掛毯 (TPR) 2011 Q2 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 like to turn the call over to the Senior Vice President of Investor Relations & 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. Mike Tucci, President of North American retail is also joining us to discuss our holiday performance and spring initiative. Before we begin, we'd like to point out that this conference call involves certain forward-looking statements including projections for our business in the current or future quarters or fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations, best based upon risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences. Please refer to our latest annual report on Form 10-K for a complete list of these risk factors. Also, please note that the 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 second fiscal quarter 2011 results and will also discuss strategies going forward. Mike Tucci will review the holiday season from a US retail perspective and discuss key initiatives for the spring season ahead. Mike Devine will continue with details on financial and operational results of the quarter. Following that, we will hold a question-and-answer session that will end shortly before 9.30 AM. Lew will then conclude with some brief summary comments. I would like to now introduce Lew Frankfort, Coach's Chairman CEO.

Thanks, Andrea, and welcome everyone. As noted in our release this morning, we were very pleased with our holiday results, including strong sales and earnings growth and exceptional comparable store sales in our North American retail businesses. Our performance clearly demonstrates the brands of vibrancy across channels and geographies and bodes well for future growth. Beyond the top line we're also very pleased with our high levels of profitability and substantial cash generation. In addition, we made continued progress against our global business initiatives, including international expansion, men's, and digital media. We experienced a strong response to our new collections, and our pricing and assortment strategy continued to resonate with consumers worldwide. We are well situated to build upon our leadership position and continue to gain market share.

Further, the announcement today of the authorization of a new buy-back program reflects our financial strength and our confidence in Coach's future. While I will get into more detail about 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 second fiscal quarter were first, earnings per share rose 33% to $1 compared with $0.75 in the prior year. Second, quarterly net sales totaled $1.26 billion versus $1.1 billion a year ago, an increase of 19%. Third, direct-to-consumer sales rose 17% to $1.1 billion from $934 million in the prior year on a comparable basis.

Fourth, North American same-store sales per quarter accelerated, rising 12.6% from prior year while total North American direct-to-consumer sales rose 17%. And fifth, sales in Japan were even to prior year in constant currency and rose 8% in dollars. And, finally, we continue 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 Canada as well as one factory store. Thus, at the end of the period, there were 347 full-price and 129 factory stores in operation in North America.

Moving to Japan, one Coach shop-in-shop was opened in addition to a travel retail location. At quarter end, there were 171 total locations in Japan with 20 full-price stores including eight flagships, 117 shop-in-shops, 27 factory stores and seven distributor-operated travel retail locations. And in China, we added three new locations all on the mainland. At the end of the quarter, there were 52 Coach locations in China, including 10 in Hong Kong, two in Macau, and 40 locations on the mainland in 16 cities.As we discussed previously, we are building a multi-channel distribution model in China, including flagships, retail stores, shop-in-shops and factory stores.

Indirect sales increased 28% to $168 million from $131 million in the same period last year. This gain reflected significant growth in shipments into international, wholesale, and US department stores given positive POS sales trends notably in the international business. Specifically, sales for the quarter at retail and international wholesale locations were very strong, driven by double-digit gains in same-store sales and new distribution while sales at POS and US department stores rose 3% for the quarter.

We estimate that the addressable US handbag and accessory category rose at a 5% to 10% rate in the holiday quarter, similar to the increase it had experienced in the preceding nine months of the calendar year. At the same time, Coach's bag and accessory sales rose about 14% across all channels in North America during the most recent quarter. In our direct businesses in North America, handbag and accessory sales rose 18%. Importantly, it now appears that the category will increase to $9 billion in FY '11, surpassing its previous peak achieved three years ago.

Separately, it's worth noting that we have seen continued modest improvement and our customers' outlook for the economy, with over a third of those surveyed now believing that the US economy is improving, the best reading in over three years. Her intention to purchase Coach over the next year is significantly higher than where it was a year ago, with over two thirds of consumers surveyed noting they probably or definitely would purchase a Coach product in the next 12 months.

