掛毯 (TPR) 2009 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'd now like to turn the call over to Senior Vice President of Investor Relations and Corporate Communications at Coach, Ms. Andrea Shaw Resnick. You may begin.

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

Before we begin, we must point out that this conference call will involve certain forward-looking statements including projections for our business in the future or current quarters and fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences or control costs.

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. Now let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our fourth fiscal quarter and annual 2009 results and will also discuss our strategies going forward.

Mike Devine will continue with details on financial and operational results of the quarter and year. Following that we will hold a question-and-answer session where we will be joined by Mike Tucci, President, North American Retail.

This Q&A session will end shortly before 9:30 a.m. We will then conclude with some brief summary comments. I'd now like to introduce Lew Frankfort, Coach's Chairman and CEO.

Thanks, Andrea, and welcome, everyone. As noted in our release this morning, we were once again pleased to generate sales that were essentially even with the prior year and encouraged by the continued stability of our comparable store sales in North America through the first half of calendar 2009.

Though still early days, we are also encouraged by the improvement of our July full price business, notably in North America and Japan, where we have seen strong consumer response to Poppy, and our broadened assortment of handbags in the $200 to $300 range supported by comprehensive new marketing programs. Our results for both the year and the quarter demonstrate the resiliency of the Coach model and our commitment to maintaining the integrity of our full price proposition in retail stores even in the face of an extraordinarily challenging environment.

This performance also reflects the strength of our franchise, and our flexibility in adapting to changing business conditions. This year, we have taken the steps necessary to reduce our expense structure, while also investing in growth areas, such as China, in order to position Coach for future profitable growth. Despite the economic backdrop and future uncertainty, we remain confident in Coach's durability and growth prospects over our planning horizon.

Clearly, the opportunities both here at home and North America and abroad, notably in emerging markets, remain abundant. While I will get into further detail about current conditions and the outlook for the category and our business shortly, I did want to take the time to review our year and quarter first. Our performance in FY 2009 was highlighted by an increase of 2% in revenues.

It was a year of many milestones including, first, the opening of 42 total net new stores in North America, 33 net new retail stores and nine new factory stores. Second, direct-to-consumer sales rose 7% to $2.7 billion with a 5% increase in North American store sales driven by distribution while we also experienced rapid growth in China sales. Third, a solid year for Coach Japan.

Retail sales there were essentially flat and on a constant currency basis while dollar sales rose 11% against very weak category sales for imported bags and accessories. Coach strengthened its Number 2 sales position in this market to about a 14% share this year. Fourth, we successfully completed the phased buyout of our retail businesses in China and saw increasing interest in the brand as the market continued to grow rapidly.

And finally, we initiated a quarterly dividend, sending a clear message about our financial strength, cash flow generation and business outlook. This annual performance was capped off by a solid fourth quarter. Some key metrics were, first, net sales totaled $778 million versus $782 million a year ago, a slight decline of 1%.

Second, earnings per share, excluding unusual items, totaled $0.43 compared with $0.50 in the prior year on the same basis. Third, direct-to-consumer sales rose 3% to $683 million from $662 million in the prior year. Fourth, North American same-store sales for the quarter remained stable from the third quarter, declining 6% from the prior year while total North American store sales rose 5%, driven by distribution.

Fourth, sales in Japan declined 4% in dollars and declined 10% on a constant currency basis as consumer spending contracted significantly during the period. And, finally, we are continuing to generate very strong sales in comps in China.

During the quarter, we opened nine North American retail stores including four in new markets for Coach, Laredo, Texas; Capitola, California; Kennewick, Washington and Boise, Idaho. We closed three retail locations as previously announced. In addition, we opened three factory stores and closed one. Lastly, we expanded one retail store and four factory locations.

At the end of the period, there were 330 full price, and 111 factory stores in operation in North America. Moving to Japan, one location was added, two closed, and one was expanded. At quarter end, there were 160 total locations in Japan with 20 stand alone full price stores, including eight flagships, 113 shop-in-shops, 22 factory stores and five distributor-operated locations.

Also during the fourth quarter and as part of our Poppy marketing programs, we opened two temporary, stand alone Poppy locations in event spaces in key department stores. They were extremely successful and we expect to do more of these pop-up locations going forward. In direct sales, which for context now represent just over 15% of Coach's sales on an annualized basis, decreased 21% to $95 million from $119 million in the same period last year.

