掛毯 (TPR) 2010 Q1 法說會逐字稿

Good day and welcome to the Coach conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to the 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 to discuss our quarterly results are Lew Frankfort, Coach's Chairman and CEO, and Mike Devine, Coach's CFO. Mike Tucci, President of North American Retail is also joining us.

Before we continue, we will point out this conference call will involve certain forward-looking statements including projections for our business in the current and future quarters and 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 to 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 fiscal quarter 2010 results and will discuss our strategies going forward. Mike Tucci will review key initiatives for the holiday season. Mike Devine will conclude 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 9:00 am. 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 welcome, everyone. As noted in our press release we were pleased to generate quarterly sales that were slightly above prior year and encouraged by the sequential improvement of our comparable store sales in North America. We experienced strong consumer response to Poppy, supported at its launch by comprehensive new marketing programs. In addition, our results reflect a positive impact of our new pricing strategy as we broadened the assortment of handbags in the $200 to 300 range. Throughout the quarter, customers responded well to our innovative relevant product offered at price points of that were particularly compelling. Beyond the top line we were also very pleased with our high level of profitability and substantial cash generation in first quarter as we continue to invest in our growth initiatives. Despite the economic backdrop in future uncertainty, we remain confident in Coach's durability and growth prospects over our planning horizon. Clearly the opportunities both in 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 quarter first. Some highlights of our first fiscal quarter were, first, sales totaled $761 million versus $753 million a year ago, an increase of 1%. Second, earnings per share totaled $0.44, even with prior year. Third, direct to consumer sales rose 10% to $654 million from $592 million in the prior year. Fourth, North American same-store sales for the quarter improved sequentially from the fourth quarter declining 1% from prior year while total North American store sales rose 8% driven by distribution. Fifth, sales in Japan rose 11% in dollars and declined 3% on a constant currency basis as consumer spending remained very weak. And finally, we continue to generate very strong sales growth and significant double-digit comps in China.

During the quarter, we opened ten North American retail stores including eight in new markets for Coach - Pensacola, Florida; Midland and Tyler, Texas; Little Rock, Arkansas; Madison, Wisconsin; Charlottesville, Virginia; and Kitchener and Newmarket, both in Ontario, Canada. In addition, we opened five factory stores. At the end of the period, there were 340 full-price and 116 factory stores in operation in North America.

Moving to Japan, two locations were added during the quarter. At quarter end, there were 162 total locations in Japan with 20 stand-alone full-price stores including eight flag ships, 114 shop in shops, 23 factory stores, and five distributor operated locations.

Indirect sales, which for context now represent 15% of Coach's sales on an annualized basis, decreased 33% to $108 million from $160 million in the same period last year. This decrease was primarily due to reduced shipments into US department stores where sales declines nearly 30% for the quarter, similar to the first half of the calendar year. Discounting continued at high levels throughout the period while Coach was generally excluded from these promotions. It should be noted, however, that we did see an improving trend over the quarter and overall better full-price sell-through on lower, cleaner inventory levels. Naturally, we will continue to tightly manage inventories into the channel given lower demand.

International retail sales rose in the period driven by both comparable location sales and distribution growth. We continue to experience better performance in locations catering to the domestic shopper where we saw significant sales gains than in those locations serving the international tourist, where sales rose more modestly. The international domestic consumer represents a sizable growth opportunity as Coach's global awareness and presence increases.

We estimate that the addressable US handbag and accessory category declined 5% to 10% last quarter, an improvement over the 10% to 15% decline experienced for the first half of the calendar year. At the same time, Coach's bag sales declined 1% across all channels in North America over the most recent quarter. It's worth noting that we have seen a significant improvement in our customers' outlook for the economy and intention to purchase over the next year.

Our total revenues in North America were essentially even with prior year in the quarter with our directly operated stores up 8% as this distribution growth offset the slightly negative comp performance. As noted, first quarter same-store sales were down 1%, showing sequential improvement from last quarter. Fueling this trend was better traffic and transaction size comparisons from 4Q. Average transaction size in full price was only slightly lower compared to prior year as increased handbag penetration offset lower average unit retails in handbags. In factory where we continued the leverage the flexibility inherent in our business model to drive sales through pricing, we saw increases in traffic and ticket while conversion levels were maintained. It's important to note that our factory store growth continued to be driven by increased spending of factory channel loyal Coach shoppers. We have seen no increase in cross channel behavior.

