Tapestry, Inc. (TPR) Q2 2007 Earnings Report, Transcript and Summary

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 Vice President of Investor Relations at Coach, Ms. Andrea Shaw Resnick. You may begin. Andrea Shaw Resnick: Good morning and thank you for joining us. With me to discuss our quarterly results are Lew Frankfort, Coach's Chairman and CEO; and Mike Devine, Coach's CFO. Mike Tucci, President of North American Retail, is also joining us. Before we begin, we must point out that this conference call will involve certain forward-looking statements, including projections for our business in the current and future quarters or fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations, based upon risks and uncertainties such as expected economic trends or our ability to anticipate customer preferences. Please refer to our latest annual report on Form 10-K for a complete list of these risk factors. Also, please note that historical growth trends may not be indicative of future growth. We presently expect to update our estimates each quarter only. However, the failure to update this information should not be taken as Coach's acceptance of these estimates on a continuing basis. Coach may also choose to discontinue presenting future estimates at any time. Now, let me outline the speakers and topics for this conference call. Lew Frankfort will provide the overall summary of our second fiscal quarter 2007 results and will also discuss our strategies going forward. Mike Tucci will review the holiday season from a U.S. retail perspective and discuss key initiatives for the spring season ahead. Mike Devine will conclude with details on financial and operational highlights for the quarter, as well as our outlook for the second half and full fiscal year 2007. Following that, we will hold a Q&A session that will end by 9:30 a.m. I'd now like to introduce Lew Frankfort, Coach's Chairman and CEO.Lew Frankfort: Thanks, Andrea and welcome everyone. Once again, I'm delighted to be speaking with you today about another excellent Coach holiday performance which reflects the strength of the Coach franchise, our position as a gift authority, and the vibrancy of the U.S. handbag and accessory category. Clearly, the Coach brand has reached a new level of popularity among North American consumers, as sales accelerated and we generated the highest level of holiday comparable store sales gains in our public history. At the same time, we achieved our highest level of POS increases at U.S. department stores. As you know, Coach just announced a sales increase of 29% and a 36% increase in earnings per share for the quarter just completed. Our results are especially impressive when you consider that Coach has achieved double-digit sales growth since 2001 in each holiday quarter for a five-year CAGR of 29%. Some highlights of our second fiscal quarter were: First, net income rose 31% to $227 million or $0.61 per share, compared with $174 million, or $0.45 per share in the prior year, as we recorded the highest quarterly operating margin in the company's history. Second, net sales totaled $836 million versus $650 million a year ago, a gain of 29%. Third, direct to consumer sales rose 34% to $675 million from $504 million in the prior year. Fourth, U.S. same-store sales for the quarter rose 25.7% with retail stores up 20.8% and factory stores up 33.4%. It's worth mentioning that in U.S. retail stores, we have achieved a double-digit comp in the second quarter in each of the last five fiscal years. And, our retail stores, on average, are more than twice as productive as they were just five holidays ago, even in this, our most developed quarter. I should also mention that Coach.com again generated excellent sales gains, increasing 46% during the second quarter. Finally, sales in Japan rose 17% in constant currency, driven by distribution growth and mid single-digit overall comps as we continue to grow our market share. During the quarter, Coach opened seven North American retail stores, including one new market for Coach -- Fayetteville, Arkansas -- and our second store in Toronto. We also opened three factory stores during the second quarter. At the end of the period, there were 237 full priced and 90 factory stores in operation in North America. In Japan, two regional department store locations were opened and one was closed, while one retail and one factory location were expanded. At quarter end, there were 131 total locations in Japan. Indirect sales increased 10% to $161 million from $146 million in the same period last year. POS sales at U.S. department stores accelerated from first quarter '07 levels. As mentioned, Coach's U.S. department store sales growth at POS continued to be outstanding, running up nearly 35% last quarter -- or over 40% on a comp basis -- our strongest second quarter as a public company. More broadly, we estimate that the U.S. handbag and accessory category sales grew at 20% during both the fall season and for all of calendar 2006. We were especially pleased with the continued momentum of Coach North American retail stores, which posted an exceptional performance in Q2, our strongest holiday quarter ever reported. As noted in our release, each metric of comp enjoyed healthy increases: traffic, conversion, and average transaction size. Results in our full-priced businesses, both Coach retail stores and U.S. department stores, continue to be driven by the monthly flow of fresh and relevant product, especially new lifestyle collections such as Legacy. It's also worth mentioning that our U.S. factory store business remained exceptional this quarter, reflecting the vitality of the Coach brand, the appeal of our product, our excellent value, and the strength of premium factory centers. We were also very pleased with the performance at Coach Japan this quarter, where sales rose 17% in yen and 18% in dollars. Growth in Japan was fueled primarily by distribution through both new stores and expansions, augmented by mid single-digit comparable location sales, as our market share continued to expand against a weakening category backdrop. Finally, as always, we were pleased with the significant improvement in operating margins. While Mike Devine will get into more detail on our financials, I wanted to give you this recap of Coach's excellent second quarter performance. As you know, I've also asked Mike Tucci to join us today to discuss our North American retail holiday sales performance and our spring initiatives.