This decrease was primarily due to reduced shipments into U.S. department stores where sales declined about 30% for the quarter, essentially even with the prior quarter. Discounting continued at high levels throughout the period in department stores while Coach was generally excluded from these promotions. Naturally, we continue to tightly manage inventories into the channel given lower demand.

International retail sales declined modestly in the period, as we continued to experience a bifurcation between locations catering to the domestic consumer where we saw sales gains and those serving the international tourists which were impacted by the slowdown in travel, exacerbated by the swine flu epidemic. We estimate that the the addressable U.S. handbag and accessory category declined 10% to 15% during the first half of the calendar year.

At the same time, Coach's bag sales declined 3% across all channels in North America over that six-month period. Our total revenues in North America were essentially even with prior year in the quarter, with our directly operated stores up 5% as distribution growth offset the negative comp performance. As noted, Q4 same-store sales were down 6%, consistent with 3Q trends.

In addition, our key comp metrics in the fourth quarter were also quite similar to 3Q. Specifically, we would note that in full price stores traffic continued to be weak on the year-over-year basis, while conversion and average transaction size both declined modestly. In factory, where we continued to leverage the flexibility inherent in our business model to drive sales through pricing, we continued to see solid increases in traffic and conversion while ticket was flat.

As noted, we posted a 10% decline in local currency in Japan and a 4% decrease in dollars. Business in Japan continued to be fueled primarily by distribution through new stores as our market share further expanded against a very weak category backdrop. In fact, Coach now holds a 14% yen share of the Japanese imported accessories market.

Our growth in share this year in the very tough Japanese market reflects the strength and relevance of our accessible luxury positioning with the Japanese consumer who is becoming more discerning and value oriented. I also wanted to call out China which is only a very small portion of our total sales today but represents a significant growth opportunity.

As many of you know, this was the first quarter we were directly operating all the China stores, having completed the acquisition of the mainland stores on April 1. During the fourth quarter, we continued to achieve significant double-digit comp growth as the Coach brand is taking hold with increasing numbers of consumers, both domestically and mainland China and with many of the Chinese who were traveling to Hong Kong.

Clearly, China is already becoming a significant market for imported brands that will grow rapidly over the next several years as personal income and consumer spending increase. We estimate that the market for imported handbags and accessories grew over 40% during the last year, while the number of target consumers in mainland China alone grew from 6 million to over 8 million.

To implement our growth strategy, as announced in May, we have appointed Andre Cohen to lead our on-the-ground team. Based in Hong Kong, he now has responsibility for the strategic leadership and operating results of Coach China. Andre originally joined Coach International in early 2008 and has extensive prior experience in the region building brands and businesses.

His experience and market knowledge together with our financial strength, brand positioning and consumer research provide a solid foundation for Coach's expansion in the Chinese market. During the fourth quarter, as always, we maintained a high level of product innovation and distinctive newness.

Beginning in April, we introduced a whimsical collection of bags and accessories inspired by our Bonnie Cashin archives. And in May, we introduced 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 palette across multiple fabrications with a key statements for Mother's Day, and for June Ali was our new group focused on soft, drapey shoulder bags and hobos.

Of course, we continue to update our core collections during the spring including Parker with new colors and silhouettes. Clearly, the big news at the end of the quarter was the introduction of the Poppy collection. Poppy is youthful in attitude and is proving to have broad customer appeal.

Presented in a variety of new silhouettes, vibrant colors and prints, it offers great value with an average handbag price of about $260. Poppy's launch has been supported by a comprehensive marketing campaign, "Are you Poppy?" utilizing several elements in digital media, including stand alone flash Poppy websites, e-mail campaigns, Facebook, fashion blogs, and targeted online banner advertising to get the word out.

The marketing impress around Poppy is clearly driving more traffic into our stores, resulting in the significant improvement in trends from the prior few quarters. Not surprisingly, the impact of Poppy has been most significant in our direct-to-consumer channels, notably, North American full price stores in Coach Japan retail locations where we have made the largest investment in both product and marketing and are experiencing the largest returns.

