early stages China, that the opportunities for us are abundant and we are looking to develop an entry strategy as well for Western Europe, starting with England and France. And even though we are not in the position to be more specific than I am now, you can expect that these will be markets we will be entering in the next few years. And over (inaudible), we are enthusiastic about the opportunities outside North America and Asia and particularly because our concept as an accessible luxury brand resonates with consumers, even more today than ever before. Consumers are looking for innovation, relevance and value. And as an alternative to the traditional luxury brands, there's no better choice than Coach.

Okay. Congratulations on -- on managing in a difficult environment. Good luck.

Thank you.

Thank you.

Thank you. As a reminder, please limit yourself to one question. Our next question comes from David Schick. You may ask your question. Please state your company name.

HI, Stifel Nicolaus. Good morning.

Good morning, David.

Just a questions, if you look back now, it's been a pretty firm trend now over a year and the disparity between the revenue growth that you guys show and that the wholesale indirect business shows. How does that make you think about the structure of the company and maybe margins, et cetera, over, five plus years, as we have seen this trend continue to play out?

Well, I will take the margin portion of it, David. We still -- our wholesale divisions, even at lower volumes are still remarkably profitable. We have very -- as you have come to know as well, we have very small wholesale teams here in New York with modest in the field presence. U.S. and internationally, so the SG&A line of these wholesale divisions is extremely modest against a healthy gross margin rate. So, there's no question, but that the divisions contribute in a meaningful way to bottom line rates of profitability.

The only thing I can add there is that from a brand positioning perspective, our philosophy is to offer consumers an opportunity to purchase Coach in image enhancing environments wherever they choose to shop and the department stores continue, as I said earlier, to be a viable channel and we will continue to participate in that venue.

Great. That's very helpful. Thanks.

You're welcome.

Thank you. Our next question comes from Irwin Runburg. You may ask your question and please state your company name.

Hi, this is HSBC in London. I wanted to come back on gross margin because you mentioned that you had essentially three elements weighing, deeper promotion in outlets, channel mix and adopting more of the sweet spot price positioning. As you mentioned, Mike, that gross margin should stay at around 70% - 72% in the next few quarters, but you haven't yet rebalanced fully towards the sweet spots. Should we -- does that imply a deeper promotion in outlet and channel mix will be a less of a concern in the next few months?

Yes, I think that's a good assumption. We will see that channel mix moderate and we are optimistic that we will be able to also moderate as we move into FY 2010, the level of promotions in the factory channel and then the big helper, of course, we mentioned earlier is the great work that our supply chain is doing to get our average costs down through lower cost materials and negotiating with our vendors, looking at everything turning over all the rocks from shipping and logistic costs and squeezing a couple of pennies out here and there. It will, of course be helpful at our volumes.

Okay, I had just a little question on diversification because I'm surprised you've added, beyond the fragrance, a lot of different product now to the fragrance and the cosmetic arena. Will there be a time for to you launch more broadly beyond your own network in that area?

We always think about opportunities, Irwin, to distribute our products through other channels and some day it's very possible we will.

Okay. Thank you.

Thank you.

Thank you. And our final question comes from Dana Telsey. You may ask your question. Please state your company name.

Good morning, everyone. Can you tell us a little bit about the decline in inventory you saw from last quarter? How much of it was driven by the clearance of excess full-price merchandise at the factory stores? Are you still on track with that mid to high teens inventory in dollar terms at the end of this fiscal year? Thank you.

Great question, Dana. You are right on point with both of your questions. Yes, we were able in a meaningful way to repurpose the full-price merchandise that we carried out of Q2 into the factory channel. We made a significant move in selling those units out through that division. I will also point out the other metric, as you know, that we track is what percentage of what we sell at the register and the factory division is made for factory versus full-price deletes. And that metric did not move significantly year-over-year. We maintained a metric north of 60%, 62%, I believe it was. 63% versus about a 65% last year. So, we are still able to accomplish that, work through the inventory and, yes, we are feeling very good that we are on track to deliver a year-end inventory level that's essentially flat in units. So ,we're feeling good about how we are working the inventory issue.

Very good. Very well managed quarter.

Thank you.

That will end the formal Q&A session. I would now like to turn it over to Lew Frankfort, our CEO for some closing remarks. Lew?

Well, first, thank you for participating with us and you can tell by our enthusiasm that we feel that we had a very good quarter and that it actually positions us well for this coming quarter that we're in now, as well as in the years ahead. I just wanted to leave you with a few -- a few thoughts. First, we do have a distinctive multi-channel model, with a very diversified consumer base and you need to appreciate that in having this model, we have an opportunity to flex our marketing and promotional activities through our factory channel, while maintaining the vibrancy of our full-price channels. The businesses work extremely well together. And as most of you know, we do not go on sale in our full-price stores. As one of our tenants, we look to give consumers an excellent value everyday and that's what we're doing and I think next year they're going to think the value is even better. With that, have a good day and thank you very much.

Thank you. And this does concludes the Coach's earnings conference. We thank you for your participation.