掛毯 (TPR) 2011 Q4 法說會逐字稿

Good day and welcome to the Coach conference call. Today's call is being recorded. At this time for opening remarks and introductions, I 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 and thank you all for joining us. With me today to discuss our quarterly results are Lew Frankfort, Coach's Chairman; and Mike Devine, Coach's CFO. Before we begin we must point out that this conference call will involve certain forward-looking statements, including projections for our business in the current or future quarters of fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences. Please refer to our latest report, 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. Please note that the results for the fourth quarter and fiscal year ended July 2, 2011, included 13 and 52 weeks respectively, while the same periods in fiscal 2010 included 14 and 53 weeks respectively.

All discussions of comparable store sales are calculated based on a equivalent number of weeks for each period, 13 weeks versus a comparable 13 week period for the fourth quarter and 52 weeks versus 52 for the fiscal year. Now, let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our fourth fiscal quarter and annual 2011 results and will also discuss our overarching strategies. Mike Devine will continue with details on financial and operational results of the quarter and year. Following that we will hold a question and answer session, where we will be joined by Mike Tucci, President North American Retail; Victor Luis, President International Retail, and Jerry Stritzke, our President and Chief Operator Officer. This Q&A session will end shortly before 9.30 AM. We will then conclude with some brief summary comments. I'd now like to introduce Lew Frankford, Coach's Chairman and CEO.

Thanks, Andrea, and welcome, everyone. As noted in our release this morning, we were very pleased with the fourth quarter results, including excellent sales and earnings growth. This quarter's performance demonstrated a continuation of the momentum we have been experiencing throughout FY '11, as we continue to improve productivity while expanding our distribution in new and existing geographies. Our results reflect a growing recognition of the Coach brand globally and the success of our new initiatives. Before I review the highlights of the quarter, I wanted to mention our CFO transition. First, as you know, Mike Devine announced his retirement earlier this year effective later this month. This will be his last earnings call with Coach and we will miss Mike greatly. Mike has played a critical role in developing and executing the strategies that have driven our superior sales and earnings growth during his tenure with the Company. We wish him every success in the future.

At the same time, we're pleased to welcome Jane Nielsen, as our new CFO, who will be officially starting in early September. Moving on to some key highlights of our quarter and fiscal year. Our performance in FY '11 was highlighted by increases of 18% in revenues, 20% in operating income and 30% in earnings per share, all on a comparable 52-week basis. It was a year of many milestones, including first, Coach surpassed $4 billion in sales driven by gains in all of our business units. Second, we placed an increased emphasis on the globalization of our business, as we accelerated our international distribution growth, especially in Asia, while we continued to open new stores and gain market share in North America. Third, we successfully re-focussed on the Men's opportunity for Coach, as we began to open dedicated Men's and dual gender locations globally, doubling the business year over year.

And fourth, we increased our quarterly dividend by 50% and authorized another $1.5 billion buyback in January, demonstrating our financial strength, cash flow generation, and our commitment to shareholder return. This annual performance was capped off by an excellent fourth quarter. Some key metric were first, net sales totaled $1.03 billion, an increase of 17% on a comparable 13-week to 13-week basis. Second, earnings per share totaled $0.68, up 22% from the $0.56 in the prior year on the same 13-week basis. Third, direct to consumer sales rose 18% on a comparable 13-week to 13-week basis. Fourth, North American same store sales for the quarter rose 10% on a comparable basis from prior year, while total North American store sales rose 18%. Fifth, sales in Japan rose 6% in dollars and declined 7% in constant currency, also on a comparable basis, modestly impacted by the ongoing effects of the earthquake and tsunami.

And finally, we continued to generate very strong sales and comps in China. During the quarter we opened 3 North American retail stores, including 2 in new markets for Coach, Fredericksburg, Virginia and Albuquerque, New Mexico, as well as our first mall based Men's store in Copley Plaza in Boston. We also closed 2 locations. In addition, we opened 9 factory stores, including 6 Men's dedicated locations. At the end of FY '11, there were 345 full price and 143 factory stores in operation in North America. This was a net increase of 3 full priced stores, including 1 Men's retail store, as well as 8 factory stores and 14 Men's factory stores from the end of FY '10. Total square footage grew 7% for the year. Moving to Japan, 2 locations were added, a shop-in-shop, and a Men's factory store.

