Tapestry, Inc. (TPR) Q4 2010 Earnings Report, Transcript and Summary

Good day, and welcome to the Coach Conference Call. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Senior Vice President of Investor Relations and Corporate Communications at Coach, Ms. Andrea Shaw Resnick. You may begin.

Good morning, and thank you for joining us. With me today to discuss our quarterly results are Lew Frankfort, Coach's Chairman and CEO; Jerry Stritzke, Coach's President and COO; and Mike Devine, 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 for fiscal year. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon risks and uncertainties, such as expected economic trends or our ability to anticipate consumer preferences. Please refer to our latest annual report on Form 10-K for a complete list of these risk factors. Also please note that historical growth trends may not be indicative of future growth. Please note that the results for the fourth quarter and fiscal year ending July 3, 2010, included 14 and 53 weeks, respectively, while the same periods in fiscal 2009 included 13 and 52 weeks, respectively. All discussions of comparable store sales are calculated based on an equivalent number of weeks for each period; 14 weeks versus the comparable 14 week period for the fourth quarter, and 53 weeks versus 53 weeks for the fiscal year. Now let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our fourth fiscal quarter and annual 2010 results, and will also discuss our overarching strategies. Jerry Stritzke will speak to our operations, sourcing and logistic plans, as we expand our infrastructure from global growth. Mike Devine will continue with details on financial and operational results [indiscernible] year. Following that, we will hold a question-and-answer session which will be joined by Mike Tucci, President North American Retail. This Q&A session will end shortly before 9:30 a.m. Lew will then conclude with some brief summary comments. I'd now like to introduce Lew Frankfort, Coach's Chairman and CEO.

Thanks, Andrea, and welcome everyone. As noted in our release this morning, we were very pleased with fourth quarter results, including excellent sales and earnings growth. This quarter's performance demonstrated a continuation of the strength we have been experiencing throughout the year as our market share expanded across all geographies. Our results reflected growing recognition of the Coach brand globally and consumers’ strong response to our product offering, and clearly bodes well for the future. While I will get into further detail about current conditions and the outlook for the category and our business shortly, I did want to take the time to review our year in quarter first. During FY '10, our performance was highlighted by increases of 12% in revenues, 18% in operating income and 22% in earnings per share. It was a year of many milestones, including first, a return to double-digit top and bottom line growth, driven by the successful merchandising, marketing and pricing strategies we put into place last year. Second, an increased emphasis on the globalization of our business through both distribution growth outside North America and the opening of our Asia Distribution Center, which will allow us to operate more nimbly. Third, the first full year of operation of our stores in China, where our sales at Retail doubled to over $100 million as the brand took hold. And fourth, we doubled our quarterly dividend and resumed our repurchase program, authorizing another $1 billion buyback this spring, demonstrating our financial strength and cash flow generation. This annual performance was capped off by an excellent fourth quarter. Some key metrics were: First, net sales totaled $951 million versus $778 million a year ago, an increase of 22%. Excluding the extra week, sales rose 13%. Second, earnings per share totaled $0.64, up 40% from the $0.45 reported in the prior year. Again, excluding the extra week, EPS rose 23%. Third, direct-to-consumer sales rose 23% to $842 million from $683 million in the prior year. Fourth, North American same-store sales for the quarter rose over 6% on a comparable basis from prior year, while total North American store sales rose 24%, augmented by distribution and the extra week. Fifth, sales in Japan rose 13% in dollars and 6% on a constant currency basis, despite a continued contraction in the category, as Coach continued to gain share. And finally, we continued to generate very strong sales and comps in China. During the quarter, we opened five North American retail stores, including two new markets for Coach: Chattanooga, Tennessee and Halifax in Nova Scotia. We also closed six locations; two at lease expiration and the remaining four by exercising our termination rights. In addition, we opened two factory stores. At the end of FY '10, there were 342 Full Price and 121 Factory stores in operation in North America, a net increase of 12 Full Price and 10 Factory stores from the prior year, while total square footage grew 8%. Moving to Japan, two locations were added, including our second Men's shop, while one was closed and one was expanded. At year end, there were 167 total locations in Japan with 20 stand-alone Full Price stores, including eight flagships, 116 shop-in-shops, 25 factory stores and six duty-free locations. In total, a net of seven locations were added in Japan last year and three were expanded, yielding total square footage growth of about 5%. And in China, we added four net new locations, all in the mainland, including our first flagship in Shanghai. At the end of the quarter, there were 41 Coach locations in China, including 29 locations on the mainland in 13 cities. 