掛毯 (TPR) 2015 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 Chief Executive Officer; and Jane Nielsen, Coach's CFO. Before we begin, we must point out that this conference call will involve certain forward-looking statements including projections for our business in the current or future quarters or fiscal years.

These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences. Please refer to our latest annual report on Form 10-K, our quarterly report on Form 10-Q for the period ending December 27, 2014 and our other filings with the Securities and Exchange Commission for a complete list of risks and important factors.

(Inaudible) may not be indicative of future performance. Now let me [add long] speakers and topics to this conference call (inaudible) will provide an overall summary of our third fiscal quarter 2015 results and we'll also discuss our progress on global initiatives across markets. Jane Nielsen will continue to (inaudible) on financial and operational results for the quarter and our outlook for the balance of the fiscal year.

Following that we will hold a question-and-answer session. The Q&A session will end shortly before 9:30 AM. We will then conclude with some brief summary comments. I'd now like to introduce Victor Luis, Coach's CEO.

Good morning. Thanks, Andrea, and welcome, everyone. As noted in our press release, our third quarter results were in line with our expectations and annual guidance, adjusted for the stronger than expected dollar. We continue to see steady progress in our results with sequential improvement in our bricks-and-mortar stores in North America as we continue to make strides against our brand transformation agenda, including greatly reduced promotional impressions.

International growth rates remained fairly stable, up mid-single-digits in local currency with China and Europe driving overall performance and offsetting the difficult comparison with Japan this quarter, as we were up against the pull forward in advance of the tax hike effective on April 1, 2014. Overall, we are pleased with our team's execution as we continue to gain traction on the strategic plan to reinvigorate growth and drive the Coach brand's relevance.

In the weeks ahead, we look forward to completing the acquisition of Stuart Weitzman, which we announced last quarter, a luxury footwear brand that we believe has significant domestic and international growth potential. As noted previously, we will develop each brand separately. Over the longer term, we will learn from each other, driving synergies across our respective businesses.

Specifically, we will leverage Coach's international infrastructure and expertise in handbags and accessories to develop Stuart Weitzman's handbag and accessories business. And in turn, Coach will benefit from the Stuart Weitzman team's expertise in footwear development where they are proven leaders in fashion and fit. As we prepare for the integration of Stuart Weitzman, we have renewed Coach's women's footwear license with Jimlar for the next two years. This will allow us to develop the multi-brand infrastructure and systems necessary to bring the category in-house.

We are very excited about our first acquisition and look forward to welcoming the Stuart Weitzman brand and organization into the Coach family. Separately, we also just announced a new multi-year fragrance agreement with Interparfums upon expiration of our license agreement with Estee Lauder and expect to launch our first scent with our new partner in the fall of 2016. Before we get into a discussion of the quarter and our progress on Coach's transformation, I wanted to briefly touch on our global pricing strategy since the topic has become a focus for our peer group given the volatility in global currencies.

Our pricing strategy has always been to provide exceptional value in local currencies to our global customers. We aim to be approximately 40% to 60% below our traditional luxury competitors, and at this time we do not have plans to change our strategy. Coach will continue to deliver on its modern luxury proposition, offering superb handcrafted products and superior customer service in image enhancing locations.

Given our high level of fashion innovation, we price our products each season and always consider exchange rates at product launches while taking into account the pricing structure of both domestic and international brands in each market. Now as we've been doing since we unveiled our playbook last June, I thought we would share some of the actions we've taken in keeping with our plan, as well as our updated learnings and results across the three brand pillars.

Starting with product, Stuart Vevers designs represented virtually all of our retail stores women's offering during the third quarter, led by our key silhouette, Swagger, available in a number of sizes, colors and novelty including [hats.] In our outlet stores globally, Stuart's impact was also noticeable for the first time with new groups and collections including Mickey, Ruby and Morgan complementing Phoebe, Christie, and Kelsey, previous retail favorites.

Margot, his first outlet design introduced for fall, continues to be strong. Stuart's product represented about a third of our outlook stores women's assortment during the third quarter. Most generally, our approach at providing value through product elevation has continued, putting more make and quality in the product has been very well received by outlet customers globally giving us confidence in our long-term direction to drive relevance across all channels.

In addition, we held our third New York Fashion Week presentation in February, showing our fall 2015 collection and once again garnered overwhelmingly positive reviews from both the editorial and retail communities. Following the fall 2015 presentation, we generated about 193 million lifetime impressions in the market, up approximately 50% from our presentation of spring 2015 in September.

And as the editorial community and fashion press has continued to react positively to our brands, we are also seeing continued progress with consumers. Our quarterly North America brand tracking survey [fielded] in March showed further improvement among category drivers that Coach is perceived as less promotion, while our brand [affinities] remains strong overall. In our third quarter, we continued to reaffirm that fashion when supported by marketing drives high sell-throughs, as has been the case with the great success we have experienced with Swagger.

On stores, during the quarter, we continued to renovate and open new stores globally in our modern luxury concept. By quarter end, we had 40 that reflected the new design including our first modern luxury outlet stores in Asia. Naturally, we are adjusting the level of investment and renovation to the market running the gamut from light touch warm ups to complete rebuilds, but always ensuring that are differentiating from the competitive landscape in an authentic Coach way.

The four North American stores we opened in November continue to post positive comps and well outpace the balance of chains. I will shortly touch more on the newer renovations in our discussion of the domestic business. Internationally, we have seen significant inflections virtually across the board following renovation, from flagships in Taipei and London to our outlets in Youju, Korea.

