掛毯 (TPR) 2012 Q2 法說會逐字稿

Greetings 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.

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 Jane Nielsen, Coach's' CFO. Mike Tucci, President of North American Retail, is also joining us to discuss our holiday performance and spring initiatives.

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 or 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 future preferences. Please refer to our latest annual report on Form 10-K for a complete list of these risk factors. Also, please note that historical growth trends may not be indicative of future growth.

Now, let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our second fiscal quarter 2012 results and will discuss our strategies going forward. Mike Tucci will review the holiday season from a US retail perspective and discuss key initiatives for the spring season ahead. Jane Nielsen will continue with details on financial and operation results of the quarter. Following that, we will hold a question and answer, where we will be joined by Jerry Stritzke, our President and Chief Operating Officer, and Victor Luis, our President of International Retail. 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 Frankfort, Coach's' Chairman and CEO.

Thanks, Andrea, and welcome, everyone. As noted in our release this morning, we're very please with our holiday results, including strong sales and earnings growth in our North American retail businesses. Our performance clearly demonstrates the strength of our franchise, our broad and diversified product platform and our multi-channel international distribution model. Beyond the top line, we were also very pleased with our high level of profitability and substantial cash generation. In addition, we made continued progress against our key global business initiatives, including expanding our share in the growing North American bag and accessory market, increasing our international presence, leveraging our heritage in the Men's business and expanding our digital presence. We've experienced strong response to our new collections and our pricing and assortment strategy continues to resonate with consumers worldwide. We're well-situated to build upon our leadership position and continue to gain market share.

While I will get into more detail about the output 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 18% to $1.18 compared with $1 in the prior year. Second, quarterly net sales totaled $1.45 billion versus $1.26 billion a year ago; an increase of 15%. Third, direct-to-consumer sales, which represent over 85% of total sales, rose 17% to $1.3 billion from $1.1 billion in the prior year on a comparable basis. Fourth, North American same-store sales for the quarter rose 8.8% 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 6% in dollars. And finally, we continued to generate very strong sales growth, significant double-digit comps in China.

During the quarter, we opened five retail stores and five factory stores in North America, including two Men's retail stores and one Men's factory store. Thus, at the end of the period, there were 350 full price and 157 factory stores in operation in North America.

Moving to Japan, six locations were open, including four Men's locations. At quarter-end, there were 184 total locations in Japan with 22 full price stores, including eight flagships, 122 shop-in shops, [33] factory stores and seven distributor-operated travel retail locations. In China, we added nine locations -- eight on the mainland and one in Hong Kong, our Nathan Road flagship, which I might add is doing very well. At the end of the quarter, there were 80 Coach locations in China, including 12 in Hong Kong, three in Macau, and 65 locations on the mainland in 28 cities. As we've discussed previously, we are building multi-channel distribution model in China including flagships, retail stores, shop-in shops and factory stores.

Indirect sales were even with prior year on a comparable basis at $166 million. Results reflected shipment timing differences from prior year in our international wholesale businesses. Sales for the quarter at retail and international wholesale locations increased at a double-digit pace, while sales at POS and US department stores were even with last year's holiday quarter. We estimate that the addressable Women's US handbag and accessory category rose at a 5% to 10% rate in the holiday quarter, similar to the increase it experienced in the proceeding nine months of the calendar year. At the same time, Coach's Women's handbag and accessory sales rose about 12% across all channels in North America during the most recent quarter. In our direct businesses in North America, handbag and accessory sales rose 15%.

Separately, it's worth noting that we saw modest improvement in our customers' outlook for the economy compared to a quarter ago, with about 60% of those surveyed now believing that the US economy is stable or getting better, up from 48%. Her intention to purchase Coach over the next year continues to be strong with about 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 15%, with our directly operated business up 17%, driven by 8.8% in same-store sales increases in new distribution. As noted in our press release, all direct channels benefited from our innovative digital media strategy spanning our own website's mobile platform and social media, which enabled customers to purchase wherever they preferred to engage with our brand. Mike will provide additional details around some of these initiatives in just a moment. Fueling these overall strong comp results were similar gains in both store channels driven by conversion and average transaction size and continued strength in our e-commerce business. Overall retail traffic rose with in-store trends consistent with prior quarters, while traffic on Coach.com continues to gain momentum.

