掛毯 (TPR) 2014 Q3 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 the Global Head of Investor Relations and Corporate Communications at Coach, Andrea Shaw Resnick.

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.

Before we begin, we must point our that this conference call will involve certain forward-looking statements, including projections for our business in the current and 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 trends may not be indicative of future performance.

Now let me outline the sequence and topic for this conference call. Victor Luis will provide an overall summary of our third fiscal-quarter 2014 results and will also discuss our progress and global initiatives. Jane Nielsen will conclude with details on financial and operational highlights for the quarter.

Following that we will hold a question-and-answer session, where we will be joined by Francine Della Badia, President North America Retail. This Q&A session will end shortly before 9:30 AM. Victor will then conclude with some brief summary comments.

I would like to turn it over to Victor Luis, Coach's Chief Executive Officer.

Good morning. Thanks, Andrea, and welcome, everyone.

As noted in our press release, during the third quarter, total sales declined as weakness in our North American women's bag and accessories business continued to offset strong growth in men's footwear and robust sales in international markets.

Our business in North America remained challenging in the period, exacerbated by the weather and shift of the Easter holiday. We experienced lower than expected traffic levels in our stores, while our internet results were impacted by our strategic decision to eliminate third-party events, as well as limit the access and invitations to our factory flash site.

At the same time, results in China and Europe remained very strong. Importantly, we continue to advance our transformation initiatives and building the foundation to launch Stuart Vevers first collection in September.

Before getting into the financial details of the period, I want to start with key milestones in our transformation journey, as I did last quarter. We will continue to provide you with these progress reports, understanding that it will take some time before these changes manifest in our financial results.

As you know, we are focused on the three primary aspects of the brand experience: product, stores and marketing. Starting with product, we continue to see strength in men's and footwear, two categories which have undergone significant evolution in previous years and quarters. In fact, men's represented 15% of our global sales in the third quarter and continued to positively contribute to our comps, while we expanded our footwear distribution, notably in international markets.

The most significant achievement in the quarter was our first ever New York fashion week presentation in February. During the event, we unveiled Stuart's inaugural collection, which will be in stores in September. The collection garnered significant attention and the global press was uniformly positive, bringing Coach into the fashion conversation.

Moving on to stores. We have just announced a partnership with Studio Sofield. William Sofield's creative inspiration will enhance and elevate our retail stores, building on the strong foundation we have created in our lower 5th Avenue and South Coast Plaza flagships. We will leverage our learnings from these two stores around customer service, multi-category merchandising, residential feel and the in-store discovery experience, incorporating them into our next generation retail concept.

And finally, on marketing, where we're working on bringing to light Stewart's vision of the Coach women and men for the season in a multi-layered, integrated marketing campaign. As our journey progresses, we have confidence in our vision of becoming a global lifestyle brand, defining our view of modern luxury, making it inspirational and approachable. And we are confident in our ability to execute against this vision.

Turning to the results of last quarter, some key financials were, first, net sales on a reported basis totaled $1.1 billion versus $1.19 billion a year ago, a decrease of 7%. On a constant currency basis, sales declined 5% for the quarter.

Second, earnings per share totaled $0.68, as compared to $0.84 in the prior year's third quarter. Third, international sales increased 14% to $441 million from $385 million last year. On a constant currency basis, international sales rose 20%.

Sales in China remained very strong, increasing over 25% with a continuation of double-digit comps. While sales in our directly operated locations in Asia and Europe rose significantly as well. And fourth, North American sales fell 18% to $648 million from $792 million last year on a 21% comparable store sales decrease.

During the quarter, looking at distribution, the Company closed 13 North American full-priced retail locations. At the end of the period, there were 338 full-priced retail and 205 outlet stores in about 155 outlet malls in North America.

Moving on to China, during the quarter, we opened five net new locations, all on the mainland, bringing the total number to 147 locations, including 128 on the mainland in 52 cities. In Japan, we opened three net new locations during the quarter. There are 199 directly operated locations, which include 151 full-price and 48 factory locations in about 30 outlet malls.

Also in Asia, during the third quarter, we closed one location in Taiwan and opened one and closed two locations in South Korea, bringing the total to 96 directly operated locations in the balance of Asia. Including 48 in South Korea, 27 in Taiwan, 12 in Malaysia, and 9 in Singapore.