Separately, all but 2 of the stores that were closed due to the earthquake and tsunami had reopened by year-end and over the last month, the remaining 2 have reopened. At year-end, there were 176 total locations in Japan, with 20 standalone full price stores, including 8t flag ships, 119 shop-in-shops, 30 factory stores, and 7 duty-free locations. In total, a net of 9 locations were added in Japan during FY '11 and 3 were expanding, yielding total square footage growth of about 4%. And in China, we added 11 new locations, 9 on the mainland and 2 in Hong Kong. At the end of the quarter, there was 66 Coach locations in China, including 53 locations on the mainland and 22 cities. Additionally, there were 11 locations in Hong Kong and 2 in Macau.

In aggregate there was an increase of 25 net new locations for the fiscal year for a square footage increase of 62%. Indirect sales, which represent about 13% of Coach's sales on an annualized basis, increased 12% on a comparable 13 to 13-week basis, or 4% as reported to $113 million. This increase was driven by both international, wholesale shipments and shipments into US department stores. At POS, international sales rose significantly, driven by both distribution and comps, while US department store sales rose high single-digits. We estimate that the addressable US women's handbag and accessory category rose 5% to 10% during our fiscal fourth quarter. Over the same period, Coach's bag and accessory sales rose about 14% across all channels in North America, including in our own stores.

For the fiscal year ended June, we estimate that the addressable category rose about 10% to approximately $9.3 billion, while Coach's North American bag and accessory sales rose 14% across all channels and 17% in our own stores over the same period. Separately, it's worth noting, our customers' outlook for the economy has been stable over the last few quarters, with a third of those surveyed still believing that the US economy is improving. Our intention to purchase Coach remains high, 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 was up 17% in the quarter on a comparable 13-week to 13-week basis, with our directly operated stores up 18%, as distribution growth augmented the comp performance.

Fueling these overall comp results was strong gains in both the full price and factory channels, driven by significant increases in conversion from prior year, while ticket and traffic were essentially the same. We were particularly pleased with the improvement in the conversion rate, since it is the driver that we have the most control over through product and service. We also have been delighted by the very strong sales trends we're experiencing in the our North American Coach.com business, our largest store, which of course, is also extremely profitable. While we have long viewed this channel primarily as a marketing vehicle, sales growth accelerated at a significant double-digit pace during the fourth quarter. We expect that Internet sales will grow rapidly in the years ahead, while also importantly driving consumers into the stores.

While the fall season is just underway, we are pleased with our current trends and consumers continued response to our product and positioning. As noted for the quarter, we posted a 7% decrease in local currency in Japan and a 6% gain in dollars, excluding the extra week from last year's results. 5 of the 7 stores that remain closed at the end of March due to earthquake and tsunami damage reopened during the fourth quarter and the remaining 2 just reopened this month as mentioned. Generally, business in Japan is trending where it was prior to the events of March 11, as business improved over the period. Naturally, I want to call out China, which is our single largest geographic growth opportunity. During the fourth quarter, as for all previous quarters this year, we achieved significant double-digit comp growth, and as I referenced earlier, we are opening stores primarily on the mainland, where increasing numbers of consumers are participating in the category.

Moving onto product. During the fourth quarter we maintained a high level of product innovation and distinctive newness. In April we introduced a collection of Natalie novelty straw totes, along with new colors and a dream sea print and Poppy. In May we launched Audrey, a modern tote story featuring perforated leather, op art and print concepts. Additionally, our lead collection for Mother's Day was Madison, offered in fresh colors and patterns. For June, we introduced new leather and patent colors in Kristin, as well as a strong new op art print. Our Kristin hobo continues to be the key item within the collection. This season's product was very well received and both handbags and women's accessories achieved strong comps in the quarter, with handbag penetration in our North American retail stores remaining at 55%.

In addition, in July, we launched a new Chelsea collection and evolved Poppy with updated styles, patterns and prints. The Chelsea collection features a modern faceted turnlock inspired by our heritage and offered in timeless silhouettes. Poppy has an updated look with new leather and logo fabrics and new pushlock closures. In August, we're offering new fall fabrications, colors and patterns in Madison and a new shoulder bag in Chelsea. On the factory side, our strong results were fuelled by a powerful combination of new product introductions, with key styles offered at great prices. Additionally, our inventory investment strategy enabled us to capture sales upside throughout the quarter. Our product assortment was also supported by our in store and direct marketing campaigns.