As we've discussed many times, outside of North America, China is our largest geographic opportunity, given the size of the market and the rate of growth. During the quarter, our sales rose again sharply from prior year, fueled by distribution and significant double-digit, same-store sales. Clearly, the Chinese consumer has embraced Coach as evidenced by the excellent comps we're consistently generating and the extremely high new purchase intent among existing customers. Consistent with our strategy of building brand awareness in China, we took a number of important steps during the second quarter. First, we launched an integrated marketing campaign with our international brand ambassador, Gwyneth Paltrow, that included advertising across print, outdoor, and the web, as well as the 70th anniversary gala dinner and gallery event in Beijing. Another key component of the campaign was the successful launch of our presence on Sina Weibo, the leading social networking site in China.

In December, we also became the first US incorporated company to list on the Hong Kong Stock Exchange. All of these events helped to drive increased awareness for our brand. While Jane will get into more details on our financials and I will discuss our outlook in some detail, I wanted to give you this recap. Now, I'll turn it over to Mike Tucci to discuss our North American Retail business. Mike?

Thanks, Lew, and good morning. Today, I'd like to review what was an excellent holiday season. Clearly, our balance in more refined handbag assortment continues to drive sustainable growth in North America. There were three important productivity drivers within our North American business -- overall product performance, our digital strategy in Coach.com results and continued 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. Our strategy to flow more product later in the quarter versus previous seasons was also very successful.

To open the second quarter, we brought in Madison, our core holiday collection, completely updated and featuring several new silhouettes. Lindsey, a new style and feature of our holiday ad campaign, was an immediate hit with consumers. Abigail was also a new fashion silhouette and key item. Also new to Madison, were the mini sophia, the flap carryall and the Caroline Dowel satchel. This was our most fully developed Madison offering and we saw the highest penetration level for the collection ever; eclipsing its highly successful launch three years ago. For November, Poppy was the focus offered in new styles, including two totes, a fold over crossbody silhouette, a hippie and satchel. Liquid gloss, a soft patent lightweight fabric with diamond quilting and chain straps, brought additional excitement and vibrant color to the collection. We also added some newness to Chelsea, only introduced last fall with a classic tote featuring chain details at compelling price points.

Right before Thanksgiving, we refreshed our offering with updates to Madison and Kristin, along with a new drawstring tote in Chelsea, giving her additional reasons to revisit and repurchase during the key holiday season. Our mid-December significant Madison refresh also delivered newness closer to our peak selling period. Of course, we also had a comprehensive assortment of great gifts from iPad covers to wristlets and a wide range of items under $100. Our holiday product was supported by a comprehensive marketing plan, which began in mid-November featuring a powerful gifting message. The emphasis of our marketing was product and item-driven across our core categories and other gifting ideas. Our campaign spanned Coach.com, social enriched media advertising and compelling print and in-store marketing. Our addition of digital media to select high-profile store windows was a new element to our in-store marketing and was very well-received.

Looking forward, we're excited about our spring product initiatives as well. Just last week, we launched an updated Poppy collection with a fresh point of view with several new silhouettes, including the hippie, hobo and the Poppy Willis, which harkens back to the classic Willis bag of the 90's. We also introduced a fresh spring palette in Madison. In late February, the focus will be on Kristin, with four new styles across multiple fabrications and a beautiful new woven leather concept in soft, feminine colors. 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 product assortment was also supported by our in-store and direct marketing campaigns.

I'd also like to take this opportunity to provide an update on our digital media strategy and the benefits that we're seeing from it. As you note from previous calls, our digital objective in North America is to drive traffic and build brand awareness, while maximizing e-commerce opportunities. Some of our key online initiatives are -- first, mobile commerce. We launched our mobile commerce platform this past May and almost 20% of our web traffic came through a mobile device this holiday season. Second, social media -- with over 2.7 million Coach fans on Facebook, this social platform continues to evolve in its contribution to our overall brand message and success. Facebook provides us with additional marketing and potential revenue opportunities as we continue to learn how to engage with our customer in this space.