A retail store environment is also where we are best able to merchandise Poppy as a lifestyle collection across all categories from footwear to jewelry to scarves, along with its handbags, wallets and wristlets. Poppy will continue to be a key collection throughout FY 2010, regularly updated with new color palettes, fabrications and styles, such as the book tote coming for holiday.

Of course, I would be remiss not to mention Maggie, also introduced in July. This key handbag silhouette provides a more sophisticated counterpoint to Poppy. Maggie will evolve and continue to be important through the holiday season. Just last week, we introduced two new handbag groups, Tribeca, a collection of East/West totes, and Garnet, which focuses on satchel silhouettes. Both are offered at new core price points, furthering our strategy to rebalance our handbag assortment, an important area of focus in this year.

Starting with Poppy in our July product, we rebalanced our assortment within our current range by increasing the proportion of bags introduced at prices below $300 from about 30% of the assortment in FY 2009 to 50% in FY 2010. This rebalancing gives the consumer more choices at prices she is willing to spend, or is able to afford.

As you know, our plan is to exploit this opportunity by designing into this price point engineering collections that can provide this excellent value and still generate excellent margins. Now that the rebalancing is in place, we have begun to achieve the goals we set out for our North American full price business. These include higher handbag penetrations, now running at about 55% of sales versus 50% a year ago, or 10% increase.

As planned, this strengthening in merchandise mix favoring handbags has resulted in flat overall unit retails in our stores. As noted, we have also seen an improvement in traffic trends for the very weak levels of the first half of the calendar year. We are encouraged that the execution of our strategies is resulting in a sequential improvement in retail store performance from Q4 levels.

As we move through FY 2010, our primary focus will continue to be on restoring productivity through our existing full price store base. At the same time, our July trends in the factory channel remain robust, with strong consumer response to new made-for-factory product, such as the pleated Soho collection. That said, it is also important to note that we manage our North American store business in aggregate.

As such we will continue to fine tune our marketing and promotional levels to maximize the long-term returns of both channels. Moving to our stores, we opened 39 new retail stores in FY 2009, and in aggregate they generated volumes of about $1.6 million, modestly below pro formas of about $1.8 million. All of these stores are very profitable and operate at high levels of productivity.

However, and perhaps most noteworthy, is that the 13 stores we opened in new markets for Coach, such as Baton Rouge, Louisiana and Modesto, California, actually out performed their planned volumes, underscoring our plan to focus on new markets in FY 2010 openings. In addition, we saw excellent response to new stores in our developing Canadian markets as well, another area of focus this year, which I will touch on more in just a minute.

As we've discussed many times, we have two drivers of long-term growth. First, is distribution, as we expand our global network of store and shop locations with an emphasis on North America and China. And second is productivity, which we drive across all geographies through the introduction of innovative and relevant product in a compelling store environment. In FY 2009, our erosion in same-store sales was more than offset by distribution growth.

The current macroeconomic backdrop does not change our long-term strategy, though 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 this year due to the challenging environment.

Given our strong productivity metrics and [grand pop] proposition, we are a highly desirable tenant and as such have ample real estate opportunities to choose from. This year we are opening 20 North American retail stores rather than the 40 we have opened for each of the last two years.

In addition, as I mentioned, we will focus on those store segments where we have seen the best relative performance, notably Canada, with six openings planned for next year and new U.S. markets. A total of 14 of this year's stores are targeted for new North American markets for Coach. In addition, we will open at least six North American factory outlets. In total, we would expect North American square footage growth of about 9%, down from about 13% in FY 2009.

We have also 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. This year we expect to open about 10 new locations, including a few Poppy locations next spring. Further, we are developing plans to open the first few men's stand alone shops in Japan, given that the stylish male shopper in this market is underserved in the accessories category.

In total, we would expect the square footage growth in Japan will increase by slightly less than 5% this year, compared to about 8% in FY 2009. In China, we now expect to open about 15 new locations this year, up from the 10 forecast previously given our performance and the opportunity. And, looking further out over the next five years, we expect to open a total of at least 50 new locations aggressively growing our sales and market share in this rapidly expanding region.

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. With the investments we are making in stores, marketing, organization and infrastructure, we are well positioned to replicate our success formula in Japan.