During the quarter, we conducted a modern luxury store intercept and shop-along survey in both the US and Japan with over 100 customers in each market. We found that, one, customers are reacting very positively to the new environments, as about 75% of those interviewed said that the modern luxury store makes them want to shop at Coach more often. And, two, our modern luxury stores are resonating with customers as sophisticated, luxurious, comfortable, and inviting across both markets.

This new store environment is especially appealing to the category drivers who found the store fresh, elegant and having a more elevated feel. As we continue to negotiate temporary locations with landlords for directly-operated stores, work with our international wholesale partners for appropriate spaces and co-tenancies and work through lease negotiations a number of projects have now shifted into FY16.

Specifically, while our North America projects, about 70 renovations and five new stores, are on plan, approximately 50 international renovations and 10 new international stores have moved into FY16. We are now targeting about 100 global renovations in FY15 and to open about 40 to 50 new stores globally in this concept for a total of 140 to 150. As expected, this means we will have a very back loaded year in terms of store investments with approximately 75 renovations and about 25 to 35 new openings this quarter.

Through the third quarter, we closed 56 North American retail locations, most in January, as mentioned on our last earnings call, and we are on track to close approximately 70 for the full year. In addition, we closed 13 outlet stores through the third quarter including 10 men's only outlet locations which we folded into existing stores leveraging the teen and cross shopping opportunities.

And as noted in our last call, we also closed the two outlet stores identified as a part of our learning agenda at the end of January. In North American department stores, we have already completed well over 200 projects over the first nine months, mostly installing open-sell environments and replacing the old case lines, and have seen an improvement versus the balance of doors. We still expect to convert over 300 total locations from case line presentations to open sell this fiscal year.

We are also on target with the shop manager program in the wholesale channels with approximately 30 managers in key doors today with the goal of adding an additional 20 shop managers by the end the FY2015. We are taking the learnings from our successful new stores and are using them to inform the development of the modern luxury concept for other channels. As noted, our first outlet stores have opened internationally during the third quarter, and just about two weeks ago we opened our first new modern luxury outlet store in North America, Savannah, Georgia.

We also working on both a wholesale store and travel retail concept and have done our first set of warm up stores that are not getting the full expression of modern luxury. On the marketing and customer experience front, continuing with our comprehensive marketing strategy, for spring we had a focus on Swagger and presented a new Dreamers campaign featuring actress Chloe Grace Moretz and recording artist Kid Cudi. Together, they brought a more relatable and understandable approach to the campaign.

We supported our coach Swagger bag with a compelling and holistic global print and digital campaign including our viral #whatsyourswagger driving over 250 million impressions, traffic and sales. Earlier this month, we garnered over 100 million impressions during the Coachella Music Festival with our Coach backstage concert attended by global celebrities.

We also saw increases in editorial mentions in all three major markets, North America, Japan and China, while our editorial [ranks] rose in North America and Japan while holding in China. And as we increased our positive brand impressions, we've also continued to pull back on our North American promotional activities. Consistent with our previously announced strategy, during the spring quarter, we held only one invitation-only customer event in mid-March about spring break.

We also reduced the cadence of eOS flash sales from three a week last year to about two a month this quarter, thereby meeting our goal to be down to about two events per month by the end of the fiscal year. In addition, there were no Coach Days in North American Department stores during the third quarter as compared to an average of approximately 30 days across wholesale accounts in the third quarter of 2014.

So while much of our journey remains in front of us, we are very pleased with what we've accomplished thus far in FY15, and we'll continue to update you on these initiatives as we move forward. Turning to the results of last quarter, some key financials were, first, net sales on a reported basis totaled $929 million versus $1.1 billion a year ago, a decrease of 15%, including a 3% negative impact of currency.

Second, earnings per share totaled $0.36 excluding transformation-related charges, as compared to $0.68 in the prior year's third quarter. Third, international sales increased 4% on a constant currency basis and decreased 3% in dollars to $428 million from $441 million last year. China sales rose 10% in constant currency and 8% in dollars with positive comparable store sales, while sales in our directly-operated locations in Asia and Europe rose in constant currency, as well.

And, fourth, North American sales fell 24% to $493 million from $648 million last year on a 23% comparable store sales decrease, as expected given the further reduction of eOS sales. During the quarter, looking at distribution and consistent with our annual guidance, there was a significant decline in our global directly-operated door count reflective of our North America retail store closures, the majority of which, as planned, fell in January.

In total, our global location count was down 48 including a net decline of 54 in North America, two net closures in Japan, four net openings in mainland China, and four net openings in the rest of Asia. As you know, we are primarily focused on replatforming our stores, elevating brand perception, optimizing our store fleet, and opening new locations selectively in key markets.

Moving on to sales by channel and geography starting with our domestic businesses. Our total revenues in North America declined 24% for the quarter with our directly-operated businesses down 23%. As noted, total Q3 same-store sales declined 23% with a further reduction in eOS events to twice monthly pressuring total comps by about 11 percentage points as store comps declined 12%, a sequential improvement from the 16% decrease posted in Q2, and 19% decrease in Q1.

As expected, in department stores, our sales trends at POS were well below the Company's directly-operated stores reflecting both the elimination of Coach Days, as I mentioned, and the heightened promotional activity in the category. Shipments into the channel declined to a somewhat greater degree than POS sales. It's worth reiterating that while we've been pleased with the relative out performance of the locations we've converted to open-sell these were amongst our smallest doors and, therefore, haven't provided a significant overall contribution.