Third, factory online -- as mentioned in our last call in the US, we introduced our invitation-only flash sales site, targeted only towards our most loyal factory-exclusive consumers. This provides them with the convenience of shopping online, while enjoying the same product and value as found in our stores. We're quite pleased with the results of this highly profitable initiative. While this is a snapshot of our North American retail digital initiatives, clearly the internet will continue to increase in importance globally as both a marketing and communication vehicle and a sales driver. We now have a web presence in 20 countries, three of which are commerce-enabled, and we welcomed several million visitors outside of North America in the quarter.

In China, we're continuing to develop our digital programs and capabilities, which include a planned launch of e-commerce. Additionally, as we grow our international data base, we're programatically communicating with our digital consumers via e-mail and seeing engagement at the levels we enjoy here in the US. We believe in digital and are clearly recognizing the benefits of this growth vehicle. Our intent is to drive further innovation in this channel, both in the near and long-term.

As we mentioned in our press release, we're also really excited about the results we're achieving in our Men's business, which is on track to double again in fiscal year '12 to over $400 million globally. We're experiencing success in Men's across all concepts and store types, including dedicated stores, shop-in shops, dual gender locations and expanded assortments in existing stores and across all geographies and channels. In North America, we see Men's as both a way to drive productivity in existing stores and a substantial new distribution opportunity. We believe that in this fragmented category, where there is no dominant player, Coach has the opportunity to become the market leader. Our approach to growing Men's is to create great product, present it in exciting formats combined with the rigor that we use to stand our consumer and his buying preferences. We also believe, based on our surveys, that beyond simply taking share, we will actually grow the Men's category in North America.

In summary, we're excited with the continued progress we've made in improving productivity and our Men's initiative. We're feeling great about the spring season, given the current sales trends in our retail businesses. With that, I'll turn it back to Lew for a discussion of our strategies and opportunities for growth. Lew?

Thanks, Mike. As most of you know, we have talked to three overarching growth strategies. First, building our Women's business in the North America market, second, leveraging the global opportunity, and third, tapping into the large and growing Men's accessory category. A fourth has emerged as a global business driver and was also mentioned by Mike, and that is leveraging the growing power of the digital world. Coach's digital initiatives are an important and effective complementary strategy to our distribution growth as we continue to grow our store base in North America and worldwide. We expect that our square footage globally and across all channels will increase about 14% this year compared to 9% last year.

Starting in North America, we will open about 40 new stores this year, including the 21 opened in the first half. The FY '12 openings include about 15 full price and 25 factory outlets, with about 0.5 being dedicated Men's locations. In total, we expect North American square footage growth of about 10% to 11% this year, driven by Men's.

Turning to China, this year, we're accelerating new store openings with about 30 locations planned or at least an additional 15 for the balance of the fiscal year, with the vast majority on the mainland. Virtually all of these openings will be dual gender stores due to the size of the Men's opportunity. Given the continued strength we're experiencing in China, we remain confident that we will achieve at least $300 million in sales during the current fiscal year. In Japan, spending has remained stable after the first few quarters of volatility in the post-earthquake and tsunami period. Our focus continues to be on gaining market share, notably in the Men's business.

During FY '12, we expect to open about 15 net new locations in Japan, or an additional seven net new stores for the balance of the year, nearly all of them dedicated Men's locations. In total, we anticipate that net square footage growth in Japan will increase by about 10% this year compared to 3% in FY '11. Consistent with our strategy of directly operating select Asian markets, at the beginning of this month, we successfully transitioned our domestic retail businesses in Taiwan, which has about 25 locations and generates about $50 million of annual sales of retail to Coach's direct control. This follows our acquisition of the Singapore business last summer and will be followed by the acquisition of the Malaysia domestic retail operation next July. It's important to note that these acquisitions allow us to leverage the investment we've already made in the region, utilizing the infrastructure created over the last few years, including our Asia shared services center and the Asian distribution center. In addition, we find these stores experience a significant improvement in productivity when they become directly managed, as we control the total brand experience.

Outside of our directly-operated markets, we continue to have thriving distributor-run businesses in other countries. During FY '12, we expect to open about 35 net new international wholesale locations, expanding to new markets including Brazil, Vietnam and Kuwait. We're also pleased to announce other distribution agreements for Latin America, initially including Colombia, Venezuela, Panama, and Chile, and to Indonesia with the first stores opening next year.