In Coach Europe, we opened two directly operated doors during the period. As of the end of the quarter, there were 26 directly operated locations in Europe, across the UK, France, Ireland, Spain, Portugal and Germany. We also opened several wholesale doors in the United Kingdom, Spain, Italy and Switzerland.

Moving on to sales by channel and geography, and starting with our domestic businesses, our total revenues in North America declined 18% for the quarter, with our directly operated businesses also down 18%. As noted, total Q3 same-store sales declined 21%.

While our over all performance in women's accessories remained disappointing, our men's and footwear categories continue to perform well. In department stores, our sales trends at POS were slightly below the prior year, while shipments into department stores declined as planned.

For perspective, we estimate that the rate of growth of the North American premium women's handbag and accessories market decelerated slightly. Reflecting the overall retail slow down from weather and the Easter shift, but still rose at a high single-digit rate in the March-quarter.

Similar to what we have done over the last two quarters, I want to provide some underlying texture to the comp performance, both in those areas where we have seen progress and those where we see the opportunities to improve our positioning in North America. As was the case industry-wide, in-store traffic continued to decline with the sharper track retail traffic index, which includes outdoor lifestyle and outlet malls, down 16% for the quarter, impacted by weather, as well as the Easter shift to April.

The NRTI, focused on indoor malls having less of weather impact, was down far less, negative 2% but also continued weak. In aggregate, conversion and transaction size were neutral to our store business, while traffic drove the comp declines.

While in previous quarters and years, we were able to offset slowing in-store traffic on the internet, as expected our online business did not contribute positively to our overall North America comp in the third quarter. Specifically, our year-over-year comparison continued to be impacted by our strategic decisions to both eliminate third-party flash events this fiscal year, and limit the access and invitations to our factory flash site. Excluding these factors, our Internet comp would have contributed to our aggregate performance.

There are some sustained themes in our North American women's business. Leather continues to well out-pace logo cross all channels and we are designing into this trend. It's a long-term shift that favors Coach, given our heritage in leather goods and our global sourcing network of tanneries.

Small bags also continued to trend well. We also saw relative strength in our elevated product in our retail stores. More generally, the above $400 price bucket grew in penetration and represented 21% of handbag sales, with the strongest performance at the upper end of our range, $600 and higher.

Outside of handbags, we continue to see strength in our lifestyle categories in Q3. Footwear, which relaunched last March in about 170 full-price retail locations, rose in penetration from about 6% to about 8% at higher AURs, reflective of the broader fashion assortment in these stores. We are also seeing a positive response to our expanded men's and footwear assortments in factory stores.

We remain focused on building our market share within the fragmented, nearly $25 billion global premium footwear category through both distribution, adding international and wholesale doors, and by maximizing footwear productivity through mix, increasing AURs and overall penetration levels across all of our businesses. At the end of Q3, nearly 180 Coach International retail locations offered the updated women's fashion collection and the response from customers has been excellent.

Turning to men's. As we have discussed, we're also continuing to drive our men's business globally through a new stand alone and dual-gender stores, and by dedicating more space for broader men's assortments in existing retail stores.

In the third quarter, Coach's sales of men's bags and accessories continue to grow at double-digit rate globally. Looking ahead, we remain bullish about the prospects for our global men's business, where we're continuing to target about $700 million in sales in FY14, up about 20% from last year.

Turning now to our international segment, which represents about one-third of Coach's business, sales rose 20% on a constant currency basis in the third quarter, and 14% on a reported basis, due to the weak yen. As mentioned, China sales rose over 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 the mainland Chinese tourist plays an increasingly important role. Further, Coach is already recognized as both a dual-gender and lifestyle brand, as men's product and women's lifestyle categories taken together represent roughly 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 a double-digit rate for the quarter, with comparable store sales gains. As a reminder, we anniversaried the purchase of our retail operations in Malaysia and Korea during the first quarter of this fiscal year, so our business is apples to apples, no longer benefiting from a wholesale to retail step up.

In Japan, we posted a 10% increase in constant currency, due in large part to a pull-forward in demand related to the April consumption tax increase, while dollar sales declined 2%, reflecting the weaker yen. Therefore, we would expect a reversal in Q4 of approximately equal size, bringing the annual sales back in line with first-half trends.

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 tourists, notably in key European cities where the affordable luxury segment is out-performing traditional luxury.

