掛毯 (TPR) 2014 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, Ms. Andrea Shaw Resnick. You may begin.

Good morning, and thank you for joining us. With me today to discuss our quarterly results are Victor Luis, Coach's CEO; and Jane Nielsen, Coach's CFO. Francine Della Badia, President North America Retail is also joining us.

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 year. 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. Victor Luis will provide an overall summary of our second fiscal first quarter 2014 results, and will also discuss our progress on global initiatives. Francine Della Badia will discuss our business in North America in more detail. Jane Nielsen will conclude with details on operational and financial highlights for the quarter.

Following that, we will hold a question-and-answer session, where we will be joined by Lew Frankfort, Coach's Executive Chairman. This Q&A session will end shortly before 9:30 a.m. Victor will then conclude with some brief summary remarks. I would now like to introduce Victor Luis, Coach's CEO.

Good morning. Thanks Andrea, and welcome, everyone. As we enter the new calendar year, I couldn't be more excited to be greeting you today as CEO of Coach, succeeding our Executive Chairman, Lew Frankfort. It is an honor to have the opportunity to build on Lou's remarkable 35-year legacy, and to lead the best team in specialty luxury retailing.

We are at a truly unique moment in time. We are faced with a new competitive landscape, evolving consumers, and changing shopping patterns. We're seizing the opportunity to define modern luxury by driving innovation and motion and relevance into the Coach brand.

Change and a sense of urgency are not new to our history. Many of you know that we talk about Coach's history in chapters. In our first chapter, Coach defined luxury leather goods for the American consumer. In our second chapter, we created the accessible luxury handbag and accessories category in North America and key Asian markets.

Now I, together with Stuart Vevers, or new Executive Creative Director, and our seasoned Coach team are excited to write Coach's third chapter, our transformation into a global lifestyle brand anchored in accessories. We will accomplish this by focusing on our key brand equities of authenticity, quality, craftsmanship, and value.

As noted in our press release, during the holiday quarter total sales fell slightly in constant currency, as weakness in our North American women's bag and accessory business offset strong growth in men's footwear and robust sales in emerging Asian markets and Europe. We continue to be disappointed by our performance in North America, which was impacted substantially by lower traffic in our stores, and by our decision to limit access to our e-factory flash sales sites.

At the same time, China results remained resilient, with total sales growing about 25%, and comparable store sales rising at a double-digit rate. Importantly, we continue to advance our transformation initiative, and position Coach to launch Stuart Vevers' first collection in September.

Before getting into the final details of the quarter, I want to start with key milestones in our transformation journey. As you know, we have focused on the three primary aspects of brand experience: product, stores, and marketing.

Starting with product, we continue to see strength in men's and footwear, two categories that have undergone significant evolution in previous years and quarters. The story this quarter was the introduction of Capsule. Notably, the success of the borough bag, a prelude to a comprehensive re-platforming of our women's assortment across bags, accessories, and lifestyle categories. Stuart has made significant progress leading Coach's design team to re-platform our assortment to both imbue more emotion in the product and elevate the brand.

In fact, we're presenting Coach's first-ever collection in February during New York Fashion Week. The presentation will be a series of one-on-one, or small group appointments, over a five-day period. The goal of presenting this format is to create the opportunity for Stuart to present the fall collection, and personally share his inspiration and vision for the brand with the fashion community in an intimate and informative environment.

Moving on to stores, there are a few areas of progress to note. The highlight of the quarter was the unveiling of a new store concept in two key flagship locations in New York and southern California. In addition, our holiday store windows, A Brilliant Season, reflected our move toward installations, rather than simply monthly product backdrops. Finally on marketing, we launched a new fully integrated marketing campaign, Coach New York Stories, showcasing top fashion models wearing Coach, set against recognizable New York backdrops.

While our journey has just begun, we have confidence in our vision of what we need to do, and have the strategies in place to realize that vision. As was the case with our former transformations, we recognize that this is a multi-year endeavor, which requires single mindedness, tenacity, nimbleness, and patience before it will be fully reflected in our financial performance.

Turning to the results for the last quarter, some key financials were: First, net sales on a reported basis totaled $1.42 billion, versus $1.5 billion a year ago, a decrease of 6%. On a constant currency basis, sales declined 3% for the quarter. Second, earnings per share totaled $1.06, as compared to $1.23 in the prior-year second quarter. Third, international sales increased 2% to $425 million, from $418 million last year. On a constant-currency basis, international sales rose 11%.

Sales in China remained strong, increasing about 25%, with the continuation of double-digit comps, while sales in our directly operated locations in Asia, ex-Japan and Europe, rose sharply, as well. Fourth, North American sales fell 9% to $983 million, from $1.08 billion last year, with direct sales declining 8% on a 13.6% comparable store sales decrease.