As noted, in Japan we posted an 11% increase in dollars on a 3% decline in constant currency. A sequential improvement from fourth quarter levels. Our market share further expanded against a very weak category backdrop. Coach now holds a 14% yen share of the Japanese imported accessories market. Our growth in share in a 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.

Once again, I want to call out China, which is only a very small portion of our total sales to date but is growing rapidly and represents a significant opportunity for Coach. We estimate that the market for imported bags and accessories in China grew by 40% over the last year. During the first quarter, we continued to achieve significant double-digit comp growth as the Coach brand is take hold with increasing numbers of consumers both domestically and mainland China and with many of the Chinese who are traveling to Hong Kong. Our blend of New York fashion and accessible price points is resonating with Chinese shoppers. Coach's potential in the China markets is reflected in our very low unaided brand awareness at 8% compared with 72% in the US and 63% in Japan among targeted consumers. Similar, our approach in the US and Japan we are building a multichannel distribution model in China, including stand-alone stores, shop in shops in department stores and factory locations as a factory outlet market begins to develop. During the last quarter we added five new stores in the mainland, bringing our total Coach China store count to 33, including Hong Kong and Macao. We're also pleased to announce our first flagship location on the mainland scheduled to open next spring in Shanghai. The 7,000 square foot store will reflect Coach's latest flagship design. While Mike Devine will get us more details on our financial and of course I'll discussion our outlook in some detail, I did want to give you this recap. Mike Tucci, as you know, has joined to us discuss our product performance for first quarter and our holiday sales initiatives. Mike?

Thanks, Lew, and good morning. During the first quarter as always we maintained a high level of product innovation and distinctive newness.

Clearly the big news in July was Poppy. While it is youthful in attitude, it proved to have broad customer appeal presented in a variety of silhouettes and vibrant colors and prints, Poppy offered great value with an average handbag price of about $240. The launch was supported by a comprehensive marketing campaign, utilizing several elements in digital media, including stand-alone flash Poppy websites, e-mail campaign, Facebook, fashion blog, and targeted on-line banner advertising to get the word out. The compelling Poppy assortment combined with marketing and press around it drove more traffic into our stores resulting in a significant improvement in trend from the past few quarters. Poppy will continue to be a key collection throughout fiscal year 2010, regularly updated with new colors, prints, fabrications and silhouettes.

It's also important to note that Poppy was not the only story in first quarter. Maggie, a key item concept, was also introduced in July, providing a more sophisticated counterpoint to Poppy. Maggie has evolved and will continue to be important throughout the holiday season as the anchor to our Madison collection. In addition, the product launches that followed over the quarter, such as Tribeca, Garnett, and Brooke were also well received and further supported our overall handbag rebalancing strategy.

Earlier this month we started flowing in our holiday assortment including a prelaunch of the Madison collection and the introduction of new Poppy styles and fabrics. The initial reception has been excellent. You will continue to see a high level of newness over the next few months with updates to Brooke and Garnett and a new tote group, Alex, for December. We're also excited about our gifting program highlighted by two new women's accessory groups, Waverly and Gramercy, which will work across all of our handbag offerings and colorful, fun Poppy items offered at great price points under $100.

In addition, our holiday product will be supported by a significant investment in marketing, building on the successful elements from our Poppy launch this summer. We he will execute a targeted strategy beginning in mid November to highlight a powerful gifting message for the season. Our primary focus will be to leverage Coach.com, digital meeting, and compelling print and in-store marketing to drive traffic.

While great products supported by creative marketing has and will continue to be key in driving productivity, the consumer is also responding to our new pricing strategy. Starting with Poppy in July we rebalanced our assortment within our current range by increasing the proportion of handbags introduced at prices below $300 from about 30% of the assortment in fiscal year 2009 to 50% this year. As we've said before, this rebalancing gives the consumer more choices at prices she is willing to pay or is able to afford. As you know, we are designing into this price point engineering collections that can provide this excellent value and still generate excellent margins.

