掛毯 (TPR) 2010 Q3 法說會逐字稿

Good day and welcome to the Coach conference call. Today's call is being recorded.

At this time for opening remarks and introductions I would like to turn the call over to Senior Vice President of Investor Relations and Corporate Communications at Coach, Ms. Andrea Shaw Resnick, you may begin.

Thank you. Good morning, everyone, 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. Ian Bickley, President of Coach International, is also joining us. Before we begin I must note that this call will include certain forward-looking statements, including projections for our business in the current and future period. Future results may different materially from our current expectations and historical growth trends may not be indicative of future growth based upon a variety of risks and uncertainties. Please refer to our latest Form 10-K for a complete list of these risk factors.

Now let me outline the division topics for this conference call. Lew Frankfort will provide a overall summary of our third fiscal quarter 2010 results and will also discuss our strategy. Ian Bickley will then discuss the increasing globalization of the Coach brand. Mike Devine will continue with details on financial and operational results of the quarter. Following that we will hold a Q&A session that will end shortly before 9:30 AM. Lew will then conclude with some brief summary comments. I would 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 very pleased with third quarter results, including excellent sales and earnings growth and a further strengthening of our full-price businesses across all geographies. Our performance reflects the continued traction of the product and (inaudible) strategies we put into place this fiscal year and bodes well for the future. Beyond our recent performance, we're also very pleased to announce a doubling of our dividend at the one-year anniversary of its initiation, signaling our confidence in our outlook. We've also authorized a new $1 billion stock repurchase program. Finally, we're encouraged with the progress we're making in transforming Coach into a global brand. As Andrea just mentioned, we've asked Ian Bickley to join today's call to talk about our initiatives, notably in Asia, and our developing strategy for Europe, initially focusing on the UK, France, and Spain.

While I can 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 key highlights of our third fiscal quarter were -- first, earnings per share rose 40% to $0.50, compared with $0.36 in the prior year; second, quarterly net sales totaled $831 million versus $740 million a year ago, an increase of 12%; third, direct to consumer sales rose 15% to $726 million from $634 million; fourth, North American same-store sales for the quarter accelerated rising 5% from prior year, while total North American store sales rose 16%; fifth, sales in Japan declined 1% in constant currency and rose 2% in dollars; and finally, we continued to generate very strong sales growth and significant double-digit comps in China.

During the quarter, we opened two North American retail stores, both in new markets for Coach, Burlington, Ontario and Brownsville, Texas, and closed two others. . We also opened one factory store. Thus at the end of the period there were 343 full-price and 119 factory stores in operation in North America. Moving to Japan, we opened our first men's location, as well as a factory store and the wholesale location. At quarter end, there were 166 total locations in Japan, with 20 full-price stores, including eight flagships, 116 shop-in-shops, 24 factory stores and six wholesale duty-free locations. Indirect sales decreased 1% to $105 million from $106 million in the same period of last year. This decline was due to slightly reduced shipments into US department stores. We continue to manage inventories into this channel carefully, although we've seen significant improvement at retail, as sales at POS rose 11%, the first quarterly sales gain in two years. International POS sales also rose in the period, driven primarily by distribution.

We estimate that the addressable US handbag and accessory category rose at least 5% in the first calendar quarter, continuing the improving trend noted over the back half of calendar 2009. Coach's bag and accessory sales rose about 15% across all channels in North America over the most recent quarter. In our own stores, handbag and accessory sales rose 18%. Our total revenues in North America rose at a similar pace as our overall top-line of 13%, with our directly operated stores up 16% driven by both distribution growth and positive comp performance. As noted, Q3 same-store sales rose 5%, reflecting a further strengthening of our full-price business. Fueling this total retail comp gain was significant gains in convergent from prior year, while in aggregate traffic was equal to last year's level.