Naturally, I also want to touch on Men's, a global initiative. As many of you know, we decided about 18 months ago that we would create a strong capability to leverage our reputation in the marketplace for quality leather Men's products. Over this period, we've built a team and the infrastructure to become a market leader in the Men's category. And we've begun to expand our global footprint in Men's. In the US we've opened 3 full price dedicated Men's stores, Bleecker Street in New York, Copley Plaza in Boston and most recently, Garden State in New Jersey. In addition, we've created about 40 dedicated Men's concept shops in select full priced flag ships. We also opened a total of 14 North American Men's dedicated factory stores as mentioned. Our results have exceeded our expectations and underscore the opportunity for Coach Men's in the US.

Outside of the US, where the male customer tends to be more style conscious, we've also opened a number of Men's dedicated stores, notably in Japan, where we have 7 Men's stores today. Our future store growth in Japan will primarily be dedicated Men's locations. More generally, in Asia, including China, we are seeing excellent early results from dual gender stores. Our first year results have been excellent, as our Men's sales doubled to over $200 million in FY '11. This performance underscores our confidences in Men's as a significant growth driver for Coach and we now believe it could contribute 25% or more of the Company's growth over the next several years. As we enter FY '12, beyond the Men's initiative, our overarching strategies remain largely unchanged. We'll continue to focus on expansion opportunities, both 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 consumers' accessories wardrobe, while continuing to attract new customers into the franchise. Moving onto distribution growth, we expect that our square footage globally and across all channels will increase about 12% in FY '12 compared to 9% last year. Starting in North America, we will open about 40 new stores in FY '12, with more than 50% being dedicated Men's locations. In total, we expect to open about 15 net new full price locations, about 50% will be Men's, and 25 factory outlets, including 15 Men's stores. In total, we expect North American square footage growth of about 7% this year, in line with last year and driven by Men's.

As we've discussed many times, outside of North America, China is clearly our largest geographic opportunity given the size of the market and the rate of growth. The Chinese consumer has embraced Coach, as evidenced by the significant double-digit comps we're consistently generating and the extremely high repurchase intent among existing customers. Our sales in China totaled over $185 million, up from $108 million last year, as the market grew rapidly and we increased our share to 6% on the mainland. In addition, our unaided brand awareness among PRC consumers jumped to 16%, about double last year's level. This year we will accelerate new store openings with about 30 locations planned for the mainland. The vast majority will be dual gender stores given the size of the Men's opportunity in China.

Overall, we're now projecting sales of between $280 million and $300 million for FY '12, up from our previous guidance of $250 million. We also intend to open a few locations in Hong Kong in FY '12, along with 1 or 2 in Singapore, where we just acquired the operations of our distributor last month as planned. In FY '12 we will make significant investment toward increasing awareness in China, as we leverage our 70th anniversary campaign to build on our positioning as a New York fashion grand, grounded in heritage and history. This integrated campaign will have several key elements, including an international brand Ambassador, Gwyneth Paltrow, who has proven relevancy in China and other international markets. In Japan, the overall consumer market remains very challenging and the category continues to contract.

Our focus continues to be on gaining market share and we have done this quite well in our core women's business. As discussed, we are now also focusing on Men's where we have seen early success. During FY '12 we expect to open about 15 net new locations in Japan, nearly all of them dedicated Men's doors. In total, we expect the net square footage growth in Japan will increase by about 10% this year compared to about 3% last year. Finally, beyond our directly owned international businesses in Japan, China and now Singapore, we do have significant and growing distributor run businesses in other Asian countries. We're also pleased to announce distribution agreements to open the first Coach stores in Brazil, which are expected to open next spring, and in Vietnam, with the first openings expected late this calendar year.

