掛毯 (TPR) 2013 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 would like to turn the call over to Senior Vice President of Investor Relations and Corporate Communications at Coach, Miss Andrea Shaw Resnick. You may begin.

Thank you, Wendy. Good morning and thanks 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, North American Group President, is also joining us for a holiday review.

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 and 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 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 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 2013 results, and will also discuss our programs on global -- progress on global initiatives. Mike Tucci will review our key programs for the holiday season. Jane Nielsen will conclude with details on financial and operational highlights for the quarter. Following that we will hold a Q&A session, where we will be joined by Victor Luis, International Group President; and Jerry Stritzke, our President and Chief Operating Officer. This Q&A session will end shortly before 9.30 a.m. We will then conclude with some brief summary comments. I'd now like to introduce Lew Frankfort, Coach's Chairman and CEO.

Good morning. Thanks, Andrea, and welcome, everyone. As noted in our press release, we were pleased with the overall progress we made against our strategic initiatives, aggressively growing our international business, becoming a market leader in the men's accessories category globally, and harnessing the power of the digital world. In aggregate, we posted modest, though highly profitable, growth. However, we were clearly disappointed in our North American performance, notably in women's, where results were below expectations. There were two over-arching issues which impacted results. First was the muted consumer environment in the US, with a fiscal cliff uncertainty weighing on shoppers, and the slow recovery from Hurricane Sandy in the tri-state area. Second was intensified competition and heightened promotional activity in the women's bag and accessory category, especially in the weeks leading up to Christmas. Importantly, we maintained our pricing strategies, protecting our brand proposition.

While we will get into further detail about current conditions and the outlook for our business shortly, along with specific strategies under way to address the North American market, I did want to take the time to review our quarter first. Some key financials were -- first, net sales totaled $1.5 billion, versus $1.45 billion a year ago, an increase of 4%. Currency negatively impacted total sales by about 1%. Second, earnings per share totaled $1.23, up 5% from prior year. Third, North American sales increased 1% to $1.08 billion, from $1.07 billion last year, with direct sales up 2% on a 2% comparable-store sales decline. Fourth, international sales increased 12% to $411 million, from $368 million last year, driven in part by a 40% gain in sales in China, with a continuation of double-digit comps.

Looking first at global distribution, during the quarter we opened two retail locations, including the first Company-operated concession in North America, at Macy's Herald Square, as well as 15 factory stores, including four men's factory stores. This brought the total to 356 retail stores and 189 factory stores in North America at the end of the period. Moving on to China, during the quarter we opened 13 new locations on the mainland, bringing the total number to 117 locations, including 99 on the mainland in 40 cities; and we just celebrated our 100th store opening last week. In the wake of our Asian distributor acquisitions over the last 18 months, we now directly operate 92 locations in Asia, comprised of seven in Singapore, 10 in Malaysia, 27 in Taiwan, and 48 in Korea. We did not have any openings in these markets during the last quarter; and in Japan, five net stores were opened. At quarter end there were 193 total locations in Japan, with 24 stand-alone, full-price stores, including eight flagships, 122 shop-in-shops, 40 factory stores, and seven distributor-operated wholesale locations.

Moving on to sales and productivity and starting in North America, our total revenues in North America rose 1% for the quarter, with our directly operated businesses up 2% on the 2% comparable-store sales decline. Overall trends in both retail and outlet malls in the US softened over the period, impacted by macro concerns and Hurricane Sandy. For Coach, traffic trends in-store also weakened while conversion and average transaction size were similar to prior year. Our Internet business remains strong, driven by significant traffic gains continuing to contribute to overall comps. In department stores, sales trends at POS were modestly below prior year, while shipments into this channel declined. Overall, we estimate that growth in the addressable women's North American handbag and accessory category remained strong in the holiday quarter, rising about 10%.

Moving on, international sales, which today represents nearly one-third of Coach total sales, rose 12% in the second quarter. As mentioned, China sales rose about 40% from the prior year. This sales growth was fueled by distribution and double-digit same-store sales growth. Clearly, the Chinese consumer has embraced Coach, as evidenced by these results, as well as the increasing contribution of the Chinese tourist to our global sales, and the extremely high re-purchase intent among existing consumers. Our other Asia direct businesses outside of China and Japan -- Singapore, Taiwan, Malaysia and Korea -- also posted strong aggregate growth in the quarter. In part, these countries benefited from the retail step-up from prior year, except for Singapore, which was purchased at the beginning of last fiscal year. In addition, their combined POS sales also rose at a double-digit rate. In Japan, we posted a 2% decrease in constant currency, while sales in dollars were down 7% from prior year, reflecting the weaker yen.