15 of these stores were in Tier 1 cities, 10 in Tier 2 cities and four in Tier 3 cities. In addition, there are 10 locations in Hong Kong and two in Macau. Overall for Greater China, there was an increase of 13 net new locations for the fiscal year for a square footage increase of 50%. As we previously discussed, we are building a multi-channel distribution model in China, including flagships, retail stores, shop-in-shops and factory stores. Indirect sales, which for context now represent about 12% of Coach's sales on an annualized basis, increased 15% to $109 million from $95 million in the same period last year. This increase was driven by international wholesale shipments, while shipments into U.S. department stores were essentially consistent with last year's levels. At POS, international sales rose significantly, while U.S. department store sales were even year-over-year in the quarter. We estimate that the addressable U.S. handbag and accessory category rose 5% to 10% during the first half of the 2010 calendar year. At the same time, Coach's bag and accessories sales rose about 20% across all channels in North America over the same period. In our own stores, handbag and accessories sales rose 24%. For the fiscal year ended June, we estimate that the addressable category rose about 3% to 5% to about $8.3 billion, while Coach’s North American bag and accessories sales rose 10% across all channels, and 18% in our own stores over the same period. Our total revenues in North America were up 21% in the quarter with our directly operated stores up 24%, as distribution growth augmented the comp performance. Excluding the additional week, North American revenues rose 12% and store revenues increased 14%. As noted, Q4 same-store sales rose over 6% on a comparable basis and Full Price stores’ comps were driven by a sharp rise in conversion, on lower traffic year-over-year, while tickets were stable. In Factory, where we continued to leverage the flexibility inherent in our business model to drive sales through pricing, we continued to see increases in conversion and traffic, while tickets declined modestly. We were very pleased to generate positive comps in both channels of our North American Retail business. It's also important to reiterate that we manage our North American Store business in aggregate. As such, we will continue to fine-tune our marketing and promotional levels to maximize the long-term returns of both channels, while maintaining the integrity of our Full Price proposition and Retail stores. While the full season is just underway, we are pleased with current trends and consumers' continued strong response to our product and positioning. As noted for the quarter, we posted a 6% increase in local currency in Japan and a 13% gain in dollars. Excluding the extra week, local currency sales were even with prior year and sales in dollars were up 5%. It should be mentioned that our market share further expanded against a continuing very weak category backdrop. Coach now holds a 16% yen share of the Japanese imported accessories market. Our growth in share this year, in a very tough Japanese market, reflects a strength and relevance of our accessible luxury positioning with the Japanese consumer, who is becoming more discerning and value-oriented. Naturally, I want to call out China, which is our single largest growth opportunity. As many of you know, this was the first year that we were directly operating all of our China stores, having completed the acquisition of the mainland stores in 2009. During the fourth quarter, as for all previous quarters this year, we achieved significant double-digit comp growth, as the Coach brand is taking hold with increasing numbers of consumers. Moving onto product. During the fourth quarter, we maintained a high level of product innovation and distinctive newness. For April, we introduced a collection of Charm Totes, along with new floral graffiti prints and Poppy. In May, it was all about Julia; a fresh modern tote and hobo story featuring new C-branding and leather Op Art and print concepts, along with fresh colors and patterns in Madison, which were the key statements for Mother's Day. In June, we also had updates in Kristin and Brooke. And in July, on its anniversary, we successfully re-launched Poppy in new and updated styles, material, patterns and prints, supported by a comprehensive and integrated marketing campaign. As you know, FY '10 was a year of strong new collection introductions, targeting specific customer segments, including Poppy, which will be part