Touching on Europe, we are building a foundation for long-term growth. First in the UK, we are beginning to build our multi-channel model. To date, we have three stores, all opened in the last 12 months, including a mall store in Westfield, our new Bond Street flagship and a factory store. We will be opening our second London flagship on Regent Street this spring. Importantly, we are gaining traction in this market as the UK consumer is embracing Coach and the majority of our business is coming from mobile customers. And second, in France, where we are [French Hong] our key boulevard Haussman Men's and Women's shop-in shops are performing well with the global tourists as we continue to grow our brand awareness with the Parisian shopper.

In closing, we're confident that our four overarching growth strategies will continue to drive our business at a double-digit pace. At this time, I would like to turn it over to Jane Nielsen, our CFO, for further details on our financials. Jane?

Thanks, Lew. Lew and Mike have been taking you through the highlights and strategies. Let me now take you through some of the important financials of our second quarter results.

As we mentioned, our quarterly revenues rose 15%. Our direct-to-consumer, which represents over 85% of our business, was up 17% and our indirect business was even with last year, due to shipment timing and to international wholesale accounts. Earnings per share for the quarter increased 18% to $1.18 as compared to $1 in the year-ago period, as net income rose to $347 million from $303 million. On a non-GAAP basis, our operating income totaled $521 million in the second quarter; up 15% from $453 million in the same period last year. Operating margin in the quarter was 36% compared to 35.9% in the year-ago period. In the second quarter, gross profit rose 14% to $1.05 billion, up from $915 million a year ago and gross margin rate remained strong at 72.2% compared to 72.4% the prior year. As expected, we showed a continued sequential improvement in the year-over-year variance.

Moving to expenses -- we were pleased that we were able to gain modest leverage in the holiday quarter, which is our toughest quarter to do so. Specifically, on a non-GAAP basis, SG&A expenses as a percentage of sales improved from the prior year levels in the second quarter and represented 36.2% of sales versus 36.5%. As mentioned in our press release, during the second quarter, we recorded certain items. They included the one-time effect of a re-evaluation of deferred tax balances due to a change in the Japanese corporate tax laws and the favorable completion of a multi-year pricing agreement with Japan. Taken together, they yielded a substantially lower tax rate of 30.4% for the quarter, which decreased our tax provision by $12 million. As a result, we made a contribution of $20 million to the Coach Foundation, increasing SG&A expenses by that amount and precisely offsetting the effect of the one-time tax benefit to net income and earnings per share.

Moving on to the balance sheet, inventories at quarter-end were $429 million, up 17% from the end of last year's Q2 and consistent with our sales growth. This inventory level allows us to support 31 net new North American stores, 13 net new locations in Coach Japan and 23 additional Coach China stores in the year-ago period, as well as the acquired stores in Singapore and Taiwan and our Men's initiatives. Further, it will support strong underlying business trends enabling us to maximize sales this spring. Cash and short-term investments stood at $1.1 billion as compared to $940 million a year ago, despite repurchases of over $900 million worth of Coach common stock in the interim 12 months. During the second quarter, we repurchased and retired 4.8 million shares of our common stock at an average cost of $62.48, spending a total of $300 million, taking our first half total to about $360 million.

At the end of the quarter, about $600 million remained on our current repurchase authorization. Net cash from operating opportunities and activities in the second quarter was $604 million compared to $408 million last year during Q2. Free cash flow in the second quarter was an inflow of $555 million versus $382 million in the same period last year. Our CapEx spending was $39 million versus $26 million in the same quarter a year ago. Consistent with our previous expectations and reflective of our global growth initiatives, CapEx for this year will be in the area of $200 million, driven primarily by the opening of new stores across all geographies and investments in technology necessary to enable our expansion. We were very pleased to once again report these strong financial results and as Lew and Mike said, we're well-positioned for the rest of the fiscal year.

To elaborate, first, we expect to achieve double-digit sales growth with earnings per share growth ahead of the top line. Our sales will be driven, in part, by at least mid-single digit comp sales in North America for the second half of the fiscal year. Second, as we've said before, we expect our second half gross margin to improve over last year as we anniversary increased sourcing costs. Therefore, we anticipate that gross margin for FY '12 will be essentially level with prior year. Third, on SG&A, we expect our developed businesses to continue to deliver leverage while we 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 two years at about 32%. And fifth, our tax rate is still likely to be in the area of 33% for the remainder of the year.