We expect the fourth quarter will remain challenging at POS in this channel given the planned decreased in year-over-year promotional activity for the spring season. Overall, we estimate that the North American premium women's and handbag accessories market rose at a mid-single-digit rate in the March quarter showing a slight moderation from recent trends, while the overall growth reflects an ongoing benefit from the [specular] shift into accessories from the [past.] We continue to believe that the category will grow at about a 7% compound annual growth rate over our planning horizon.

Turning to men's, which represents 18% of the global category spend, or about $7 billion today. As we've discussed, we're also continuing to drive our men's business globally, primarily through new dual gender stores. In the third quarter, Coach's global sales of men's bags and accessories were up slightly, impacted by the weak yen and the pull back of promotions and POS in North America. Backpacks and our new husband bag with a modern business sensibility have been particularly strong.

And as noted on our last call, we were delighted with the response to Stuart's first men's lifestyle presentation during Fashion Week at London collection men's in January and look forward to his collection arriving in stores this fall. Therefore, looking ahead, we remain bullish about the prospects for our global men's business and are continuing to target $1 billion in sales in calendar 2017. Before we discuss international sales, I wanted to provide some more insight into our North American business and third quarter results.

In aggregate, and as planned, our total store comps were down low-double-digits at negative 12% with higher ticket offset by a decline in traffic which was pressured by the overall weak mall trends, as well as lower conversion, which was greatly impacted by the reduction in promotion days in our retail and wholesale chains. Our total comp was pressured an additional 11 points by eOS as we pulled back from three flash sale events a week in last year's third quarter to about two events a month this spring.

Looking at results sequentially, average transaction size in both channels rose and was the primary driver of the 4-point comp improvement in bricks-and-mortar stores as elevated fashion and compelling novelty drove improved handbag performance. And while mall traffic continued its secular decline during this spring, as measured by ShopperTrak, we did see a relative sequential improvement in our traffic from the holiday quarter despite the weather, meaning while still a drag to our overall comparable store sales, it was less onerous than in the second quarter.

Conversion, impacted by the pull back in promotional activity, continued to be pressure as expected. And though we did not have any additional North America stores in our new concept opened for the quarter, the four stores renovated and reopened during the holiday, Time Warner, Rodeo Drive, Fashion Valley and Manhasset continued to comp very positively, individually and in aggregate, well above the balance of the retail [group.]

Over the last few weeks, beginning in mid-March, we did complete several renovations of varying scope from warm ups to more significant upgrades on 13 relook retail locations and also opened our first new modern luxury store in San Juan, our only retail opening in FY15. While early days for these locations, we're pleased with initial performance. By the end of the fiscal year, we expect to have completed about 35 additional renovations.

We also continue to see relative out performance in the 12 MSAs in North America where we are most focused and where we are distorting our attention. I know many of you are also interested to hear about the impact of those 56 retail store closures on revenues, and in turn, sales transfer to the existing fleet. As a reminder, and as noted in our analyst day presentation last June, these were the least productive stores in our fleet, so their impact to overall revenues and operating income is very small. Similarly, the sales transfer and impacts to comp in those markets where other retail stores were present was also expected to be small.

Since January, when the bulk of these stores closed, the results have been inconsistent across markets. In some cases, such as Miami and New Jersey, and also Southern California, we have seen the lift notably in traffic. In other areas, such as Chicago, we haven't seen any change yet. Given the short time period since our closures, we will continue to monitor results.

We are also working on specific actions to steer and guide customers to other doors in their respective markets. As mentioned, we also closed 10 men's outlet stores which were successfully folded into women's locations in the same malls, as well as two core outlet stores as part of our learning agenda, originally discussed at our analyst day. These closures, both in January, were executed to better understand crossover between outlet and retail stores, as well as our ability to influence purchase behavior.

While very early days, thus far we have not seen any transfer from outlets to retail stores in these markets. At this early stage, it appears that customers are dedicated to their channel and mall and there is little transfer even to other outlets if we close the customer's primary store. Of course, we will continue to monitor these shoppers over the longer time period to see if these very early takeaways remain valid.

Drilling down a bit more on our retail performance, while we have now anniversaried the tighter assortment of handbags, we continue to see absolute strength in our elevated products. More generally, the above $400 price bucket grew in penetration, saw another positive comp, and continued to represent over 30% of handbag sales versus roughly 23% last year.

More broadly, leather continues to outpace logo across all channels, and we are designing into this trend. It's both a shift that favors Coach longer term, given our heritage in leather goods, and elevates our impressions in the marketplace. In the third quarter, logo across all categories represented less than 5% of retail sales compared to less than 10% a year ago, and in outlet was down below 30% versus 40%.

Importantly, this trend has also resulted in significant increases in average handbag price points for traditional luxury brands due to their previous reliance on vinylized canvas and/or [chicard] fabrications and the necessity to pass on increased costs of using leather to their consumers, thereby creating additional white space in the market and a further widening in our relative price points and value perceptions. Outside of handbags, we continue to see relative strength in our lifestyle categories in the third quarter.

Women's footwear again increased its penetration from last year's level of about 8%, growing to about 10% of North America retail sales in those stores carrying a full offering. Men's footwear, introduced last fall, was also well received in retail stores. In addition, we are seeing a positive response to our expanded men's and women's footwear assortment in outlet stores.