During the quarter, looking at distribution, the Company opened one North American full-price location and opened seven factory stores, including one men's free-standing store. At the end of the period, there were 351 full-price and 205 factory stores, in about 155 outlet malls in North America.

Moving on to China, during the quarter we opened 10 net new locations, with 2 locations in Hong Kong, and 8 on the mainland, bringing the total number to 142 locations, including 122 on the mainland, in 51 cities. In Japan, as expected, we did not open any new locations during the quarter. There are 196 directly operated locations, which include 149 full-price, and 47 factory locations, in about 30 outlet malls.

Also in Asia, during the second quarter we opened two locations in Malaysia, one in Korea, and one in Taiwan, bringing the total to 98 directly operated locations in the balance of Asia, including 49 in Korea, 28 in Taiwan, 12 in Malaysia, and 9 in Singapore.

In Coach Europe, we opened four directly operated doors, including Serrano, our first flagship in Madrid, two shop-in-shops in Galleries Lafayette in Paris, and a shop-in-shop in El Corte Ingles. As of the end of the quarter, there were 24 directly operated locations in Europe across the UK, France, Ireland, Spain, Portugal, and Germany. We also opened several wholesale doors in the UK, Germany, France, and Italy.

Moving on to sales and productivity, our total revenues in North America declined 9% for the quarter, with our directly operated businesses down 8%. As noted, total Q2 same-store sales declined 13.6%. While men's and our re-launched footwear categories continue to perform well, we remain disappointed by our overall performance in women's handbag and accessories. Fran will provide some additional granularity to our retail businesses in a moment.

In department stores, sales trends at POS were slightly below prior year, while shipments into department stores declined as planned. The out-performance vis-a-vis our retail stores was reflective of the overall channel, and generally better traffic trends than the malls at large. Overall, and consistent with the September quarter, we estimate that the North American premium women's handbag and accessories market again rose at a high single-digit rate in the second quarter.

Turning to men's, as we've discussed, we are also continuing to drive our men's business globally, through new stand-alone and dual-gender stores, and by dedicating more space for a broader men's assortment in existing retail stores. In the second quarter, Coach's sales of men's bags and accessories increased nearly 20% globally. Looking ahead, we remain bullish about the prospects for our men's global business, where we're continuing to target about $700 million in sales in FY14, up about 20% from last year, and $1 billion in sales in three years.

Turning now to our international segment, which represents about a third of Coach's business, sales rose 11% on a constant-currency basis in the second quarter, but only 2% on a reported basis, primarily due to the weak yen. As expected, China sales rose about 25% from prior year, fueled by double-digit same store sales and distribution growth. We're very pleased by the continued development of this market, which bodes well for our global travel retail business, where mainland Chinese tourist plays an increasingly important role.

Further, as Coach is a relatively young brand in China, we are already recognized as both dual gender and lifestyle, as men's products and women's lifestyle categories taken together represent over a third of sales. Our other Asia-direct businesses outside of China and Japan -- Korea, Taiwan, Malaysia, and Singapore -- also posted strong aggregate growth, increasing at double-digit rate for the quarter, with robust comparable store sales. As a reminder, we anniversaried the purchases of our retail operations in Malaysia and Korea during the first quarter, so our business is now apples to apples, no longer benefiting from a wholesale-to-retail step-up.

In Japan we posted a 2% decrease in constant currency, while sales in dollars were down 21%, reflecting the significantly weaker yen. In Europe, where our brand is small but growing rapidly, we generated significant sales growth at POS, and strong comps in the quarter. We continue to believe that Europe represents a significant long-term opportunity for Coach, both with domestic shoppers and the international tourist, notably in key European cities where the accessible luxury segment is out-performing traditional luxury.

While Jane will get into more details on our financials, and I will discuss our outlook in some detail shortly, I wanted to give you this recap. Francine Della Badia has joined us today to review our holiday season and discuss our business in North America in more detail. Fran?

Thanks, Victor, and good morning. As Victor mentioned, we continue to feel pressure in our North America business in traffic in our retail stores, impacting women's handbags and accessories. Simply put, we were dissatisfied with our performance in these categories. As I did last quarter, I am going to give some underlying texture to the comp performance, both in our successful and strong product initiatives which are resonating with consumers, and where we see the opportunities to strengthen our product positioning in North America.