Finally, I would like to touch on our international wholesale business, where we experienced a modest decline in shipments, but retail sales gains were strong, primarily driven by distribution expansion. While Jane will get into more detail on our financials, and I will discuss our outlook in some detail shortly, I wanted to give you this recap. Mike Tucci has joined us today to discuss our North American retail business and some of our initiatives going forward. Mike?

Thanks Lew, and good morning. Lew has just given you a recap of the quarter, noting the traffic challenges in North America continued through the season in both retail and factory malls in general; and for us specifically, impacting our in-store business. Our online business performance remains strong, and the success of men's was a bright spot as well.

First, let me start with full-price women's handbags. Legacy and Madison were our lead collections for holiday, with new silhouettes introduced throughout the quarter. Penetrations for these collections matched our internal expectations, but in the context of a weaker-than-expected business, handbag comp declined. We did, however, maintain average unit retails in handbag, and overall transaction size rose in our full-price channel. There were a number of key take-aways during the quarter. First, letter handbags continue to be strong, while logo and mixed materials under-performed. We saw strength in the over-$400 handbag assortment, which validates the larger opportunity at higher-price points. Tech accessories were very successful, including our new iPhone covers, which we'll be expanding going forward.

Looking ahead, we are excited about our spring product initiatives, including updates in January in Madison, such as the Kara Carryall, as well as newness in Legacy, with perforated leather novelty offered in our key silhouettes, and new style, the MiniTanner. We also launched our newest fragrance, Love, and a Mini Boyfriend watch, which is a smaller size of our best-selling Boyfriend collection, and already being embraced by consumers. In February, we introduced the new Legacy Courtney Hobo and Romy Flat, both styles featuring our iconic turn-lock closure.

In March, we launched the powerful new Saffiano Tote group. Our color palette is on trend for the season, with mint, robin's egg blue, lemon, bright coral, and new neutrals. As of last Friday, all of our stores have transitioned fully to spring. One product opportunity that we're particularly excited about is footwear. In March, we'll be re-launching shoes in about 170 retail stores, featuring great ballet flats, fashion wedges and heels, and on-trend sneakers. In a select number of flagship stores, we will begin to install shoe salons to showcase the New World of Coach footwear.

Shifting to e-commerce, online business was strong for holiday, with sales and traffic growing at a double-digit pace through Coach.com and EFS, our factory site. In addition, we are seeing an increasing percentage of sales and traffic coming from mobile. Clearly, this trend is representative of our consumer shopping behaviors in this growing, digitally enabled environment, and is consistent with our increased emphasis on digital, both through our own websites and social media. Our intent is to rapidly drive further innovation in this channel. We're also really excited about the results we're achieving in our men's business, which is on track to grow about 50% globally this year to over $600 million. We're experiencing success in men's across all concepts and store types, and across all geographies and channels. In North America, men's is driving productivity in existing stores, and also represents a substantial new distribution opportunity.

In our press release today, Lew noted that we are implementing a number of strategies and actions to enhance and present a broader lifestyle expression of Coach to our consumers. As part of this brand-building initiative, we've elevated our store environments in both full price and factory stores, telling a more complete story. We've experienced excellent customer response to new retail concepts, such as our remodeled 625 North Michigan Avenue flagship store in Chicago; our dual-gender, side-by-side concept store in Pentagon City Center; and at our first North American concessions shop at Macy's Herald Square here in New York, which provides an elevated environment to showcase our products and enhance the Coach experience within a department store. We've also added some of these new visual merchandising elements to many of our retail stores and several key US department store doors, and will continue to push these enhancements to more stores over the balance of the fiscal year. Later this spring, we'll begin to leverage mobile POS, which will allow us to remove cash ramps and re-claim selling space for lifestyle categories, with the goal of driving improved productivity in the same footprint.

On the factory side, our store elevation and enhancement strategy was piloted in our Riverhead and Woodbury common stores, and rolled out to about 25 of our highest-volume stores during November. We also opened our factory store of the future in Deer Park, Long Island, this quarter. It is the most advanced store format in terms of merchandising and store experience in this channel, and will be a laboratory for future store development.