We were particularly pleased with the conversion improvement, as it is the driver that we have the most control over through product and service. And full-price stores' average transaction size was slightly lower compared to prior year, as increased handbag penetration offset most of the impact of lower handbag and accessory prices. Traffic trends improved from two quarters -- from the second quarter and were only slightly down from the prior year. And factory, where we continue to leverage the flexibility inherent in our business model to drive sales through pricing, we saw increases in both traffic and conversion, while ticket declined slightly. While most of the quarter remained ahead of us, we're tracking well and are excited about Mother's Day and the rest of the spring season. 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-price proposition in retail stores. As you know, we have resale price maintenance 365 days a year, a full-price proposition. As noted in Japan, we posted a 2% increase in dollars on a 1% decline in constant currency. Our market share further expanded against a continued very weak category backdrop and reflects the relevance of our acceptable luxury positioning with the Japanese consumer, who is becoming much more value oriented. We were also very pleased with our performance in China, where our proposition of New York fashion and accessible luxury clearly resonating with both domestic consumers and with tourists in our Hong Kong and Macau stores.

Clearly, our double-digit comp store sales growth further demonstrates Coach's great potential with this emerging consumer group. Finally, as mentioned in our press release, our sales are trending about a year ahead of our original plan unveiled two years ago when we announced our intention to take control of this business. Moving on to product. During the third quarter we maintained a high level of product innovation and distinctive newness. Beginning on December 26th, we transitioned to spring with the introduction of the Peyton Collection, offered across multiple fabrications and Silhouettes, anchored by both our carryall and shoulder bag styles. This is followed by the relaunch of Poppy's in February and the new Kristin Collection in March. With its new and distinctive hardware and soft feminine styling, Kristin represents another significant design evolution for Coach and was supported by our spring ad campaign.

Just this month we introduced a collection of [Chontos] along with new floral graffiti prints and Poppy. And yesterday we launched Julia, a modern tote and hobo story featuring new branding in leather, OpArt and print concepts, along with fresh colors and patterns in Madison, which are the key statements for Mothers Day. In addition, this July, on this anniversary, we will relaunch Poppy. Its new and updated styles, new materials, patterns and prints, with a comprehensive and integrated marketing campaign. Our strong product of offering and rebalanced assortment strategy continues to resonate with consumers. Average handbag prices are down about 12% this quarter, similar to the first half of the year. These factors were the primary drivers of our conversion improvement in full-price, as handbag unit sales rose 22% on a comp store basis.

Handbags represented 59% of sales in our North American retail stores in the third quarter, up about 10%, or five points, from the 54% handbags represented in the same period last year. Moving to factory, our business remains strong. 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 customers. Of particular note in our factory business was a significantly higher penetration of factory exclusive product at 80% compared to last year's 60% levels. This improvement in mix favoring made for factory product, as well as improved manufacturing costs, resulted in significantly higher profitability in this channel. More broadly, our strategies remain largely unchanged, focusing on expansion opportunities both here in North America and increasingly in international markets.

In addition, as always, we're focused on improving performance in existing stores by increasing Coach's share of our consumer's accessories wardrobe, while continuing to attract new customers into the franchise. Starting in North America, we plan to open an additional five stores this quarter, bringing the total to 20 new American retail stores for the year. In addition, we will open two factory stores. In total, we expect North American square footage growth of about 8% this year, down from about 13%. I would now like to introduce Ian Bickley, President Coach International, to talk about our abundant opportunities outside of North America. As many of you know, Ian has been with Coach since 1993 and has been a key architect of our international growth strategies.

Thanks, Lew, and good morning. I'm very pleased to be able to talk about the globalization of the Coach brand. We now expect the global luxury handbag and accessories market to reach about $29 billion during 2013. Today, about 50% of global category sales and 90% of Coach sales are generated in North America and Japan, pointing to a very large opportunity outside of our core marks. The most rapid growth is coming from the emerging markets, notably in Asia, with China clearly our largest opportunity, as it is expected to double from about 10% of the global market today to nearly 20% by 2013, contributing the lion's share of category growth. The Chinese consumer loves Coach, as evidenced by the significant double-digit comps we're consistently generating and the extremely high repurchase intent among existing customers. Coach's potential in the China market is reflected in our very low, unaided brand awareness of 8% compared with 72% in the US and 63% in Japan among target consumers.