In total, we saw a significant increase in footwear sales across all directly-operated channels in North America. In outlet, where the overall environment continues to be very promotional, the customer responded to the storytelling presentation throughout the store, along with supporting email campaigns. Neon was a great example of this in March.

As mentioned, we've just opened our first modern luxury outlet store in North America in Savannah where customers have been surprised and delighted by the elevated environment. As I've already talked to the global learnings around product, stores, and marketing in my opening, I'll move on to our fourth quarter initiatives. We are very excited about the arrival of Colorburst Swagger which will be our Mother's Day key item, and our Festival Styles, featuring flame-stitched patterns across multiple silhouettes in retail stores globally.

For Mother's Day, we brought back our #MyFirstCoach social media and digital campaign, celebrating your first coach in life, your mom. In June, we have a new story, the Turnlock [hide] in tote, shoulder bag and rucksack shapes. In outlet, our integrated Mother's Day floor set highlights our Pretty Pink floral. In June, we'll bring in a new Americana floral print available in the tote and [batchen.] As discussed during analyst day and subsequent calls, our approach to customer events, formerly known as PCE, are far fewer in number annually, about three, focusing specifically on our best customers during key holiday periods such as our Black Friday event during the holiday, and our Spring Break event in March.

We expect to hold one event in the fourth quarter around Mother's Day, taking us to three for the year, as planned. We are being far more tailored in our segmentation, selectively extending invitations. Separately, with two semi-annual sales now under our belt, we will continue this practice moving forward with our next event scheduled to begin around Memorial Day and end shortly after July 4 taking advantage of the higher traffic during the holidays.

This approach will support sustained sales growth and build our brand reinforcing our multi-channel positioning. Overall, we are pleased with the steps we've taken to reposition Coach, notably in the North American women's business adding more emotion and excitement to the product offering, and around our brand. Turning now to our international segment, which represents about a third of Coach's business, sales rose 4% on a constant currency basis in the third quarter, but declined 3% on a reported basis impacted by the stronger dollar.

As mentioned, China sales rose 10% from the prior year in constant currency and 8% in dollars with positive comparable store sales and slower distribution growth in line with our forecast. We remain optimistic on the prospects for this market over time as the long-term drivers we've consistently mentioned remain intact, including a rapidly growing middle class and overall shift from pure status to value, as well as the recent anti-corruption and anti-extravagance campaigns favoring the affordable luxury segment and the evolving retail landscape with the development of new luxury shopping malls.

While we are still targeting sales of $590 million to $600 million, which now reflects the negative impact of the stronger dollar, we expect that there will likely be continued volatility in the near term due to both macro issues and geopolitical events which are impacting trends in China and some key tourist markets. Consistent with our peers, we have seen continued and increasing traffic challenges in Hong Kong, as new demonstrations have targeted cross-border shoppers in key malls.

We also experienced a pickup in Chinese tourist spending in Japan and Europe, especially around Chinese New Year aided by the compelling value, the weaker yen and euro has provided for the Chinese shopper. At this point, our other Asia direct businesses outside of China and Japan, South Korea, Taiwan, Malaysia and Singapore, posted positive aggregate growth in local currency.

In Japan, we posted an 11% decrease in constant currency, somewhat better than expected, as the difficult compare against last year's pre-consumption tax pull forward and generally lackluster domestic spending were somewhat offset by the Chinese tourist notably around lunar new year. Dollar sales declined 23%. In Europe, where our brand is small but growing rapidly, we generated significant double-digit sales growth in the quarter driven by both distribution and comp.

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 affordable luxury segment is outperforming traditional luxury. We are maintaining our sales forecast for FY15 of about $90 million and our goal to achieve about $0.5 billion in sales at retail representing a mid-single-digit share of the premium men's and women's bag and accessories markets over our planning horizon.

Turning now to our global distribution plans, as they haven't changed materially from what we outlined on previous earnings calls, I'll be brief. We continue to expect that our square footage globally and across all channels will increase slightly in FY15 reflecting our North American fleet optimization. Our overarching focus will be on renovation and remodels to drive productivity. To this point, and as guided previously in North America, our directly-operated square footage will be down around 5% given the 70 retail and 15 outlet closures, offset by a number of expansions within the context of our transformation and a number of outlet store openings.

And in wholesale, as we've noted, we're moving to more open, accessible displays and rolling out a shop manager program. We expect our footprint in department stores to increase slightly in FY15. We plan to add about 30 locations resulting in a low-single-digit increase in square footage while converting about 300 locations from case line presentations to open sell.

Turning to China, we are still planning to open about 20 stores and could have about 10 closures, resulting in about 10 net openings. While we expect to open a few stores in our other direct Asia markets outside of China and Japan in FY15, our portfolio approach is focused on renovating key impact doors with our new modern luxury concept in order to drive our brand transformation and maximize productivity gains with modest growth of our footprint.

Turning to Japan, in FY15, we continue to expect the total number of locations to remain the same with slight square footage growth from the new flagship and expansions of a few highly productive locations. Led by retail, our brand transformation planned in Japan focused on the renovation of key doors in Tokyo, representing over 70% of traffic in that metropolitan area by the end of FY15 including the new flagship store in Shinjuku which opened in October.

We will also renovate key locations in important cities throughout the country along with our flagship stores in Tokyo this summer. As a reminder, now that we have anniversaried last year's consumption tax increase, which was effected on April 1, 2014, we would expect to see a rebound in our fourth quarter. Of course, reported sales will be substantially lower given the yen weakness.