Our total revenues in North America rose 17% with our directly operated businesses up similarly, driven by 12.6% in same-store sales increases and new distribution. Fueling these overall strong comp results were significant gains and conversion from prior year and modest traffic growth, partially offset by a slight decline in average transaction size. We were particularly pleased with the improvement of conversion since it's a driver that we have the most control over through product and service. Mike Tucci will discuss our performance in more detail in just a moment. In full-price stores, conversion was a primary contributor to our comp growth, while average transaction size was also modestly higher compared to prior year. Traffic trends were slightly lower, year-over-year.

And factory, while business remained remarkably strong, we saw increases in traffic and conversion while transaction size declined modestly. Our factory store growth continued to be driven by increased spending of factory-channeled, loyal Coach shoppers and by new consumers entering the franchise. As noted, in Japan, we posted an 8% increase in dollars on a flat performance in constant currency. Our market share further expanded against continued contraction in the category. Our growth in share reflects the relevance of our accessible luxury positioning with the Japanese consumer who is becoming more value oriented.

Once again, I want to call out China, our fastest growing business. During the quarter, our sales continue to rise sharply from prior year, fueled by distribution growth and significant double-digit comps. Clearly, the Coach proposition is resonating with this consumer who is participating in this category in increasing numbers. While Mike Devine will get into more detail in our financials and I will discuss our outlook in some detail, I wanted to give you this recap. Now, I will turn it over to Mike Tucci to discuss our North American retail businesses. Mike?

Thanks, Lew, and good morning. Today I would like to review what was an exceptional holiday season, touching on the three important productivity drivers within our North American business -- product performance, digital strategy and Coach.com results and progress on our new men's initiative. During the holiday quarter, as always, we maintained a high level of product innovation and distinctive newness, ensuring that we had a steady flow of new product throughout the period. The key to this effort was that we were somewhat less front-end loaded than in previous holiday seasons. In October, we relaunched the Madison collection, featuring the new Sophia satchel in core leather, gathered leather, and novelty applications, along with a fresh dotted Op Art logo. The reception was excellent and Madison was our top collection for the quarter.

We also benefited from a first-time inclusion on Oprah's Favorite Things for Holiday, featuring our large patent Sofia in crimson and camel on network TV. During the quarter we also updated Poppy and added new colors in our Madison and Kristin collections. In mid-December we introduced the Alexandra Tote group to capture peak sales with new product just before holiday. Additionally, we generated excellent sales increases in women's accessories in the quarter, notably in money pieces and small bags. Our holiday product was supported with a comprehensive marketing plan which highlighted a powerful gifting message for the shopping season.

The emphasis of our marketing was item driven across handbags, women's accessories, and other gift ideas. Our campaign spanned Coach.com, digital media, and compelling print and in-store marketing to drive traffic into stores and on the Internet. Most generally the merchandising and pricing strategies we initiated last year to create a more balanced and productive handbag assortment have become proven, sustainable growth drivers in North America. Both handbags and women's accessories achieved positive comps in the quarter, with handbag penetration holding at over 53% of sales, with a high, single-digit increase in average unit retails. This pricing power was driven by mix, as leather and novelty continued to trend very well.

Looking forward, we are excited about our spring product initiatives as well. We have been pleased with our performance of our newest collection, Colette, which launched on December 24 featuring new tote, hobo and carryall silhouettes. And for spring, our major product launch is the new Kristin collection which will be introduced on February 18. Kristin is a strong assortment of beautiful hobos, totes and satchels offered in a range of leathers and novelty fabrications such as embossed python, linen signature and Op Art appealing to a broad range of consumers. This relaunch will be supported by comprehensive broad-based marketing campaign including window vinyls, a special shopping bag, and a focused online and print media campaign.

On the factory side, our strong results were fueled by a powerful combination of new product introductions with key styles offered at great prices. Our inventory investment strategy enabled us to capture sales upside throughout the season. Our product assortment was also supported by our in-store and direct marketing campaigns. Importantly, while we are bold in our pricing strategies, the gains in our factory business drove improved operating margins. As we enter the spring season, we continue to see opportunity to leverage our factory model and increase productivity within this business.