During FY '12 we expect to open between 35 to 40 net new international wholesale locations bringing our total number to nearly 250. Touching on Europe, last year we opened a total of 14 locations, including 7 in [Printemps] in France and through our JV with Hackett, 6 shop-in-shops in El Corte Ingles, 5 in Spain and 1 in Lisbon, along with 1 retail store in the UK. We have been pleased with our initial performance and the early reaction of domestic shoppers and international tourists to the Coach proposition. FY '12 we expect 3 additional openings in Printemps, including 2 Men's shops, as well as a number of new locations in Spain, the UK, and Ireland through our joint venture. Naturally we're very excited about our new Bond Street flagship, which is on target for a September opening and will be supported by our new ad campaign featuring Gwyneth Paltrow.

Beyond the opportunities in the Coach brand, as you know we launched Reed Krakoff last September in a few boutiques in the US and Japan, as well as through prestigious international specialty retailers. We are pleased that the product is appealing to the targeted pinnacle luxury consumer. As we mentioned on the 3Q call, Valerie Herman joined Reed Krakoff as president and CEO this April from YSL and has been a valuable addition to the leadership team. What I have just reviewed are our strategies to drive our business at a double-digit pace given the continuing strength of the Coach business and our increasing global expansion. We have significant runway ahead of us both in North America, which remains a growing market, and worldwide while our re-focus on Men's provides an additional opportunity for growth. At this time I will turn it over to Mike Devine, our CFO for further detail on our financials. Mike.

Thank you, Lew. Lew has just taken you through the highlights and strategies, let me now take you now through some of the important financial details of our fourth quarter results. As mentioned on a comparable non-GAAP basis our quarterly revenues rose 17%, with direct to consumer which represents about 87% of our business up 18% and our indirect segment up 12%. Similarly, operating income rose over 20%. Net income for the quarter increased 18% and totaled $202 million, with earnings per diluted share of $0.68, up 22%. On a reported basis, sales rose 9%, net income rose 4%, and earnings per share gained 7%. For the fiscal year sales rose 18% on a comparable non-GAAP basis totaling $4.16 billion, while earnings per share were $2.92, up 30%, and net income was $881 million, up 24%.

On a reported basis for the full year sales rose 15%, net income gained 20%, and earnings per share increased 26% from fiscal 2010. For the quarter operating income totaled $312 million, up 20% from the prior year on a comparable non-GAAP basis and 5% above the $297 million reported in the year ago period. Operating margin was 30.3%, 80 basis points better than the 29.5% generated in the prior year on a comparable basis and versus 31.2% on a reported basis. During the quarter gross profit rose 6% to $740 million from $697 million reported a year ago, while gross margin rate was 71.8% versus 73.3% reflecting the impact of higher sourcing costs, partially offset by channel mix and modestly lower levels of promotional activity in our North American factory business.

SG&A expenses as a percentage of net sales totaled 41.5% compared to the 42.1% reported in the year ago quarter. We were pleased that we were able to gain 60 basis points of leverage on a reported basis in the quarter, as our primary direct businesses here in North America and in Japan provided leverage to the corporate P&L, more than offsetting the impact of our investment spending. We believe we're striking the right balance between driving future growth opportunities and operating efficiencies. For the full year operating income totaled $1.3 billion and 32% of sales, up 20% from the prior year on a comparable basis and 14% above the $1.15 billion reported in the year ago period. On a comparable basis, operating margin expanded 50 basis points and was above our stated objective and last year's actual margin of 31.5%.

On a reported basis operating margin was 31.4% versus 31.9%. During the year gross profit rose 15% to $3.02 billion from $2.63 billion a year ago. Gross margin was 72.7% versus 73% a year ago. SG&A expenses as a percentage of net sales totaled 41.3% compared to the 41.1% reported in fiscal 2010. As a reminder, there were a number of items that affected comparability for the fourth quarter and the full year. First, the fifty-third week in FY '10 contributed about $70 million to sales, $24 million to net income or $0.08 to earnings. In addition, as noted in our press release, we recorded certain one-time items during the third quarter of 2011, which resulted in a substantially lower tax rate of 26.5% in that quarter. These included a favorable settlement of a multi-year tax return examination, which decreased Coach's provision for taxes by $16 million.

In addition the Company made a $21 million contribution to the Coach Foundation and also contributed JPY400 million or just under $5 million to the Japanese Red Cross. Together these contributions totaled nearly $26 million pretax, impacting GAAP SG&A expenses by that amount and precisely offsetting the benefit of the tax settlement to both net income and EPS. Moving to the balance sheet. Inventory levels at quarter end were $422 million, up about 16% from FY '10 year-end, consistent with our expectation and sales growth. This inventory level allows us to support 25 net new North American stores, 8 net new locations at Coach Japan and 25 additional Coach China stores from the year ago period, as well as the Asia distribution center, the Reed Krakoff brand and our Men's initiatives.