As was the case industry-wide, in-store traffic decelerated further from Q1 levels, as the National Retail Traffic Index posted the steepest holiday season decline in at least six years. Similarly, in factory malls, which are primarily open air, in traffic, notably in the key weeks leading up to Christmas, we did not experience the build that we expected. On these lower levels of foot traffic throughout our store base, overall conversion rose, and transaction size held. While in previous quarters and years we were able to offset slowing in-store traffic on the Internet, our online business did not contribute positively to our overall North America comp. Our year-over-year comparisons were impacted by our strategic brand health decisions to both eliminate third-party flash events, as well as limit the access and invitations to our factory flash site. Excluding these factors, our Internet comp would have experienced moderate growth.

What we have found, as was alluded to earlier, is that when we do offer fashion innovation, our customers do respond. As Victor mentioned, the story this quarter was the introduction of Capsule. All of our full-priced stores in North America received a new Capsule handbag silhouette, the Borough, in two sizes and three colors. A tiered offering of more fashion handbags in additional colors and materials were offered in select flagship locations, with the full assortment, including ready-to-wear, available in 25 global flagships, including 11 in North America. This all-store silhouette, priced at $548 and $798, experienced strong sell-throughs, surpassing our internal expectations. Importantly, we experienced no price resistance. More generally, the above-$400 price bucket grew in penetration, and represented 22% of handbag sales, with the strongest performance at the upper end of our range, $600 and higher. Emotion clearly trumped price, as our consumer is willing to pay more for compelling elevated products.

As mentioned, we continue to see strength in our lifestyle categories in Q2. Footwear, which re-launched last spring in about 170 full-price locations, rose in penetration from about 5% to over 8%, at higher AURs, reflective of the compelling assortment. This category performance highlights our consumer's desire for more emotional trend-right fashion product. We're seeing strong performance across heels, flats, and booties.

We remain focused on building our market share within the fragmented nearly $25 billion global premium footwear category. For holiday, we introduced more dominant fashion footwear assortments in our international and wholesale locations, and continued to focus on building our key items. We're evolving our mix and growing both AURs and overall penetration levels across all of our businesses. At the end of Q2, nearly 150 Coach international retail locations offered the elevated women's collection, and the response from customers has been excellent.

In factory, after a strong Black Friday weekend, we did not experience the anticipated build in traffic in the weeks leading up to Christmas. However, similar to full price, we are seeing the consumer respond to distinctive newness and fashion innovation, as well as an overall shift to leather versus logo. Faux exotic's, pearlized, and gathered leathers performed better than we expected at above-average price points. The fact that we're experiencing a strong appetite for more elevated product is exciting for us. We were also pleased with the performance of outerwear, footwear, and the newly introduced watch and jewelry categories.

We have also remodeled a majority of our factory stores into our new factory design concept, including enhanced visual merchandising and marketing elements. We are using elements of our New York Stories marketing in the windows, elevating the look and feel of these stores.

In terms of our full-price store design, Victor touched on windows, and most importantly, our new full-priced concept stores on lower Fifth Avenue and South Coast Plaza. These stores are a physical expression of transformation, as we bring our brand positioning to life. They're modern, elevated, elegant, and warm, and offer our customers a more complete dual-gender lifestyle experience. They invite customers into a much richer relationship with our brand, giving Coach greater relevancy and fashion credibility. In the weeks since they have re-opened, we have seen our customers explore the stores and engage with our product and brands in new and exciting ways. We view these locations as laboratories. We will live in them, learn from them, and ultimately be able to take the elements and roll them out more broadly across the fleet.

This spring and summer, you will see bolder, more feminine visual merchandising initiatives, especially in our most prominent flagship locations, and concepts that will be represented in all store, continuing to elevate marketing and our brand positioning.

Our fall marketing campaign communicated more aspirations and consistent brand story, reinforcing the bond with our existing consumer, while driving new customer engagement globally. During the holiday quarter, we evolved the campaign with new taste makers, such as Misty Copeland, the first African-American lead ballerina for the American Ballet Theater; Michael Chernow, a founder of the Meatball Shop, and Gia Coppola, a photographer. They're all telling their own New York story featuring their favorite Coach product.

In summary, we're confident in our road map to restore productivity in North America. While we recognize this will take some time, and are clearly disappointed with our recent performance, we are focused on maintaining our operational excellence. We are making the necessary investments in our digital capabilities, as the business becomes increasingly omni-channel. We're reviewing our store fleet systematically, culling where necessary, and investing where appropriate.

With that, I will turn it back over to Victor for a discussion of our international business, strategies, and further opportunities for growth. Victor?

Thanks, Fran. Our strategic focus remains on the four pillars of growth that we have previously shared: First, and most broadly, growing our business in North America and throughout the world by transforming into a global lifestyle brand anchored in accessories; second, leveraging the global opportunity by aggressively growing our international businesses; third, tapping into the large and growing men's accessory category, which we have already touched on; and fourth, harnessing the growing power of the digital world to both drive e-commerce and customer engagement globally.