Now this 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 57% of sales versus 52% a year ago, or a 10% increase. As planned this improvement in merchandise mix favoring handbags has resulted in essentially flat overall average unit retails in our stores. Additionally, we saw an improvement in traffic trends from the very weak levels of the first half of the calendar year.

The execution of our strategies resulted in a sequential improvement in retail store performance from fourth quarter levels. As we move through fiscal year 2010, our primary focus will continue to be on restoring productivity to our existing full-price store base. At the time same time, our results in the factory channel remain robust. Here, we are focused on maintaining very high levels of productivity through the introduction of innovative factory exclusive product, combined with in-store and direct marketing initiatives targeted at our best factory consumers. It's 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 while maintaining the integrity of our full-priced proposition in retail stores.

Moving to our stores, as Lew mentioned, we opened 10 new retail stores in Q 1, and on average the generating annualized volumes of about $1.6 million. All of these new stores are very profitable and operate at high levels of productivity. As discussed, our fiscal year 2010 emphasis is on new markets for Coach.

I also want to mention that we are beginning to explore a broader men's opportunity for the brand, both in North America and globally. We will be opening our first men's stand-alone store this spring adjacent to our Bleecker Street store here in New York. We view this concept as a laboratory, where we can pilot emerging men's collections and evolve our merchandising practices. Ultimately we will use these learnings to help refine our global long-term men's growth strategy. With that I will turn it back to Lew for a discussion of our overarching strategies and opportunities for growth. Lew?

Thanks, Mike. Setting the course for the new normal does not change our long-term strategy, although we have sharpened our focus on distribution, putting more emphasis on international growth especially China. At the same time, we are continuing to build market share here in North America and grow our store base, although at a slower pace due to the environment. As you know in fiscal year 2010 we're opening 20 North American retail stores rather than the 40 we've opened for each of the last two years. In addition, we're focusing on those store segments where we have seen the best relative performance, notably Canada, with six openings planned for this year and new US markets. A total of 14 of this year's stores are targeted for new North American markets for Coach, including the eight new markets opened in first quarter. In total, we expect North American square footage growth of about 9%, down from 13% last year.

In China, we expect to open about 15 new locations this year compared to four net new locations opened last year to. To support future growth, as mentioned in our press release, we will also open our first Asia distribution center in Shanghai before the end of the fiscal year, allowing us to better manage the logistics in this region. With the investment we're making in stores, marketing organizations and infrastructure, we're positioning ourselves to replicate our success in Japan.

Moving on to Japan, this year we expect to open about 10 new locations, including a few Poppy shops. In addition, we will be opening our first few exclusive men's locations next spring. In total, we expect our square footage in Japan will increase by 5% this year compared to 8% last year.

This year, we plan to open more than 30 new locations in what we call our international wholesale business. In Asian marks such as Korea, Taiwan, and Singapore, Coach is among the top five brands with significant potential for further strong growth. We've also made considerable head way in the Middle East and expect continued robust performance.

Finally, as we grow our brand awareness across new markets, global travelers will increasingly represent the 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 four or five years. Thus across all geographies and channels we plan to grow our square footage by 9% to 10% this year, modestly below the 11% growth last year, primarily due to opening fewer new stores in North America.

In summary, naturally we're feeling very good about the early success of our fiscal year 2010 initiatives, notably the sequential improvement in our key store productivity metrics in North America and increased handbag penetration which bode well for Coach. Our October results have shown a continuation of the strengthening trends that we saw in first quarter with a consumer responding well to innovation such as our updates to Madison and Poppy at a wide range of price points. In addition, as Mike Tucci mentioned, we're well positioned for the holiday season with a wide range of product at particularly compelling prices. At this time I will turn it over to Mike Devine, our CFO, for further details on our financials.