Thanks, Lew. As mentioned in our release, our holiday offerings were remarkably well-received across categories, collections and price points. Overall, sales were driven by handbags and women's accessories, while items such as pet accessories and our $98 multifunction wallet were great giftables at sharp prices. The real story around holiday was the introduction of Legacy, a new collection that was inspired by our heritage with many iconic elements. As some of you know, we created 15 Legacy shop-in-shops in our flagship locations and for the first time ever, dedicated an entire catalog to this collection. We also significantly increased our investment in the collection in the wake of the exceptional pilot results we achieved last spring. Legacy was a standout, representing about 18% of sales for the quarter, and at price points about 45% above our core offering, elevated our overall mix. Separately, our key item investment strategy was successful, as our ten key item concepts achieved our objective of representing about 50% of sales. Additionally, introductions including Gallery Totes, Holiday Patchwork, Duffels and Satchels also posted strong results, and our December resort package of Legacy, in signature khaki trim with gold and a denim and white version, sold through quickly. We were also very pleased with our pilot of jewelry this holiday, underscoring the potential of this flanker category. This capsule group, primarily consisting of bangle bracelets, was introduced in November in a cross-section of about 60 stores and on Coach.com. The group performed exceptionally well and sales were significantly ahead of plan. We will take the key learnings from the jewelry pilot as we expand the assortment and distribution in advance of Mother's Day and prepare for a global launch next fall. Overall for the quarter, we were delighted with the breadth of our appeal. Not only at our mid-range price points, but also the success of our entry level handbag offerings, such as the Soho Signature small hobo at $178 and the Soho Signature small flap at $218; and the higher-priced pieces such as the Ali shoulder flap at $498 and the Legacy leather satchel at $698. These styles blew out and reflect the continuing opportunity to more effectively target the top tier of our customer base and to selectively trade up our average retail in handbags, while still attracting the younger and aspirational consumer. It's worth mentioning that handbags over $400 represented about 7.5% of U.S. retail store sales, the highest level of penetration ever. Before moving on to Spring, I'd like to touch on some of the key points from our Coach service initiative during holiday. As you know, we launched our coaching initiative at the start of FY07. This new program, which introduces and refreshes selling and service skills in an ongoing way to our sales associates, allows us to continually reinforce the service-focused, consumer-centric store environment. Our store managers own the implementation of weekly modules, such as engaging multiple customers, adding on, and closing the sale. Season-specific coaching modules for the holiday quarter were also created, which focused on delivering our Coach service commitments during peak traffic periods. We believe our program is providing meaningful service improvements to our customers, and we are committed to this initiative as a long-term strategy. In order to get product to our customers quickly and efficiently as possible, we made process improvements to our order taking and product running systems. Additionally, an electronic version of our product running process piloted in 19 stores yielded additional efficiencies around transaction throughput and labor scheduling. We are reviewing these learnings and creating a plan to roll out this process to more stores prior to next holiday. Turning to Spring, we're excited about our transitional and seasonal offerings, which are already off to a great start driven by the enthusiastic response to our new product. These introductions include the new Carly handbag group within the Legacy collection, offered in leather, suede and Signature across multiple sizes, with iconic elements such as harness detailing and turn locks. In addition, we updated our Hamptons collection with a fresh color pallet and silhouettes and introduced new spring accessories. For February, we will introduce an evolved Soho collection, featuring Satchels and a new group of Signature striped handbags and accessories. For March, we will launch our own fragrance to all U.S. full-priced stores and Coach.com, as well as the new Hamptons Weekend collection, which will include a distinctive patchwork design and a new stripe group. For April, we introduce our third new lifestyle platform of the fiscal year, Ergo, with soft styles and a sophisticated appeal. The new collection will include a broad assortment of handbags and accessories and based on our successful pilot, we expect Ergo to be a strong business driver. In summary, we are excited about our spring opportunities, both in product flow and our continued focus on Coach service. With that, I'll turn the discussion back to Lew to continue with our overarching strategies.