While focusing on productivity, we will selectively continue to expand our distribution. As our annual plans haven't changed materially from what we shared in July and in October, I will be brief. We still expect that our square footage globally and across all channels will increase around 9% in FY14, consistent with prior guidance. In North America, our directly operated square footage will be up about 7%, driven by about 15 new store openings, focused on factory, about 20 expansions within the context of our transformation, and 15 to 20 previously announced full-price closures. In China, as we discussed, we're on schedule to open about 30 net new dual-gender locations, increasing our square footage by about 25%. As noted in our press release, our sales remain on track to reach $530 million this year, driven by both distribution and double-digit comparable location sales.

While we expect to open a few stores in our other direct Asia markets of Korea, Taiwan, Malaysia, and Singapore, our primary focus remains productivity. We have been realizing the benefits of Coach's direct management in these markets, and are pleased with the development of both our teams and our brand.

In Japan, we expect net square footage growth will increase slightly, with the opening of about five to 10 net new locations, most of them dedicated men's doors. In Europe, including the UK for FY14, we still expect to open about 10 retail locations focused on key European cities, and now plan to open about 30 total wholesale locations.

As you know, we also have significant and growing distributor-run businesses in other countries. Our primary areas of focus are: First, other Asia-Pacific markets, including Australia, Indonesia, Thailand, Vietnam, and the Philippines; second, Latin America, including Mexico, Brazil, Columbia, Venezuela, Panama, Peru, Chile, and Argentina; and third, in the Middle East.

I've just reviewed our transformation progress, ongoing strategies to reinvigorate growth, while taking steps to improve productivity in North America. Importantly, we are confident in our vision, and we have the right team and resources to execute our transformation already under way. At this time, I will turn it over to Jane Nielsen, our CFO, for further details on our financials. Jane?

Thanks, Victor. Victor and Fran 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 decreased 6%, with North America declining 9%, and international increasing 2% in dollars. As noted, on a constant-currency basis, revenues were down 3% overall, while international sales rose 11%.

Net income for the quarter totaled $297 million, with earnings per diluted share of $1.06. This compared to net income of $353 million, and earnings per share of $1.23 in the prior year's second quarter. Our operating income totaled $436 million, as compared to the $527 million reported last year, while operating margin was 30.7%, versus 35%. During this quarter, gross profit totaled $983 million, versus the $1.09 billion a year ago. Gross margin was 69.2%, versus 72.2% for the prior year. Our expense ratio in Q2 totaled 38.5%, compared to 37.2% reported in the year-ago quarter.

Our SG&A dollars actually declined slightly on a year-over-year basis, as we managed variable costs to the lower sales levels, adjusted our outlook for lower performance-based compensation levels, and benefited from the weaker yen. We also realized the benefit of our fourth-quarter restructuring actions and the sale of RK, which were offset by higher spending on Coach brand marketing, as well as the impact of taking Coach Europe in house.

Inventories at the end of the quarter were $553 million, 12% above the $494 million reported at the end of last year's Q2. As mentioned on our last call, we have planned for inventory levels to be up over the balance of the fiscal year, based on several key factors, including distribution growth, the acquisition of Coach Europe, higher average unit cost, and our expansion into lifestyle categories. In addition, sales growth that is below our expectations is also driving inventory levels. However, our operating model, with a robust factory channel, allows us to view our inventory as currency, and our balances our high quality and current.

Cash and short-term investments sit at $799 million, as compared with $859 million a year ago. On the balance sheet, we continue to deploy international cash into high-quality investments with higher yields, and durations over a year. In turn, there is a shift between cash and short-term investments into other non-recurring assets.

During the second quarter, we repurchased and retired about 3.3 million shares of common stock, at an average cost of $52.99, spending a total of $175 million. At the end of the period, about $1 billion remained under the Company's current repurchase authorization. Net cash from operating activities in the second quarter was $400 million, compared to $628 million last year during Q2. Free cash flow in the second quarter was an in-flow of $340 million, versus an in-flow of $567 million in the same period last year. Our CapEx spending was $61 million, even with a year ago.

Consistent with our guidance last quarter, we expect the CapEx this year will be in the area of $280 million, primarily due to new store openings, and expansions across all geographies, elevating our store environments within our existing stores, and investments in the technology and infrastructure necessary to enable our global expansion and transformation.

Based on our second-quarter results, we have modified our outlook for the balance of the year as follows. We now expect to deliver low single-digit sales declines in constant currency in the second half. Assuming the yen remains close to JPY104, this would equate to low- to mid-single-digit rate decrease in sales for the balance of the year in dollars. For the full year, this would take us down low single digits in constant currency, and low- to mid-single digits in dollars. Also, we are forecasting our North America comp run rate to be in the range of our Q2 levels for the balance of the year, with 3Q as a more difficult compare, given the Easter shift.