A second important growth area in the quarter was digital. As we discussed last quarter, Coach.com is a key marketing tool and is becoming a very important revenue opportunity as well. We noted that our primary objective online in North America is to build top-of-the-line brand awareness and drive store traffic while also maximizing e-commerce opportunities. In our second quarter, we saw the digital initiatives we put into place for holiday, such as the virtual gift guide and e-gift card payoff in the exceptional performance of our online business. In fact, Coach.com is now our fastest growing full-price channel in North America where both traffic and sales continue to grow at a double-digit pace during the holiday quarter. Of course, our web presence is now global, with informational sites in 16 countries, three of which, US, Canada, and Japan, are e-commerce platforms. More generally, we will continue to use our digital capability as an enabler and customer touch point as we expand the Coach brand globally.

Moving back to our stores, as Lew mentioned, we opened two new retail stores in Q2, Pickering in Ontario and Victoria, British Columbia, taking our first half openings to five, all of which are performing very well and ahead of plan. We also opened one new factory store taking the first half total to eight, including our first five men's standalone factory stores which opened in Q1. These stores also opened strongly and are running above our performance. In full-price, based on the initial success of our first men's standalone store on Bleecker Street and our men's sales growth in core Coach stores, we will be opening two additional men's retail stores later this fiscal year, including one at Garden State Plaza in New Jersey and one in Copley Plaza in Boston. This month we dedicated more space and introduced a broader men's product assortment to seven additional stores, bringing our total men's concept store account to 37 in North America, including eight flagships, such as 595 Madison Avenue in New York.

On the factory side, our men's the stores, which are located next to or nearby our most productive factory locations, are performing extremely well. We believe the strong consumer response we are experiencing reflects the strength of Coach brand and the factory consumer's focus on value and function. It confirms our belief there is a particularly large opportunity for men's in our factory channel. During the remainder of FY '11, we are planning to open at least five more men's factory locations.

In summary, we are excited with the continued progress we have made in improving our full-price productivity and our men's initiative. We are feeling great about the spring season given the current sales trends, and both are full-price and factory channels. With that, I will turn it back to Lew for a discussion of our strategies and opportunities for growth. Lew?

Thanks, Mike. Our strategies continue to be focused on expansion opportunities both here in North America and increasingly in international markets. In addition, as always, we are focused on improving performance in existing stores by increasing Coach's share of our consumers' accessories and wardrobe while continuing to attract new customers into the franchise. Mike just discussed the men's initiative which we are confident will be a significant contributor to global growth in the seasons and years ahead, both in North America and in international markets. Moving on to distribution growth, as mentioned in prior earnings calls, we expected our square footage globally and across all channels will increase about 10% this year compared to 8% last year.

Starting in North America, we will open about five stores in the back half of fiscal 2011, bringing the total to about ten new North American retail stores for the year. In addition, we will open about 12 new factory stores during the balance of the year, primarily to support our men's initiative. In total, we expect North American square footage growth of about 8% this year, similar to last year.In China, as mentioned, our sales are growing rapidly, as the market continues to develop swiftly. Last year, we doubled sales to over $100 million and are on track to generate sales of over $175 million this year. We are also now targeting $500 million in sales during FY '14, a 10% market share compared with 5% today. Driving this growth in addition to same-store sales, we expect to open about 25 new locations this year, increasing square footage by about 65%. Over the next few years, we're targeting to open about 30 new locations per annum. These locations will be primarily focused on the mainland and mirror our multi-channel distribution model in North America and Japan.

In Japan, the overall consumer market remains very challenging and the category continues to contract. Our goal continues to be market share gains and we have done this quite well in our core women's business. As elsewhere, we're now also focusing on men's where we've already seen early success. This year, we now expect to open about ten net new Coach Japan locations, including five men's stores. In total, we expect the net square footage growth in Japan will increase by about 6% this year, similar to last year. Beyond our directly owned businesses in China and Japan, we have a significant international wholesale business generating over $400 million in sales at retail. Most of these sales come from other markets in Asia, where the Coach brand resonates well and includes a sizable travel retail business catering to the growing population of Asian travellers. Given our focus in this area, we're also opening about 25 new distributor operated locations in the Asian region during this fiscal year.