of Coach for years to come. More generally, we adapted our merchandising, marketing and pricing strategies to respond to a changed consumer environment. Our strong product offering and rebalanced assortment strategy were the primary factors driving the conversion improvement in Full Price stores. Average handbag prices were down about 10% in the fourth quarter, while handbag unit sales rose 25% on a comp store basis. Handbag penetration represented over 55% of sales in our North American Retail stores in the fourth quarter, up nearly 10% from the same period last year. It's important to note that we're focused on maintaining our present price positioning in handbags in the $200 to $300 sweet spot, which is clearly resonating with consumers. Moving to Factory, our business continues to be strong. Here, we are focused on maintaining very high levels of productivity through the introduction of innovative, factory-exclusive product, combined with in-store and direct marketing initiatives targeted at our best Factory customers. A particular note in our Factory business this quarter was a significantly higher penetration of factory- exclusive product at about 90%, compared to about 75% last year. This improvement in mix, favoring made-for-factory product, as well as improved manufacturing costs, further improved profitability in this channel. As we end FY '11, our overarching strategies remain largely unchanged, focusing on expansion opportunities both here in North America and, increasingly, in international markets. In addition, as always, we're focused on improving performance in existing stores by increasing Coach's share of our consumers’ accessories wardrobe, while continuing to attract new customers into the franchise. One new global initiative for us that we're particularly excited about is Men's, which we now believe will be a significant contributor to top line sales in the seasons and years ahead. For context, the Men's global premium bag and small leather goods market is about $4 billion to date, or about 15% of the total premium market. And in key Asian markets, it actually represents a much larger percent of the total. For example, in Japan, the Men's premium market is nearly $1 billion and over 20% of total sales. And in contrast to the contracting Women's market, Men's is actually stable in Japan. In Greater China, today, Men's represents about $900 million in sales, which is about 1/3 of the nearly $2.5 billion market, and is growing rapidly. At the same time, for Coach, Men's represents only about 3% to 4% of global sales today, depending on the geography. During FY '10, we began to pilot a more comprehensive Men's accessories assortment. In the U.S., we introduced our first Men's stand-alone store on Bleeker Street in New York City in May, next door to our Women's store. We've seen very strong initial results and will use key learnings from this store to inform our Men's product and merchandising in the 30 North American flagships where we offer a complete Men's accessories assortment. We also expect to further pilot the concept in a few select Retail locations in North America later this year. In addition, as most male consumers in the U.S. have essentially focused on value and function, we believe that there’s also a large opportunity for Men's domestically in our Factory channel. Thus during FY '11, we will be opening about 10 stand-alone stores in the best outlet malls, most in close proximity to existing Coach Factory stores. First, we'll be opening in late August in Riverhead on Long Island in New York. In Japan, where the male consumer is more brand- and fashion-oriented, we've introduced a comprehensive Men's assortment in key Full Price locations and have opened two stand-alone stores. Our early results have been excellent. For example, our first Men's shop-in-shop in Umeda, Hankyu, which opened in March, is running at annual rate of over $1 million and 210 square feet. And our second store, just opened in June, is also performing very strongly. We also recently reformatted our Marunouchi flagship location, which is the business district of Tokyo, making the whole first floor Men's, and experienced an immediate and dramatic increase in sales driven by all key metrics; traffic, ticket and conversion. We also have placed an expanded Men's assortment into over 60 locations in Japan during the last fiscal year and saw an immediate and significant positive impact to results. We believe that over time, that our share of the Men's market in Japan can approximate our total market share of about 16%. Beyond North America and Japan, we believe that Men's can play a more prominent role in our international locations, especially in China, where it's noted the category is growing rapidly, with Men's playing a significant role, as well as in other Asian markets and in Europe. We are continually and currently assessing opportunities in these markets with an expectation of rolling out a more comprehensive Men's assortment globally and expect to double the number of international wholesale locations carrying Men's to about 90 during FY '11. Most generally, we