Gross margin is projected at about 70% for both the back half and the year. The primary impact compared to last year will be increased factory promotion levels, the weaker yen, rising sourcing costs, as well as inventory amortization from the JV acquisition and Coach Europe.

We continue to expect modest mid-single-digit SG&A dollar growth in the second half, with increased investments in Europe, marketing, and other branch transformation initiatives, generally funded by the restructuring actions taken in last year's Q4, but with some de-leverage on the lower sales forecast. Therefore for the full year, SG&A will be up low single digits. Taken together, we would expect operating margin to be in the area of 26% to 27% for the year. Finally, our tax rate is expected to be around 32% for the year.

Regarding the balance sheet, cash flow, capital, and capital allocations, we expect to have strong -- we expect to continue to have a strong balance sheet and substantial operating free cash flow. We will prudently invest in the growth of our business, while returning cash to shareholders through dividends, coupled with share repurchases. Our current FY14 outlook continues to reflect about $700 million in share repurchases, approximately equivalent to our prior three-year average.

Our long-term commitment to growth and shareholder value are unchanged. We have a business model that generates significant cash flow, and we are in a position to invest in our brand, while continuing to return capital to shareholders. I would now like to open it up to Q&A.

Thank you.

(Operator Instructions)

The first question today is from Ike Boruchow with Stern Agee.

Victor, I wanted to ask about some of the initial steps you have taken in this transformation, both from a product perspective -- I mean, it sounds like the Borough bag has been a hit and the lifestyle stores look great -- but both have been done on such a small scale. The question is, why wouldn't you be a little more aggressive from both a product and stores perspective on some of these changes that appear to be working? Then a quick follow-up would be, internally, what gives you the confidence that Stuart's product will work, and that the brand is still healthy?

Thanks, Ike. Let me start with the second part of your question, which really is about confidence around the brand. I not only have the pleasure of leading the best team in luxury specialty retail, but also without a doubt the leader in the space from a brand perspective. We are the original US luxury brand. We are the most authentic brand, and certainly any piece of research that we see today, and which I know many of you also do, shows us as the most loved brand in this space.

Of course, the environment around us has shifted. Consumer shopping behaviors are changing. There is a new competitive environment. We realize that. We're grasping that opportunity through our transformation, and are very cognizant of the need for us to tell a richer story to our consumers and provide a richer context, which is what we're doing through our strategies and through transformation.

With Stuart Vevers as our creative director, we have undertaken that journey. He has been with us for four months. Just yesterday, internally, we showed the first collection. I can tell you that the energy amongst this team was palpable. We are extremely excited by the initial steps we're taking.

Stuart is providing us with a rich context for us -- not only in terms of rediscovering what is great about Coach, which is a story on quality, great purity of design, understanding materials and craftsmanship, but also providing a fashion relevance for the brand like we have never had. We're incredibly excited about that. In a minute, I will ask Lou to give you his opinion as well, because obviously having been in a journey for 35 years, he can certainly compare it with past years.

In terms of the Borough and the stores, we want to be of course learning on everything that is happening. The Borough was developed by our team 12 months ago, and we made the initial buys, we've gone back in. You are going to see increasing presence of that specific silhouette across the fleet in North America and globally. In fact, from this floor set, if you were to visit stores today relative to holiday, you will see an increased presence there.

In terms of the fleet roll-out of the new concept, the lifestyle concept that I know many of you have visited at lower Fifth and perhaps in South Coast Plaza, as Fran touched on, the feedback from consumers and just our staff and their interaction with them has been very positive. We're learning, we're tweaking obvious fixture programs and the like, and over the next weeks and months, we will be making decisions on how extensively we roll that out based on the feedback.

Lew, perhaps you want to give your comments on what you've seen in relation to Stuart's first development.

Sure. Good morning, everybody. Just for some context, our brand grew organically from our product. Before we had a great brand, we had a great product. The attributes of the product, as Victor mentioned -- authenticity, craftsmanship, quality and value -- were the cornerstones of our product, and eventually became key brand equities.

Today, when we look at the product that we are going to be launching in our first-ever presentation -- well, first-ever presentation next month, launching in September -- Stuart has been absolutely true to our underlying brand equities. The product is rich. It's elevated. It's original. He has interpreted and brought forward a good many codes that our consumers have come to know and embrace for Coach. In closing, the product is imbued with emotion. It resonates with quality, and is quite appealing.

Great. Thanks so much, guys.