In summary, we'll continue to drive our women's business through fashion innovation and broadening the expression of the brand through lifestyle categories. We'll leverage the opportunity in men's, and evolve our store and digital concepts to provide a brand-right shopping experience for our consumer, wherever she chooses to shop. With that, I'll turn it back to Lew for a discussion of our strategies and further opportunities for growth.

Thanks, Mike. Before we move on to our usual discussion of distribution and our financials, I want to recognize it's not business as usual. We have a long history of responding to change, and I want to go back to the future to discuss the specific actions we're taking to enhance and build out our Coach women's business here in North America and globally. For perspective, the Coach proposition is based on several differentiating elements. First, Coach is a distinctive brand which grew organically from the inherent and recognizable qualities of our products. Second, we are innovative and consumer-centric -- change and continuous improvement is built into our culture. Third, we have a multi-channel international distribution model with increasing global presence. Most importantly, fourth, we have a broad, diverse, and committed consumer base.

Over the last decade, we have built Coach into a leading international accessories company, with a loyal and highly engaged consumer franchise. Our customers recognize the Coach brand for its authenticity, innovation, and relevance. Building on these equities, we are now transforming Coach into a global lifestyle brand, anchored in accessories. We've been strengthening our teams to enhance and build out the Coach experience through product, retail environments, and integrated markets. This holistic approach will continue to add excitement and cachet to the Coach brand. We've demonstrated the ability to offer a lifestyle assortment including categories such as outerwear, shoes, jewelry, watches, eye wear, and fragrance.

This next evolution of the brand will encompass a full head-to-toe expression of the Coach woman, including a focused, ready-to-wear presentation to inspire our customers with a complete Coach point of view that is relevant to how she lives her life. This new design direction, while still grounded in accessories, covers all categories and price points, including a more elevated product platform. It's intended to imbue our products with much more of an emotional context. You'll see elements of this brand strategy implemented through the spring and fall, with a more complete expression of the New World of Coach next holiday. We plan to convey this new expression of the Coach brand by telling a complete story about the women and men who are our consumers. We will impact every way the brand touches the consumer, including in our stores, window, online, and marketing.

Now moving on to our distribution update. As our plans haven't changed materially from what we first outlined on the July earnings call and reiterated in October, I will be brief. We expect that our square footage globally and across all channels will increase about 10% or 11% during this fiscal year. In North America, we expect to open a few net new stores in the back half, in addition to the 22 net openings in the first half, taking us up about 25 net new stores for the year. In total, square footage will increase about 10% in FY '13.

Turning to international and starting with China, as you know, we expect to open about 30 new stores this year, or about another 10 in the second half, bringing the total to about 125 locations at the end of the year. All of these openings are planned to be dual-gender stores, due to the size of the men's opportunity. Total square footage in China is expected to grow about 35%, and we expect sales to total at least $400 million, driven by both distribution and comparable-location sales. We're also pleased to announce a new distribution channel for China, e-commerce, which went live in November, providing Chinese consumers a new way to engage with the Coach brand.

In terms of our other Asian direct markets, our primary focus this year is on driving productivity, rather than new distribution, as we continue to invest in training, merchandising, store environments, and systems, creating a brand-right experience. In Japan, where the overall consumer market remains challenging, we expect to open about 10 net new locations, most of them dedicated men's stores. In total, we expect that net square footage will increase by about 10% this year.

Finally, as you know, beyond our directly owned international businesses in Asia, we do have significant and growing distributor-run businesses in other countries. We're focusing on expanding through partners in four regions -- first in Europe, where we've begun to build a foundation for long-term growth. Second, Latin America, including Brazil, Venezuela, Columbia, Panama, Chile, and Peru. Third, other Asia-Pacific markets, such as Australia, Thailand, and Indonesia; and fourth, in the Middle East. These are in addition to the significant global travel retail opportunity that continues to exist for Coach as the brand's recognition continues to grow globally.

We have just reviewed our strategies to drive the next chapter of growth for Coach, based on our strong brand and business equities. We have significant runway ahead of us, both in North America, which remains a growing market, and of course, world-wide. At this time, I will turn it over to Jane Nielsen, our CFO, for further detail on our financials and investment plans. Jane?