Thank you, Lew, and good morning, everyone. Lew has just taken you through the highlights and strategies. Let me now take you through some of the financial details of our first quarter results. As mentioned, our quarterly revenue has increased 1% with direct to consumer which represents about 85% of our business, up 10%, and indirect down 33%, primarily due to lower shipments to US department stores. Net income for the quarter totaled $141 million with earnings per diluted share of $0.44. This compared to net income of $146 million and earnings per diluted share also at $0.44 in the prior year's first quarter.

Our operating income totaled $223 million, below the $233 million last year while operating margin was 29.3% versus 31% even. We are pleased with these results and our continued high levels of profitability. During this quarter gross profit totaled $550 million versus $558 million a year ago. Our gross margin rate was 72.3% versus 74.2% a year ago. The year over year change in rate was a function of promotional activity and factory (inaudible) and channel mix with (inaudible) benefits offsetting the impact of sharper pricing.

We were particularly pleased with our expense ratio in first quarter as SG&A expenses as a percentage of net sales totaled 42.9% compared to the 43.1% reported in the year-ago quarter, a 20 basis points improvement. As a result of the profitability initiatives put into place over the last few quarters, we believe our expense spending strikes the right balance between driving future growth opportunities and operating our core businesses efficiently.

Inventory levels at quarter end were $338 million, 16% below the $402 million reported at the end of last year's first quarter, and essentially even on a two-year basis. This inventory level allows to us support 35 net new North American stores, or net new locations of Coach Japan from the year-ago period as well as our 33 Coach China stores.

Cash and short-term investments stood at $995 million as compared with $410 million a year ago. During the first quarter we did not repurchase any shares. Thus, $710 million still remains available under the current repurchase authorization. Net cash from operating activities first quarter, $241 million, compared to $76 million last year during first quarter. Free cash flow in the first quarter was an inflow of $221 million versus $10 million in the same period last year. Our CapEx spending was $20 million versus $58 million in the same quarter a year ago. It's important to note that based on our current plans for fiscal year 2010 we expect the CapEx will be in the area of about $110 million.

As I have already said we are very happy to report first quarter earnings per share equal with prior year on essentially even sales, showing sequential improvement compared to recent quarters. In spite of the continued difficult macroeconomic backdrop, our goal for the balance of fiscal year 2010 is to achieve continued gradual quarterly improvement versus our fiscal year 2009 earnings per share results. Coming out of first quarter, we believe we are well positioned to achieve this goal.

I believe it will be helpful for you modelers out there to keep a few things in mind when looking at the balance of the year. First, our gross margin is likely to stay in 72% area over the next few quarters versus our previously stated range of 70% to 72%. Second, while we were able to leverage our expense base in first quarter, he would note that similar improvements will become more challenging to achieve as we ramp investments for the RK brand and China and anniversary savings initiatives over the balance of the year. And finally, our tax rate is likely to remain in the area of 37% for the year as we noted on our July call.

Before we open it up for Q and A I wanted to reiterate Lew's earlier comments. Our first quarter 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 joining us on our conference call today, and now Lew, Mike Tucci, Andrea and I will be happy to take questions. And as Andrea mentioned, we'll be followed by a brief comment by Lew.

(Operator Instructions) Our first question comes from Bob Drbul. You may ask your question, and please state your company name.

Barclays Capital. Good morning.

Good morning, Bob.

Lew, I guess I was wondering if you can go into a little bit more about your sales expectations for the second quarter and for full year fiscal 2010, how are you thinking about it and looking and planning the business -- are you looking at it on a two-year basis? And I guess sort of tying it together with that the inventory levels, do you think the inventory levels will impede continued sales gains, given that they're down 16%?

Good question, Bob. First, consistent with what Mike Devine said earlier, in reference to gradual improvement in earnings per share over the prior year, for the rest of fiscal year 2010, we also anticipate modest increases in sales as we move forward in fiscal year 2010 from quarter to quarter. We're planning conservatively. We have the ability, as you well know, to chase inventory, and we don't think it's going impede sales at all. We have actually a more focused product assortment this year than we did last year. I think our SKU offering is down about 15%. So inventory is very healthy.

Thank you very much.

Bob, let me just build on that. Or provide another fact. Because of the great sourcing work that our supply chain team has done, our average unit cost is actually down about 8% over where it was a year ago so as a result, on a unit basis, which we think obviously is more important than the raw dollars, our inventories are down only 8%, and above where they were two years ago at the same time. We feel like we're in very good position with our inventories.