As mentioned, our business is trending about a year ahead of the plan we originally articulated back in the spring of 2008. We're now targeting to achieve about $250 million in sales during FY 2012. And as a result of this growth we are now profitable in China, also ahead of schedule, as strong unit economics have allowed us to leverage the considerable infrastructure investment. In China, we expect to open five new locations during the remaining few months of the year. This will bring our net FY 2010 openings to 13, resulting in approximately 50% growth in square footage. As mentioned, this week we're officially opening our first flagship location on the mainland in Shanghai, just ahead of the World Expo, which is expected to attract 70 million visitors to the city over six months. This 7,000 square-foot store reflects Coach's latest flagship design.

We believe this important store will further elevate the brand's image and is consistent with our strategy of raising awareness and aggressively growing market share with the Chinese luxury consumer. Next year we will accelerate new store openings with at least 20 new locations planned. To support our growth in China and the region we have just started up an Asia distribution center in Shanghai, allowing us to better manage the logistics in this region, while reducing costs. It's important to note that our growth in China is not constrained by finding the right locations, but rather our emphasis on excellent customer service, which requires recruiting and training the right retail teams to run our stores, a much greater challenge than finding store sites. In Japan, the overall consumer market is very challenging and the category continues to see declines.

Our focus remains on growing market share and we have done this quite well in our core women's business. We're now exploiting new categories, such as men's, where we've already seen early successes. For context, the men's imported leather goods market is nearly $1 billion in size and has been less impacted by the macroeconomic environment than women's. With only a 3% share of the men's market today, Coach is very underpenetrated. And over the next few years, we believe it has an opportunity to match our total market share of 14%. We will open two more locations in FY 2010 or seven net new locations for the year, including the first two men's shops. In total, we expect that net square footage growth in Japan will increase about 5% this year compared to about 8% in FY 2009. Finally, beyond our directly owned international businesses in China and Japan, we do have significant and growing distributor-run businesses in other Asian countries.

For example, in Korea, Singapore, Taiwan, and Malaysia there are about 90 total Coach locations generating nearly $200 million of sales at retail. Coach is already among the top five imported brands in these markets, with significant potential for further strong growth. During this quarter, we plan to open about six net new international wholesale locations. This would take us to about 25 net new international distributor operated locations this year. At fiscal year-end there will be about 180 Coach international wholesale locations in over 20 countries around the world, generating sales at retail of nearly $350 million. We're also pleased to announce our expansion plans into western Europe. As you know, Europe is a large market for women's and men's luxury accessories, representing about 25% of the global category sales.

Our experience with European tourists, in combination with recent consumer research, has given us confidence that our current design direction resonates with Europeans and that our price points will offer a compelling value proposition. Further, Coach's heritage, linked to New York fashion, is appealing for most Europeans and creates a differentiated positioning compared to the traditional luxury brands. As discussed in our press release, we are starting with a two-pronged approach with strong local partners. Initially, we will focus on France through a distribution agreement with the prestigious Printemps department store group. Through Printemps we expect to open at least 14 shop-in-shops in their stores over the next three years. The first will be a 1700 square-foot shop, which will open in June in their flagship boulevard Haussman location in Paris, followed by five additional locations by the end of the calendar year.

We have also agreed in principle to establish a joint venture with Hackett Limited, the iconic British retailer, to open in the UK, Spain, Portugal and Ireland, creating a multichannel distribution model in these markets. We expect the first locations in the UK, Spain, and Portugal to open during the next 12 months. With that I will turn it over to Mike Devine.

Thank you, Ian. Lew and Ian have just taken you through highlights and strategies. Let me now take you through some of the important financial details of our third quarter results. As mentioned, our quarterly revenues rose 12% with direct to consumer, which represents over three-quarters of our business, up 15% and indirect down 1%, due to slightly lower shipments to US department stores. Earnings per share for the quarter increased 40% to $0.50, as compared to $0.36 a year ago, while net income rose 37% to $158 million from $115 million. Excluding the one-time charge from last year's third quarter, EPS rose 31% and net income increased 28%. Operating income totaled $249 million, up 34% from the $185 million reported in a comparable year-ago period, while operating margin was 30% versus 25.1% reported for the prior year.