Thanks, 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. Our quarterly revenues increased 4%, with North America up 1%, and international up 12%. As noted, the weakened yen reduced sales growth by about 1 point. Net income for the quarter totaled $353 million, up 2%, with earnings per diluted share of $1.23, up 5%. This compared to net income of $347 million, and earnings per diluted share of $1.18 in the prior year's second quarter. For the first half, net sales were $2.67 billion, up 7% from the $2.5 billion reported in the first six months of fiscal 2012. Net income totaled $574 million, up 2% from the $562 million reported a year ago, while earnings per share rose 5% to $2 from $1.90.

For the second quarter, our operating income totaled $527 million, 5% above the $501 million reported last year on a GAAP basis, while operating margin was 35% versus 34.6%. During this quarter, gross profit totaled $1.09 billion, versus $1.05 billion a year ago, an increase of 4%. The gross margin rate was 72.2%, even with prior year, constrained by just over 20 basis points by the higher cost of inventory re-purchased in our acquisitions. As expected, our expense ratio in Q2 totaled 37.2%, compared to the 37.6% reported in the year-ago quarter on a GAAP basis.

During the year-ago quarter, we recorded certain items which yielded a substantially lower tax rate, and decreased our provision for taxes by $12 million. As a result, we made charitable contributions which precisely offset the benefit of the tax settlement to the net income in earnings per share. Therefore, on a non-GAAP basis, excluding these items, operating income for the prior year's second quarter was $521 million, with a 36% operating margin, and the SG&A expense ration was 36.2%. Importantly, even including the impact of distributor acquisition costs, we were able to gain leverage to EPS. As a reminder, this year our most significant investment is accelerating our international growth through the acquisition of the domestic retail operations of our key Asian distributors, and the further development of infrastructure to support this global growth. We are also distorting our investments in the digital space to expand and deepen our engagement with consumers.

Moving on to the balance sheet, inventory levels at the end of the quarter were $494 million, 15% above the $429 million reported at the end of last year's Q2. Our inventory levels are driven by the re-purchase of inventory from our recently acquired market, and distinctive newness that will allow us to support distribution growth and to maximize sales this spring. Cash and short-term investments stood at $859 million, as compared with $1.09 billion a year ago. During the second quarter, we re-purchased and retired nearly 4 million shares of common stock, at an average cost of $56.63 per share, spending a total of $225 million and taking the six-month total to $400 million. At the end of the quarter, about $1.4 billion remained on our current re-purchase authorization.

Net cash from operating activities in the second quarter was $628 million, compared to $611 million last year during Q2. Free cash flow in the second quarter was an inflow of $567 million, versus $572 million in the same period last year. As a reminder, we shifted our dividend payment, paying it out in the second fiscal quarter, as compared to the third fiscal quarter last year. Our CapEx spending was $61 million, versus $39 million in the same quarter a year ago. We continue to expect the CapEx this year will be in the area of $250 million, primarily due to new store openings and expansions across all geographies, elevating our store environment, and investments in technology infrastructure necessary to enable global expansion.

Looking at the remainder of fiscal 2013, we're mindful of balancing the impact of the muted consumer environment and the challenging market dynamics in North America with our optimism around men's, and the strong international expansion opportunities for Coach. We also recognize the yen is likely to be an accelerating head wind over the remainder of the fiscal year. Therefore, our second half outlook has become more cautious.

First and most generally, we expect to achieve high single-digit second-half sales growth, with North America comps about even with prior year. Second, our second-half gross margin is planned to improve modestly on a year over year basis, as channel mix and our sourcing initiatives continue to contribute to profitability. On balance, we continue to expect gross margin to remain high, at about the 73% area for the year. Third, on SG&A, as we've noted previously, international acquisitions alone will cause our expenses to rise about 150 basis points for the year. Fourth, therefore taken together, we still expect an annual operating margin of about 31%, with the compression from prior year as a result of our investments. Notably, we expect our core businesses to continue to deliver leverage to EPS. Fifth, our tax rate is likely to be in the area of 33% for the year, as we continue to further refine our international tax strategy.

Over the last decade we've become a leading international accessories company. It's now time to build out a fuller expression of our brand, and to tell a more complete brand story to our consumers. Importantly, we have the financial strength and the brand vibrancy to capitalize on the opportunities ahead and drive profitable growth. I'd now like to open it up to Q&A.

Thank you.

(Operator Instructions)

Bob Drbul, Barclays.

Lew, I have two questions for you. The first one, in the new transformation strategy, is it a reaction to market conditions, and really, what do you hope to achieve with it?