Great, thank you.

Thank you. Next question comes from Kimberly Greenberger. You may ask your question and please state your company name.

Great, thanks. Citigroup. I had a couple of real brief ones if you will indulge me. Gross margins, Mike, I was hoping you could give us a relative magnitude on the gross margin impact of the mix shift versus promos. I'm wondering if you can also talk to us at all about any sort of monthly progress in your North American comps throughout the quarter. Would you care to comment on October month to date? And share repurchases, any expectation to reenter the market on share repurchases? Thanks.

Thanks for that one question, Kimberly.

I'll take the gross margin question first, and for the quarter, where we were down year-over-year by about 190 basis points, which, by the way, was a significant closing of the GAAP, in fourth quarter I think we were about 550 basis points below the year earlier quarter, so we're pleased with where gross margin is landing north of the 72% range we had given. Of that 190 basis points the vast majority of is it increased factory promotions. We had not started our deepest discounting during first quarter of last year. We really took it to its greatest level during the December quarter and then perpetuated it through the balance of the year. We've carried into it fiscal year 2010. So we still are seeing negative compares in this quarter from factory discounting. The good news is that we anticipate anniversarying that for second quarter through fourth quarter for the balance of the year, and therefore actually delivering some of the sourcing cost up side as gross margin rate improvement in the factory channel. At full price we would expect sharp pricing again to be offset by sourcing, and that's why we're feeling good about guiding to a 72% range for year to go, which represents improvement for the back three-quarters of the year.

With regard to October results, we've seen a continuation of the strengthening trend that we experienced in first quarter with consumer responding well to innovation such as the relaunch of Madison and Poppy.

So I will take the question in terms of share repurchase. The markets obviously were very volatile during our September quarter. You have seen, Kimberly that we have been big buyers of our stock over the last three years. We spent $2.7 billion 2007 through 2009, retiring more than 65 million shares. We still have $710 million available to us, so that is still a lever we have available to us as a method of returning cash to our shareholders.

Great, thanks, and good luck for holiday.

Next question comes from Lorraine Hutchinson. You may ask your question and please state your company name.

Hi, it's Rick Patel in for Lorraine. Bank of America, Merrill Lynch. Can you just provide some color on your SG&A plans for this year? I know improvements in the future will get tougher but do you expect to get leverage? And how should we think about variable expense impacting operating margins as comps get better?

So as I said in the prepared remarks, and you picked up on, yes, the compares for the balance of the year will get more challenging. We really thought very differently about our spending in first quarter last year before the holiday sales did not materialize, as we all know we had challenging top line back three-quarters of the year and we took a dramatically different approach to spending second quarter through fourth quarter last year. So anniversarying those activities will be again more challenging. As an example we took a number of compensation actions, most notably we stopped accruing bonuses, in second quarter for the balance of the year, and then as we all know we actually add headcount reduction in third quarter. None of those activities were we required to anniversary in first quarter. That being said, I'm feeling very good about the underlying good news that the first quarter represents. Our two primary direct businesses here in North America and Japan both provided leverage not only to their own P&L but to the corporate P&L as well as we were able to manage our variable expenses, both of those important markets very nimbly applying labor at just the right levels to maximize conversion and also now as sales move up, our percentage rent in many of our locations will not kick in until we get to higher sales levels. So feeling very good. I would project that those two large businesses will continue to be able to provide leverage through the balance of the year at low negative comps as we recorded in first quarter. So we're feeling very good about where we are in SG&A in the main.

Thanks very much.

Next question comes from Jennifer Black. You may ask your question and please state your company name.