Excluding the one-time charge last year, operating income rose 25% from prior year or double the rate of sales growth, as the year-ago operating margin was 26.9% on the same basis. In the third quarter, gross profit rose 17% to $616 million from $525 million a year ago and gross margin rate increased to 74.1% versus 71% flat in the prior year. The primary driver of our substantial gross margin expansion was lower manufacturing costs. Product mix, notably the increased sell-through of handbags in our full-price stores and the increase of higher margin made for factory product in factory stores was also a contributor to the year-over-year improvement. SG&A expenses as a percentage of net sales at 44.1% compared to 45.9% in the year-ago quarter. Excluding the one-time charge in the year-ago comparison, the expense ratio was equal year-over-year at 44.1%.

Once again, our two primary direct businesses here in North America and in Japan both provided leverage, not only to their own P&Ls, but to the corporate consolidated P&L as well. Inventory levels at quarter end were $307 million, down about 14% from prior year on a comparable basis. On a unit basis, inventory was up 3%, reflecting our lower average unit costs. Cash and short-term investments stood at $908 million as compared with $551 million a year ago, despite repurchases of $700 million worth of Coach common stock over the last 12 months. During third quarter, we continued our repurchase activity, buying nearly 11.3 million shares of common stock at an average cost of $35.52. As of the end of the period, approximately $10 million remained under the Company's previous repurchase authorization. As noted in the press release and by Lew earlier on this call, the board has authorized a new $1 billion repurchase program.

As you know, we've also announced a doubling of our dividend rate from $0.30 to $0.60 annually, effective with our July payment. It's important to note that it will still represent only a fraction of our cash flow at about $180 million a year, leaving us more than ample cash to fund our growth and continue our buyback program. Net cash from operating activities in the third quarter was $205 million compared to $207 million last year during Q3. Free cash flow in the third quarter was an inflow of $190 million versus $180 million in the same period last year due to lower CapEx and higher net income. Our CapEx spending was $15 million versus $27 million in the same quarter a year ago. Naturally, we are very pleased to report third quarter earnings that demonstrated our ability to achieve strong top-line and accelerated income and earnings growth. Looking ahead, I think it would be helpful for you modelers out there to keep a few things in mind when projecting our fourth quarter.

First, we would reiterate that our gross margin is expected to expand significantly in Q4 versus last year, although it will likely be somewhat lower than our Q3 rate due to channel mix, as factory will be distorted in the 14-week quarter. Second, as a result of our sales productivity gains and our ongoing operating efficiencies, we continue to expect that our SG&A dollar growth will be quite close to our top-line growth for the fourth quarter. We are targeting these levels in spite of more difficult compares from last year's fourth quarter due to our higher investment spending and increased incentive compensation accruals. Third, we do expect to see some inventory growth as we plan to build inventories for the fall season and we begin to anniversary our average unit cost improvements. Separately, based on some changes in project timing, we now expect that this year's CapEx will be in the area of $90 million to $100 million, down from our previous guidance of $110 million.

In summary, our double-digit growth demonstrates our ability to manage our business nimbly, while investing prudently in longer term opportunities for the brand. We are accelerating our distribution plans to leverage the emerging market opportunity, with a particular focus on China, while also exploring new geographies, capitalizing on the increasing popularity and recognition of the brand with discerning consumers globally. And with a business model that generates significant cash flow and with virtually no debt, we are in a position to take advantage of profitable growth opportunities globally, while continuing to return capital to shareholders. Thank you all for listening this morning and we'd be happy to open it up to Q&A.

(Operator Instructions) And our first question comes from Bob Drbul. You may ask your question and please state your Company name.

Hi, good morning. Barclays Capital. I guess, Lew, the one question that I have for you is when you look at the results this morning, very encouraging, do you view this quarter as an inflection point for Coach and why do you think?

We do see it as another inflection point for Coach. I think in a year from now or two years from now we will look back upon this quarter, the initiatives that we announced in Europe, the acceleration of our business in China and the rejuvenation of our full-price businesses and conclude that it indeed was an inflection point. We're extremely encouraged by the results across all channels and geographies last quarter.

Great.

And are you finished with your question, sir?

Yes, thank you very much, Lew.

Thank you, Bob.

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

Great, thanks, it's Citigroup.

Good morning.

Good morning. The comp acceleration this quarter was nice. I'm wondering if you could give us any color on the -- if the factory versus the full-price comp, if that differential has been closing further and do you think that the go forward comp can be sustained here in the mid single-digit range or are you looking for a low single-digit going forward?