Moving to Europe, we plan to add about 10 directly-operated locations and more than 100 wholesale locations. Finally, and as we've expressed in the past, we also believe there is a significant opportunity for the Coach brand in global travel retail which represents the majority of our international wholesale sales.

At quarter end, we had a total of 215 international wholesale locations in 31 countries, which included 113 travel locations and expect to add about 25 net additional locations by year end. Now I'll ask Jane to provide some additional 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 fiscal quarter results, as well as our outlook for the fourth quarter. Our quarterly revenues declined 15%, with North America down 24%, and international down 3%. As noted, total sales would have been 3% higher excluding the impact of currency, with international sales up 4% on a constant currency basis.

Excluding transformation and other related charges, net income for the quarter totaled $100 million with earnings per diluted share of $0.36. This compared to net income of $191 million and earnings per diluted share of $0.68 in the prior year's third quarter. For the quarter, operating income totaled $146 million on a non-GAAP basis versus $263 million last year, while operating margin was 15.8% versus 23.9%.

During the quarter, gross profit totaled $665 million as compared to $781 million a year ago while gross margin was 71.6% versus 71.1%. As expected, gross margin benefited from the reduction in North American promotional activity and was helped by out performance in Japan relative to our expectations. SG&A expenses as a percentage of net sales totaled 55.8% on a non-GAAP basis compared to 47.2% in the year-ago quarter.

Absolute SG&A dollars were essentially flat to prior year and well below our expectations despite a $10 million increase in marketing spend. There were three primarily drivers in the variance to our forecast. First, our fleet had lower than expected depreciation and occupancy expense given the shift in timing of renovations and new store openings, notably flagship, into FY15. This will also impact our fourth quarter, which I will speak to shortly.

The second is currency, as SG&A costs in the quarter benefited from the impact of the stronger dollar. Third, restructuring savings, as we continued to capture savings related to our restructuring sooner than originally anticipated, and now expect savings of closer to $100 million in FY15. As I turn to GAAP metrics, let me recap key transformation and other related charges.

With the realization of our restructuring savings, we now expect to incur pre-tax charges in the $300 million range associated with our transformation plan, $210 million of this charge has been taken over the last four quarters. As previously announced, these charges, which will be largely completed by the end of FY15, are related to inventory and fleet related costs including impairment, accelerated depreciation, and severance associated with store closure. In total, we now expect to capture about $100 million in savings related to our transformation initiatives in FY2015, and approximately $150 million in ongoing annual savings in FY2016.

During the third quarter of FY15, the Company recorded charges of $23 million under the Company's multi-year transformation plan. These charges consist primarily of accelerated depreciation for renovations, lease termination costs related store closures, and organizational efficiency costs. These actions increase the Company's SG&A expenses by $23 million, negatively impacting net income by $12 million after-tax, or $0.04 per diluted share in the third quarter. Therefore, during the first five months of FY2015, the Company recorded total transformation-related charges of $80 million and acquisition related costs of approximately $4 million.

These charges increased SG&A expenses by approximately $79 million in total and cost of sales by $5 million, reducing net income by $56 million after-tax, or $0.20 per diluted share for the current nine-month period. Moving on to the balance sheet, inventory levels at quarter end were $457 million, down 22% from Q3 of FY14. Cash and short-term investments sit at $2.02 billion as compared to $775 million a year ago.

As expected, during the quarter, we announced the closing of an underwritten public offering of 4.25% senior unsecured notes with an aggregate principle amount of $600 million. In addition, we amended our existing revolving credit facility to borrow up to $1 billion, up from $700 million previously. This amendment included the issuance of a five-year senior unsecured $300 million term loan, therefore, in total we had borrowings of approximately $900 million outstanding as of the end of the third quarter.

As previously shared, we expect to use these proceeds to cover our working capital needs in light of investments in our business, the acquisition of Stuart Weitzman, and the new corporate headquarters. Net cash from operating activities in the third quarter was $157 million compared to $105 million last year during Q3. Free cash flow in the third quarter was in inflow of $122 million versus $54 million in the same period last year.

Our CapEx spending was $45 million versus $51 million in the same quarter a year ago. Based on renovation and flagship project timing we now expect CapEx for FY15 to be in the area of $275 million to $300 million excluding the cost associated with the new headquarters. The capital costs associated with our new headquarters are now expected to be approximately $15 million in FY15 driven by construction timing. And we are maintaining our current dividend at an annual rate of $1.35.

Before I discuss our financial outlook, I want to touch on the pending Stuart Weitzman acquisition. As Victor mentioned, the deal is on track to close next week. While I cannot provide more detail at this time, as disclosed, we expect the Stuart Weitzman business to be accretive from year one, exclusive of transaction related charges including anticipated purchase accounting adjustments and contingent payments related to the transaction.

We expect to use our cash to fund the purchase price. Also keep in mind that our outlook for the balance of year excludes the impact of Stuart Weitzman, consistent with our previous guidance. Next quarter, post-deal close, we will be in a position to provide details on the acquisition's impact on fourth quarter results in addition to providing FY2016 guidance for both Coach and the Stuart Weitzman brand.

Turning now to our financial outlook for FY15, overall, our annual guidance has not changed for FY15, although the noted project shifts and stronger dollar will impact reported sales and SG&A dollar spend. First, on sales, we still expect to deliver a low-double-digit decline in constant currency in FY2015. Given the strength of the dollar, we continue to expect sales to be down more on a reported basis.