Thanks, Mike. Naturally, we're thrilled with our results and what they bode for the future. As outlined in our release, our opportunities notably in our home market are boundless. We expect double-digit category growth in handbags and accessories to continue unabated in North America as the following drivers are still intact: First, consumers are purchasing more handbags as they increasingly use accessories to play a leading role in updating their wardrobes. This is a secular shift which has evolved over many years. Second, concrete evidence of this shift is the surge in traffic we are experiencing in Coach retail stores, coming from an acceleration of new consumers, many of whom are trading up to Coach; as well as the surprisingly strong sales we are seeing in new stores in secondary markets such as Naples, Florida, and Milwaukee, Wisconsin. Third, we are also seeing pent-up demand from the moderate customer who has traditionally followed the lead of the upscale consumer. This is clearly illustrated by the strength of the category in department stores where both units and average prices are rising. Fourth, commensurate with this increased demand, handbag and accessory shelf space is growing in department stores, as they devote more square footage to this category. Finally, new accessory brands are entering the market, while apparel brands and other retailers with their own stores are also entering the category, driving consumer interest through increased visibility, including advertising. Our analysis also shows that about one-third or more of new consumers are actually trading up to Coach from brands such as Fossil, Liz Claiborne, Kenneth Cole and the like, further reflecting the enhanced role accessories are enjoying within a wardrobe. This leads us to believe that we have been significantly understating our addressable market, which we now estimate to be over $7 billion, giving us even more room to grow. Thus, with the market growth rapidly expanding and the Coach brand so vibrant, underscored by the acceleration in our business after literally many years of excellent growth, the potential for Coach in its current concept is clearly greater than we ever thought possible. As most of you know, we have been implementing five key strategies that focus on sustaining growth within our global framework. Clearly, our first priority and still our largest opportunity is North America. First, most generally, we're building market share in this rapidly-growing North American women's accessories market by leveraging our unique position as an accessible luxury lifestyle brand. As part of this strategy, we have been emphasizing new usage occasions, such as weekend, through such collections as Signature Stripe introduced in the first quarter of this year; and more sophisticated product, such as Legacy, to heighten our cachet, especially with our top tier customers. As many of you know, Signature Stripe and Legacy are two of three lifestyle platforms for this year with Ergo coming in April, as Mike just mentioned. In addition, two complementary categories, such as jewelry and fragrance, both fiscal '07 introductions, represent additional opportunities for the brand longer term. Our second strategy is the continued rapid growth in North American retail. We now plan to add about 40 U.S. retail stores in each of the next three years, bringing the retail store base to over 350 at that time. As announced today, during this fiscal year we intend to open about 40 new retail stores, including an incremental ten stores above our previous guidance, given the multi-store portfolio deals we have recently signed with a number of mall developers. It's important to note that these additional stores will open very late in the fiscal year and are not expected to meaningfully impact this year's results. These will include 11 new full-priced markets for Coach, six of which we mentioned already opened during the first half and five coming in the balance of the fiscal year. In aggregate, these 40 new stores will add over 100,000 square feet to our retail store base during the fiscal year. In keeping with our strategy to expand our most productive locations, we will also be expanding seven retail stores this year. These expansions will add a total of about 6,000 additional square feet to our total retail space. In addition, we are also planning on opening three more factory stores in FY '07 and expanding five more outlets, given the success we have experienced through our previous outlet store expansions. Thus, in total factory store development in FY '07 will add about 40,000 net square feet to our store base. Thus, in total the square footage of our North American Coach stores will in aggregate grow about 18% in FY '07. Third, outside the U.S., we're continuing to grow market share with the Japanese consumer, driving growth in Japan primarily by opening new retail locations and by expanding existing ones. During this fiscal year, we expect to open between 15 and 20 net new locations in Japan, a net increase of at least 25,000 square feet, or about 13% to the store base. Similar to the U.S., we also plan to expand at least ten of our most productive retail and factory locations in FY '07, adding nearly 6,000 square feet or about 3% to our retail base. Given the current weakening market for luxury accessories, we're planning Japan more conservatively for the balance of the fiscal year and are now targeting constant currency sales to increase between 10% to 15% from the prior year, driven primarily by distribution growth and low single-digit comps. Our fourth strategy is to raise brand awareness in emerging markets to build a foundation for meaningful sales in the future. Specifically, Greater China, Korea and other emerging geographies where the category is rapidly growing and Coach is taking hold or increasing in importance. During the