Well, in terms of fall precision, when we say low single-digits, mid single-digits, to us that's just a very subtle change. What we said publicly quite recently is that we do believe we can achieve during our LRP period double-digit top-line growth with the bottom-line growing at a faster rate. And what we also said is that we're anticipating low to mid single-digit comps worldwide. If we get some wind at our back it will be higher. If we don't, it will be somewhat lower. With regard to the earlier part of your question, yes, there is a -- there's been a convergence between full-price and factory. It's increasing, the convergence.

Fantastic, thanks, Lew.

You're welcome.

Thank you. The next question comes from David Schick. You may ask your question. Please state your company name.

Stifel Nicolaus. Good morning.

Good morning.

Kind of a question going back on the broad thinking over a year. One of the reasons I think Coach didn't face comparisons that were -- dropped off the table was that you guys recognized the change, called it the new reality, had some strategic changes around that a year ago. So as you lap that, and I know you mentioned that the handbag unit comp was 22, but down 12% I think you said in price on the call, is there any reason to revisit the new reality, or would any improvement off of the new reality be taken care of in the RK line? How should we think about your thinking on that strategic shift?

Sure. David, I think I'm going ask Mike Tucci, who is sitting in with us on the call, to take that question. Mike?

Sure, Lew. Good morning, David. Specifically on handbags, the unit acceleration has been a key. Obviously with a rebalancing and repricing strategy, and a stabilization of traffic, the key for us in getting productivity back is selling more units in handbags. We had a positive comp, high single-digit in our full-price stores in dollars, which was key. If we're looking out, as we build our assortments through Q4 of this year and into the first half of next year, we actually do see some subtle opportunity to blend the product differently going forward, and the key for us is really in the middle. It sits between, in the Coach handbag hierarchy, between Poppy, which is our introductory price offer, and Madison, which represents a higher price offer.

The best representation of that today in the stores is Kristin and Julia, which launched yesterday, really targeting that core leather and signature sweet spot between $2.98 and $3 .58. As we built that in Q3, we saw the strengthening of our handbag business in particular and our overall business. We will build on that significantly in FY 2011 and beyond. And I think that bodes very well for us to give us three layers in our pricing and positioning hierarchy to meet three very distinct consumer segments. Thank you, Mike. Thank you, David.

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

Needham & Company and congratulations on a great quarter.

Thank you, Christine.

Wanted to ask about the international customer. As you go global going into western Europe and then also focusing on China, what differences do you see between the customer across the country? Is the Chinese customer similar to the Japanese customer? Does the European customer shop differently than the U.S. customer versus the Asia customer, and how do you think about that as you grow?

I believe that overall the differences between our customers are very subtle and we've learned through our consumer research that consistently our heritage as a New York fashion brand, as well as our accessible luxury positioning and value, compelling value proposition for the consumer is something that resonates globally.

And then with respect to Europe, I guess, what are you doing differently this time other than partnering with key retailers than when you tried to grow in Europe in the past?

Yes, let me take that one, because this is our second try at Europe, as you know. I failed the first time and a few things. First, it was the old world of Coach. It was on-line leather bags, Christine. I'm not sure if you're old enough to remember them. But, -- .

I re -- I'm old enough.

Yes, Christine.

I remember, I'm old enough.

Well, we actually developed a great business in North America, but it did not resonate that well with the Europeans, who wanted products that were more stylish and are more sophisticated. Second, we did not have local partners and we did it remote without putting the level of investment into these markets that we're doing today. Today, as we announced, we have two great partners that we're starting with and we're very enthusiastic about what we can do together.

Okay, great, that's helpful, thank you.

You're welcome.

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

Hey, guys, good morning. It's actually Ike calling in for Brian, JPMorgan. Mike, you had talked about the gross margin expansion you guys saw in the quarter. I think you pointed out the lower product costs, channel mix, and made for factory product at factory as the primary drivers. Is it possible to quantify those in terms of basis point impact?