Well, first, Bob, we have been working for the last two years on moving Coach from an accessories brand to a lifestyle brand. We started with a holistic approach to men's, which is running extremely strongly. We have moved forward with footwear. We've introduced new store prototypes. We have expanded our lifestyle categories with key items, particularly in outer wear, all of which demonstrate consumers' interest in Coach providing a more complete expression.

Based on the accumulation of variety of factors, including having the right team in place, success with our initiatives, business process change, and an articulation of who the Coach woman will be through our lenses, we have now galvanized on this initiative, and you will see this holiday a complete expression of the Coach brand. In essence, what we really want to do is enable the consumer to see Coach in a more complete emotional context, rather than seeing Coach as a great accessory, or a great bag, we want them to first think of Coach as a great brand, anchored in accessories, but through a lifestyle lens.

Great. I have a second question, Lew. Within the holiday season, was there a variation between full-price comps and the outlet stores in North America?

The short answer is no. There was a -- the trends were very consistent. Both bricks and mortar channels were impacted by lower traffic, and we did not promote our way to positive comps, which obviously we had the marketing levers to do, but wanted to protect the brand proposition.

Great. Thanks very much.

Kimberly Greenberger, Morgan Stanley.

I just had a follow up on Bob's question before I move on to my question. Lew, it sounds like you had negative traffic in both channels, and if you could just comment on the level of couponing and discounting? Obviously, we saw flat gross margin, so it looked to be relatively similar to last year, but I think there might have been some -- an incremental discount for example, at the factory channel in December. If you could just comment on that?

The promotional activities were consistent with our last year in factory. What impacted us was overall mall traffic, which was down during the month of December, in particular.

Okay, great, thanks. Did you quantify the impact of Sandy? Then, just any initiatives here in the first half of calendar 2013, your second half of your fiscal year, to move that comp from that negative 2% level back into the flat range, that would be helpful? Thanks so much.

Kimberly, just to answer your question -- one, on the factory stores, in the second quarter our factory store gross margin was flat to prior year, so we held our gross margin in our factory stores. Overall, Sandy was about 1 point of comp in North America in the second quarter. As we look at initiatives over the second half, we feel well-positioned for spring. We are overlapping our no-math in our factory channel in the coming quarters, and Mike also had some comments on comp.

Sure. Well first, of course we recognize that we battled through a tough holiday season. We were pushing the business, but we did limit some of our activities. Our approach to spring is really around very fresh inventory going into the spring season, a focus on women's handbags and accessories as an opportunity to strengthen, and within that, leveraging underlying strength in the leather category, and trying to offset the weakness that we're seeing in non-leather, mixed materials, and logo through further innovation, more fresh delivery there; and frankly, re-balancing our inventory to push more emphasis on leather, where we see growth. Another opportunity to improve comp performance is clearly taking advantage of the digital space and the men's opportunity, which continue to be very strong for us.

An area that we're studying and will take a little bit more time to understand is the impact of anniversarying the no-math strategy in factory. It literally started today last year. As we get deeper into the spring season, I think we have some opportunity to be creative there, to focus on merchandise opportunities within the factory channel against that backdrop. And then finally from a product standpoint, really focusing on shoes as a growth lever as a frequency opportunity, as an opportunity to engage with the consumer in an extremely important category where we've invested significantly in product innovation, presentation, and in-store efforts to improve that business.

Great. That's helpful color, thank you.

Brian Tunick, JPMC.

Two questions, if I could. The first one maybe some thoughts over the next couple of years how you think margins on footwear or outerwear or apparel, I guess, as you look to build into more of a lifestyle brand -- how do you think the margins on those new categories will impact the overall operating margins of the Company? The second question maybe shorter-term here, just your comments -- interesting, leather in over $400 price point was stronger, a weakness at logo -- do you think that's something economically hitting your more aspirational Coach shopper? Is it a fashion direction change? More competition? What you think's happening there that the logo business has been weaker? Thanks very much.

Why don't I take the second piece, and then I'll let Lew speak to the longer-term context of the business. This leather and mix issue that we're seeing in the business, I do think that the leather opportunity for us is very significant, and one that we have to be more aggressive with. Both from a pricing and innovation standpoint, there's a strong reception there. One interesting fact -- on the wholesale side we saw a very nice season at Bloomingdale's, and it was driven by leather. There's not a signature compare in that specific account, so the benefit there was much more significant to us. We need to build on that.