In Asian markets, such as Korea, Taiwan and Singapore, the Coach brand is among the top five brands with good headroom for further strong growth. We have also made significant headway in the Middle East and expect 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 from about 4% today to around 8% during the next five years. Thus, across all geographies and channels, we expect to grow our square footage by about 9% in FY 2010, modestly below the 11% distribution growth last year, with the greatest moderation in our North American full price expansion.

Finally, I would like to touch on the announcement of the Reed Krakoff label, a new global brand which we intend to launch in the fall of calendar 2010. It will encompass all women's categories, including ready-to-wear, handbags, women's accessories, footwear and jewelry.

We believe that this concept will serve to define the new American luxury, and engage a different customer, who is looking for exclusivity and limited distribution. While still in the development stage the Reed Krakoff brand is targeted at the rapidly evolving luxury market. It will be a stand alone brand, separate and apart from Coach, while leveraging Coach's infrastructure. It will have a unique point of view and aesthetic, reflecting Reed's personal design and philosophy.

Initially, Reed Krakoff will be launched with a few boutiques in the U.S., Japan, and Hong Kong, as well as limited distribution in specialty stores. In closing, while our new fiscal year has just begun, we are very encouraged by the early success of Poppy and our pricing strategy in this very tough environment. Accordingly, we will plan cautiously until we see concrete evidence of a change in consumer behavior.

Irrespective of the backdrop, we are confident that our proven growth strategies, built upon our leadership position and diversified business model, will continue to deliver excellent returns in the seasons ahead and over our long-term planning horizon. At this time, I will turn it over to Mike Devine, 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 results. As mentioned, our quarterly revenues declined just under 1%, with direct-to-consumer, which represents nearly 85% of our business, up 3% and indirect down 21% primarily due to lower shipments to U.S. department stores.

Excluding the impact of certain unusual items, which I will touch on in a moment, net income for the quarter totaled $136 million, with earnings per diluted share of $0.43. This compared to net income of $172 million and earnings per diluted share of $0.50 in the prior year's fourth quarter. For the full fiscal year, earnings per share were $1.91 as compared to $2.06, while net income totaled $622 million versus net income of $742 million recorded in FY 2008.

On the same basis, our operating income totaled $220 million, below the $281 million reported last year while operating margin was 28.2% versus 35.9%. For the full fiscal year, operating income was $1 billion even, a 15% decrease from $1.18 billion generated a year ago. Operating margin for the year was 31% flat, as compared to 37.1% a year ago.

During the quarter, gross profit totaled $547 million versus $593 million a year ago. Gross margin rate which met our expectations was 70.4% versus 75.9% a year ago. As planned, we maintained a high promotional activity in factory stores, which was the primary driver of our lower gross margin rate year-on-year. 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. For the full year, gross profit declined 4% to $2.32 billion from $2.41 billion a year ago. Gross margin rate was 71.9% in FY 2009 versus 75.7% posted in FY 2008. Again, excluding the unusual items in FY 2009 and FY 2008's fourth quarters, SG&A expenses as a percentage of net sales totaled 42.1% compared to the 40% flat reported in the year ago quarter.

For the fiscal year on the same basis, SG&A expenses as a percentage of net sales totaled 40.9% compared to the 38.6% reported in FY 2008. As a result of our recent profitability initiatives, we believe our expense spending strikes the right balance between driving future growth opportunities and operating our core businesses efficiently.

As mentioned in our press release, we recorded unusual items resulting in a substantially lower tax rate of 29.5% for the fourth quarter. These consisted of a favorable settlement of a multi-year tax return examination which decreased Coach's provision for taxes by $9 million, as well as other certain tax accounting adjustments. These items also increased net interest income by $2 million.

In addition, as a result of this favorable tax settlement, we made a contribution to our charitable foundation which increased expenses by $15 million pre-tax, or $9 million after tax. As you may remember in the third quarter, we had announced a one-time net charge related to the reduction of corporate staffing levels in the U.S., the closure of four North American retail stores, and the closure of our sample making facility in Italy.

In aggregate, these actions increased the Company's Q3 SG&A expenses by $13 million. Including the impact of the unusual items in all periods, net income totaled $146 million or $0.45 per diluted share for the current quarter, and $214 million or $0.62 per share for the fourth quarter of 2008. For the year, net income totaled $623 million for 2009 as compared to $783 million in 2008 while earnings per diluted share was $1.91 compared to $2.17.