Moving on to distribution. As our annual plans haven't changed materially from what we shared in the past, I'll be brief.

We now believe our square footage globally will increase around 7% in FY14, slightly below our original guidance of 9%. Primarily due to North American wholesale, where we purposefully deferred some openings and case line to open self-conversions to align with the next generation retail store design in FY15.

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 have discussed, we're on schedule to open about 30 net new dual-gender locations, increasing our square footage by about 25%.

And as noted in our press release, our business is now on course to deliver sales of over $540 million. While we expect to open a few stores in our other direct Asia markets, our primary focus remains on 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 that net square footage growth will increase slightly with the opening of about 5 to 10 new locations, most of them dedicated men's doors. And in Europe, including the UK, for FY14, we still expect to open about 10 retail locations focused on key European cities and a growing number of wholesale locations.

As you know, we also have a significant and growing distributor-run businesses in other markets. Our primary areas of focus are, first, other Asia Pacific markets; second, central and South America; and third, the Middle East.

Before handing the call over to Jane Nielsen, our CFO, I wanted to reinforce that we're excited about our vision for the brand and the long-term benefits of the initiatives currently underway. But we also recognize this is a multi-year journey. We understand that it will take time, as indicates of our first reinvention for our re-platforming to drive improved performance.

As such, we expect sales in FY15 to moderate further as we position the brand for healthy, sustainable growth. In addition to reduced sales, increased investments on transformation initiatives, including stores and marketing, will impact EPS.

I wanted to take this opportunity to provide this initial guidepost, but look forward to providing additional context. And more importantly, our plans to drive brand vibrancy and long-term value creation during our Analyst Day on June 4.

Now I'll ask Jane to provide some additional further detail on our financials and outlook for the balance of the year. Jane?

Thanks, Victor.

Victor has just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our third-quarter results.

Our revenues decreased 7%, with North America declining 18% and international increasing 14% in dollars. As noted, on a constant-currency basis, revenues were down 5% overall, while international sales rose 20%.

Net income for the quarter, totaled $191 million, with earnings per diluted share of $0.68. This compared to net income of $239 million and earnings per share of $0.84 in the prior year's third quarter.

Our operating income totaled $263 million, as compared to the $348 million reported last year. While operating margin was 23.9% versus 29.3%.

During this quarter, gross profit totaled $781 million versus $880 million a year ago. As expected, gross margin was 71.1% versus 74.1% for the prior year.

Our expense ratio in Q3 totaled 47.2%, compared to 44.8% 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 4Q 2013 restructuring actions and sale of RK, which funded higher spending on Coach brand marketing and helped offset the impact of taking Coach Europe in-house.

Inventory levels at the end of the quarter were $584 million, 13% above the $516 million reported at the end of last year's Q3. As mentioned on our last call, we planned for inventory levels to be up over the balance of fiscal year based on several key factors, including distribution growth, the acquisition of Coach Europe, higher average unit costs and our expansion into lifestyle categories.

Clearly sales below our expectations also contributed. We are carefully managing our open-to-buy to allow for the appropriate investment in Stuart's fall collection.

Cash and short-term investments sit at $775 million, as compared with $928 million a year ago, with a substantial portion held outside the US. On the balance sheet, as noted earlier this year, we continue to deploy international cash into high quality investments with higher yields and durations over a year.

And in turn, there's a shift between cash and short-term investments into other non-current assets. As expected, we ended the third quarter with $210 million outstanding on our credit facility, in order to cover our working capital needs in light of our investments in our business and our new corporate headquarters.

During the third quarter, we repurchased and retired about 3.6 million shares of common stock at an average cost of $47.99, spending a total of $175 million. Year to date, we've repurchased $525 million of common stock. At the end of the period, about $835 million remained under the Company's current repurchase authorization.

As noted in our press release, the Board declared a quarterly dividend of $0.3375 per common share, payable at the end of June, maintaining our annual rate of $1.35. It's important to mention that we have modified the timing of our annual dividend rate assessment to align with the Company's fiscal year end and the review of our annual operating plan.

Net cash from operating activities in the third quarter was $105 million, compared to $209 million last year during Q3. Free cash flow in the third quarter was an inflow of $54 million versus an inflow of $167 million in the same period last year.