second quarter, three new Coach locations opened in Mainland China, including our second locations in Beijing and Shanghai and our first in Shia. It remains our intention to open at least ten more locations in major cities on the Chinese mainland during the next two years, bringing our total to at least 15 locations. In addition, three Coach locations were opened in the Middle East during the quarter. Lastly, of course, we continue to have an overall focus on improving the rate of profitability so that our bottom line results continue to outpace top line performance. In closing, these strategies and actions are designed to enable us to achieve excellent financial results through our planning horizon. I will now turn it over to Mike Devine, our CFO, for further detail on our financials. Mike Devine: Thank you, Lew. Lew and Mike have just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our second quarter results. As mentioned, our quarterly revenues increased 29%, with direct to consumer, which represents over three-quarters of our business, up 34% and indirect up 10%. While our POS sales in U.S. department stores accelerated over the period and shipments to these customers increased significantly, as planned we constrained our international wholesale shipments due to slowing Japanese travel trends in our markets and to maintain healthy wholesale inventory levels, as the company continues to limit its exposure to tourist sales. At POS, international wholesale sales rose at a double-digit pace, led by domestically oriented doors. Net income for the quarter increased 31% to $227 million or $0.61 per share, as compared to $174 million or $0.45 per share in the year-ago period. This was ahead of the analyst consensus estimate of $0.58 for the quarter. Our operating income rose 32% to $362 million in the second quarter versus $274 million in the same period last year. Operating margin in the quarter was 43.3%, the highest in the company's history, compared to 42.1% in the year-ago quarter, a 120-basis point improvement. In the second quarter, gross profit rose 28% to $644 million, up from $505 million a year ago, while our gross margin rate remained exceptionally high at 77.1% versus 77.6%. Year-to-date, gross margin rate is essentially flat with prior year. SG&A expenses as a percentage of net sales were well below prior year levels in the quarter and represented 33.8% of sales versus 35.5% last year. Naturally, the leverage we achieved in our U.S. stores was significant, given the level of comp reported for both channels, while we also saw excellent leverage on what we refer to as our semi-fixed corporate functions. Inventory levels at quarter end were $250 million, about 22% above prior year levels, and well below our sales increase, as the investment in key holiday initiatives, notably Legacy, paid off as Mike previously mentioned. Further, this inventory increase allowed us to support 40 net new U.S. stores, 18 net new locations in Japan, and substantially increase sales levels. Accounts receivable balances rose negligibly versus last year. Cash and short-term investments stood at $820 million, as compared with $746 million a year ago. Net cash from operating activities in the second quarter was $345 million compared to $249 million last year during Q2. Free cash flow in the second quarter was an inflow of $307 million versus $220 million in the same period last year, mainly due to higher net income. CapEx spending, primarily for new stores and renovations, was $38 million versus $29 million in the same quarter a year ago. Now I'd like to provide you with some of our updated goals for fiscal 2007. For the second half of '07, we are targeting net sales of at least $1.24 billion, representing a year-on-year increase of about 23%, with U.S. comparable store sales gains of at least 10% in the retail channel and mid-teens in the factory channel; and also a low single-digit total comp gain at Coach Japan. Operating income, up about 30%, reflecting about a 200-basis point improvement in second half operating margin year over year. And earnings per share of about $0.77, an increase of more than 30% and $0.02 above the analyst consensus estimate. Our current goals for the full fiscal year are: net sales growth of nearly 25% to about $2.63 billion. We're targeting an operating margin increase of about 200 basis points to over 38%, which assumes a gross margin at about last year's extraordinary levels over the balance of FY '07 and further SG&A leverage. Operating income dollar growth of about 32% above FY '06. Interest income of about $40 million will add to pretax income, while net income will be somewhat offset by a higher tax rate at about 38.5% for the year due to the fact that incremental taxable income is being taxed at higher rates. Including these factors, we expect to generate EPS growth of 34%, which will produce earnings per share of about $1.71 compared with the analyst consensus estimate of $1.67 per share. For FY '07 we now expect CapEx to be about $160 million, primarily for new stores and expansions, both here and in Japan. As Lew noted, we'll be opening about 45 net new U.S. retail and factory stores and continuing our North American expansion programs. In Japan, we will be opening about 15 to 20 net new locations. While these are our current goals, our actual results may vary from these targets based upon a number of factors, including those discussed under The Business of Coach Inc. and risk factors in our annual report on Form 10-K. Coach also does not assume any obligation to update these targets as the year progresses. In summary, we're confident that our growth strategies will enable us to continue to gain share in the large and growing global market for fine accessories and gifts. Thank you all for calling in this morning. Now Lew, Mike, Andrea, and I will be happy to take some questions.