I do think that some of the competitive and pricing promotional activity that we saw in the quarter, particularly in December, was a heavy emphasis on promotional goods, logo goods in the marketplace. We did not take prices down there. We weren't pristine, but we did not cut price points there in the full-price channel on our signature business. We need to re-base that business. We need to move forward. I do think that there's clearly a macro trend, particularly globally, towards leather and away from the traditional logo business.

With regard to operating margins, we're not concerned that they will place any stress on them. First, we are in the footwear and lifestyle category today. Second, we will continue to be anchored in accessories. Third, many other factors impact our gross margin, including channel mix and geography. We are confident that we can maintain our operating margins as we broaden our expression.

Erika Maschmeyer, Robert W. Baird.

Could you talk a bit about the trends that you saw in terms of your shipments and POS at department stores? How did that trend throughout the quarter? In instances where you implemented the automated replenishment, did you see a lift there after implementing that? Any quantification would be helpful. Could you also talk a little bit more about the promotional environment? Was that worse within the department stores and your wholesale accounts versus specialty stores, or any color there would be great? Thanks.

Sure. Within the wholesale channel, we actually saw continued improvement in managing inventory, in that we were able to effectively control shipments in, which allowed us to run a cleaner business. We actually saw some organic margin improvement in the quarter in our wholesale business, which we were pleased with. We came out of the quarter cleaner. If you look in the market place today, we are fully transitioned there, and we're very clean. From a ship-in standpoint, we manage the business very tightly. We're able to stay close in terms of POS sales, and we feel like we're very well-positioned for spring. We continue to work on the opportunity around automatic replenishment, particularly with key foundational styles, and we will build on that. That's a learning opportunity for us. It's a consistency opportunity for us that we will manage, and we'll move forward.

Then on the promotional environment?

The promotional activity, I think, built throughout the quarter. Frankly, the surprise for us was the level of promotional activity that we saw within department stores in the month of December in the category. I think the category was very strong, and it became aggressive from a pricing standpoint within the December period.

That's helpful. Thanks so much, best of luck.

Evren Kopelman, Wells Fargo.

I wanted to ask more about the footwear opportunities, since that's the most near term. Like you said, you have been already in the footwear business, so can you give a little bit more color? Is it maybe how many more SKUs, or more space in the stores? When do you think some of this investment can begin to move the needle? Thanks.

Sure. I'll speak to it from a retail standpoint across digital and our retail stores. We actually have carved back the footwear business significantly in the last several quarters in preparation for re-launching footwear this spring. In addition, we've built a design team there. We've built a production capability there. The big movement there is to really move away from a more casual sneaker-oriented, price-driven business, to a more complete offer of footwear across end-use, wearing occasion, price points.

Now, I want to be very clear here. The full expression of footwear we will do in a select number of stores in a very pointed way, and we will learn and go to school. The best proxy I can give you for this is the way we approached our men's business, where we got very deep into it in a very concentrated way, impactful, and built it out from there. There is a broader opportunity in footwear in more stores, which you'll see this spring, but we believe that moving the needle in footwear will require a more significant investment in store presentation, inventory, marketing, and really working to re-space the business in our stores in terms of providing a better shopping and service environment. That will take more time. That's more of a long-term play.

The only thing I'd like to add, Mike, is that we see footwear as a real traffic driver. It's a very frequent purchase. It's emotional. As we present other worlds of footwear in our marketing, in our windows, and all consumer-facing environments, women will be surprised and we believe very pleased with the tiered and more -- we might say original assortment that reinforces not only our heritage, but also which builds on our heritage, but talks to today's fashion and usage.

Chloe Wayne, ISI Group.

It would really help us to think about the shift to a global lifestyle brand strategy. If you would give a couple sentences on how you define the Coach brand, how would you describe what the core Coach lifestyle represents, and what does your consumer research show about how your customer thinks about this? Thanks.

Let me begin by saying that we have a very loyal and committed franchise. I said earlier that our franchise is very broad and diverse, and obviously with 30% market share in the United States, we reach virtually every one of our targeted consumers. The way in which consumers see us is as a loved and trusted brand. They believe in the authenticity of Coach, the quality, the function, the durability of our product. As I said earlier, as a product-driven brand, the equities of our brand have really evolved from our product.

By migrating to a lifestyle brand, we are looking to build on these equities to create a greater emotional context for this consumer to see the entire Coach woman. The Coach woman is intelligent, self-assured, she has a -- she is looking for style and function. She's not looking for product to overwhelm her, but to complement her lifestyle. We are going to reflect that in the head-to-toe expressions, which already exist, we're just -- already exist in our key flagship stores. We're looking to just express it more fully.