Our CapEx spending was $51 million versus $43 million in the same quarter a year ago. We now expect that CapEx this year will be in the area of $250 million to $260 million, primarily due to new store openings and expansions across all geographies, and investments in the technology and infrastructure necessary to enable our global expansion and transformation.

The decline from previous guidance of about $280 million relates to a shift in the timing of retail store and wholesale remodels and conversions into FY15. While many of the metrics we have guided to remain intact, including our expectations for gross margin rate and SG&A investment spend, based on our third-quarter results, we have modified our outlook as follows.

First on sales, we now expect to deliver a mid single-digit decline in constant currency and a high single-digit decrease in dollars for the full year. This includes a fourth-quarter sales decline of about 10% with our North America comps in the range of our Q3 run rate.

Gross margin is still projected at about 70% for the year, which includes a fourth-quarter margin of about 69%, reflecting our usual seasonality between the third and fourth quarters. We now expect total SG&A dollars for the year to be roughly even with prior year, with increased investments generally funded by the restructuring actions taken in last year's Q4, but with some deleverage on the lower sales forecast.

This guidance reflects a mid single-digit increase in SG&A dollars in Q4, reflective of marketing spend and some timing of financial adjustments compared to prior year. Taken together, and based on the lower than expected sales, we would now expect operating margins to be in the area of 25% to 26% for the year. And finally, our tax rate is expected to be around 30% for the year, benefiting from certain discreet items, as well as favorable geographic mix.

Regarding our balance sheet, cash flow and capital allocation, we continue to have a strong balance sheet and operating free cash flow. As we've noted in the past, our first priority for cash is to reinvest in our business. And of course, we remain committed to our dividend.

However, given our current outlook for the business, domestic cash flow requirements, including funding our transformation initiatives to drive long-term growth, we do not anticipate further share repurchases during the remainder of FY14.

As Victor mentioned, we look forward to sharing more of our plans to drive productivity, restore growth, and create long-term shareholder value the at our Analyst Day in June.

I'd now like to open it up to Q&A.

Thank you. We are now ready to begin the question-and-answer session.

(Operator Instructions)

We ask that you please limit yourself to one question per request. The first question today is from Bob Drbul with Nomura.

Hi, good morning.

Morning.

Victor, on the comments as you looked at FY15, I was wondering if you could give us some insight, when you think we will start to see the benefits of the transformation play out.

Morning, Bob. Thank you for your question. We obviously have been very consistent in saying that we're on a multi-year journey. We're really excited about the vision that we have.

In fact, we just spent yesterday reviewing our spring product. I could not be prouder of the work that Stuart and the team are doing. We also showed the team the new Studio Sofield design that will be the basis of our retail rollouts moving forward from the fall.

We also understand, however, that our vision, while clear is not yet known to all of you. We're really excited about sharing it with you and taking you on this journey with us. Which we plan to do June 4 when we show you exactly what we're doing on product, work around our stores, and of course the marketing plans that we will have around brand transformation.

Great. Thank you very much.

Thank you. The next question is from Oliver Chen with Citigroup.

Hey, guys, thank you. Regarding what you're seeing right now in the outlet channel, could you brief us on the promotional environment there? And also, as you undergo the transformation, could you let us know regarding full price versus outlet in terms of what we should think about as product and marketing gets refined further? Thank you.

Hi, Oliver, it's Fran. As noted, we were more promotional during the quarter, specifically in North America factories and specifically on clearance. Part of the cost decline was due to a deceleration of traffic in the factory channel.

We did push the business a little bit harder there. So that was our positioning in factory for the quarter.

In terms of going forward, we were also less promotional on EFS. We did limit access to the site, as Victor discussed in his prepared remarks.

Oliver, in terms of your second question in regards to brand transformation, we're of course looking at all channels as part of our transformation, not just full priced factory. But also of course our wholesale channels, where we have made some comments in terms of the work that we need to do in re-platforming that business as well.

Saying that, we understand that our full price business must lead. All of our attention to date, or the vast majority of our attention to date, has been on full price products, stores and marketing. We expect that Stuart's focus on the factory channel will lead to roll-out of product in that channel from spring-summer, with some initial product coming in December in a small way.

Okay, thank you. As a quick follow up, as we look to this transformation taking place, which comp lever are you most encouraged about going forward on a long-term basis? Which would be the leading inflection point in terms of which comp lever would we monitor?