(Operator Instructions) Your first question comes from Bob Drbul - Lehman Brothers. Bob Drbul - Lehman Brothers: Two questions. The first one is can you elaborate a little bit more on the gross margin surprises that you had in the quarter, and some of the factors? Japan or currency or the Legacy contribution? The second question I have is, overall can you just elaborate a little bit on the Japanese market, Lew, in terms of what you're seeing and do you still believe that your long-term sales and market share targets are still attainable, given the tougher market over in Japan?

Sure. Let me take the second question first. Japan is a vital market, but what's clear is that it's increasingly mature as consumers are spending money elsewhere. What we saw in the overall market was a contraction of about 5% in the holiday period for imported brands. Now, we were up 17% or 18% during that period. But nevertheless, the market is contracting and the competition is obviously intense. We feel very strongly that our proposition is appropriate and strong for Japan and we continue to envision double-digit growth in Japan, but at a slower rate than we've experienced in the past. We're looking to achieve about 10% to 15% growth during the second half of this year. In terms of our market share, we think 15% target is very realistic over the next few years. At the same time, as we mentioned, North America's accelerating, so we're thrilled to have our lead market afford us so many additional opportunities beyond what we ever contemplated. With regard to gross margin, we didn't really have any surprises. We were very pleased with our gross margin. We said that it would be approximately equal to last year, and the 50 basis points difference, in our minds, is roughly equal. Mike, you may want to just elaborate on why. Mike Devine: Sure, Lew. What I would first start out by saying is, Bob, we really feel like where the investment community should focus their attention and their effort is on the operating margin line, and we couldn't be more pleased with the fact that we've recorded the highest operating margin in the company's history this quarter. With that being said, if we were to build a bridge for the 50-basis point difference at these exceptional levels between this year and last, about one-third of it is coming from channel mix with the factory channel -- which by the way, their organic gross margin rate is up nicely from last year, but still below the weighted average total for the company -- but about one-third of it coming from channel mix driven by factory success, where it was well ahead of last year and our own expectations. The remaining two-thirds of the 50 bips is coming out of the currency line, our FX, we actually had some help in last year's second quarter from the yen that we did not anniversary in this year's second quarter. So those are the two primary factors of why we're different from LY. Bob Drbul - Lehman Brothers: Thank you very much.

Your next question comes from Jeff Edelman - UBS. Jeff Edelman - UBS: Lew, what are you learning about the new markets that you're entering? They're smaller, obviously, less traffic in the malls. Can you give a sense of volume you're running there and the impact on profitability, please?

Sure. What we're finding first is that our new stores are running well ahead of our expectations, and we're very pleased with the reception that we're getting from customers when we open in those malls, both customers who are long-term fans of Coach as well as first-time buyers. Their reaction is thank you for opening in our malls, and what we're finding in general is that the rate of new customers is increasing. This year we estimate that the rate of new customers into our franchise represent about 20% of our customers compared with about 15% last year. It's a very healthy level of increase. When we dissect on who are the new customers, we're finding that about one-third are consumers who are accustomed to spending at our average handbag price points; one-third are consumers trading down; and very pleasingly, one-third are consumers trading up from the moderate segment. So our stores are exceeding our expectations, and it just tells us that there are many, many more stores across America that we can very successfully open than we've contemplated. Jeff Edelman - UBS: Thank you.

Your next question comes from Margaret Mager - Goldman Sachs. Margaret Mager - Goldman Sachs: Hi, Lew. Congratulations on another good quarter.

Thank you. Margaret Mager - Goldman Sachs: Can you talk or elaborate on what you just said, that you think you could have many more stores than you might have originally contemplated? I know you were targeting 400 stores and with 40 opening up per year, you're going to move pretty quickly towards that number. So if you can expand on that thought and also elaborate on what you're thinking about layering on additional growth strategies for Coach? Would that be possibly entering Europe? If so, what might the timing look like, or making acquisitions, et cetera. So if you could talk about the long-term growth strategy. Secondly, I'd like to ask about the development of the higher price point business where Mike Tucci said you're now at 7% of your mix at $400 or higher. What's the plan there to introduce more $400-plus price point bags and how do you see that evolving in terms of penetration? Thanks.