Thank you. We do ask that you please limit yourself to one question per request. The next question is from Oliver Chen with Citigroup.

Hi, thanks for all of the details on the guidance. Regarding the factory channel and the promotional nature of what is happening there, could you highlight potential catalysts for abatement there, and what you're seeing competitively within the marketplace? Just as a follow-up, to help us set expectations for your business going forward, how do we think about timing for a better comp store sales, and what should we prioritize as the key drivers for that happening? Thank you.

Hi Oliver, it's Fran. I will start with your factory question. In terms of factory stores, as we mentioned, we had a strong Black Friday weekend, and then we were disappointed by the deceleration of traffic post that, in the weeks leading up to Christmas.

We have been promoting more heavily, specifically on the clearance end of the business in factory, to move through some inventory and manage our inventory as efficiently as possible. The good news is that Maria's new product and the new design that we have in the stores is really checking with consumers, and we are selling that product extremely well at above-average factory price points.

When we have the traffic, we are able to very effectively convert and actually move ticket. As we are into the spring season, we anticipate holding that traffic, that we should be able to continue down the path of being really proud of the product that we put into factory stores, and continue to convert the customers that are walking in.

Thank you and my second question was more about setting appropriate expectations for the timing of the turn-around of the comps, and which drivers would you prioritize for us as the most important aspect?

Okay Oliver, Victor is going to answer that second part.

Thanks, Oliver. Certainly, we're committed to driving productivity, as we have discussed, and long-term value for our shareholders. We have, of course, also guided that we will not forecast a change in the trend until we see it. There is of course the knowledge that traffic is a lagging indicator. We are going to see conversion being the main driver. We're excited about the fact that we have a tremendous amount of internal excitement already in what we're seeing in new products coming out for September.

We know that while shopping behaviors are changing, all of our traffic is being impacted globally. This is truly about great brands. We're focused on driving relevance for the Coach brand, getting back to the core, creating exciting shopping experiences for consumers, engaging with them online and in the stores in new and exciting ways, which is necessary in this changing environment. Doing so, of course, through all of our marketing mediums, whether it be through traditional advertising, social media, and the like.

We're on a journey. We will take you along with us on that journey, and we're very focused of course on the fall, as a very important key next chapter for us, as we continue with the marketing campaign that we already have, but also the presentation of Stuart's first full collection in our full-priced channel, where we will have the largest single introduction of new SKUs that we have ever had in one launch.

Thank you. Best regards.

Thank you, Oliver.

Thank you. The next question is from Liz Dunn with Macquarie Capital.

Thanks for taking my question. My question is relative to your place in the market place. You talked about the overall North American handbag market still being fairly robust, but obviously your business was tough. Traffic was tough. Do you think it has to do with a shift to business online, or where -- I'm just sort of struggling with how the overall market remains as robust as you see it being, but your problem is primarily traffic. If you could just help add context? Is it you're just not checking online to the same extent your competitors are? Where do you see, what channel do you see losing the most share in?

Liz, I think that most retailers today are seeing that the shopping mall channel is seeing the most pressure in terms of traffic overall. Our online business is more mature than perhaps some of the other competitors that we have. We have been in this space longer than most of our competitors.

But saying that, as we discussed in our notes, we did take very important strategic decisions this past quarter to limit access, especially on our flash site, as we look at driving brand equity moving forward. We know that this is a long-term journey. Specifically we did not have third-party events via our flash web sales, as we had this time last year. We have been also very vigilant in ensuring that we try and keep resellers off of our flash web sales model because of the impact that it has of course through the parallel channels, both domestically and international.

Our number one opportunity, of course, is in recruitments of consumers into the franchise here in North America, where we are still the leaders. We know that that is going to happen from an omni-channel way, both through the wholesale channel, through our current partners where there is a definite opportunity for us to drive further relevance and the further strong presence for our brand.

Of course, through our own stores, and we realize that the full-price channel has to lead. This is something we have shared with you, and we're very focused on driving relevance through that as our most important priority, because of the halo that that plays across the entire brand.

For those of you who have visited our lower Fifth Avenue store, and you compare that experience with the rest of the Coach fleet, and you can imagine that across an entire fleet, as we tweak it, develop it, and perfect it, I think you see a Coach of the future, of course, as well through the digital channel, which is not only an important channel for communication, but increasingly for e-commerce. It is really about the brand across all channels.

Thank you. The next question is from Bilun Boyner with JPMorgan.

Hi, thanks for taking my question. It is very encouraging that you mentioned you did not see price changes and then higher price points performed better. When we get Stuart's first product in September, where should we expect AURs for that line compared to the collection at lower price? Then you mentioned that you limited access to the factory flash sale web sites. I'm trying to get a sense how material that was? Was it a significant portion of the customers or businesses that you cut out? Thanks.