Moving to Europe, it is a new region of expansion for Coach. To date, we've opened six boutiques in Printemps Department Stores in France and expect to open one additional location within Printemps during the balance of the fiscal year. And through our joint venture with Hackett, we've launched the brand with four shop-in-shops in Spain, and one in Lisbon with one more to go before year end or within El Corte Ingles. Last quarter, we also announced plans for initial stores in London, a standalone store in the Westfield White City Mall which is on plan to open in late February, and a 5,100 square foot flagship on New Bond Street, our first global flagship store in the region coming this summer. We've been pleased with our initial results in Europe as our brand gains recognition with the domestic consumer and benefits from our popularity among tourists, notably those who are Asian based.

Beyond the opportunities in the Coach concept and brand, as you know, we launched Reed Krakoff in September and a few boutiques in the US and Japan, as well as through prestigious international specialty retailers such as Lane Crawford in Hong Kong and Colette in Paris. While it's still very early days, we are pleased that the product is appealing to the targeted pinnacle luxury consumer. In summary, we are excited about the global opportunity for Coach, especially the emerging market potential given the rapid growth of the category and the foundation which we have begun to build in the important Asian region. At this time, I will turn it over to Mike Devine, our CFO, for further detail on our financials. Mike?

Thank you, Lew. Lew and Mike have just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our second quarter results. As mentioned, our quarterly revenues rose 19% with direct-to-consumer, which represents over 75% of our business, up 17%, and indirect, up 28%, due to higher shipments and to international wholesale accounts and the US department stores. Earnings per share for the quarter increased 33% to $1 even, as compared to $0.75 in the year-ago period as net income rose to $303 million from $241 million. Our operating income totaled $453 million in the second quarter, up 19% from $381 million in the same period last year. Operating margin in the quarter was 35.9% compared to 35.8% in the year-ago period.

In the second quarter, gross profit rose 19% to $915 million from $771 million a year ago and gross margin rate remains strong at 72.4%, even with the prior year. Gross margin reflected the impact of channel mix and continued high-levels of promotional activity in our factory channels offset by sourcing cost improvements.

Moving to expenses. We were pleased that we were able to gain modest leverage in our holiday quarter, which is our toughest quarter to do so. Specifically, SG&A expenses as a percentage of sales improved from prior year levels in the second quarter and represented 36.5% of sales versus 36.6% last year.

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 P&L as well, more than offsetting the impact of our investment spending.We believe we are striking the right balance between driving future growth opportunities and operating efficiently. Inventories at quarter end were $367 million, up 36% from the end of last year's Q2 but down 4% on a two-year basis. Clearly, these inventory levels were key to delivering the exceptional holiday quarter. Our current inventories support the strong, underlying business trends and will allow us to maximize sales this spring. Generally, it's worth noting we've been rightsizing our inventories this year, bringing them up to more appropriate levels to support our growing businesses, including new growth initiatives, such as men's, global expansion and our new distribution center in Asia.

Cash and short-term investments stood at $940 million as compared with $1.1 billion a year ago, despite repurchases of nearly $1.4 billion worth of Coach common stock in the interim 12 months. During the second quarter, we repurchased and retired nearly 7 million shares of our common stock at an average cost of $55.72, spending a total of $388 million. Net cash from operating activities in the second quarter was $408 million compared to $364 million last year during Q2. Free cash flow in the second quarter was an inflow of $382 million versus $347 million in the same period last year due to higher net income offset by working capital items. Our CapEx spending was $26 million versus $17 million in the same quarter a year ago. As we stated on our last two earnings calls, based on our plans for the year, we expect the CapEx will be about $150 million in FY '11, primarily for the opening of new stores across all geographies.

Naturally, we were very pleased to report these strong financial results. And as Lew and Mike have said, we're well positioned for the back half of our fiscal year. While we do not give specific guidance, as you know, I always think it's helpful for you modelers out there to keep a few things in mind when looking at the year. First and most generally, we continue to target double-digit sales increases globally with double-digit earnings growth. And given the ongoing strength in our business, we now believe that we'll achieve high single digit same-store sales growth in North America for the balance of the fiscal year, even in the face of more difficult spring compares. This is up from last quarter, when we projected mid single-digit growth.