Good morning, Jennifer black and associates. I wondered what your response to your CRM event was. Do you see definitive changes in consumer behavior, or do you think it's the better product or is it both? And then I also wondered, with today's consumer being more discrete, how does that affect your brand? For example, with op art versus one of your solid beautiful patent bags. Does it vary by age as to how discrete she is? Thanks so much.

well, first, with regard to our CRM initiatives, a good portion of them have been focused in recent months on our factory channel which, as you know, we're able to use promotional levers to help pull people into our factory stores and they have worked very well, because the factory consumer wants to buy a brand, Coach, however, at an excellent value. What we have found with regard to product, our product has been extremely important, both in factory and especially in full price. Our consumers have embraced our new offerings. I think it's a function of great product at especially compelling prices. So a cautious consumer feels really wonderful when they actually pick up the bag and see, for instance, in the case of Poppy, price points for full-price bags at $198. Now, with regard to consumer preferences, whether it's for op art or patent letter what we have found is a high level of interest in novelties. Consumers are looking for cheery product, bright products to help compliment their wardrobe. We have seen the real increase in our sell-throughs of novelty and we're well positioned for the holiday season in that arena.

Thank you.

Next question comes from Neely Tamminga.

Piper Jaffray. Thank you and good morning. One clarification then just a general question on directal expectation for average retail in average ticket. If we've kind of gone through the tougher compares and obviously the comps ease considerably, just remind what you say the composition of that comp was last year, Mike, and how would you expect either AUR average ticket to compare in the second quarter period? And then just point of clarification - SG&A, are you looking for a low single digit on the year increase in the dollars? That would be helpful for the modelers.

I'm going to speak to the handbag average unit retail performance. And to give you a basis of foundation, our average unit retail in handbags for first quarter was $290 this year. Down about 14% from the prior year, and right where we targeted it from a performance standpoint. Our expectations as we move into second quarter will be to hold average unit retail in handbags at roughly those levels and to continue to focus on increasing the number of handbag units sold at an average store rate, which we did achieve in first quarter to pace our productivity improvement through increased penetration of handbags. All of those drivers and metrics are the foundation of our plan for second quarter and beyond, and we see that playing out with the assortments that we've put into the stores thus far. Neely, in terms of your question on SG&A,I'm going to answer it in another way, and what I would say is that we're planning SG&A spending that will be a couple points above where our top-line growth would come. So in spite of the leverage we achieved in first quarter, some modest de-leverage in the back three-quarters of the year and for the year in total.

Thank you, good luck.

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

Needham & Company. Just wanted to ask about China. I know you gave the number of stores you're opening this year but ultimately how many store or locations do you think that market could support? Does the shopper shop differently from the Japanese customer and can you quantify the contribution in this quarter to sales?

Christine, we're just at the tip of the iceberg. The opportunity is extremely large. There's over 125 cities in China with populations north of one million people. I visited a few weeks ago with my colleagues, a number of cities in China, secondary cities, and they are modern, the infrastructure is extremely strong, and the emergent professional middle class is embracing imported accessories. We're pleased to say that Coach is high on her list. So it's early days, and it's too early to say how large the market can be. We do believe that we have an opportunity for the market for Coach, to be larger than Japan today within the next five or six years. We're not planning that way, but we're ready for the opportunity. So you can expect that we will be ramping up in the years ahead the number of stores that we're opening from the 15 this year.

And does that customer buy a specific type of product more than others, logo versus non-logo?

Very good question. We actually see her primarily as a fashion driven consumer. She likes the same styles and the same shape in the main as consumers both in Japan and in the United States. So we're finding very little differentiation in what she's purchasing from us. The only thing I will add is that she is starting with a bag. So when she makes a first import purchase, she wants it to be something that can be seen by others that can contain her essentials. So we're finding our accessory penetration lower today, but that we expect it because it's a developing market.

Great. Thank you and good luck for holiday. The product looks awesome.

Next question comes from Liz Dunn. You may ask your question and please state your company name.

Hi, good morning. Thomas Weisel. Let me add my congratulations on beating the analyst estimates. My question was related to gross margin stabilization. You're now saying gross margin should remain in the range of 72% versus prior guidance that was a little bit weaker than that. Can you just talk through how you have been able to impact sourcing and to some of these lower price points and should we just think about gross margins at that stable 72% rate for the foreseeable future, or is there opportunity to go higher over the longer term? Thanks.