Sure. We know, Oliver, that traffic is a lagging indicator. We would expect conversion to be the first sign of transformation taking hold. And of course, moving forward as well, potentially, some slight increases in AUR as we continue to shift our assortment.

Thank you very much.

Thank you. The next question is from Ike Boruchow with Sterne Agee.

He, everyone, thanks for taking my question. Victor, can you remind us what changes we should be expecting to see when we start to visit stores in September, with the new fall collection? Meaning how many stores of the base will be showcasing the new assortment?

How will the department store channel handle the launch? And how should that roll-out progress as we move into 2015 and then into 2016? Thank you.

Thank you. We will see, of course, the major shift in our full price channel, with 80% to 85% of the SKUs transforming to Stuart's new collection globally. That is across all of our full price locations.

In addition, we will start with Sofield, and that means wholesale as well, of course. In addition, we will start seeing the new Sofield concept rolled out in key flagship stores in North America if the fall.

We will start with Rodeo Drive, AOL Time Warner, and as well, one international flagship, [Wishinjuku], in Tokyo also being re-platformed. Then from holiday, as I mentioned earlier to Oliver's question, we will begin to see the flow-in of a few SKUs in our factory channel, which have been inspired by the new collections that we have in full price, with a much broader roll-out coming in spring-summer as our attention turns to that channel as well.

Okay, great. Then a quick question about the Easter impact to your quarter that you guys just reported. Curious if you guys have quantified that. Maybe I missed it.

About 100 basis points.

Okay, thanks. Good luck.

And then, we have also called out weather was about 200 basis points.

Got it. Thank you.

Thank you. The next question is from Brian Tunick with JPMC.

Thanks, good morning. I wanted to talk a little bit about the real estate and your conversation about remodels and conversions pushing into 2015. Should we, A, expect CapEx then to shift into 2015? Does that impact how you're thinking about the buy-back program, which I think was $1.4 billion over a two year plan?

And then, on the store closing side, how many leases come up on the full price side over the next couple of years? Would you consider accelerating the store closing program if comps don't meet your plans?

And then the second question is on your guidance, Victor, for next year as we try to get ahead of it, what do you mean by sales expected to moderate further? Any more color on the earnings line, as well, would be helpful. Thanks very much.

Brian, why don't I take the first part of your multi-part question, and then I'll turn it over to Victor. So in terms of what we called out in terms of CapEx, we do expect that those remodels and wholesale renovations will roll into FY15.

We are looking across, as part of our business transformation, all of the needs required for brands transformation. And that will certainly be a part of that as we move forward into CapEx.

As it relates to our share buy-backs, what we had guided to was about $700 million of share buy backs. We have completed $525 million, as I mentioned.

It's really based on our current cash flow forecast, our domestic cash requirements to really invest in our business. That's our primary focus.

We'll continue to keep you, to update you on that as we move forward. As we have called out in this quarter, we're very committed to dividend as our primary means of returning capital to shareholders.

You stepped back and asked about our store leases. As a part of our transformation, and I think as Fran mentioned on the last call, we are looking critical across our entire fleet and across our entire asset base. And aligning that for long-term brand growth and aligning it with our transformation.

Brian, in reference to your question on FY15, we really don't have much more texture to provide at this moment. Really looking forward to sitting with all of you on June 4. Sharing with you all of the details and plans and texture around the guidance that we have provided. And sharing, of course, the vision of having all of you meet the talented group of individuals who are executing around our plans.

Thank you. The next question is from David Schick with Stifel.

Hi, good morning. My one question is, when you think about the 13 stores, full priced stores, in North America, could you take us through your thought process on culling stores? I understand there are still stores to be opened, but the thought process, how you look at markets, the stores themselves, or the future vision as it pertains to right-sizing the store base. Thank you.

Hi there, so we have been taking a look at our total fleet and undergoing a very comprehensive review, first of the economics of the stores. We have also been looking at our 12 major markets and really trying to understand how penetrated as a brand we are in those markets. Obviously economics and profitability will drive most of our decisions as we go forward and continue to assess the fleet.

We're doing this across full priced stores, factory stores, and wholesale, so that we have a very comprehensive understanding of the brand's positioning. As I said, in first in our most important 12 markets, but this is throughout the entire fleet. We are looking at a number of different metrics and evaluating them so we can continue to be opportunistic on a go-forward basis.