Additionally, we expect a continuation of our positive POS trends in our indirect businesses. However, our second half comparisons will be impacted by the timing of shipments in those indirect businesses and the extra week in the prior year's fourth quarter. As you may recall, that extra week contributed $70 million of sales and $0.08 of EPS. Second, we were excited that our top line sales growth drive higher levels of profitability in the first half. And while our previous comments regarding second half gross margins still stand, our sales growth, coupled with controlled spending, will help offset both product cost and channel mix pressures. Therefore, we are reiterating our previous guidance of a full year FY '11 operating margin at about last year's level of about 31.5% on a 52-week basis. Third, our tax rate is likely to stay in the area achieved in the first six months for the balance of the year as we continue to refine our international tax strategies.

Fourth, I wanted to briefly touch on share count. We would expect second half share count to be similar to where we ended second quarter. Before we open it up for Q&A, I wanted to echo Lew's earlier words. This was an exceptional quarter for Coach. Clearly, our holiday results bode well for the future and we're confident that we'll continue to deliver very strong sales and earnings gains over the balance of the fiscal year and beyond. Thank you all for joining us on our call today. And now Lew, Mike, Andrea and I will be happy to take questions which will be followed brief closing remarks from Lew.

(Operator Instructions) Bob Drbul with Barclays Capital.

Lew, the first question that I had. Can you talk about what contributed to the upside in the comp versus the mid to single digit guidance? What impacted [flow] through P&L as you look at it. And the second question I have for Mike is I was wondering if you could put any buckets on the inventory increases with the various initiatives in terms of quantifying any of the specific buckets on each category?

Sure Bob. I'll actually ask Mike Tucci to answer your first question regarding comps.

Sure. Good morning Bob. We had strong performance across the board from a comps standpoint. When I look the business by channel, the full-price channel performed very well, balanced throughout the quarter. A really strong online quarter which was very nice for us. We continue to see that channel grow from a interaction standpoint as well as being able to drive revenue there. So that was very pleasing to us and that did provide some upside. On the factory side, the quarter was extremely strong and we felt like from a positioning standpoint while we were able to drive value in terms of our proposition.

We did see some upside there based on ownership of product of very strong handbag assortment which drove sales as we went right into peak through Christmas and the week after. I would say across the board, we had strength. We were pleased with the pricing power in handbags which drove comp in both full-price and factory. We had a very strong accessories quarter and it feels like a cycle from an accessories standpoint was a driver of comp within the quarter as well.

Bob, let me jump in on inventory levels, we've never answered inventory levels with that degree of specificity but let me just say a couple of things about it. Our inventory investments are nicely aligned with our growth opportunities. And I think that, that would span a number of our initiatives. I would firstly say that our investment factory inventories allowed us to capture the outperformed during the holiday quarter that Mike just spoke to do that we wouldn't have been able to get to this time last year. So that investment was well placed. Also investment in our men's initiative is a part of the inventory driver and then lastly, feeding inventory into the Asia region through the [ABC] is also a subset of where the inventory growth came from. But the thought I want to leave with in addition to enabling the growth, is their inventories are exceptionally clean and current and really positions us well now to maximize sales as we move into the spring quarter. I'm sorry, the spring half of the year.

Thank you very much.

Our next question comes from Kimberly Greenberger with Morgan Stanley.

I was hoping you could talk to us about your gross margin outlook and in particular, in light of sourcing cost inflation, are you considering any very slight increases in pricing or are you simply redesigning into the higher cost of goods? How are you thinking about gross margin progress throughout the calendar year of 2011 and with sourcing cost inflation coming, how does that impact your thinking?

So I will take the cost part of the gross margin equation and then I will ask Mike to speak to the pricing power but Kimberly, we really are, where we have been for about a year now in terms of talking about our gross margin rate. We did -- have called out inflationary pressures would have a dampening impact on our gross margins raids in the back half of fiscal year 2011 so that is still going to hold. The way we want to ask everyone to think about it, however, is the guidance we have given previously of gross margin rates coming into the year in 72% to 73% range are still valid, that guidance that we gave a couple of quarters ago. We still feel very good about it.