Inventory levels at quarter end were $326 million, essentially even in both dollars and units with prior year on a comparable basis. This is consistent with management's second half expectation as we have worked through all of the excess inventory from calendar year end.

This flat inventory level allows us to support 42 net new North American stores, six net new locations in Coach Japan from the year ago period, as well as our 28 Coach China stores. Cash and short-term investments stood at $800 million, as compared with $699 million a year ago. During the fourth quarter, we did not repurchase any of our own shares, thus $710 million is still available under the current repurchase authorization.

Net cash from operating activities in the fourth quarter was $270 million compared to $323 million last year during Q4. Free cash flow in the fourth quarter was an inflow of $245 million versus $268 million in the same period last year. Our CapEx spending was $26 million versus $55 million in the same quarter a year ago.

For all of fiscal year 2009 net cash from operating activities was $809 million compared to $923 million a year ago. Free cash flow in Fiscal Year 2009 was an inflow of $569 million, which included the $103 million purchase of our corporate headquarters building here in New York City versus $749 million in Fiscal Year 2008.

CapEx spending totaled $240 million for the year, also including the cash outlay for the headquarters purchase, as well as for new stores and technology and corporate infrastructure investments. This compared to $175 million spent for CapEx last year. As you know, we did eliminate certain long-term payback initiatives this year, as well as benefited from negotiated savings for ongoing projects.

It's important to note that based on our current plans for FY 2010, we would expect that CapEx for next year will be down further and will be in the area of $110 million. While as you well know, we are not giving specific guidance for FY 2010, I believe it would be helpful for some of you modelers out there to keep a few things in mind when we are looking at the new year.

First, as I mentioned on our third quarter call, our gross margin is likely to stay in the 70% to 72% area over the next few quarters. We noted previously that our cost cutting actions will net at least $50 million in SG&A savings in FY 2010. However, it will still be an investment year for Coach in terms of China and our new business Reed Krakoff. Taken together they will impact FY 2010 earnings per share by about $0.05 or about the same amount as they did in FY 2009.

Finally, our tax rate is likely to be in the area of 37% for the year. Before we open it up to Q&A, I want to reiterate Lew's earlier comments. Our fourth quarter and full year 2009 results demonstrate Coach's strength, our resiliency and the flexibility and balance our diversified operating model provides in challenging times such as these.

Thank you all for your attention, and now Lew, Andrea, Mike Tucci and I will be happy to take some questions, which will then be followed by a brief summary by Lew. Thank you all for joining us on the call today, and we'll now take questions.

Thank you. At this time we're ready to begin the question-and-answer session. (Operator instructions). And one moment for our first question. Our first question comes from Bob Drbul. You may ask your question and please state your company name.

Hi, good morning. Barclay's Capital.

Good morning, Bob.

Lew, I guess the questions that I have all stem around the top line as you look at the business. You know the comment that you made around Poppy in July, can you maybe expand upon just how dramatic there was an improvement during the month of July? And I guess the second part of that would be, can you just talk about in the factory channel, the e-mail promotions to factory consumers and how sustainable you think the factory channel is?

Sure. What we say here at Coach is that Poppy created a positive inflection point for Coach in our North America full price stores and in Japan. When we talk about an inflection point, it is significant. We'd rather not be specific, of course, because it's early days, it is four or five weeks in, and we have a long view.

But what it does do is reinforce our new pricing strategy to rebalance our assortment, as well as the opportunity to come out with a broad, new lifestyle collection that is youthful in attitude yet appeals to our broad and diversified consumer base.

With regard to factory, our business continues to be very robust. And we also feel very confident that we can continue to grow our factory base because we have a very strong consumer who is brand loyal, but is looking to buy Coach at a, on a sale, which is effectively a diffusion channel. We do not go on sale in our full price stores, so we force the consumer who wants to buy Coach and get a full array assortment of Coach, although last year's products or product made exclusively for factory to go to the factory channel.

It works very well. I'm sorry, in terms of e-mails, what I can say is that it's a marketing lever for us, we are very enthusiastic about our ability to draw into factory stores consumers who are exclusive factory shoppers, and they do respond to price. And, again, we do not go on sale in our full price stores.