Before we open it up for Q&A, I want to echo Lew's earlier words. This was an excellent quarter for Coach. Clearly, our holiday results bode well for the future and we're confident that we will continue to deliver very strong sales and earnings gains over the balance of the fiscal year and beyond. Thank you for participating in our conference call today and now, Lew, Mike, Andrea, and I, joined by Jerry Stritzke and Victor Luis will take some questions, which will be followed by a brief comment from Lew.

(Operator Instructions) Bob Drbul, Barclays.

The question I have is, on the Men's, you talked about a lot of the growth and a lot of drivers for the growth. You talk about the $400 million for FY '12. Can you update us on what you think the long-term opportunity is for that business and the timing of it?

Sure. The first one that comes to mind is it's boundless. But to actually try to dimensionalize it, as Mike said we're experiencing success wherever we're offering a comprehensive assortment of Men's. Again, across all geographies and all channels and it's extremely exciting for us. Second, Men's spending globally represents about 15% of the global luxury spend. For Coach, with Men's sales expected at $400 million, that will represent about 8% of our overall sales for this fiscal year. We believe that we can very comfortably get to our rightful share of at least 15% of a larger business over the next few years. We think $1 billion is well within reach over the next three to five years and that's our internal mantra.

Great. Thanks, Lew. And the other question I have, just a quick follow-up, did you guys give ticket and traffic for North American comps?

Ticket in North America, from a comp standpoint, was up slightly, and traffic, as we said, was very consistent with prior quarters. Overall, traffic was greater when you factor in across all channels. Our store traffic in factory and full-priced stores sequentially improved from Q1, which was a benefit to us. However, was still down in full price and up in factory.

Thanks, Mike. Thanks, Lew. Congratulations.

Neely Tamminga, Piper Jaffray.

Let me add my congratulations to the whole team as well. I also have a question, a very specific question, on your mantra on your Men's business, Lew and Mike Tucci. Maybe if you guys could give us some explanation in terms of the rollout on the North American side. It's been our understanding that you guys are actually underpenetrated within the North American retail footprint. Just wondering, more specifically, what the game plan is maybe as we head into Father's Day this year in terms getting more product in the stores?

Sure. There are a lot of components to that and I think what we plan to do, with the investor community, is share a very detailed global view of our approach to Men's expansion for FY '13, but let me give you some grounding and headlines on what we're doing. First, we're very pleased with the results of our freestanding Men's stores. There are a handful of them out there. They are great learning platforms for us and the performance in those stores is excellent. The larger opportunity that we see is actually expanding our Men's business in existing retail locations through shop-in shops, what we call concept shops, and, in fact, selling more Men's products in all stores globally. We're doing this through increased presentations, through actually selling our product via our website enabled in-store through laptops.

There's a very broad opportunity for us to sell more product in Men's. Where I see us going in Father's Day is several new Men's shops, which will be installed this spring, the opening of our Pentagon dual gender location, which will happen in May, that's a Women's and Men's side-by-side location, and as we enter FY '13, a significant rollout of Men's shops in existing retail locations. Where we see the growth is driving productivity in our existing stores, taking advantage of the Men's momentum that we're seeing through CBSR, our coach by special request program, as well as growing freestanding Men's stores. Victor, if you want to add a little bit on the global side, what we're doing in Asia?

Sure. Lew had mentioned, in his remarks, that the Men's opportunity globally is approximately 15% of the global premium handbag and accessories market, which is at about $28 billion. The Asia opportunity today is about 25% of a $12 billion market. Of that, Japan is approximately $4.4 billion, China at $3.2 billion, including Hong Kong, Macau, including duty-free, and then the rest in the rest of Asia. Japan, the Men's penetration is about 25% and we're still very much in a rollout phase. Today, we have 14 dedicated Men's locations, 7 in full price, 7 in factory. As many of you know, most of our distribution in Japan is within department stores where we are on the Women's handbag floor and there, the opportunity would be to increase distribution with the Men's floors, which we are now commencing and initial results have been quite promising.