And of course, we could go on and list in addition to the inflationary pressures, all the positive things that we are doing -- the move of gross margin and help to offset those pressures, things like (inaudible) sourcing, materials, looking to migrate a substantial amount of our production into lower cost countries out of China countries like Vietnam and India as an example. And ultimately, with the top line growth in the Asian region, most notably, China, we'll start to get some help from channel mix as well so there are a number of positives going on in the gross margin line that will help mitigate inflationary pressures.

On a retail side, in full-price, there is absolutely a focus on finding pricing opportunity within handbags, in particular, using Q2 as a foundation where we took handbag average unit retails to $295. Again, we are targeting that $300 sweet spot. That was a 9% improvement. We will continue to focus on that area in the back half and there are a couple of things going our way. One is a shift towards leather which helps us from a pricing standpoint on the retail side so we do see an opportunity to impact average unit retails in the second half. On the full-price side of the business, that will carry through to factory and I really want to be clear on the factory side, we do have pricing power. We were aggressive in the quarter, however, we were able to protect margins from a gross margin standpoint of the factory and we drove tremendous operating margins. That effort positioned us very well in the back half to continue to focus on unit retail gains in the factory channel -- productivity gains in the factory channel and drive operating margins.

Thank you.

Brian Tunick with JPMorgan Company.

One clarification first on this channel mix that impacted the gross margin here, what it deeper promos at factory or was it selling less made for factory products?

It was actually neither one. It was not deeper promos or discount rate and factory was virtually the same. Our margin rate, and factory, was actually a touch higher. It's purely a function of volume. When we put that volume increase into the quarter, it moves a bigger percentage of our overall pie into the factory channel which has an impact on gross margin. Also, it has a very positive impact on operating income. Hence, you see the UPS impact that we are able to deliver. That is a story on channel mix there.

On China, you talked about $500 million goal by fiscal year 2014, can you give us a sense about how you think about profitability expectations in this channel, clearly, I guess higher gross margins but how would you expect China, by 2014, to rank in terms of profitability versus your other channels?

Brian, I will jump in on that one. We already are achieving four-wall store operating margins in China that begin with a four, so as we gain same-store sales, those four walls will only drive higher and as we grow the top line and open additional stores, we realize same-store sales, year over year, will more than cover the infrastructure investment at the ground they are today. And so, we will have a positive as a toxin that one of the highest gross margin channels and will help gross margin from a channel mix perspective but ultimately be a strong driver of operating income as we grow the top line and leverage the infrastructure there with these exceptionally strong for while operating margins from the China stores.

(Operator Instructions) Our next question comes from Omar Saad with Credit Suisse.

I wanted to ask about the SG&A flow-through in the quarter? I know you've got a lot of investments going on. Help us understand how you think about managing SG&A, the duration of some of these investments? I know you've got a lot of growth as you talked about in China and other markets. How should we be thinking about modeling SG&A along those lines? Thanks.

Omar, I will take that one as well. I was really pleased with that flow-through during Q2 and we really leveraged the top line growth. If you go back actually as I did in preparation for the quarter and look at Q1 transcript, I actually called out that I did not see us having SG&A leverage in the December quarter. And the reason there is if you look across the four quarters of the year, you will see that Q2 last year was in the mid-30% where the balance of the quarter the remainder of the year was in the 43%, 44% range in terms of SG&A as a percentage of sales.

Point being that we already have so much leverage them as holiday quarter because of the top line growth so the fact that we outperformed in our North American business -- I'm sorry, the Japan did as well as it did with a tough market backdrop really allowed those mature businesses to pull leverage to the P&L that helped us offset our investment spending in Europe, in other parts of Asia, in the new RK brand, et cetera. So I was very pleased that the flow-through was as strong as it was in Q2 and that really bodes well for the flow-through coming our way in the back half of the year.

Great. Thanks.

Christine Chen from Needham.

Thank you and congratulations on a great quarter.

Thank you Christine.