I think there are a lot of parts to your question. Let me take several of them and then ask Mike Tucci to talk about the retail store opportunity and the opportunity on the higher end. First, for context, the category in North America, it grew by 20% this year. This is the fourth consecutive year of double-digit growth. Even though we grew by over 30%, our market share grew extremely modestly. We have only about 20% market share in the United States and as I indicated earlier, our average store is twice as productive as it was five years ago. When we first went public, I believe we had contemplated a total of 250 stores in our universe. Today, as you mentioned, we're projecting 400. We do think the opportunities are obviously greater than that, but we're not going to be commenting on that until we complete our annual operating plan for next year when we take our yearly look at the market and we know that it's obviously much more than 400 locations. We continue to believe that North America represents boundless opportunities and we do anticipate double-digit growth continuing. We're also thrilled with our U.S. department store business here, which grew, as I commented, by another 35% this fall. Now, in terms of new markets beyond Japan, which continues to be a growth market for us, we see Greater China as the number one largest opportunity during our post LRP period. We are, as I indicated, rapidly developing a footprint in China in order to build awareness and be well-positioned for when that tipping point occurs when the middle class is in large enough numbers so that they will buy premium accessories at very good levels. We believe that's just one or two or perhaps three years away. Beyond that, we are looking at other regional markets and our business has grown very rapidly in Korea and Taiwan, to name two markets. We are not contemplating expanding into Europe now because that market continues to be extremely mature, very competitive, and the opportunities that exist for us in the remaining 75% of the world are boundless. Mike, would you like to wrap up for me?

Sure. On store growth, just quickly, it's important to note that we've spent several years building our team and our infrastructure from a systems standpoint and store construction and planning standpoint to manage to a 40-store opening cadence per year. It's a very measured and thoughtful decision, some of which was brought about by the extraordinary results of the stores that we've been opening over the last 12 months, and also a very significant window of opportunity brought about by very careful negotiations with our five key developers, Simmons, General Growth, Matridge, Talisman and Wetfield, all of whom we have developed some strong relationships with and were able to look at their portfolio in total. So that, we feel, is the best approach that we can take today, is to go at an accelerated rate; and that would imply that the addressable opportunity could be larger in terms of store count, we'll do that work. In terms of development of bags over $400, Legacy, of course, was the catalyst in driving that 7.5% penetration level. Maybe another way of looking at it is that bags over $400 ran at a 40% comp clip in Q2. That's a very, very important number and we break our business into price bands and say where is the opportunity? We've been talking about an opportunity to protect our opening entry price points in the franchise, in key handbag category and small accessories, and to take advantage of a growing market opportunity in bags at the higher tier of our price range north of $400. We will continue to focus on that. We're obviously well-positioned for the back half of the year, and we are also very, very intently working on what our merchandise investments will look like for Q1 and Q2 of next year. That price band will play an important role. Margaret Mager - Goldman Sachs: Is Ergo a $400 level program?

It's very interesting. Ergo is actually more of a mid-range. It's right in the sweet spot. There are some bags in the Ergo collection that'll be in the $400 range, but it's really more typical of what we would see in what we call our core offering in Soho and Hamptons and other core handbag resources. Margaret Mager - Goldman Sachs: Okay. Thank you.

Retail in Ergo is closer to the $300 price point than the $400 price point. Margaret Mager - Goldman Sachs: Okay. Thanks so much, Mike and Lew, and good luck in the upcoming second half.

Thank you.

Your next question comes from Kimberly Greenberger - Citigroup.

I have a question about your indirect sales. This is the second quarter in a row where we've seen indirect sales growth in the sort of 10% to 12% range, and obviously U.S. department stores are seeing very robust sales. It would seem that implies some deceleration, if you will, in international wholesale. I was wondering if you are expecting that to continue for the next two quarters and then to stabilize, or do you see a sort of second leg of deceleration as we move into fiscal '08? Thanks.

That's a good question, Kimberly. One of the things we did this holiday season was monitor our shipments very carefully so that we would not be in a position where our distributors had excess inventory. We could have obviously shipped considerably more than we did. The reality is that our number one travel market has been Hawaii, and travel inbound to Hawaii is down 8% year-on-year, and that has significantly impacted our business in Hawaii. We expect that level to stabilize and for the tourist part of our international wholesale business to level off as we put more effort to grow our domestic international wholesale business. So over the next quarter or two, we very well might see lighter shipments than we had contemplated a while ago when travel was stronger. But we expect that in FY '08 for that to bounceback once we anniversary the downward travel levels.

Terrific. That's helpful. Thanks, Lew.