Hi. In terms of the average price points, in the over $400 bucket as we talked about strength in that in the prepared remarks, we actually had a 7% increase in AUR over last year. As we anticipate Stuart's collection and look forward to his fall, the newness in his product, we do anticipate that AURs will increase, and important balance in the assortment is important. But seeing that we are performing well in the categories where we had very emotional product, the consumer is willing to pay for it, and we will price the goods accordingly.

In terms of the Internet and the limitation of the flash sales site, we did eliminate third party, as we've said, and paid search as well, and the reseller impact. Those things taken together did have an impact on the overall performance of our Internet business. If we took those out, we would have seen a moderate increase in Internet sales.

Thank you. The next question is from [Bob Durbil] with Nomura.

Good morning. I guess I just had one question. What led to the decision to have an Analyst Day. and what do you plan to share with us on that meeting?

Hi, Bob. Glad to have you back with us. We want to share detail, the vision that we have. Obviously, seeing is believing. You will all be able to see the product in all of its glory, meet the team that's there, which is, as I have shared, and we believe strongly, without a doubt, the best team in the space, and share with you our vision for the future.

Great. Thank you very much.

Thank you. The next question is from Kimberly Greenberger with Morgan Stanley.

Thank you, good morning. Victor, you mentioned the endeavor to restore brand equity. I'm just wondering how do you think about that effort over time, with the ongoing increase in square footage in factory? It would seem in some ways that those two things work against one another, given that typically expansion in factory is not really brand enhancing. It certainly increases distribution opportunity, but having more discount product out in the market place would not really seem to be congruent with the effort to restore brand equity. I'm just wondering if you can help us with how you think about those two sort of opposing forces?

Sure, Kimberly. It is obviously a question we get often. What I would share is that we believe the brand first and foremost must be led through the full-price channel. What you see, again, in lower Fifth, what you see in South Coast Plaza, in terms of a direction for the future of our fleet, and the equity that we want to drive through that fuller lifestyle experience, where consumers are engaging with the brand differently, without a doubt, will be both a business driver, but just as important, if not more so, the halo for the entire multi-channel strategy that we have.

Outlets in terms of their importance globally are unquestionably the fastest-growing certainly bricks-and-mortars channel in the luxury space. That is not only true for US-based multi-channel brands. It is increasingly true for European and traditional luxury brands who are driving further relevance for the channel globally -- whether it be here in the US, where it is quite a mature channel, but of course increasingly in Europe, and now more than ever increasing in China and the rest of Asia, as well. As that channel grows, we want to make sure that we participate in it and take our fair share there.

Saying that, we're very cognizant of the need, as a result of increasing competitive pressures in that channel as well to remain relevant there. Many of you have visited our Deer Park roll-out, which is now our global roll-out already, which we believe in that channel elevates the brand, provides a terrific experience.

I think just as you're seeing and will see increased value, not just through price, but through great products, emotional product in our full price channel, you will continue to see that moving forward in our factory channel. That is the key. The key is not just to see it as a promotional channel, but to see it as a channel which is of relevance to a certain consumer, who does not shop in other channels, and where we have the leadership position and see continued growth moving forward.

Thank you, Victor.

Thank you.

The next question is from Faye Landes with Cowen and Company.

Hi, good morning, and thanks for taking my question. On the outlet thing, can you just give us some dimension for us. You implied that you are going to be selling the excess full-priced product in the outlet channel, just to get rid of the inventory you have right now. How quickly do you think you can clear that? As you've often indicated before, that is not your -- that is not the core of your outlet strategy.

Hi Faye, it's Jane. Our outlook is that we will return to -- we will be able to move through a great deal of our inventory over the next several quarters. Given the size of the productivity of our factory channel, and the volume that we move through there, we have a lot of confidence that we will be able to clear through our inventory profitably over the next several quarters.

Faye, I would just add that this is not new for us. Many of you who have been with us on our journey know that even during the 2008 - 2009 crisis, it didn't take us more than two to three quarters. This inventory is currency for us. It is no more than 5% of our total sales. We have always sold full-priced elite in our factory channel. It adds to the relevancy of that channel. There are many consumers who are obviously looking for the hunt of what was in full price in previous months, and so we look to it as an opportunity and not necessarily as a negative.

Fay, I just want to -- there are several drivers of inventory, some of which are -- one of which is our sales outlook that was lower than expectation. Some core drivers, like our distribution expansion, our higher average unit costs, and the acquisition of Coach Europe, and our expansion into lifestyle categories, has elevated inventory levels some, just based on the nature of the business. In terms of that which is excess because of our sales outlook, we will move through that very quickly.