Further, our current inventory support the strong underlying business trends and will allow us to maximize sales this summer and fall. Cash and short-term investments stood at $702 million, essentially even with $696 million a year ago after $1.1 billion of share repurchase in the interim 12 months. During the fourth fiscal quarter alone we repurchased and retired about 6.3 million shares of our common stock at an average cost of $60.08, spending a total of $381 million. At the end of the year, approximately $962 million remained under our present repurchase authorization. Net cash from operating activities in the fourth quarter was $221 million compared to $182 million last year during Q4. Free cash flow in the fourth quarter was an inflow of $164 million versus $152 million in the same period last year.

Our CapEx spending was $57 million versus $29 million in the same quarter a year ago. For the full fiscal year 2011, net cash from operating activities was $1 billion compared to $991 million a year ago. Free cash flow in fiscal year '11 was an inflow of $886 million versus $910 million in fiscal year '10. CapEx spending totaled $148 million for the year compared to $81 million in the prior year. It's important to note that based on our current plans for FY '12, we expect the CapEx for next year will be up in the area of $200 million-- up to the area of $200 million driven by timing shifts of certain projects or primarily for the opening of new stores across all geographies and investments in technology necessary to enable our global expansion. While we are not giving specific guidance for FY '12, we see the year unfolding very similarly to FY '11, with strong revenue trends, robust core businesses delivering leverage while we continue to invest in the future.

First and most generally we do expect to achieve double-digit sales with earnings per share growth ahead of the top line. Our sales will be driven in part by at least mid single-digit comp store sales in North America. Second, as we've said before, our gross margin is likely to improve sequentially in the first half of the year versus the second half of FY '11, though it will still contract on a year over year basis. The second half is expected to be slightly easier, as we anniversary increase sourcing costs, while channel mix and our sourcing initiatives contribute to profitability. On balance we expect gross margin to remain high and in the 72% to 73% range for FY '12. Third, on SG&A we expect our core businesses to continue to deliver leverage, while we will also continue to invest in global growth for the future.

Fourth, we are committed to delivering an operating margin similar to what we've generated over the past 2 years. And fifth, our tax rate is likely to be in the area of 33% for the year, as we further refine our international tax strategies. In summary, our fourth quarter and FY '11 results demonstrated our ability to manage our business nimbly, while investing prudently in longer term opportunities. We're 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 Coach brand with discerning consumers globally. We're also optimizing the brand's potential in Men's, leveraging our long heritage in this category. 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.

As Lew mentioned, this will be my last earnings call, so before I open it to questions, I just wanted to say that this has been the most remarkable and rewarding 10 years of my professional career. I'm quite proud of what Coach has accomplished over this time. And in addition to all the many people at Coach I need to think, at this time I'd especially like to thank all of my many, many good buy side and sell side friends out there. Your support has been tremendous. I'd also like to welcome, Jane, who I know is listening as she takes the best CFO job in global branded retail. And close by saying that I plan to be a long time shareholder, as Coach's prospects have never been brighter and I look forward to watching its continued success as I pursue my board work and spend more time with my family. Thank you. I would now like to open it up to questions and answers.

Thank you, Mike.

(Operator Instructions) Bob Drbul with Barclays Capital.

Mike, congratulations and best of luck and Lew and everybody, congratulations on the quarter. I guess the first question I have is on the comp results for this quarter, what really drove the upside to your plans and do you think those drivers should remain intact for potential for upside in your plans for the next fiscal year?

Mike Tucci will take that.

We're very pleased with the quarter. We're very pleased with the year. The drivers behind it converge in significant. More importantly behind conversion, improved handbag productivity through pricing, where we had average unit retail increases, as well as unit comps. That was a significant driver. I think it speaks to the longer term rebalancing of the assortment and driving of focus on balance in our assortment in hand bags. Additionally we're starting to see Men's become a comp driver, contributing to overall productivity in our stores, particularly in the significant high profile stores where we have Men's in a more definitive and larger format within those stores.