David, I would only add that of course we're leveraging all of the data that we have internally in it terms of name capture from all of our locations to understand consumer movements across channels and within channels. Of course, looking at opportunities both from a competitive perspective as well as mall vibrancy, to understand where we can leverage, as Fran mentioned, other channels, whether it be our wholesale presence, which is quite extensive. Or of course more importantly, and very much a topic du jour for all of us in the retail space, is the power of the Internet and how we can leverage that in a transformative way as well.

Thank you.

Thank you. The next question is from Barbara Wyckoff with CLSA.

Hi, everybody. Given the weakening traffic at the outlet malls, why would you be opening 15 stores there? I know that's where all the action is in terms of new mall development, but it just seems like a lot. Could you verify when the Herald Square store goes into the comp base?

Yes, okay. Hi. As you know, our factory store division is incredibly profitable, so we're taking a look at all of the new store development that is happening on the factory side, and looking very carefully at those opportunities.

We continue to see new premium mall development with increasing co-tenancy from European luxury players. Therefore, we are proud of our positioning in these malls and centers, and also deliver incredible productivity and profitability in the new stores that we plan to open. That is contributing to our revenue top line.

Herald Square is comped in October.

October. Okay.

I would add to what Fran said in reference to the factory outlet channel. As you know, and we have discussed this a few times, and I think you hinted to, is the vibrancy of this channel globally, and it is relative.

Of course we see the full price channel in general, especially in the US markets, suffering much more dramatically from traffic trends. Of course Q3 is a very unique situation, given the weather impact and given that all of these malls, or the vast majority of them of course, are outdoor malls and therefore would suffer more at this moment in time.

Thanks.

Thank you. The next question is from Omar Saad with ISI group.

Thanks, good morning. Question on SG&A and the philosophy. I think it's going to be roughly flat, maybe down in dollar terms this year, based on your guidance.

Are you thinking about, you've got all these different initiatives in play, and transformation projects going on, when do you think about ramping up the spend in dollar terms? Are you going to wait to see an inflection as the new product and the new direction under Stuart on the creative director side starts to see the sales impact of that? Or is the spending really going to ramp up ahead of any turn in sales? Thanks.

Yes, Omar, I think as we called out, a big part of our SG&A guidance for the fourth quarter is a ramp-up in marketing as we anticipate Stuart's product arriving in stores in September. So we are committed to investing in our transformation, and we're committing to investing in this now in order to drive the momentum as product arrives in stores.

Thanks.

Thank you, Omar.

Thanks. The next question is from Dana Telsey with Telsey Advisory Group.

Hi, good morning, everybody.

Good morning, Dana.

Hi. Can you talk a little about, if you think about full price in department stores, how did the business differ in Q3? Was there any difference in terms of what sold through and what you're seeing there? And then on the transformation, how do you see the marketing plan for both international and North America? Timing and cadence, what you're seeing. And lastly, inventory, as you get to the end of the year, how should we be thinking about it? Thank you.

I'm going to let Jane in a moment discuss inventory. In relation to the question on the wholesale channel, Dana, we have not really seen dramatic change in trends. That channel overall was less impacted by traffic declines this past quarter, obviously for many reasons, and has performed generally better than the overall mall environment.

In terms of marketing we're very focused on right now, with Stuart, in leveraging external and internal resources and putting together a very detailed plan. We look forward to sharing that with some texture, both in terms of the visual imagery and the actual media plan with all of you, along with PR and press, at events and the like at our June 4 Analyst Day.

We're really looking, of course, at a multi-year journey to drive consumer perception around the brands. We know that product and our store experience will be key in that. But of course are very excited about communicating this vision to consumers.

It will be a global campaign. Obviously in terms of execution, there may be some tweaks by markets, around language and the like. But we do see it being very consistent and global.

On inventory levels, Dana, we called out that for the balance of the year, we expect our inventory levels to remain high. Based on some of the factors that we called out related to our business, distribution growth, higher AUCs, the acquisition of Coach Europe and our expansion into lifestyle.

Also as our inventory obviously is impacted by our sales growth, but it's below our expectations. As we move through, we still continue to look at our factory channels, our primary means of moving through inventory.

We have always had a small portion of our product in this position. We'd expect to increase that somewhat as we move through the balance of the year.

Thank you.