Overall for FY15, we expect continued pressure on sales due to our reduced promotions and store closure activity. This guidance assumes that fourth quarter sales will be down by similar levels at Q3 on both a constant currency and reported basis. In the fourth quarter, we continue to expect an improvement in North America bricks-and-mortar comp despite the more difficult comparison. Our eOS pullback will pressure total North American comps by about 10 points. Coach Japan is expected to post positive growth in constant currency, benefiting from the lapping of the consumption tax increase and higher PRC tourist flow.

However, we do expect softness in the rest of Asia, specifically in Hong Kong and Macao, based upon deteriorating conditions, as has been noted in recent weeks. Keep in mind that in last year's fourth quarter we reported an increase in disposition sales which we will not anniversary given our current and clean inventory positioning. Gross margin is still projected to be in the 69% to 70% range for the year reflecting our usual seasonality between the third and fourth quarters, with higher sourcing costs largely offset by favorable channel mix and lower promotional activity for the year.

We expect our fourth quarter gross margins to be similar to the prior year. SG&A expenses are now expected to be slightly below prior year reflective of our increased marketing spend and transformation initiative, offset by shifts in fleet actions, currency and the faster realization of savings than anticipated. Therefore, we expect SG&A dollars to be down slightly in the fourth quarter.

Taken together, we continue to expect operating margins to be in the high-teens for the year. Finally, our tax rate is still expected to be in the area of 32% for the year, so there may be some variability in the fourth quarter. In closing, I would like to reiterate Victor's earlier remark. We laid out a very clear plan last summer and its execution is well underway. You heard this morning about our brand transformation progress around product, stores, and marketing, as well as our key learnings and takeaways.

And I will add that we are also on track from an investment and restructuring perspective. We've taken the majority of our total expected transformation-related charges over the last four quarters, including right sizing our inventory levels. We are investing in replatforming our stores and wholesale doors and are on track to spend about $570 million over the next three years, though the timing of some projects have moved to the [FY16] as noted.

We have begun to realize our cost savings, running a leaner, more efficient organization sooner than we expected. Therefore, looking further ahead, we expect to realize an overall annual top line improvement beginning in FY16, with FY17 being the year where we return to growth in line with the category. We have the resources to fund our plan while maintaining our dividend during our heavy investment period. Ultimately, our objective is to restore Coach to a place of best-in-class profitability and sustainable growth. I'd now like to open it up to Q&A.

Thank you. (Operator Instructions) Bob Drbul with Nomura.

Hi, and good morning.

Hi, Bob.

I guess the question that I have is this was the first quarter with some of the newer product in the outlet business in North America. Can you just elaborate a little bit more what's going on in the outlet business? Did it, in fact, show sequential improvement from the second quarter?

Sure, Bob. The short answer is, yes, it did, and as we've been very consistent in communicating, we really believe that transformation is about touching all of the consumer touch points, product, stores and marketing, and doing so across all three channels, our full price channel, wholesale and outlet.

And even if we do believe that, of course, the full price channel will lead we've been focused on the outlet channel, as you mentioned, with approximately one-third of the product in the outlet channel last quarter having been Stuart's designs. Specifically, we launched a collection called Margot in Q2, which in Q3 was joined, as I shared in my notes, by Mickey, Ruby and Morgan and we're very pleased with the performance there.

And I would say most generally our approach in product of just providing value by putting a lot more make and quality into product has been incredibly well received, and we've seen that in a very strong increase in our ADTs. In terms of the stores, I mentioned in our notes, we just recently a few weeks ago opened up our first modern luxury concept store in Savannah, Georgia. That is a new store.

Many of you have seen our previous concept most recently perhaps in Cabazon, which is our Deer Park concept, and I think that once you see the modern luxury outlet stores you'll understand why we're really excited about this next evolution, and certainly seeing that in Savannah where the very initial results have been beyond our own expectations.

And lastly on the marketing front, while we don't outwardly, of course, market to the outlet consumer through advertising, or social media, or any other means, we do through direct email, and, of course, most importantly through our in-store customer experience, visual merchandising, and our windows, and there we are making great strides, as well, and continuing to elevate that experience, as well.

Great. Thank you very much.

Matthew Boss with JPMorgan.

Good morning. Could you just help us walk us through the bridge in your store comp, between today, and then your expectation for the return to growth at some point next year? And with that, when will we be fully apples-to-apples on a promotional basis?

From a promotional basis, in terms of being apples-to-apples, it is really looking towards July, once we get beyond, of course, our seasonal clearance which we will have comped this past year, as well, as, of course, getting beyond the events. From a third quarter of FY16 we will be apples-to-apples on eOS, which, of course, we have reduced from what was in essence three a week now to, as I mentioned on my call, two per month on average.

Okay. And then on the margin recovery, what type of sales recovery is needed to move EBIT margin, say, back to mid-20s, which we saw only a few years back? And do we need to think about any kind of the expense build next year given some of the -- it sounds like some of the store builds potentially shift into next year?

Yes, Matthew, as we talked about it in June when we laid out our long-term transformation plan, we will, right now in FY17, we will return to growth in line with the category. And our guidance suggests that that's the point where we will be back in the higher-20% margin range. As you look at FY16, what we've called out is that some of our store renovations and flagships have shifted into FY16, so that will put some SG&A pressure into FY16. Again, we're executing the plan as laid out, there's just a shift in timing here.