As you well know, we tend to be conservative planners and while it's early in the quarter in Q1, the trends and tempo of the business that we saw coming out of Q4, we really see that continuing in the early stages of July. We like what we see happening with the response to product, largely driven by Chelsea, very strong response to what I would call a more refined look within Poppy, and continued reaction to newness in our factory channel, where we continue to refine our flow strategies there. I think the other important channel to mention is that our digital opportunity continues to be a growth driver for us, not only from a sales and revenue standpoint, but in terms of visitation and browse and we know that a large reason for consumers coming to our site is to pre-shop our stores. So we see that as a continued opportunity as we enter into Q1.

And just one follow-up question is I think, Lew, you mentioned strong gains on a comp basis in both full price and factory, was there a variance between the two this quarter?

It was roughly the same.

Great. Thanks very much.

Omar Saad with ISI Group.

I'd like to add my congratulations to Mike as well. Best of luck. Quick question on the international, your international wholesale business. It sounds like there's some a little bit of acceleration in the store growth plans for this year, especially in light a couple more of those businesses are now in house, could you put that in context what's going on there, especially with the announcement today on Brazil and Vietnam, thank you? I mentioned earlier that our growing awareness globally has created substantial opportunities for us and so first, in existing markets we're finding that we're gaining on the higher awareness, increased traction, which gives us confidences that we can continue to open new locations. We're also benefiting in many markets from the global tourist, who is contributing substantially to our sales in many locations. Due to the new distribution agreements and increased traction, we're in a position to open up many more locations than we have had -- than we have opened in the past. And how will the sourcing work in Brazil, where I know there's sometimes some tariff issues for imports. Is your partner there going to be source locally.

We're gong to be -- consistent with the way we run our business we're going to do all sourcing. We're going to deal with the tariffs as we need to. The assortment will be a global assortment.

And then one quick questions on Men's. Could you remind us what it was historically at its peak in terms of a percent of total Coach sales and do you think it could get back there some day.

I'm sorry.

20% to 25% of our sales as recently as the late '90s, Omar.

Thank you.

It's conceivable that we could. I mean, right now we're looking to grow our business from about 4% to over 10% during our planning horizon.

Thanks a lot. Good luck.

Thank you.

(Operator Instructions) Kimberly Greenberger, Morgan Stanley.

I want to send my best to Mike. I hope you really enjoy retirement.

Thank you, Kimberly.

I'm wondering if you could talk about your pricing and your mix strategies in North America and are you planning to increase price in order to offset rising cost of goods sold? And then Mike, could you just help me a little bit on your gross margin outlook, can I read your comments to mean that you're expecting flat gross margin in 2012 or do you think there's a possibility you could see some recovery in the year, obviously, with the improvement in the second half of the fiscal year?

Well, why don't I take the latter half of that first and then perhaps Mike or Lew can jump in on the first part of the question. But, Kimberly, we're -- yes, what we're asking people to model is essentially a flat gross margin rate at this point in the year. It's still very early days of the year, but we're actually feeling guardedly optimistic about gross margin. We do believe that the quarter just reported is likely the low point and we feel that we can continue to deliver margin rates similar to '10 and '11 for FY '12, with some gradual upside improvement in the out years and that's in spite of continued sourcing pressures, the most worrisome of which is wage inflation in China. As we've talked about, we're at the beginning of a very aggressive program to move 50% of our units produced out of China and while its early days we're ahead of schedule on this one and we'll continue to battle this.

We're now actually hearing some rumblings of wage inflation elsewhere. But in terms of materials, our design, merchandising, sourcing teams have done just a remarkable job in designing into cost and counter sourcing. And of course, our cost of materials are not as dramatically impacted as some of the apparel brands you might be following and we do feel like as we move into the second half of the year we'll be anniversarying the worst of the material cost inflation. Really all the other dynamics of the business will be helpful to gross margin as we move forward, most notably channel mix, as our full price businesses in our mature markets continue to trend positive, and notably China grows far more quickly than total Coach.