China is really a massive opportunity for us. When we look at mainland China, for many of our competitor brands, Men's reminds 50% or more of their sales. And there, of our 65 mainland China locations today, 28 of them are dual-gender locations where we have basically stand-alone Men's presences. Of the 30 locations we are opening this fiscal year, practically all of them will be dual-gender locations. We're starting, with very early stages, as basically a global Men's and Women's brand and we're seeing truly terrific results with very early stages 25% to 30% penetrations for Men's in these locations at a point where we really still don't have an awareness as a Men's brand. As many of you know, in the past, we've discussed our unaided brand awareness at 16%, up from 8% last year and we're really just starting in the Men's space.

To achieve these penetrations this early is truly exciting and bodes well for the future. And in the rest of Asia, we're still at our very early stages. We have, of course, as Lew announced, just taken back our Singapore business and Taiwan only a few weeks ago. And there we are commencing the Men's rollout, as well, and expect to see similar penetrations to what we're seeing in China in the medium term in the next two to three years.

Thank you, Victor.

Thank you, Victor. Thank you, Mike.

David Schick, Stifel Nicolaus.

Congratulations.

Thank you.

And let's congratulate you by asking you the third question in a row about Men's. The growth is so dynamic and I'm sure we all have these questions because it sounds like we're going to be talking about it for a long time. May be some other metrics we could get into -- gift versus self purchase, is it bringing in a new customer or is it a customer making different trip? Is there a different proportion of gift versus self purchase for the Men's, as you're seeing it? This is just shorter term, but the comp versus distribution growth just in the number you're talking about, the $400 million? Lastly, just anything you'd tell us about ticket just to round out our view a little bit more, again, about the characteristics of the Men's business? Thanks.

Sure. First, gift versus purchase it varies a lot by market and by channel. At present, I would say in North America, a slightly greater proportion of Men's is for gifts than self purchase. We have estimate gifting for women is about 20% of our sales. I would estimate men's, it might be 30%. It's obviously a great marketing opportunity for us and you will see us distorting a good portion of our marketing globally, both on the internet and in traditional media, as well as social networking, towards men to both build awareness and to encourage gifting.

In terms of existing consumers versus new consumers, we are, in North America, attracting a higher rate of new customers into the franchise through Men's than we are Women's, but that should be expected because the Women's business is, of course, extremely developed with growth opportunities ahead, but in the Men's, it's early days. In terms of distribution growth versus same-store sales growth, I'm being cautioned not to provide much detail. What I would say is that we are achieving significant double-digit same-store growth in the Men's area.

Okay, let me come in on this one and what we understand is that the concept is proven. We have enough exposure in the marketplace and enough experience with consumers to know that the concept is a very proven concept and the category is very real. We need a little more time to very tactically break out the opportunity from a distribution standpoint, our digital opportunity with our Men's website, our global opportunity in terms of store footprint, both the existing opportunity in large format flagship stores at Men's, the new opportunity to develop Men's and Women's dual-gender stores and how we can provide a Men's presence in all stores where we trade that are currently Women's stores is something we need to sort out. We need to really work through the entire fleet in full price; in North America alone, that's 350 stores. We're doing that work today and we have traction in each of the formats which gives us a path for growth.

On the product side, what's interesting is that as we expand this category it's not all about bags. Bags is still the anchor, but we're seeing very strong response to accessories, to lifestyle categories, to emerging categories like footwear, outerwear, small travel pieces. We believe this concept hangs very well on its own and drives very strong productivity metrics comparable to our Women's business in terms of ticket size and, from a margin structure, very comparable as well.

You've probably heard more about Men's just now than you wanted to.

No. Very helpful, thank you.

Christine Chen, Needham & Company.

Congratulations on another good quarter.

Thanks, Christine.

Wanted to ask, in Women's, handbags $400 and up -- was curious if you were able to increase the penetration for the holiday season? I'm wondering what your outlook is for that part of the handbag business going forward for the rest of the year? Thank you.

Sure. Our overall handbag performance was actually very strong. Comps were positive. We saw a growth there. Our mix in handbags, average unit retails was about flat for the quarter and that was very intentional around our gifting strategy and a mix strategy, where some of our core price points at $298 and $198 were extremely successful. The handbag performance at over $400 is actually down from prior year, although our outlook going forward would suggest that, that is still a growth opportunity for us.