Great. Thank you so much.

Dana Telsey, Telsey Advisory Group.

I wanted to ask a little bit more about as you see inventory levels, both in the full-price channel and the off-price channel, where do you see them as you look forward to the second half of the year? How do you see those evolving? Also, as you look at the international business, are you experiencing the same product trends overseas as what you're seeing here with logo and also with leather? Thank you.

Jane will take the first part and then Victor will discuss our international trends.

Dana, over time, we expect our inventory levels roughly to track with sales. There are some -- our acquisitions will take that level up as we build for newness, and we'll have a little more inventory on hand. But overall, our inventories are in a great position, and they generally track with sales.

Thank you.

On the international product trends, Mike touched it on earlier, in general they are global. We are seeing leather trending positively in all markets, and this is also true in China, where we have moved and are really ahead of the curve. There may be some slight nuance between a second- or third-tier city and a first-tier city, but in general that is a global trend. In those markets, especially again in China, we've also been very hard at work on advancing our transformation from just an accessories brand to a broader lifestyle brand. It's easier to do so in those markets where we don't have the history. There, the consumer is really reacting incredibly positively to our proposition. In our flagship stores during the past season, we have seen lifestyle categories reach penetrations of 20% to 25%. We're really excited about the changes underway, and the impact that will have on our global business, not just here in the US.

Lastly, how do you see the investment costs related to this transformation to a lifestyle brand?

Dana, the guidance that we've given for the year really encompasses the start of this journey on our transformation. As we look at the opportunities, both the sales impact and the profitability impact, we'll assess the investment levels as we move forward.

We have built in sufficient capital to address store renovations and new store concepts and improved different fixturing. In addition, we do have a very strong supply chain that is extremely efficient. We know how to bring product to market, and we don't see significant ramp-up costs. The key is talent. As we indicated before, we have strengthened our designer merchandising leadership, and we do believe that we now have the strength and team in place to be able to drive us to our potential.

Thank you.

Thank you. As a reminder, please limit yourself to one question. Antoine Belge, HSBC.

I've noticed that your new store seems to be contributing less to sales growth. I think if you look at the difference between your direct-to-consumer sales in North America, up 2% under comps, down 2% to a 4% contribution, I think. In the past, it was probably a higher number, so can you elaborate on that? Maybe just a follow-up on your guidance of flat comps in the remaining two quarters. I noticed also that the comparison base is quite different between Q3 -- I think you did 7% last year, and only 2% in Q4, so should we expect actually the flat number for it to be a negative number in Q3, followed by a -- I don't know, low single-digit number in Q4?

Yes, Antoine. Given the current market and variability, we're not giving specific quarterly guidance. We're comfortable with our guidance for the half of about even with prior year. We do see that the new square footage comes on not at full productivity as we build it out, but we are seeing -- we do see that our new stores are coming online and are continuing strong. But overall, we see some of the back-half stores coming later online.

The only thing I would add here, Jane, is that our stores are profitable from day one. Second, I'd like to just emphasize the point that you've made around rack, and they are not open for a full year. Third, most of the stores that we're opening are in secondary markets -- not all of course, but many -- and we have a lower cost structure. That's what makes them extremely profitable.

Thank you.

Laura Champine, Canaccord.

Lew, I'm sorry if I missed it, but what was the growth in the category in the US for handbags? I think this is the first time that you guys -- in a long while -- have admittedly given up share. Is that one new competitor, lots of new competitors? Are you kind of hitting a wall in terms of the market share potential for handbags? If you could comment on that, that would be great.

Sure. First, the category growth was 10%, more or less. We -- this is the first time that we have not held or grown faster than the category. As I said earlier, we have about a 30% market share. In other areas we have obviously have grown, and here we're talking North America women's. We are confident that the strategies that we have articulated are strategies that can enable us to resume growth, and maintain if not grow our category share in the years ahead.

Jennifer Davis, Lazard Capital Markets.

A couple clarifications. First, could you share your thought process behind your share re-purchase program? Do you purchase shares opportunistically, or how do you go about that? Then, Jane, could you remind us of the impact of the acquisition of your distributors -- the timing of the expenses associated with that, and how that flows each quarter through the year as you acquire a distributor? And then, sorry, on traffic, I believe mall traffic was down 4% in December. Do you guys have outlet mall traffic numbers that you could share with us? Then finally, my question -- Lew, I guess --

Pick one, Jennifer.