Also the conversion of these distributor businesses, namely Singapore thus far with Malaysia on the horizon, will also be helpful to gross margin rate. And I think ultimately long-term as Men's shares increases, we can also drive gross margin rate longer term as our relatively new Men's team gets their legs under them. And frankly, we believe that our male consumers are not as bargain obsessed as their wives and girlfriend's, so the last thing I think that can be helpful to gross margin rate is that as the overall economy generally improves, I think we'll continue to see full price trending nicely and perhaps over time have a little bit of pricing power in the factory channel as well. So we're looking for to model a relatively flat FY '12. As the year plays out, the wild card will be the promotional levels probably in factory, but there is gradual improvement in upside into the out years.

On retail pricing, the answer is we absolutely see opportunity for pricing and it's not absolute price increases it's driven by mix and offer. A couple of things that are happening in the market that are favorable to us, one is we're in a strong leather cycle, which affords us the ability to get higher retails. That will drive average unit retails up. In our handbag category had an impact on Q4 where you see average handbags over $400 contributing 17% to our overall handbag sales versus 11% in the prior year, that's a big deal. The refinement of the Poppy strategy allows us to work the mix withinside of Poppy for some potential retail upside. And one other significant opportunity is what we're calling small bags in Crossbody, which offers us a pricing opportunity and also protects our opening price points, both within Poppy as well as in the overall mix.

That's a very important element, so while we dial back to a target of 300 and land it into the 280 range a couple years back, we're now working our way back and trying to capture that $20 of upside in average unit retail in handbags and I think over time we see that as a real opportunity. On the factory side, it's a similar story with a strong leather trend and also being very creative there on our pricing strategy to create differentiation in our retail strategy between leather offer and signature offer, which the customer accepts on the factory side and allows us to gain average unit retail increases in our handbag category. That was also helpful and a driver and we see that continuing.

And a driver of gross margin rate as well, particularly in factory.

Thank you, Mike.

I'd like to just add one clarification, Mike T., when we talk about 50% of our units coming from outside of China, what we're really referring to is incremental production requirements. We plan to maintain the same level of jobs in China that we have today, but all of our future requirements we're planning to come from outside of China.

Great. Thank you.

Brian Tunick with JPMorgan Chase.

And my congrats as well and wish you well, Mike.

Thank you, Brian.

I guess my question is on the SG&A side, just maybe talk about the investment spending this past year on RK and Europe and the continuation of the design build out, how much of a drag was that this past year and how should we think about that going forward in FY '12? Can this business get back to that 38% SG&A as a percentage of sales, especially if you guys get to that $5 billion in revenue target over the next couple of years. And just quickly on the Hong Kong listing, is there any update on timing of what we should be looking for and your thoughts on that?

I'll take the simpler one, the Hong Kong listing, first, although actually it's not simple. It's proving to be complex and we're currently going back and forth with the exchange answering some questions based on the documents we've submitted required to get listed. I think we're looking probably for a listing sometime in the early fall. But going back to SG&A, we were very pleased actually with the fourth quarter and the way we just delivered. As we talked about, we delivered on an as reported basis 60 basis points of leverage to the SG&A line. And we did that in spite of losing some of our healthiest revenue from Japan as a result of the earthquake. And again that's on the 14 versus 13-week compare.

So we're continuing to see great leverage being delivered by our mature businesses here in North America and in Japan, while we continue to investment spend. So, we talked about that investment spending as it was directed for RK, the infrastructure build in China and in other parts of Asia to allow us to capitalize on the opportunity there as being an investment in the neighborhood of about $0.08 this most recent year. I think we can look to see that investment continue to improve into '12 and into the out years. Valerie Herman has come in and is really doing, I think, a number of the right things around RK. We're likely to pick up $0.02 in investment spend there. What will happen is that in the first half of the fiscal year we will pick up the Singapore direct expenses, and while relatively modest to total Coach, that will be a drag to the SG&A rate.

It will take Victor Luis and his team a little bit of time to bring that business to its full profit potential. We will get there, but [not] get there quickly, it takes a while for us to install our retail processes, adjust the assortment, and remember, when we transition a business from the distributor to a direct business, we're buying that inventory back at wholesale prices. So the first six months of selling is also at somewhat reduced gross margin rates. But going forward into FY '12 the balance of all of these investments and the leverage we expect to get from our mature businesses, looks like we're going to have a pretty flat SG&A rate for the year, while we grow the business a very strong double-digit top line.

Lorraine Hutchinson, Banc of America.