Okay. Great. Thank you and good luck.

Barbara Wyckoff, CLSA.

I'd like to have some more color on China. What are they selling versus the other markets? You talked about Men's and Women's, which is fine. How many stores do you think you can have in China in the next three to five years? Then is there a chance that travel retail would be a candidate for you to take in-house?

Victor?

Sure. First, maybe we could talk a little bit about the distribution. We are, as Lew mentioned in his opening remarks today, at 80 doors with the vast majority of those 65 on the mainland. When we look at the opportunity, it is truly boundless. Barbara, you know well the socio-demographic, socioeconomics of the market, 1.3 billion population, of which 50% is urban and continuing to urbanize; already 120 cities with a population of 1 million or more. We are today only in 28 of those cities and with our broad collection, from a style prospective, as well as our broad price points, we're able to much more easily than traditional luxury brands, of course, to go into these second and third-tier cities where we're seeing some success.

Of course, we are also seeing a rapidly growing middle class and we're not seeing many limitations from a distribution perspective. When we start looking at Coach's strategy towards multi-channel rollouts, China really fits nicely. We have approximately 600 department store doors today in China, of which already over 110, 120 are doing incredibly well in the imported luxury cosmetic space, which serves as a barometer for us. Malls are continuing to develop nicely, both in the full price, as well now, in increasing rollouts of factory outlet malls, of course, which we know well. Looking at the rollout for this year, as we've announced, 30 doors and we see us continuing at that pace for the foreseeable future. I think the second question was on product and there, we really don't see a tremendous difference, globally, quite frankly, in terms of our collections; Madison, Poppy, Kristin are truly global collections for us.

The difference and what truly differentiates Coach from many of our competitors is that we have a group of very talented merchants in each of our markets who are supported by a truly superb consumer insights team. We're constantly listening to our consumers and that allows us to tweak our collections, whether it be from color, size, shape, style and therefore maximize the opportunity in each of our markets. The difference, as I touched to earlier, of course, in China, is really the Men's opportunity. And we're starting out from the beginning, in these very early stages, as a dual-gender brand, whereas we had been three, four years earlier opening 1,000 to 1,500 square feet locations that were basically Women's only locations. Today we're targeting 2,000 to 2,500 square feet on average location with a Women's and Men's in most cases and getting truly terrific results and seeing our product resonate, even though we still have a very low are awareness level at these early days.

Touching on duty-free and specifically, we're looking at two parts of the travel retail piece. Of course, for China, the big opportunity is outside of China, approximately 50% of Chinese luxury sales occur outside of China. We're very active in developing our distribution in Asia and we're seeing tremendous benefits from that, of course, within China itself and Hong Kong and Macau, and beginning to see some of that in other markets as well. Within China domestically, at the airports there will be opportunities both in the duty-paid as well as in the duty-free spaces as airport authorities begin to put the infrastructure in place. It's something we're investigating. We haven't made a move in that space at the moment because there's so much opportunity in the urban areas themselves that we're going after, but it is something we're paying attention to.

Great. Can I just ask one more question about the China outlets, how many malls are there now? How many are you in?

We, today, are in nine malls, including Hong Kong and Macau, seven in mainland China. Only a few months ago, I attended a conference with global factory outlet developers in the city of Shuzo, where there were talk of 100 or so outlets being developed in the next 5 to 10 years. We expect the channel to develop rather quickly and to be a substantial opportunity.

Right, thanks so much.

(Operator Instructions) Randy Konik, Jefferies.

First, Lew, how do you think about the US consumer for 2012 versus 2011, what's your thoughts there? Lew or Jane, if we think about the various moving pieces of increasing China as a percent of sales, increasing Men's as a percent of sales and then taking back these various Asian geographies, how do we think about the long-term operating structure for the Company? You've been very consistent in the low 30%'s for the last couple of years. How can we think about where those operating margins end up over the next few years? Thanks.