I know, well here's my -- those were clarifications. My question is, could you remind us of your penetration of accessories and non-handbag categories versus handbags? What that mix is today, and then where you see it going? Thanks a lot.

Why don't I take the first two clarifications and then I'll have Mike comment on malls and penetration. Our share re-purchase program -- we view share re-purchases and our dividend program combined the way of returning capital to shareholders. We -- our first priority is to invest in our business. After we've done that, we look at the residual of our cash, and look to return that to our shareholders. We balance our working capital needs, our expected CapEx, and then re-purchase shares opportunistically based on the capital flows and needs of our business overall.

On the acquisitions, when we acquire a business, there are several impacts. We acquire a distributor business. Remember, the sales that we get, we already have the wholesale sales, so we get about the mark-up between wholesale and retail. We get that bump on the sales line, but it's not 100% of sales. But we take on 100% of the SG&A of the acquired markets. That SG&A impact is with us for the whole first 12 months of the acquisition and ongoing, but once we're out of the first year, the overlaps become much less dramatic. In as we acquire a distributor, we have to mark up the inventory that we acquire. It takes us about two quarters to be out of that higher-priced inventory that's marked up to roughly wholesale -- our wholesale prices. After about the first two quarters following an acquisition, the gross margin impact subsides.

The only category that we track in a -- let's call it in a rigorous way, other than women's -- is men's accessories. Here in North America, we have about a 17% market share, and that category is growing by about 25%.

Thank you. As a reminder, please limit yourself to one question. Oliver Chen, Citibank.

Regarding the intensified competition and the environment here, what are your thoughts on where you stand with the legacy average unit retail? As you look to drive incremental traffic or look to improve traffic trends, do you think moderating AUR is a potential strategic option? My follow-up is related to your ideas on broadening expression. How do you -- what should we think about in terms of where you want to get footwear as a percentage of mix? Also, are there efforts in relation to jewelry and watches as you undergo this process in other categories? How should we think about the mix composition that you're targeting? Thank you.

Why don't I begin, and then turn it over to Mike. First, with regard to how should we think about AUR, and do we think there's an opportunity to have lower price points. The reality is there's an opportunity at all price points, and we look to maintain and achieve a very balanced assortment. We believe there is a very substantial opportunity in the space over $400, where we barely participate. Consumers have embraced all of our limited-edition product in that price range. You will continue to see us maintain a very balanced approach to the very diverse and broad consumer base that we have. With regard to Legacy, Legacy has been an important step in our transformation. Legacy is going to -- as we've said before -- continue with us. The average Legacy price point is somewhat higher than the overall assortment, but in part, that's because the collection is driven in leather. Mike, you want to talk a little bit about mix?

Sure. The piece that I'd like to speak to on specifically on handbag positioning from a pricing standpoint, our stated $300 sweet spot, I think, remains. The opportunity is to nuance that by store type and push harder across our most premium locations, which by the way performed significantly better than primary locations in the quarter. We continue to see that trend as an opportunity going forward, pushing higher price points into the most premium locations, while balancing that with compelling innovation at opening price points, particularly in primary locations where 350-store business, and in many of our department store doors, where there is more of a price-compelling proposition to be made for us to maintain and grow the share. That's the piece on handbags.

On shoes, we haven't placed specific target on shoes as a percent to total. What we're looking at there initially is diversifying the assortment, building a tiered assortment there, and using shoes as an incremental productivity opportunity, building ticket, building frequency, and improving productivity in stores, and across our digital platform as well.

Thanks a lot, guys. Lew, just to be clear, within the Legacy portfolio, are you saying that you're happy with where the AUR is within that collection, or are there changes?

Absolutely. The average handbag is about 20% higher than the average bag. As you know, Legacy has a very substantial number of key outer wear items, which performs extremely well.

Okay, thanks guys, and good luck.

Thank you, everybody, for joining us today. The market is now open. As is our prior practice to conclude the call, I'll just turn it over to Lou for a couple of sentences of closure, and I look forward to speaking to you over the next couple of days.

First, I just want you all to know that we're extremely focused, single-minded, and confident in our ability to address the near-term challenges in North America. At the same time, we'll be continuing to leverage the global opportunity as we evolve the Coach brand. As I've said before in years behind, stay tuned. Thank you.

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