Just wanted to follow-up on the Men's business and how are you thinking about the total store base for both factory and full price domestically and then in Asia?

Mike T.

We're a little further along on the factory side only because it's more demonstrated there. We do have 15 stores open. We opened a handful of stores this past several weeks, so we're adding to that. The factory opportunity from a store count standpoint is significant. And while we're not committing to a long range number, we will be nimble and aggressive in terms of taking opportunities in the marketplace to gain space on the factory side. On the full price side, we're really pleased with what we see happening in the couple of stores that we have open outside Bleecker Street and we've committed to a handful of stores this year that we're working on, including a format where we have Men's and women's side by side with a pass-through that will open in the spring in Pentagon Center Mall outside of DC, that's when we talk dual gender, that's the format that we want to get into the marketplace. It's a format that we're seeing a lot of success with internationally and we think that opportunity may play itself out in North America as well. I think it's important to note on the full price side, that Men's is a more premium proposition for us and we're going to target the absolute best real estate within the full price arena. As we get more experience, we'll be better informed and we'll approach the Men's full price opportunity accordingly.

Victor, would you touch on Asia for us please.

Sure, first from the size of opportunity perspective, I think it's important to understand the scale of the opportunity that stands in front of us. We're looking at a premium handbag and accessories market in Asia of about $12 billion today, of which approximately 25% is Men's. That would be the approximate penetration in Japan. And in PRC and mainland China we see the penetration of Men's closer to 50%. So a truly tremendous opportunity for us. From a distribution perspective, of course, you're all aware that we have a more mature distribution in Japan, and as Lew mentioned in the speaker notes today, we have already seven locations in Japan, three full priced locations and four factory locations. We're planning to open 15 doors in FY '12, the vast majority of which will be Men's freestanding locations. Increasingly we're also experimenting with bringing Men's into current women's doors where it makes sense from a distribution perspective.

This a slightly more difficult in Japan, given that most of our locations are in department stores where often we're on the women's handbag floor. In China, the opportunity is truly boundless, as we like to say. We have a today 53 locations in the mainland combined with 13 in Hong Kong and Macau, as you know. Of those 53 locations in the mainland, already 23 of those are those dual gender locations that Mike referred to earlier. And of the 30 locations that we plan to open in FY '12, approximately 27 of those will also be dual gender locations. So it is very much at the center of our strategy. We have the opportunity to go boldly there given that, of course, we are building distribution from scratch. Across other Asian markets, we are looking at both strategies, as we are in Japan and here in the US, where we have the opportunity to start with new doors and it works. We're going in with the dual gender location and where not, we're going in with the Men's standalone location.

Thank you and good luck to you Mike.

Thank you "

(Operator Instructions) Dana Kelsey, Kelsey Advisory Group.

Congratulations and Mike, best of luck. I wanted to -- couple things, how much reduction are you planning to shift out of China in this upcoming year and if you think about the outlook business and the returns, what was the penetration of the made for products this quarter versus last year and how do you see those margins? Thank you.

The first question in terms of -- over 85% of our production will be coming out of China this year. And if I understood your question correctly and Mike, in terms of made for factory.

About 85% with where we have been. And we closed out on that yesterday and that does carry a slightly higher margin than the full priced transfers into the channel.

Any thoughts on any remodels for the full line stores for this year with CapEx dollars.

We are. There are a couple things happening. One is we're actually in the process of taking a look at the entire fleet on the full price side and in particular looking at potential locations where we either have lease opportunity or space opportunity to better position Men's and renovate the store at the same time. And an example I would give you, a couple examples locally, one would be we're about to reopen our store 342 Madison, where we were able to reformat the state and add a men's point of view and shop in that space. We did a very significant project at 595 Madison. So we have at least allocated slightly more capital to the idea of renovation and remodels within North America, particularly around taking advantage of the Men's opportunity.

Thank you all for joining us on our conference call today, that will be our last question. I'd like to turn it back now to Lew for a few closing words. Lew.

I think our results and our comments speak for themselves. We're off to a great start in fiscal '12. We believe we have the strategies in place to continue to grow that double-digits with the bottom line growing faster that the top line. And as I said many times before, stay tuned. Thank you and have a good day "

Thank you and this does conclude the Coach earnings conference. We thank you for your participation. You may now disconnect your lines.