Okay, great. Best of luck.

Barbara Wyckoff with CLSA.

Good morning, Barbara.

Hi, everybody. Can you talk about the dynamic of the US full price stores versus outlet traffic conversions? You talked about ADT being up in outlets, what about the full price stores? And then maybe touch on the mix a little bit, how has it changed?

Sure. Pretty much consistent with what we've been experiencing last quarter, Barbara, and what we shared, which is the performance really has been driven by ADT across both channels. Even if we have seen a sequential improvement in traffic from the second quarter to the third quarter, it still remains a drag. Of course, in full price, that's very much also driven by the broader pressure that we have seen across malls.

In terms of other news in the full price channel, very pleased still with the performance that we're saying in the above $400 price bucket, which as I mentioned in my notes, is now still hanging about 30% -- above 30% penetration compared to the 23% last year. Good performance in our footwear business across all channels, full price included. And, of course, beyond that driven by a reduction in conversion which, as we have consistently communicated, is impacted by, of course, the promotional cadence year-on-year. In the full price channel, once we get beyond semi-annual sales, so into July, we will be on a like-for-like comparison with promotions. So there we should see, of course, a change in those trends

All right, thank you. Are you going to still be not participating in doing Coach Days in department stores, or was that just a test for the spring season?

No, that has been our strategy for the whole year and that is our strategy go forward

Thank you.

Thank you.

(Operator Instructions) Joan Payson with Barclays.

Hi, good morning.

Good morning, Joan.

So just in terms of some of the dynamics we've been seeing with tourist traffic in the US, could you just quickly touch on if that affected comps at all in North America? And then also, just in terms of the overall category growth comments you had in terms of mid-single-digit growth, it looks like Coach has now been more focused on basically product over $200, so are you seeing any differences in category trends in the over $200 versus under $200 segment?

Sure. In terms of the tourist flows, we have not seen dramatic changes in our North American business. As I did mention in our notes, the major change in flows of what we're seeing, especially in terms of the PRC consumer, are really within Asia, with especially Tokyo, Seoul, Taipei picking up increased tourist flows at the expense of a reduction in Hong Kong and Macao for all of the reasons that most of you know, of course, with the geopolitical conditions there.

In terms of the North American category, we have not seen necessarily a slowdown in the below $200 and increase in the above $200. We've been speaking very much to our own strategies and to, of course, our own individual performance. In general, the slight slowdown that we've talked about in the category has really been at the expense of the larger brands in the space, which, of course, is driven in part by our own pull down in our promotional activities that we have mentioned very consistently.

Great, thank you.

Thank you.

Ike Boruchow with Sterne, Agee.

Hi, good morning, everyone, thanks for taking my question.

Good morning, Ike.

Victor, I just wanted to ask a higher level question regarding your traffic and profitability within the full price channel, so excluding eOS. So you're doing a great job right now holding back from discounts and markdowns within your new stores, but some of your bigger competitors are building larger clearance sections and going deeper on their sale merchandise.

Is there a point where you need to evaluate your thought process around how you balance sales and margins? I guess, basically, does your customer need more value to come back into the store to get the traffic positive again is what I'm asking?

Yes, of course, Ike. In many ways, that is job description for us and we have to, obviously, continue to evaluate what is happening across all channels. eOS does not really impact the full price business, it has been a flash sales model focused on our outlet consumer database only. In the case of the full price channel and what we're seeing with the competitors and how promotional they may be, either seasonally or openly, for us it's really about continually to improve our own product assortment and looking to balance price points across all of the price buckets.

So rather than producing and introducing a product that is, say, $300 or $400 and having it on sale constantly in the full price channel for 30% or 40% off, our preference is to give the consumer value by giving them -- and creating consumer trust by giving them a great product at a suggested retail price.

And then at the end of the season that product which doesn't perform, as is the case with most fashion brands, will go on sale, and then eventually if it doesn't sell there, of course, into our outlet channel. So our focus is really on getting the balance, actual price within all of those buckets. We've seen that over the last quarter and communicated it specifically at gifting periods, and that is something that we are developing into.

I would just add, Ike, that as we moved to semi-annual sale, one of the benefits that we saw is that it did pull new consumers into the store as we switched from PCs which went to our loyal consumers to semi-annual sale, we saw new consumers enter the store during that period which was a benefit.

Got it. Thanks so much.

Anna Andreeva with Oppenheimer.

Great, thanks so much, good morning.

Good morning, Anna.

A question on inventories, very tightly managed, down 23%. Do you think any of that possibly constrained top line in North America? And how do you feel about inventory content heading into the fourth quarter?

And just curious, on a gross margin expectation for 4Q being flat, why couldn't we see upside to that given that you're pulling back on promotions pretty successfully? Thanks.

Sure, Anna. Just as we sit today, we're very pleased with our inventories. I think we're well-positioned, we feel that we're well-positioned to support our sales plan as we move forward and as we move into the fourth quarter. Our inventory is fresh and in great shape. So we feel good about where we are at. We made a commitment to manage our inventory tightly as we came out of our transformation and that's what we did.

On your question on gross margin, in the fourth quarter, we're really executing against our strategy and that is to put make in our product, more value in our product, pull back on promotion and balance the headwinds that we are seeing in rising sourcing costs and FX.