Okay, great. Thanks.

Thank you. The next question is from Laura Champine with Canaccord.

Good morning, this is I'm afraid just an extension of what Liz has already asked, which is, can you talk about what is driving the strength in the category, and how you diagnose the, in the most important category, in the most important quarter of the year, an acceleration in market share loss, and what is being done specifically to address that, other than obviously new product coming with Stuart's arrival?

Thank you. Well, the strength in the category really speaks to the message that we have been putting out there for many quarters now, which is obviously that consumers are increasingly look to accessories as the most important part of their wardrobe. It is what they are doing, and leveraging, and that is to identify themselves as they spend less on apparel, and more on accessories. This is a cyclical shift that has been going on for over a decade now.

Obviously, as a result of our own success, as a result of this growth in the category, there is increased competition. That competition creates excitement in the category, which continues to drive it. The opportunity for us, of course, is to leverage our solid equities in our brand, the amazing team and know how that we have, and with new creative direction, to drive relevance in our brands, and take our fair share of the market as we have in the past. That's what we intend to do.

Our strategies for dealing with that are everything that we have been sharing with you in terms of transformation. We're excited about having you all together with us on June 4, when we will share not only with you the details of our vision, but of course the strength of this team, in terms of what we're doing, and how we are going to execute moving forward.

Just as a follow-on, is there a concerted effort to elevate the brand, and how might that change the market size that you can address in North America, if I am hearing that right, that there is an effort to elevate the brand to higher price points?

Yes, it is a terrific question. You will see some increased SKU counts at the higher price points, but our strategy is not to change the range of our price points. Many of you will remember during the financial crisis when consumers were more price sensitive, we talked about a re-balancing in our assortments.

What we're seeing with obviously consumer confidence, at levels that are much better and the increased competition and excitement around the category, is an opportunity for us to leverage our core strengths, our authenticity, quality, heritage, and the respect that consumers have for Coach as the leader in this space, to continue to elevate and re-balance our assortment now to more SKUs in the above $400 space.

But this is not about us becoming a European luxury brand tomorrow. This is about us driving desirability, and driving, if you will, confidence in the brand in the mind of the consumer, through increased value through quality.

Thank you.

Thank you. The next question is from Randy Konik with Jefferies.

Great, thanks a lot. Can we just follow up on that with pricing architecture? Because you said on the call that about 22% is done at the greater-than-$400 price point, which is doing well. But 80% of your business is below that. When you look on the website, you're hit with price points right away that are $598, $658, $1,000, et cetera. When you look at your key competitors, their opening pages on their web sites are $298, $328, to $458.

I'm just curious about how you're thinking about pricing architecture and how to message that to the consumer? Again, when I look at the website, it just looks like the prices are just not accessible, as they have been in the past. I just want to follow up with your point that you're not going to alienate that lower-price-point offering. Your thoughts there would be helpful. Thank you.

It is a great question, Randy, because I think what you're looking at, as you open up our website of course, we always start with newest and with newness. What you're seeing on the top of the page there is the Borough. Thankfully, the Borough is resonating incredibly well. As you go into the bottom of that first page or into Page 2 or 3, you will see that we have not given up the $200 price bucket, $300, or $400 price bucket, and that we continue to be very active in that space.

As well, I think what you will see is that we will play across channels a little bit, in a bit more targeted way. You're going to see us develop more specific products that will be in more price-sensitive channels, such as that with our wholesale partners versus what you might find in a flagship store, versus what you might find in a secondary market, either here in the US or internationally. These are strategies that we have been leveraging globally quite successfully.

There is, without a doubt, a very substantial opportunity above the $400 price point bucket. We know that that is becoming increasingly attractive, not just here in the US, so I would ask us to think about that opportunity globally. As we see the logo business challenged, what is increasingly happening globally is brands headed further into the leather space.

As many of you know, our European competitors have a very hard time achieving price points below $1,500, below $2,000, when it comes to leather handbags. The opportunity for us is not just to play with lower prices, but to play with increased value and perception through quality, and that's where we're going to look to change the value proposition in the months ahead. Doing so by re-balancing the assortment, not by shifting completely.

Thank you all for attending our Coach conference call this morning. As is our custom, it is now 9:30, and I will turn it over to Victor for some concluding remarks.

Thank you, Andrea. Thank you all for listening, and for being on this journey with us.

As we stated, while we are disappointed in our Q2 results, and as Lew has stated in the past, we know that we are at a very specific moment in time. We have tremendous confidence in the strength of our brand, in our vision, and in our team, and we are very excited about partnering together as a team to execute the transformation already under way, and to get us back on the road to a healthy track, and long-term growth.

Thank you very much.

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