Yes, I would probably stay away from going with too much more precision, but rest assured that of the 310 of margin expansion, far and away the biggest contributor was from those two factors, which we actually look at and think about as very closely related, because they both end up resulting in a growing expansion between our average out the door pricing and the average unit cost for the items sold. The other traditional big movers of our gross margin rate were relatively quiet this quarter versus last year, our levels of promotions in the factory channel were very similar, TYLY. And also, we're starting to see some easing of the pressure brought about by channel mix as due to a number of factors. Firstly, the convergence that Lew just spoke to and we discussed in our prepared remarks. It taking a little bit of pressure off the channel mix. And also the rapid growth, while it is still small for the total Company of Coach China with its very healthy gross margin rates also helped move the needle on channel mix a little bit this quarter. So the big story really is about price versus cost, which is very exciting for us.

Right. And with the increased penetration of the made for factory product and if you guys are able to continue to diverge the full-price in the factory channel comps, is it reasonable to assume that you guys could possibly get back to a 75%-ish gross margin?

Well, again, we're not giving specific forward guidance, but what I would say is that we're feeling good about our gross margin rates heading into Q4. And for the coming quarters we do expect to be able to deliver year-over-year gross margin expansion out over the next couple quarters. We've locked in many of our material costs at historically low levels. That being said, we are beginning to see some inflationary pressures. So that will be a challenge for us going forward. However, we do have many opportunities to look to offset this pressure, whether it's through alternate materials, counter sourcing, channel mix, as China grows, as I mentioned earlier, and our divergence between full -- our convergence between full-price and factory. So we're feeling like there are opportunities, but there are headwinds on the inflationary pressure side.

I'd like to also just add, Mike, if I could, is that we actually internally nicknamed Mike Devine Mike "gross margin" Devine. We be so unsuccessful with all of you guys migrating you to operating margins, because we do think that's really the way you need to evaluate us. And that's a more comprehensive measurement. Notwithstanding everything positive about our outlook on the gross margin side, I just urge you to move down the P&L.

All right, thanks. Great job, guys. Thank you. Thank you.

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

Good morning, it's Rick Patel in for Lorraine, Bank of America Merrill Lynch. Can you talk about your thought process in choosing your new European partners? Where exactly do you see the synergies with Hackett and Printemps?

Sure. Well, first of all we really see the new partnership with Printemp as the cornerstone for going into western Europe. France obviously is a very important market. It's a leading fashion market and we believe if we're successful there we really will build a halo effect for the rest of Europe. Printemp for us is a perfect partner. We know that they get the vision for the Coach brand. They will help us to establish image enhancing locations and they will give us broad geographic coverage throughout France and enable us both to leverage the domestic consumer as well as international tourists, which especially in their flagship Printemp location in Paris represent a very significant share of the business. In terms of Hackett, with whom we are jointly developing other key western European markets, we do believe, again, they are a group that understands Coach, understands the positioning in the market, have strong local expertise, and also have a high-touch customer service model that is very consistent with the way we drive our business.

And can you provide some color on the markets you expect to target in terms of demographics?

We actually -- Ian, I'll take this one. Now the question is can we talk about who we're trying to target. We actually have a very broad reach. As a democratized luxury brand where available to consumers who are aspirational trading up into Coach, as well as consumers who are purchasing alternative brands at our levels and of course the European luxury brands. So we find that we're able to develop a broad and diversified consumer base in each of the markets where we're in. That's one of the elements that's very compelling to our proposition.

Great. Thank you very much.

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

Hi, it's Tag and congratulations.

Thank you, Dana

Can you talk a little bit about as you see the department store business or indirect business, any updates there in terms of what's happening? And then just to clarify, on the positive high single-digit comp that you mentioned for full-price is that just in handbags, is that overall? Thank you.

The positive comp was in handbag, handbag units. Am I correct? 22% more units, yes. With regard to department stores, we had an excellent quarter. At POS our sales were up 11% driven by full-price sales. That compares actually to down 22% just in the last quarter. And I think that's both a reflection of Coach's strength and the strength in department stores. They have really backed away from the promotional proposition and are giving consumers a stronger every day value. We're benefiting from that, of course, and we're encouraged. We believe that we will stay in positive territory at POS and US department stores. It bodes well for not only Coach, but other brands and their entire franchise.

Thank you.

You're welcome.