Your next question comes from Paul Lejuez - Credit Suisse. Paul Lejuez - Credit Suisse: Thanks, guys. Can you just remind us of what sort of money you're spending in some of these newer international markets, just as far as what are the capital investments required? Second, doesn't sound like you leveraged SG&A on the Japan business. How much of a drag on SG&A was Japan? Thanks. Mike Devine: First in terms of the international doors that are being opened, Paul, Coach's capital contribution is modest. We actually categorized the new locations in our mind into a couple of categories and only those that we would consider to be what we call strategic will we participate in the capital with our distributor partner, and typically it's at levels of 50% or below. So the weighted average across all of our international store openings is probably somewhere in the 25% to 30% range of the construction costs and the opening costs. Actually, Paul, it's very interesting in this quarter, SG&A leverage at Coach Japan did contribute to Coach's quarterly SG&A leverage in a very modest way, as their SG&A growth was slower than the Company's total growth as a whole and they were very close to breaking even on their own P&L on SG&A. We should expect to see that over the next quarter or two, as Lew had talked about as we plan the growth trajectory down modestly in Japan. So there actually was a bit of an inflection point for Coach Japan this quarter. Paul Lejuez - Credit Suisse: And you expect that to continue, to still leverage modestly? Mike Devine: We would expect to see that as we plan the back half of the year. For FY '08, as we go through our detailed planning process, we will make that call and we will talk to The Street about it. It's too early to call for '08 at this point. Paul Lejuez - Credit Suisse: Okay, great. Thanks. Good luck.

Your next question comes from Christine Chen - Pacific Growth Equities. Christine Chen - Pacific Growth Equities: Congratulations on another fabulous quarter.

Thank you, Christine. Christine Chen - Pacific Growth Equities: Wondering if you could talk a little bit more about the jewelry business, how many doors will it be in going forward? I know that you tested it in the 60. Then if you could just give the actual metrics for conversion traffic and average transaction size.

You got a lot of good information coming your way. I'll do the jewelry piece first. I think the way that we should think about jewelry is that we saw an immediate very strong reaction from a consumer standpoint to jewelry when we put it out in Q2. It was in 60 stores, and we learned a lot from that pilot. We're chasing it, to be very frank, to be able to just maintain sales at the demand that's coming in, in the 60 stores that we have, and we'll continue to focus on jewelry for the back half of the year in maintaining inventory levels and sales levels in those stores. It is absolutely a category that has great gift appeal and gives our stores an opportunity to build on our core franchise of handbags and small leather goods. We will roll it out to all stores for fall. We've seen our fall jewelry presentation in our recent line reviews. We think it's spectacular. We think it will be a more broad assortment. We're working on positioning in stores. We're working on fixturing in stores. We're working on product knowledge and selling attributes in stores, and I think the next six months is an opportunity for us to go to school on that business and come out in a very bold way and also introduce the category on a global level. In terms of traffic conversion and ADT metrics, we saw it coming. I have to say that when we had a strong traffic spike in Q1, that was a very strong indicator that we had an opportunity around traffic in Q2. Traffic and conversion were both up between mid and high single-digits, and we really focused on managing the conversion of that traffic. As an example, in our ten peak days this year during the holiday quarter, we were able to increase the number of transactions in an average comp store by 14%. That's big news when you think about throughput and the level of traffic that hits us in our ten most heavily trafficked days in the quarter. So we managed it well with great investments and great operating skill. And then on the ADT side, that was the bump that took us up slightly in comp and that was driven by Legacy. Christine Chen - Pacific Growth Equities: The margins for jewelry, are those comparable to handbags?

Absolutely. Christine Chen - Pacific Growth Equities: Thank you. Good luck.

Your next question comes from Melissa Otto - WR Hambrecht. Melissa Otto - WR Hambrecht: Congratulations on a great quarter. Just a couple of questions around the China business. What is the company doing about copies that seem to be pretty ubiquitous in that market?

Well first, we have a multi-pronged approach towards protecting our trademark, and to hit it with a few points. First, we have registered our trademarks in China, and we have worked very closely with the Chinese government and both the national government as well as provincial government and the customs departments to be respectful of the Coach trademarks; and they have been taking very significant actions to both shut down factories and prevent counterfeits from leaving the market. We've had an anti-counterfeiting program in place in China for five years, and it's been very successful. We do recognize that some level of counterfeiting will occur, and we try to bring it to as low a level as possible. Melissa Otto - WR Hambrecht: Just a quick follow-up question, could you give some color around the size of the fragrance rollout, maybe some numbers around it, what you're expecting for that.

We're launching fragrance in our North American retail stores and on the Internet in its first phase, and we're looking for success to be somewhere between 2% and 3% of sales once fragrance is launched. Melissa Otto - WR Hambrecht: Great. Thank you very much.

You're welcome.

Your next question comes from Antoine Belge - HSBC. Antoine Belge - HSBC: The first question relates to the environmental factory, no slowdown there. Can you perhaps elaborate on the most recent trends during the quarter? And also follow up on Legacy. It seems that you've been opening shop-in-shops. Is it true for stand-alone stores for the Legacy, which would then become a sort of sub-brand of Coach?