Thanks, Liz, for the question. We feel good about the 72% range for the foreseeable future. There are obviously many variables, and we don't after crystal ball to predict with perfect clarity. The big levers are going to be the required level of promotional activity in our factory channel, then channel mix. We feel very good that we know what we're going deliver the product at in terms of the cost and the, so initiatives have really been very powerful for us, so we know that they are strong enough to offset the sharper prices for Poppy collections and others as we rebalance our assortment. In the factory channel, what's going to make the determination as to how much up side will be the level of promotions required to continue to drive traffic and deliver the productivity and enormous operating margins that that channel delivers when we deliver top-line dollars. Now, we have very good vision through fiscal year 2010 on our costing base. We are also benefiting from the macroeconomic backdrop in this regard that our raw materials and input costs are at lower levels than we've achieved over time. As the economy turns, there may be inflationary pressures in fiscal year 2011, so that will cause us to continue to be sharp in our product planning, design, and production, and sourcing to look to offset those which we feel like we have a capability do.

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

Telsey Advisory Group. Good morning and congratulations. Could you talk about, on the factory store side, as you transition from full price merchandise in factory to direct made for factory, how is that going, how are those price points being adjusted, and how important are lower raw material prices to the gross margin being maintained at 72%? Thank you.

Sure, Dana, good morning. On the factory side, it's important to note that within first quarter, and actually as we look forward through balance of this year, we restored our mix in factory back to a more traditional level of made for factory product in the range of around 75%. It had been lower than that in the back half of last year based on the amount of clearance activity that we had in the channel. That bodes well for us as we have more pricing flexibility there. We have more promotional flexibility, and frankly our margins returns there on made for factory product have been excellent, which allows us to mix the business differently. We really have seen no movement in average unit retail in factory from our historical levels, and we have no plans to really change the model on the factory side. We think the balance between full price at about $300 and factory at roughly half that is the right balance. It's the right relationship, and if you travel into our factory stores today will you notice that from a look and feel standpoint, while it's clearly a Coach store, there's no aesthetic overlap between the two businesses. We have clean platforms in full price, which are really driven by Madison and Poppy on both ends of the fashion spectrum, and then we have a real foundational business on the factory side with Hamptons and SoHo as the anchors to that business. Over time, we've been able to realize some cost savings. I think Mike has outlined what we've been focused on there in terms of raw materials benefits, hardware benefits, make and trim opportunities on the factory side, all with the intention to maintain very strong margins in the factory business, and also allow us to be aggressive there because it is our promotional channel in the business model.

Thank you.

Thanks. Next question comes from Erwan Rambourg. You may ask your question and please state your company name.

Erwan Rambourg from HSBC. I just wanted to come back to Japan because you've had a sequential improvement in yen terms from last quarter to this quarter. Most of your European competitors are actually noticing a stabilization of trends if not a worsening of trends so should we consider this as a Poppy related boost or is there something else you're doing differently? And related to that I just wanted to come back to your comment on China and saying that eventually in five, six years time China could be as big as Japan. Should we hence consider that your long-teller target, stated at $250 million by 2013 could be conservative at this stage?

Well, first of all to your second question, $250 is extremely conservative. We're not yet prepared to provide numbers. We're distorting our time and resources in China to really understand how large it can be. We are running well ahead of where we thought we would be, and we're finding great reception with Chinese consumers, particularly on repeat purchasing, which is key to developing a sustained brand. With regard to Japan, Poppy actually created an inflection point in Japan. We had an integrated comprehensive launch in late June throughout Japan. We even created a few freestanding temporary locations for Poppy in prime locations such as (inaudible) and Poppy has been enormously important to us. In addition we actually benefited from a year-on-year improvement in our men's business which has become a much more important focus for us in Japan, and that's contributed to gains as well. And more generally, we do believe that the very challenging economy in Japan is forcing consumers to make very tough choices, and in terms of where they will spend their accessory dollars, and fortunately, they're spending a disproportionate amount or growing amount on Coach.

Thank you very much.

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

Laura Champine with Cowen. My question is a follow on to the gross margin guidance maintained around that 72% level does that imply your mix of full price to factory is likely to stay stable where it is or should we see full price grow as a percentage of mix in the December quarter?