Thanks, Lew.

Thanks. Our next question comes from Kimberly Greenberger. You may ask your question and please state your company name.

Oh, thanks. Good morning, it is Citigroup.

Good morning, Kimberly,.

Lew, I just had a follow-up to Bob's question and then my question is on your gross margin. Do you have something following Poppy that you think can sustain the momentum you are seeing here in July? I know the Poppy collection will live in the stores.

Or do you think the improvement in full price is really driven by the new pricing strategy and the collections that follow also have that lower price point of view?

Good question. Let me ask Mike Tucci to address it.

Good morning, Kimberly. Thanks for your question. I think what we see is Poppy is a nice catalyst for us. It's created a platform, an energy in the stores. Certainly, the response has been terrific to the product assortment and the marketing. But it's really part of a much more broad strategy, across-the-board and specifically targeted at building handbag conversion and penetration in our stores.

Interestingly, we just released Tribeca and Garnet, and these are two what I would categorize as core groups within the mix, again, priced against our new strategy and we are seeing very strong results with those two groups over the weekend, again, targeting price points that have been traditionally very strong for Coach -- $268, $298, $328, $358 -- to build this presence.

What we feel strongly about going forward is sustaining momentum in Poppy and building the foundation at $300 for the long term. You are seeing us very quickly react to what's going on in Poppy by flexing our on-order, moving goods through the pipeline. We don't see it as a specific reorder business, but we do see it as a newness and excitement business.

We are reinvesting in 10-1 and 11-1 in our pipeline today and we will turn to products around very quickly. And what I think is also very important to note the marketing and positioning campaign both in traditional print and digital media as well as our in-store presence, you'll see us replicate that again, specifically in Q2 with a strong Poppy message and a very broad gifting message.

So I believe it is just the beginning of what we are doing and use Poppy as kind of a benchmark for how we'll launch products going forward.

That is very helpful. Thanks, Mike. And then my real question was just on gross margin for Mike Devine. Mike, could you just help us understand the relative weight of the three different contributing factors to the gross margin pressure here in the fourth quarter?

Sure. Of the more than 500 basis points of year-over-year decline, slightly more than half of that is going to be driven, Kimberly, by the increased level of factory promotions. Then I would say the remaining, let's call it half, is roughly split between channel mix and sure margins on the sharper priced product in the full price divisions.

Now, let me quickly say, however, that since that time, and since the product sold through in the Q4 full price divisions, our supply chain, our merchandising and design teams, everyone involved here in getting product into the stores has done a magnificent job to work on these full price, sharper priced collections to move the gross margin rates back to longer term, more acceptable Coach levels.

With the state of the world the way it is today and the receptiveness of our suppliers, et cetera, I'm happy to say as an example the Poppy collection has a gross margin rate that is quite consistent with the balance of the full store chain. So I do think there is some opportunity in that third metric, if you will, that caused the fourth quarter decline as we move into the new fiscal year.

Great, Mike. So you were not seeing any of the deflationary trends benefit the fourth quarter? But they should start in first quarter?

Correct. The product we are selling through in the stores now is showing in the full price collections that are quote/unquote sharply priced are generating higher gross margin rates than what we had in Q4.

Fantastic, thanks. Good luck for fall.

Thank you.

Thank you. And 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.

Good morning, Stifel Nicolaus. Question on China, what's really selling there? You talked about the big comps. How is the brand position there? Is it similar to Japan? Or how should we think about that?

A good question. First, what's selling well in China is what's selling well worldwide. Poppy is doing extremely well, as are our other ranges. We're positioned similarly in China as an accessible luxury brand, targeting the growing, middle class professional female who is looking for great product at a, that is relevant to her lifestyle at an excellent value.

And what we are finding is that our business and product is resonating very well with the emerging middle class in China.

Thanks very much.

Thank you. The next question comes from Christine Chen. You may ask your question and please state your company name.

Thank you. Christine Chen, Needham & Co. Good morning.

Good morning.

I'm wondering, with Poppy, could you just share with us, is it attracting the younger customer that you are hoping it to attract? I know it has broad appeal, but are you seeking the addition of new customers?