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

Good morning, thank you for taking my question. We've been dancing around it a little bit, but I was wondering what appetite you have or tolerance you have, for planned reductions in your sales base to restore the Company back to health.

Obviously you have made this change with your presence in the flash sales sites and there's the preliminary guidance for 2015. Would you consider taking a bigger planned haircut to sales to restore the Company back to its historic health? It's still quite healthy, you know what I mean.

And then also, I had a question on the 12 markets that you identified focusing on. What percent of your stores and your sales are those 12 markets? Are you seeing some dynamic that's different in those 12 markets versus the rest of your store base? Thanks.

Thank you, Liz. I think in terms of planned reductions, we realize that it's obviously a delicate balance. As you referenced we see ourselves doing just that.

Obviously the strategic steps that we have taken in relation to all of the work with reducing partnerships with third party sites, reducing invitations to our data base in terms of our flash web sites, are all actions that we have taken towards protecting our long-term brand health. We really will then look at, of course, driving all of the positive steps that we need to take in terms of product, in terms of marketing and in terms of stores to drive relevance and to drive aspiration around the brand. And of course, as mentioned earlier, conversion and eventually sales through those actions.

Thank you. The next question is from Lorraine Hutchinson with Bank of America.

Thank you, good morning. How much testing of styles and colors have you been able to do for this fall's launch versus prior seasons?

Hi there. We have not tested any of Stuart's new products. As you know, Stuart joined us about 6 months ago. So he's been very, very busy executing for the new product development for his fall collection.

While we haven't tested anything to date, we will be looking at one or two styles in later in spring, early summer, which will guide our buys. But more importantly, I would add what we know and have shared, which is that the editorial reviews have been absolutely fantastic.

Our first audience, of course, is always our internal teams and our global buying teams, who have been here, actually, this week and last week. Last week they were here to review our outlet product presentation for spring. This week they're reviewing the full price product.

I can tell you that the reactions have been terrific. I certainly personally have never been more optimistic about a new collection in my seven years at Coach than what we are about to launch in the fall, and what e are seeing for spring today.

I want to go back to Liz's question because we didn't answer the part two, which is how important are the 12 markets. The 12 markets represent about 50% of our overall sales. They represent more than that in traffic.

And in terms of consumer perception, they're key to really changing brand perception. And so we're going to focus on those 12 markets, certainly with Studio Sofield, and the brand transformation efforts that we have around marketing products in stores.

Thank you. The next question is from Michael Binetti with UBS.

Good morning, guys.

Good morning, Michael.

One thing that I think is counter-intuitive, and I think we have talked about it on past calls, is how you're going to be able to go to market with price points you want in the full price stores, which would include raising price points. While we have seen how hard it is for both you guys and for anyone to reduce the amount of couponing or promotionality in stores like factory outlets. Maybe you can help us think about how we can think about pricing integrity for the brand based on where you're at today.

Sure. It's a terrific question, Michael, because as you suggested, it is of course counter-intuitive. I would caution, though, that the strategy is not to increase prices across the board. The strategy is for us to continue to work on rebalancing our assortments across the various price buckets.

We have absolutely no intention to give up on the $300 sweet spot in our full price channel and slightly below that, that exists in the wholesale channel. We're going to be developing into those price points moving forward.

We look forward to showing you side by side the current product as well as the future product in those price buckets, and the increased value that we're working to provide consumers. Moving forward, value is not just about a price point. It's going to be about quality, great design and, of course, all of the aspirational imagery that we're going to be developing around the Coach brand through what we do in our store environments, customer experience and marketing.

So we're really excited about that. I think seeing that holistically, which hopefully we will be able to show all of you on June 4. We'll provide a little bit more clarity around the vision that we have on how we're bringing that to life.

Okay. And then, Jane, if I could follow with one question. As far as the share repurchases, any way you could give us some early thinking on how you would look ahead? And say, potentially this is what would cause us to restart share repurchases. Thank you.

As we look back, our priorities for cash have remained the same. Our first priority, as we have always said, the best thing we can do for our shareholders is to invest in the growth of our business.

Our second priority is we'll look to make value-accretive acquisitions. And then our third priority is to return capital to shareholders.

As we've said today, we're committed to our dividend. We really view repurchases as what we would do with excess cash flow.

So those are the priorities and that's our view on repurchases. It's really about our investment needs and our outlook as we move forward.

Thank you.