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

Good morning, we're with Cowen. Given the capex guidance for the full year that's changed a little bit, but the step up in Chinese growth and also the European plan, can you give us kind of an initial look at 2011 capex?

Well, we haven't completed yet our complete capex planning for our new fiscal year 2011 out through next June. I can tell you that the reduction this year from the $110 million to the $90 million to $100 million is just project timing. So I would anticipate that from that $110 million level, if you look at that as a go forward number and then have the movement of $10 million to $20 million, I think we'll probably will end up coming forward with a capex plan that would be in the $130 million to $150 million range for next year. But it's very early in our detail planning processes. The relationships that we're forming with our new partners and our growth in China will increase our capex spend, but we've done tremendous work around store construction costs and sourcing, and so we feel like our capex spend will continue to be very well controlled.

Great. Thank you.

You're welcome.

Thank you. Our next question comes from Erika Maschmeyer. You may ask your question and please state your Company name.

Thanks. Erika Maschmeyer, Robert W. Baird. I noticed that your unaided awareness in the US looks like it had a nice jump. Could you talk about the factors there?

Our unaided awareness is extremely high. I'm not quite sure what source you're referencing, but our unaided awareness is, I believe, north of 70% in the US. So seven out of ten consumers who we target mention Coach as a top of mind brand. Perhaps it's a bit higher than it was, but we haven't seen the results of that effect.

Okay, great. I thought you had said 80% unaided awareness there, up from 70%. I'm sorry, I misheard that. Thanks for clarifying.

I think what we referenced was 8% unaided awareness in Japan -- 8 China, sorry. China compared to in the 60s in Japan and 70s in the US. And the reason Ian made that point was to suggest that the opportunity for us to continue to grow rapidly as awareness builds is boundless in China.

Great. Well, excellent quarter. Thank you.

Thank you.

Thank you. Next question comes from Marie Driscoll. You may ask your question and please state your Company name.

Thank you. Standard & Poor's Equity Research. I have a question about how you are going to be flowing your goods in Europe and Asia. Will you be flowing them as constantly, as frequently as you do here in the US?

The short answer is yes, we do that today with the same pace. We have a global calendar and when we update our windows in the United States, we do the same in China, Korea, and every other market. So the cadence is exactly the same. What we did announce and Ian touched on it, I believe, today, is a Asia distribution center, which is just opening now. And for the first time we will be shipping goods for Asian markets directly into a distribution center that will enable us to provide much more rapid response. Today, for countries outside of Japan that are located in Asia, the goods go all the way to Florida, believe it or not, and then go back to Asia. We're going to be cutting four to six weeks of transit out. We're going to be able to have a pulled inventory so that we can respond to country variations and demand in a much more spontaneous way. So we're trying real hard to strengthen our capabilities there.

And can I just ask you also have an e-commerce platform in Europe.

Is that a question? We do not today have an e-commerce platform in Europe. We're actually launching later this week, I believe, if we're still on track, a Japanese e-commerce site. What we have in China and several other markets and will have in Europe once we launch is an informational site that will provide updated information on product news worthy stories as well as directions on where they can go within the respective countries and purchase Coach.

Thank you.

You're welcome.

Thank you. Our next question comes from Antoine Belge. You may ask your question. Please state your Company name.

Yes, hi, it is Antoine Belge at HSBC. Regarding your expansion in France, will be your pricing much different from your pricing in the US and at the same time the profitability, do you expect some initial earnings dilution from going into Europe?

Ian?

In terms of the pricing in France, we expect to, as Lew talked about earlier, position our brand (inaudible - technical difficulty) has an effect of a luxury brand between the international brands and the domestic brands, targeting about 120% premium.

20%.

20% premium.

To US, US prices. And, Antoine, we do not see any dilution of earnings from this initiative in France.

Okay, thank you very much.

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

Hi, guys,The Retail Tracker, congratulations.

Thank you.

I saw Julia yesterday and I think it's one of the best finds you guys have put forth in a while. It is absolutely (multiple speakers).

Wonderful. Think about buying it for a loved one.

Or yourself.