I wanted to ask, so your opportunities to increase AUR at the full-price stores, I was wondering if you could share with us on the really high-end bags over $400. What was that penetration in the holiday quarter versus last year and another note, as far as factory, what was the percentage of factory exclusive product in the holiday quarter versus last year? I think last quarter you had mentioned that it had to get pretty substantially from the year before.

Sure. There is absolute opportunity by price bucket in full-price. We had a very good quarter, average, was handbags over $400 and thus, that's a benchmark. Penetrations were double digit, north of 10% which is very good. We will focus on that as an opportunity, particularly given the fashion cycle we are in around manipulated leathers, gathered leathers, treated leathers, some of the burnishing that we are doing on bags. So that offers us a pricing opportunity on the full-price side as we move forward, as we develop our assortments into spring and next fall.

On the factory side, our product mix in factory was very much driven by made for factory product. Again, I think we were north of 80% and made for factory. In fact, it was 89% for the quarter. Probably an all-time high. Very little clearance. Very little full-price (inaudible) activity in the quarter, and the factory channel and that trend will continue. One of the things that we did this quarter, which helped us on the factory side, is that we corrected a flow-in balance that we had last year where we were chasing inventory and factory and doing a lot of pull forward on spring goods to sell in the holiday quarter. We corrected that this year and we were able to maximize the quarter with product that was actually planned within the quarter and that also positioned us very well as we entered into January.

What were the penetrations last year?

About 85%. In fact, made for factory.

And the $400 bags of full-price last year?

About the same.

About the same? Okay, thank you and good luck.

Thank you. Lorraine Hutchinson with Bank of America.

I wanted to follow up on the men's business in both full-price and factory. could you just Give us a little bit more detail about your plans for size of stores, expected productivity versus women's and then what your expectations are for margins over the long-term for men's?

I am sorry?

The question, focuses on men's, Mike. What type of size of store are we contemplating, what type of productivity are we achieving and anticipating relative to our women's stores?

Sure. Okay. The men's stores actually are being targeted smaller. Probably less than 1,000 square feet of selling space, about 1,500 square feet overall. You can assume that productivity on those stores will be extremely high given our sales threshold so it's very intimate environment. On the factory side, store size will be about 2,500 square feet . We're still working the model. We are also trying something, or we're exploring something on the full-price side where we will have a dual gender store, side by side with a separate men's environment and women's environment and that may give us some productivity opportunity. We actually see that from a margins standpoint in terms of store contributions as well as gross margins, the stores are

Thank you. Neely Tamminga with Piper Jaffray.

Let me add my congratulations on a fabulous quarter. Lew, can you talk a little bit more about the Chinese consumer as you are learning more and more about the customers in terms of their preferences or is there any price resistance, some of the price points you have out there?Just a little bit more on the qualitative side about those consumers. That would be helpful. Thank you.

Sure. What we are finding is, is that she wants to participate in the accessory category as she does in other modern fashion areas. And she is looking for authenticity, quality, value, she is discerning, she is thoughtful, we are -- see her as embracing Coach, the purchase re-intent is approaching 90% which is remarkable, a level we have not seen in any other market at any early stage of our business. And we have the emerging Chinese middle-class consumers growing at 30% rate and she sees Coach as an expression of authentic New York fashion. She likes the spirit, she likes our heritage and she sees us as offering exceptional value and she is willing to pay two to three weeks of her annual income to purchase a Coach bag.

Thank you very much. Good luck.

You're very welcome.

Our next question comes from Jennifer Black was Jennifer Black and associates.

Let me add my congratulations as well.

Thank you.

You've expanded your price points as well as the appeal in your Poppy collection with your most recent flora set and I was wondering if you had planned to do the same with your other collections and I also wondered if you have already seen an impact on your blended AURs on Poppy?

I think as we get more time with each major collection we are constantly moving and refining it. What is happening within Poppy specifically, is that we are trying to capture the opportunity around trend in some novelty applications, and leathers and mixed materials and that actually will have a positive impact on pricing within Poppy which really flows through the balance of our collections as well.

Thank you.

The next question comes from Laura Champine with Cowen and Company.