And that's what you'll see play out in the fourth quarter as it's played out all year. There will be pushes and pulls, we expect a little bit more pressure from FX and we will see our production variances move more in line with what we had in the first half, which is about 50 basis points of pressure Even though it's after 9:30, operator, we will take a couple of more questions understanding that our prepared remarks went a bit long. So you can continue to take Q&A.

Thank you. Oliver Chen with Cowen and Company.

Thanks. Congrats on the progress of the brand management. Regarding Stuart and the outlet opportunity ahead, could you give us a yardstick from which he'll reach a half or three quarters? And then, as we think about the metrics, is his main impact as he illustrates more progress on this assortment ticket or traffic, or a combination of both?

And then, Victor, I just had a question on the inventory composition with respect to the pricing spectrum, are you happy with the freshness across your different price points including the access?

Sure. Let me first touch on the inventory one, and then I'll talk a little bit about outlet product from Stuart and how that flows in. On inventory, we're very happy, both with the freshness of the inventory and with the sell-throughs that we are seeing. We are really pleased with the product that we continue to launch in the full price channel, as I mentioned in my prepared notes, especially what were saying with our new master style in Swagger, in some of those styles and certain fabrications. We're very much in chase mode and that is a collection that we will continue to develop into and have a lot of excitement and innovation that we are working into that line over the course of the next 12 months or so.

In addition, we have been, as I mentioned in my reference to Ike, in reference to Ike's question, continually developing into the key price buckets and functionalities. We have some key tote Silhouettes coming out from June, another Kitt carryall silhouette coming out in August, and other smaller cross-body, especially at shopper price points. But for the full price channel coming out throughout, later in the fall and into spring and into holiday and spring of next year.

So very, very actively developing for balance across all price points. In terms of outlet and the continued rollout of Stuart's product, by fall and into holiday, the vast majority of outlet product will be new designs, and even current designs that are there will get a certain freshening up, facelift, if you will, so that all product will have Stuart's influence in it. We're very pleased. And there, again, our strategy continues to be to provide great value to the consumer at great price points, but certainly to continue to invest in giving the make and to continue to elevate the product.

Thank you, best regards.

Thank you.

(Operator Instructions) Dana Telsey with Telsey Advisory Group.

Good morning, everyone, and nice to see the improvement. I was in the Beverly Hills store last week and I can tell you that it looked terrific.

Thank you, Dana.

As you think about the gross margin impact of fewer promotions versus higher leather goods, how should we -- because this is the first gross margin improvement we've seen in like six quarters, how should we see that gross margin continue to trend, and will more of the improvement come from the fewer promotions, higher leather goods, how are you seeing it? And are you seeing this penetration of product globally? Thank you.

Thanks, Dana. So the way -- our strategy is to balance the pullback in promotions with the increased make that we're putting into the product. So that's sort of the strategy. We balance those two. We have a very high gross margin, as we've called out through our transformation, we expect that to be in the 69% to 70% range. There will be some pushes and takes in terms of sourcing cost and FX, but overall we will continue to have our tailwind benefit as international grows, sets the growth pace and that will continue to be a tailwind for gross margin overall. But it's really balancing those two and managing the headwinds and tailwinds.

Thank you.

Erinn Murphy with Piper Jaffray.

Great, thanks. Good morning. I just wanted to go back to kind of your comments in the prepared script on higher promotional activity in the category. Are you seeing that across the board from your competitors? Is there a specific channel that that's showing up?

And then, in particular, if you take a step back, if the category remains increasingly promotional, are you worried about kind of the timeline as you kind of work on improving your own promotional cadence and kind of elevating the product in terms of the turnaround? Thank you.

Sure, thanks, Erinn. We have seen, of course, the outlet channel by its very nature is a promotional channel. So there's nothing new there, it's always been promotional. And from our perspective there, the key is, of course, to engage and convert consumers coming in. We don't outwardly advertise to that channel and its about providing them with excitement.

And I think that the step change that we are making across all of the consumer touch points in that channel, with our new store concept, of course, most importantly, the new product, which is now across stores, as well as our new visual merchandising guidelines are proving to be the winning recipe there rather than providing further increased discounts at the moment. So very pleased there.

In terms of the other channels, in our own full price channel in the shopping mall, I think there was some reference to some competitor grants potentially always being on sale. That is not our strategy, we, both in our full price stores and in dot com we have the seasonal sales, we believe that that is the best way to build relationships with our consumers.

In the case of the wholesale channel, we are not participating in our own Coach Days, and I believe that was the question asked earlier by Barbara in terms of Coach only events. We've reduced those and that was a reduction by 30 days compared to last year. Of course, there are other promotional days that are across the channel that we participate in to some extent, but wholesale is really, it's 8% of our total business and we are really focused in driving the transformation plan, further strategy that we've laid out.

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

Thanks, Andrea. And I want to once again thank you all for following us and continuing to be on this transformation journey. As a team, we're incredibly encouraged by the positive signs that we're seeing in the execution of our strategies as we continue to drive first and foremost fashion relevance for the Coach brand, as well as to differentiate it from the accessible luxury competition that has grown over the last five to 10 years.

I want to recognize our entire Coach team for their commitment and, most importantly, for continuing to have the courage and the discipline to stay the course with our strategies which are very much in the long-term interest of our brand health and of our business. And I know that I speak for all of us at Coach as we prepare to welcome the Stuart Weitzman team to the Coach, Inc. family and looking up with great excitement to having them join us. So with that, I thank you all and look forward to seeing you over the course of the next few months. Thank you.

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