First, Randy, as I mentioned, consumer sentiment has really improved over the last 90 days. Actually, 60% of consumers now in North America believe the economy is stable or improving and that's up from 48% just three months ago. It's also evident that consumers are beginning to borrow more and save somewhat less. Savings rates, as you know, are down to 3.5% from 5% and year on year, non-mortgage borrowing is increasing, which says that the consumer's more encouraged than at any point than they have been in the last 6 to 12 months. So we feel, barring any unexpected event, that consumer sentiment will continue to be positive.

Obviously, the recovery is very uneven while unemployment is still at a terribly high rate of 8.5%. Unemployment for college graduates over the age of 25, who is our primary consumer, is only in the mid-4% range. We're benefiting from our positioning, which is to offer excellent product at acceptable and affordable price points and our very diversified consumer base is responding well. Guardedly optimistic.

I think as we look at the components of operating leverage, I think that the net on long-term positives we have are our growing international business driving overall operating margin as it continues to grow and achieve scale. Our Men's business, as it grows internationally, achieves scale will also be a positive operating driver and will continue to drive the productivity initiatives and efficiency initiatives that we have delivered over time to keep our high operating profit and continue to invest in growth. As you know, as we've talked before, as we take over markets like Taiwan, Singapore and Malaysia, there is the initial few quarters as we purchase the inventory at wholesale rates and we cadence our flow of merchandising and take over the store operations. Over time, those become very good businesses for us, but we have the first few quarters of transition before their operating margin stabilizes and becomes a net benefit for us.

Is there just a number we could look towards? Is there like a 35 number or anything like that you would want us to look towards?

Randy, we don't have an aspirational goal. You know us well. We drive to build a lasting franchise and give our shareholders an excellent return. Obviously, we're working in all areas to maximize operating income consistent with building a lasting franchise.

Fair enough. Thanks, guys.

Brian Tunick with JPMorgan.

My congrats to everyone as well. Question's a little on the gross margins here, it still sounds like we're hearing about double-digit labor cost increase in China. Just trying to understand where is your gross margin improvement coming from? If you can just give us a little more color there. Is it channel mix? Is it all relief and sourcing and how that's happening? On the new headquarters that we've been hearing about, can you maybe talk about any cash flow implications from that and does that change or your commitment towards continued share repurchases or dividends? Maybe just talk about the cash flow and your minimal cash balance requirements?

Sure. Let me ask Jerry Stritzke to jump in here.

On the sourcing opportunities, we're very pleased with the job that our team has really done trying to mitigate some of those challenges and it's hard work. We've done a lot of work trying to get raw material sourcing in place to help offset, working on where we're doing our manufacturing and how we're doing it, but it is still a pressure we have to cope with that pushes the wrong way and creates some pressure on our margin. We're fortunate in that, as our international business does grow, particularly in Asia, that's a plus, but we have puts and takes, as we expand to other markets, we go the other direction. We are really striving to lose points, to hold the ground, but there are puts and takes and we fight that battle every other time. We've talked, I think before, about our counter-sourcing activities in Vietnam, India, we're actually continuing to expand that and aggressively look at that. We've had some great successes that have worked to our benefit and I think it's a reflection of the talent we have off-shore, which we think is unique to Coach, to really build manufacturing capabilities and our hands-on activity to do that in a way that ensures that we continue to deliver high-quality product.

And in the next quarter, too, as is our practice, we'll come back and talk to you about our next year's outlook on gross margins.

Okay. And how about the headquarters and the cash flow thoughts?

Yes, I think what you've seen in our Q2 repurchase activity, we remain committed to two things -- one is investing in our business to continue to drive long-term growth in returns and the second is we remain committed to returning capital to shareholders. We're doing that through a combination of dividends, which you've seen increase over time since our initiation and through stock repurchases. And I don't anticipate that our building would stop that in any meaningful way.

Thank you, Jane.

Thank you all for joining us on our conference call today. It is now 9.30 am. The market's about to open. As is our tradition, I'd like to turn it back to Lew for a few closing words. Lew?

Thank you, Andrea. Obviously, a lot of good discussion around Men's, China, our stabilizing gross margins, which I think is a testimony to the nimbleness of our team. The digital world is extremely powerful and is now, for us, an overarching strategy. We do feel good about where we are and we feel excited about our prospects. Have a good day, everybody. Thank you.

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