Mike Tucci?

Sure. Absolutely. I think Poppy is absolutely appealing to a younger consumer as part of the story. And I say that because we have been spending a lot of time in our stores, working with the consumer, watching her.

And we have also been spending an enormous amount of time online, dialoguing with the consumer through some of the social media sites, Facebook, as an example. She is very engaged, she is excited. That is not the total story, though.

Poppy has a strong foundation of product that appeals to a very broad range as Coach consumers. That's really important. We have hallmarks in Poppy like classic signature, op art, very important trim details, things like our turn lock that we have given a new sort of energy to. That rings true through the entire collection.

I think it offers us an opportunity to speak to the Coach audience in a very powerful way. So we are pleased with the consumer response, and we also believe that part of our traffic improvement is really excitement around Poppy and what it brings to the brand and what it brings to the store from an environment standpoint.

Okay. I guess on that note, could you share with us how same-store sales trends progress during the quarter? I mean I would assume that June was, even though it was just the last part of June, that June showed a bigger improvement over April and May trends?

Actually, to be clear, Poppy hit on literally the last Friday of June. So we didn't really, I wouldn't attribute June's performance with anything that happened with Poppy.

We had two days in the quarter.

We did spend a lot of time in June setting Poppy up in terms of launch activity and marketing activity. But the true impact of Poppy is coming with the July floor set.

What about quarterly trends for same-store sales?

The quarterly trend for us was very consistent throughout the quarter. We didn't see a lot of wavering there. It really held in both full price and factory, our trends held very consistent throughout the quarter and consistent with what we saw in Q3.

Okay, great. Good luck.

Thank you.

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

Hello, I'm sorry. Was that me?

Liz Dunn, you may go ahead and ask your question. Please state your company name.

Sorry, I didn't hear the introduction of my name. Hi, Thomas Weisel.

Just a follow-up on the question surrounding the improvement related to Poppy. So you saw a traffic improvement. Was there also a conversion improvement? Can you talk us through some of sort of the gives and takes around increasing handbag penetration but at lower prices? I mean, will the net effect of that have sort of a neutral impact on transaction value? Or how should we think about that?

You actually answered your question within your question. It absolutely what the goal has been for us, or the broadest goal for us is to improve productivity in our full price stores. Behind that is an objective to drive handbag penetration in our stores and drive handbag conversion.

That is our brand hallmark, that is the foundation of the brand. And what we are seeing is handbag penetration improving. Unit sales in handbags as a -- from a run rate standpoint improving which has a virtuous, positive impact on average dollar transaction. As the handbag becomes a greater portion of our overall transaction, it helps us to drive productivity. That's what we are seeing.

I think what we want to build on is an improvement in visitation in our stores, work with that consumer, develop the relationship with her, and then ultimately, as we improve conversion, we think that that is a driver of restoring productivity in our stores as well.

Will you continue to have many of these events like you have been having for Poppy?

We will. We'll continue to focus on things like preview events. We will also use very dynamic Web marketing to drive events in-store, things like pre-sales, some of the gift with purchase ideas, we are absolutely committed to them and we'll fund that going forward.

Great. Thanks.

I don't want to totally dodge your conversion question. It is early, but I would say that what we are happy with is a sequential improvement in conversion performance. That's important for us to continue to monitor. And as you know, an important driver of comp.

Great. Good luck.

Thank you.

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

Hi, TAG. Congratulations on the improvement in traction you're seeing. I was in Tokyo just a few weeks ago and I saw the excitement from the Poppy collection.

What are you seeing the impact of Poppy in other channels? Wholesale? Online? And do you see Poppy at all going into factory? And as you get leaner in inventory in factory do you keep factory excited with other merchandise? How do you see that trending? Thank you.

To answer the second part of your question first, we don't have any plans in the foreseeable future to put Poppy into our factory stores. It will stay out of the factory stores indefinitely. We see it as a sub brand.

As I mentioned earlier, and you were in Japan and you saw the excitement there, we are going to be opening Poppy stores in Japan and possibly here in the United States as well at some point. As we experience more, we'll fine tune our strategies and refine our thinking. With regard to other channels, we are finding that Poppy is doing extremely well.