Good morning and congratulations on a great growth in the US. In Japan, even though you mentioned you are still gaining shares, sales weren't quite as strong as what we were looking for. Maybe you can comment on the pace of sheer gain or more importantly, what your long-term views are of the health of that market and how that will color your investment there?

First, our business was even with last year which is running about 10% ahead of the category during the corresponding period. We were very pleased with our results. We were able to maintain very strong profitability in that business. Ramp up men's which offers a future opportunity and I believe that our share today is in the neighborhood of 17% or 18%. We believe there is opportunity for us to gain additional share in the years ahead because the Japanese consumer is extremely value-oriented. In terms of the future of the categories, unfortunately, the category has been on a ten year decline. And while we are expected to slow in the rate of decline, we are not optimistic considering the aging of the Japanese population and the absolute decline in population that the category will resume growth. So, our focus is to be efficient, develop our men's business and leverage our team in Japan to assist us in the growing Southeast Asian region and we are doing all of those things.

Thank you.

Erika Maschmeyer with Robert W. Baird.

Thanks. Congratulations.

Thank you.

I remember when you first started lowering your handbag AUR, you had talk to more of a $200 to $300 sweet spot and today I think you mentioned $300, is that a subtle change in your philosophy?

No, our $300 target, again, it's a benchmark it's really where we built the assortment strategy going back almost two years now. What is happening, as we anniversary that strategy and continue to fine-tune the assortment and the cycle involves we will constantly look at ways to impact that from a growth and productivity standpoint, price being one of them.

Thank you.

Dana Telsey with Telsey Advisory Group.

Good morning everyone. Congratulations. As you talked about new sourcing opportunities and shifting production out of China into maybe India and Vietnam, what categories are moving? How do you see the percentages shifting in the impact on margin? And just lastly, department store and wholesale business has done well. Are you gaining further selling space and what is changing there? Thank you.

I'll take the second part first, Dana. We have a healthy department store business. We are pleased with its performance and our accounts are as well. We do have very strong presence today and situationally, we do gain real estate in some locations but in general we are very comfortable was the nature of the distribution of the size of the space we have and we are looking forward to a good and strong spring season. Mike D., with regard to production?

Sure, Dana. In terms of moving production out of China. We have a lot of opportunities available to us. We actually have implemented or started effective January 1, under Jerry Stritzke's leadership, a four year plan, measure progress and look to drive that growth by measuring and revisiting as frequently. Our big opportunities, firstly, will be move factory store production out of China into these new markets. And we're also going to target small leather goods, which as you can imagine are more labor-intensive than bigger bags. But we've been having a lot of success there in India already and we are continuing to build on that success and we believe that you get to somewhere in the neighborhood of 40% or 50% of unit production. So we're outside of China by the end of our four-year plan so it is an important meaningful initiative that we are putting a lot of energy against.

In terms of them gross margin impact, obviously labor costs are increasing in a variety of markets so there is a whole sense of assumptions that we have made that we believe this migration in four years will benefit us by at least 150 basis points from what it would have been had we remained in China.

Thank you.

Thank you for joining us today for our second quarter conference call. I will now turn it over to Lew for closing remarks. Lou?

We have had a lot of attention on individual metrics and I think that is appropriate and it's probably also appropriate for me to bring us back to our overall performance. Not only were we pleased with the exceptional top line growth but we were also equally pleased with the exceptional bottom line growth and importantly, I think you need to appreciate that our organic strength has not been the strong as it has been in several years. We are leaving this recession with all guns blazing and feeling very confident that we will continue to be able to drive on the top line, double digit sales growth and double-digit on earnings growth and we're committed to that. Individual metrics will move around a bit.

We will measure ourselves primarily by operating income and return to shareholders, EPS. We will manage our balance sheet tightly. I just want to also comment very briefly on inventory. About two-thirds of the inventory growth that we have year-over-year is to actually support new locations in terms of modeled stocks as well as a new Asia distribution center. So it's only about our inventory, like-for-like, is estimated at about 15%. So thank you. Have a good day everybody.

Thank you. This does conclude Coach's earning call. We thank you for your participation.