Thank you, the next question is from Randy Konik with Jefferies.

Hey, great, thanks a lot. My first question is regarding the fiscal fourth quarter comp guidance. I think you said it was going to be similar to the third quarter. How do we think about that, given that you said the third quarter was negatively impacted, I think by 300 basis points, because of the Easter shift and weather?

Can you talk to us about on one hand it sounds like you're trying to elevate the brand, and you spoke about the penetration as an increase of higher price points. But yet you're continuing to expand the outlet channel distribution.

How are we supposed to think about the that balancing act? What's the vision long term for how the outlet sits in this business model, the price points sit in the business model and then how the logo sits in this business model? Thanks.

Randy, as we think about our fourth-quarter comps, I think we have been clear that we're not going to call a change in trend in the business until we have seen it. As we give you guidance in any quarter, we give you our best estimates, based on what we're seeing in the business at that time.

Obviously, as we called out clearly, traffic deterioration in our business was the key factor that led to the change in comp. We clearly had Easter overlap, we had a weather impact, but traffic was the real challenge, relative to our expectations.

Okay. In terms of your second question, which is indeed, as you suggested, a really important balancing act, I would just say that this is not a change in our business model. The word elevation is not about transforming Coach into what we perceive or what may be perceived as a traditional luxury brand.

Indeed, while some may believe that affordable and luxury are two words that don't go together, this brand has been created and has that as its purpose. Affordable luxury as its positioning, and that's what we will do moving forward.

Indeed, we're really excited as I mentioned earlier, about providing extreme value to the consumers at really great price points. Quality, great design, great materials, craftsmanship are all a part of what has made Coach great and what differentiates us from many of our traditional competitors. Especially the new accessible luxury competitors that have arisen in the market space. That's part of our mantra and what we're going to reclaim.

As it comes to the factory channel, there are some who believe that there may be a magic formula to full price doors to a factory door, or three to one, or four to one, or whatever it may be. I haven't seen that at play in our own analytics.

Certainly there is a fine balance and it really comes down to consumer perceptions across the channels, as we have suggested and talked about. We have taken very important steps as it relates to how we deal with the online EFS customer, in terms of trying to manage those impressions.

And as it relates to the actual outlet channel, we will make any moves in a very careful way in terms of selecting doors, looking at cannibalization. And doing so by markets, as Fran suggested earlier.

When we really talk about advancing the brand across these 12 markets, we're talking about doing so across all channels. We'll make a move across full price, factory and wholesale, and drive brand perception first and foremost across these 12 key major metropolitan areas in the US. And as we do so, globally as well, across the major fashion capitals.

Thank you, the last question today is from Faye Landes from Cowen and Company.

Hi, thanks for taking my question. Two things, first of all, I may have missed it, but Brian's question earlier, about the cadence next year of sales. I know it's preliminary, but how we should be modeling next year. And also if you could talk about some of your staffing. You have had a couple people leave, Jeffrey [Hiel], I don't know the pronunciation. But who is in that job now? Are there other roles that you need to fill?

(multiple speakers) We have obviously a very experienced senior management team. We're very happy for Jeffrey, and his own move in his career.

What I can share with you is that Stuart has a tremendous amount of experience in the men's space. Just yesterday we have seen the new men's collection, which has continued to evolve and looks absolutely great. We're excited to show that to you on June 4 as well, and you'll be able to see it live.

In terms of FY15, I think Victor called out that our expectation at this point is that sales will moderate further. We're not giving any more specific shape as to FY15.

To moderate further, though, means more negative.

Correct.

Correct.

Okay. All right, great, thanks.

Thank you. That concludes our Q&A. I will now turn it over to Victor Luis for some concluding remarks.

Thank you, everybody, for joining us. Of course we're disappointed by our North American performance, especially as it relates to our women's handbag and accessories business. But we're incredibly excited and happy to be in what is, and continues to be, a very vibrant category.

Our international business, our men's business, our footwear business all points into the positive direction. As I mentioned earlier, unfortunate that you all can't see what we're seeing and experiencing in the last six months, with the steps that we have taken forward towards brand transformation.

I am more optimistic than at any point during my seven years at Coach in terms of the clarity of our vision, and how the actions that we are taking move in a very positive direction towards bringing that vision to life. And very excited about sharing that with all of you when we're together June 4. Thank you.

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