With regard to the second question, I'm not sure I fully understand. Let me try to paraphrase. Your question has to do with Legacy and its future role in Coach? Antoine Belge - HSBC: Yes exactly, and especially since you've said you've opened shop-in-shops already for Legacy within your own store. Do you think it's possible to see perhaps a stand-alone store for the Legacy products separate your current Coach store network?

It's an excellent question, and we're not prepared to announce anything today, but we would say stay tuned and you might very well see us moving in that direction. But, again, we're not ready to announce anything today. In terms of our factories, the question, Andrea? Andrea Shaw Resnick: Factory stores.

Does your first question have to do with the strength of factory stores? Antoine Belge - HSBC: Yes, exactly, and any slowdown in factory?

Let me just mention if I could Antoine, the first thing to realize for us at Coach, we do not go on sale in our full-priced stores. We offer an excellent value 365 days a year and our consumers understand that. At the same time, goods purchased in America on sale or in discount sectors are a significant majority of all sales made in the United States are in the discount sector and people are accustomed to looking for special pricing. In many ways, our factory stores serve as our diffusion channel because instead of having a separate brand, we have distinctive product where customers have to go if they want to purchase Coach at a discount and we have a very loyal factory store consumer who primarily shops in factory stores. The growth in factory store traffic overall was very strong in the holiday quarter. It was up almost mid single-digits. Our traffic was up considerably more than that, and the momentum that we experienced during the second quarter, that is the strength of the business in the second quarter, has continued into the third quarter. We see no slowdown. Antoine Belge - HSBC: Thank you.

Your next question comes from John Rouleau - Wachovia Securities. John Rouleau - Wachovia Securities: Hi, Lew. Just as a follow-up on the Legacy business, will you continue with a similar type of Legacy offering in the back half of the year, or does that change much?

Legacy will be a very important piece of our business in the back half. An example is Carly, which is a new introduction in our January offering on 12-26. We will have SKU and color adds to Legacy throughout the back half as well, absolutely. You'll see it in store throughout the rest of the year. John Rouleau - Wachovia Securities: So if it was 18% of the mix, which I think probably was a bit stronger than you had maybe initially thought, but should we look at that as a benchmark going forward, or how should we think about that?

I think that the penetration is one that will ebb and flow based on platform introductions, strength of the overall lifestyle offering within Legacy. As an example, when we feature Ergo later this spring, Ergo will show some penetration erosion into Legacy. But I think we're very much feeling like Legacy becomes a platform for us that maintains a year-round presence in the stores. We will build on the Legacy point of view in stores as we go into fall next year with a new extension of Legacy, and it may very well exceed the penetrations that we saw this year. John Rouleau - Wachovia Securities: Thank you.

Your next question comes from Jim Hurley - Telsey Advisory Group. Jim Hurley - Telsey Advisory Group: Thank you, good morning and congratulations as well. My question is about the Internet, exceptionally strong growth there relative to pretty much every competitor and even total online sales growth. Did you do anything different this year than you had in the past as it relates to driving online sales?

Our internet business was very, very strong and I think what we're pleased with there is that number 1, it's a tremendous communication vehicle for the brand. We get as many visitors on our internet site as we do in all of our stores in North America. So if you think about the opportunity to engage a consumer on Coach.com, it's as important to us as every customer who walks into one of our stores throughout the year. We did change our strategy or shifted our emphasis in Q2. Number 1, we had a very strong gift and merchandise focus on the site around ease of shopping, strong item messaging, and a very, very strong point of view around key collections such as Legacy and other handbag drivers. E-mail was a very strategic approach, which was segmented and much more focused on specific messaging to consumer types, so our campaigns were very segmented and pointed. Lastly, we made a decision to move away from what we would call Internet advertising. Some might call it banner advertising on the internet, which has a tendency to drive traffic to the site, but is not necessarily driving qualified traffic to the site. The result of that was that the organic traffic that came in was converted at significantly higher rates, particularly in December versus a year ago. That's what drove almost a 50% increase in our sales online. Jim Hurley - Telsey Advisory Group: That's great. Any noticeable trends in terms of average transaction size online versus in the stores or are they pretty similar?

Very consistent. It mirrors, we merchandise our internet site as a flagship store, and it mirrors the same kind of behavior that you would see in a flagship store in Coach. Jim Hurley - Telsey Advisory Group: Great. Thanks and congrats again. Andrea Shaw Resnick: At this time, it's 9:32, after our stated close time. Of course, we'll all be available for questions later today if you need us. Have a wonderful day.

Thank you. That concludes today's conference call.