So I had just a couple of questions about France and western Europe and even a little bit about China. Could you talk about, as you roll the brands into these areas, how are you approaching this from marketing, but also product-wise? Are you rolling in with brands, with sub brands like Madison and Julia or is Signature there, too? Is Poppy there? And do you have a full assortment as far as fragrance, jewelry, small leather goods? Just a little behind that. And I know the stores in the department stores, the shop and tells will be smaller. So if you could just talk specifically about that versus a store, say, in China.

Ian?

Sure. Well, first of all let me talk about product and marketing. We expect the assortments for Europe to be very consistent with our assortments globally. Of course, there will be preferences that consumers have there, particularly we expect leather to be more important in Europe, for example, than a logo product. And in terms of marketing, we'll be approaching each market that we're entering with the specific launch strategy. We are partnering as part of our agreement with Printemp on a shared integrated marketing and communications champaign to launch the brand in France that will focus a great deal on the Haussman store leveraging databases, windows, but also some degree of national advertising as well as editorials.

We'll also be packing into opportunities to leverage the international tourist in that market as well. And we will take a consistent approach when we go into the UK and Spain and those markets in advance of opening the first locations. With regard to the store sizes, as I mentioned earlier, our location in the Printemp flagship location on boulevard Haussman is going to be 1700 square feet in a very prime location. Actually, when you go into the store it will have a three-room concept and will look very much like an elevated Coach freestanding store, actually, within a department store. In terms of the broader distribution, we'll probably be looking at shop-in-shop sizes that will range between 50 and 80 square meters in size.

And then could you just follow up on China? I'm assuming just based on those store sizes that the assortment in France, at least, would be a little bit more limited and focused on handbags. Is that correct?

No. It's the same broad lifestyle collection that we offer. There's no difference in China.

No, no, I'm sorry, in France. China is getting now the full -- is the full assortment, but in France with these smaller shop-in-shops the assortment will be focused primarily on handbags?

No

What Ian was saying is that the smaller shops will have a comprehensive assortment. What we do in a smaller sized flagship, and we have many of them around the world, is have a more edited assortment of the comprehensive offering, but it will be a true flagship assortment, which is a lifestyle expression of the Coach brand.

Excellent. Thanks, guys, sorry about that confusion. And good luck with Mother's Day.

Thank you.

Thanks. Your next question comes from Michael Binetti. You may ask your question and please state your Company name.

Hi, it's Michael Binetti with UBS. Congrats on a nice quarter, guys. I was wondering if you could comment a little bit closer on whether the promotional cadence at the factory stores was higher year-over-year. I think last quarter when we talked you guys you expected it to be about flat for the rest of the fiscal year. I don't know if you kind of gave us directionally for the quarters. I'd be curious on any insight you have there and then maybe your outlook for fourth quarter.

Sure. Really importantly on the factory side, what's driving factory and the significant margin improvement in factory is mix, where we are back to historical levels of 80% penetrations in made for factory goods. Remember, at this time last year we were peaking in the level of delete activity in our stores as we were clearing through excess inventory. That situation no longer exists. The promotional cadence in factory is absolutely flat to last year. We're trying some different methodology. It is a promotional channel. It's what drives traffic and drives purchase. That's where we play. And we will continue to do so. So the value proposition within the factory channel we have stated and will be committed to a very, very strong and value oriented experience for our consumer there and we see that carrying through Q4. And the tactics, we will lever those tactics as we need to.

And to build off of Lew's earlier point, we want to break you down to operating income here and the expansion of the gross margin coupled with the increased productivity is driving operating margin expansion that's driving earnings at an accelerated pace. The factory division itself actually four-wall contribution is up hundreds of basis points year-over-year.

If I could just follow up really quickly, could you try to quantify any kind of calendar shift in the third quarter, as well as whether we should expect one for our models into the fourth quarter, please?

Sure. There is no, there really was no calendar shift in the third quarter. The way we report the Easter shift had no bearing between Q3 and Q4, so we feel very good about April and how the fourth quarter shapes up.

Thank you.

Thank you for all your questions today. As we draw towards the open of the market I'm going to turn this back over to Lew for a few closing remarks. Lew.

Thank you, Andrea. First, our results speak for themselves. It's pretty self-evident. You can tell also by our enthusiasm regarding our outlook that we do feel that we have reached another inflection point for Coach, so I would just say stay tuned. Have a good day, everybody.

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