It's a very good question. And the answer to your question is yes. We do assume that we'll carry through the balance of the fiscal year a full price factory mix about in line with what we just achieved in first quarter. As Lew just talked about, the full price business strengthening in Japan, Mike Tucci talked about it strengthening here in North America, channel mix was not nearly the detractor in first quarter of fiscal year 2010 as it has been recent quarters as we have seen inflection point and that business is getting healthier. So channel mix will not be the detriment go forward that it has been in prior quarters.

Great.

Thanks. Next question comes from Janet Kloppenberg. You may ask your question and please state your company name.

Good morning. JJK Research. Congratulations to everyone.

thank you.

I was just wondering, Mike Devine, on the average cost outlook, I know you said it may start to work higher in 2011, but I'm wondering what the prospect is for more or lower cost as we move through the rest of the year. And if you could give us an update on your plans for marketing this holiday season in terms of dollar spending versus last year? And I just was not clear if you had been accruing for bonuses, if you had accrued for bonuses here in this quarter, and going forward versus what you had done last year, and just for Mr. Tucci, I was wondering if you could talk a little bit about Poppy and the customer base there? Is it all a youthful base, or are you seeing some crossover, and what opportunity that might represent? Thank you.

All right. So, I'll take the questions on average cost and the bonuses. Janet, we are in very good shape and have contracts with most of our raw material suppliers and our factories through the balance of fiscal years introduction. So we feel like we have great vision to what our costs will be, so we would anticipate delivering similar year-over-year average unit costs favorability. Now, of course, we began to capture some of those improvements during the back half of the year, so the 8% will gradually decline, but we won't see average unit cost increasing. And we look forward to delivering that. That's in the 72% guidance that I've talked about and given. The fiscal year 2011 went by a long shot given up on holding our average unit costs constant. I just point out that there's likely to be some inflationary pressures and we're going to look to offset them. Secondly, in terms of the bonuses, we did accrue bonuses both this year and last year in first quarter, so there was not a challenging compare there, if you will, in this most recent quarter. That changes on a year ago basis. Our plans are at this moment in time to deliver bonuses in fiscal year 2010, so therefore to accrue for them, year ago to this year as compare against the situation in 2009 where that was not the case so it challenges the leverage.

I'll take dare of the Poppy and the marketing piece. On the Poppy side, my feel on Poppy is that it actually is selling very broadly across our consumer base. We see that through all channels. We do believe it has driven some energy into the store and attracted a fashion consumer, but it's selling broadly. On the marketing side, very important for holiday to understand we're actually spending about the same amount in marketing. However, we've reshaped our marketing spend dramatically away from some traditional print emphasis and away from packaging to fun concepts and programs similar to what we did for the Poppy launch. To it's (inaudible) to support our gifting practice. Significant investment in on-line advertising, including some association with fashion blogs, our continued relationship with other social networking sites that are out there, a very targeted approach to in-store marketing both in mall and in our windows and in store which we got feedback very quickly with the launch of Poppy. It was highly effective in bringing people into the store and getting a strong message out there. All of this will break in the markets mid quarter. It's really a different type of quarter in second quarter where everything is shaped to the end leading to December 25th, obviously, so we're going to target our marketing mid quarter, November 15th and drive the marketing spend November 15th right through the Christmas selling period and I think you'll see a very dominant, very mixed in terms of platforms with a high level of energy in our stores from a marketing standpoint.

Lots of luck for a great holiday season.

Thank you.

With that, we will conclude our Q-and-A session, and pass it on to Lew for some closing remarks.

Obviously you can hear from both our prepared remarks and our responses to your questions that we feel that we did have an inflection point with the arrival of Poppy and the rebalancing of our assortment to much more compelling price points. We do feel very good about our positioning for the holiday and seasons ahead, and more broadly we feel that the adaptation we are taking to adjust to a consumer who will be spending less than she did for the long term, that is for the foreseeable future, we do not expect the consumer to spend as much as she did in discretionary areas. So our adaptations are, we think, are positioning us well and we're looking forward to restore growth and we think that's available to us. Thank you very much.

That will conclude our call. Thanks everyone. Have a great day.