In the wholesale channels, we tend to measure performance by sell-through rates weekly, and what we are finding is that Poppy is selling through at two to three times the rate that prior collections at last quarter sold through. So everyone wants more Poppy, and we are developing a rapid response program to get back into Poppy everywhere.

In Japan, we have a robust back order program. Similarly in the U.S. we are developing one, and we think Poppy will be a continuing success story throughout the entire fiscal year.

Thank you.

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

Hi, it's Laura Champine with Cowen. Just looking at what your comments on SG&A expense this year there and that there will be a $50 million flow through of savings offset by some investment.

If I run that investment through the numbers you gave, it seems like you still have an opportunity for SG&A improvements, but I know you are investing in marketing and other things. Do you think it's possible you can actually take SG&A expenses down year-on-year in fiscal 2010?

With our conservative planning and where we are right now, we don't see that happening. We have made major strides, though. I have to say, I couldn't be more pleased with the way the business, of the operating in these challenging times. Perhaps the most exciting work really has been done in the field in the selling teams where we actually have seen us move the needle significantly on the leverage point required for our SG&A line.

As an example, if you followed us for some time you may recall we used to talk about North American retail store chains needing about 5% to 7% comp to deliver SG&A leverage to their own P&L.

With the fabulous work that's been done there largely around labor management, the great rent negotiations that we have had, the great new deals we are booking on the new stores that we are opening and just the fact that we have challenged every line item on the store P&Ls, I think we will see moving into FY 2010 that we can deliver leverage to the retail P&L with roughly a flat comp.

So real, real progress has been made. Similar things happening in Japan, where the cost cutting and expense spending review has been fantastic. So real, real progress has been made.

Nonetheless, with the investments that we are making in new stores, and the investment in China and RK, Reed Krakoff, it is unlikely we'll get to a flat SG&A number next year. But we are going to continue to work hard and see what we can bring home.

Thank you.

Thank you. Our next question from Lorraine Hutchinson. You may ask your question and please state your company name.

Hi, this is Rick [Batelle] in for Lorraine. Can you just update us on how your sourcing relationships are changing? Do you plan on sticking with the countries and vendors you have been working with or do you plan to seek lower cost options this year?

We have a broad constellation of partners that constitute our sourcing base and many of them who are entrepreneurial actually have migrated with us to lower cost areas. While we always look for new partners to work with, we do have a very broad and diversified group of suppliers who are working with us to establish significant capabilities in Vietnam, India, other parts of China where costs are lower.

The key is to maintain quality. So we put as a premium those people who we have worked with in the past, who understand the Coach way and our requirements.

And then can you update us on your inventory plans going forward? Perhaps are you thinking about inventories both on a dollar and unit basis as you prepare for the holiday season?

Yes. We are very pleased with the way the second half of Fiscal Year 2009 ended. We were able to manage the inventory flat on a year-over-year basis with a significantly higher store base in North America and Japan and, of course, we took over the 28 stores in China.

So to get flat on dollars and units versus where we were coming out of December was a real accomplishment for the team. So we've gone into FY 2010 with a conservative approach against this very challenging macroeconomic backdrop. But we are in a position now of looking at chasing.

It is something we as an organization did exceptionally well over the years as we chased comp as the business was so strong in the past. It is something that we'll look forward to doing again. We have Jerry Stritzke, our COO, and Angus McRae, the head of our supply chain, looking at and working very hard against that initiative.

As we talked, Mike talked about earlier, we are looking to get back into Poppy in a bigger way by October and again in February. I think we'll continue to see very, very good inventory metrics as we go through FY 2010.

Great. Thank you very much.

As it is now 9:29 a.m., I'm going to thank everyone for joining us today and I would like to turn it back over to Lew for some closing words. Lew?

Okay. Thank you, everybody. The big story, of course, is Poppy, and as evidenced by your comments. But really, the larger story is the rebalancing of our assortment to bring great product to consumers at much more compelling prices to address a consumer who is more cautious and reluctant to spend.

We have been working on this strategy for the last nine to 12 months and it is exciting for us to actually bring product into the market and see the early results, which are in keeping with our expectations. We shared with you previously that it's our intention to emerge stronger from the adversity we are experiencing, and we are committed to doing that.

Thank you, everyone, and have a good day.

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