will capitalize on the brand awareness Coach already enjoys in these markets to grow our penetration of Men's. Moving on to distribution growth. We expect that our square footage globally, and across all channels, will increase about 10% in FY '11, compared to 8% in FY '10. Starting in North America, we will again open about 30 new stores in FY '11, but the composition will be somewhat different with 10 Full Price locations, 10 Factory outlets and 10 Men's-only Factory stores, as I already mentioned. In total, we expect North American square footage growth of about 8% this year; similar to last year. Outside of North America, China is clearly our largest geographic opportunity. As it is expected to double from about 10% of the global market share today to nearly 20% in just a few years, contributing the lion's share of global category growth. The Chinese consumer has embraced Coach, as evidenced by the significant double-digit comps we're consistently generating and the extremely high repurchase intent among existing consumers. As mentioned, our sales at Retail doubled in China this year to over $100 million as the market grew rapidly, and we increased our share as well from about 4% to 5%. And as a result of this growth, strong unit economics allowed us to leverage the considerable infrastructure investment, which enabled us to achieve profitability during FY '10. This year, we will accelerate new store openings with about 30 new locations planned, up from the net of 13 opened in FY '10, increasing square footage by about 60%. All of these locations will be in mainland China. In Japan, as I mentioned, the overall consumer market remains very challenging and the category continues to contract. Our focus continues to be on gaining market share, and we have done this quite well in our core Women's business. As discussed, we're now focusing on new categories such as Men's, where we have already seen early success. During FY '11, we expect to open about eight new locations in Japan, including two Men's and two Poppy locations. In total, we expect that net square footage growth in Japan will increase by about 6% this year, compared to about 5% in FY '10. Finally, beyond our directly-owned international businesses in China and Japan, we do have significant and growing distributor-run businesses in other Asian countries. During FY '11, we expect to open about 25 net new international wholesale locations, bringing our total number to nearly 210. And consistent with our strategy of directly operating select Asian markets, we're pleased to announce that we reached an agreement to take control of our Domestic Retail businesses in Singapore and Malaysia. The agreement provides for a phased transition of the current Retail businesses over the next two years, beginning in July 2011. While the impact of the transition will be small, it is an important step towards controlling our future in Asia. As you know, last quarter, we announced our first expansion plans into Western Europe, which represents about 25% of the global category sales. Initially, we focused on France through a distribution agreement with the prestigious Printemps department store group. Through Printemps, we expect to open a total of at least 14 shop-in-shops in their stores over the next three years. We opened our first location in June; a 1,700-square foot shop in their flagship Boulevard Haussmann location in Paris. We've seen excellent early results, attracting both domestic customers and international tourists. We have also now commenced a joint venture with Hackett Limited, the iconic British retailer, to open Coach in the U.K., Spain, Portugal and Ireland, and we’ll be creating a multi-channel distribution model in these markets. The first locations will be opening in El Corte Inglés in Portugal and Spain this fall. Beyond the opportunities in the core Coach concept and brand, I'm excited about our upcoming Reed Krakoff launch. We believe that this concept has an opportunity to define new American luxury and engage a customer who is looking for exclusivity and limited distribution. The Reed Krakoff brand is targeted at the rapidly evolving luxury market. It is a stand-alone brand, separate and apart from Coach, though leveraging Coach's infrastructure. It also has a unique point of view and aesthetic, reflecting Reed's personal design philosophy. Reed Krakoff will be launched with a few boutiques in the U.S. and Japan, as well as in prestigious international specialty retailers such as Lane Crawford in Hong Kong and colette in Paris. In the coming week, we will be opening a store in Madison Avenue in New York, one in Tokyo, the first shop-in-shops in Saks, and the brand e-commerce site, reedkrakoff.com. What I’ve just reviewed are our strategies to drive our business at a double-digit pace, given the strength of the Coach business and our increasing global expansion. In order to achieve these goals, naturally, we need to create the global infrastructure to support it and continue to evolve our supply chain. To discuss our operations initiative, I'd like to turn it over to Coach's President and COO, Jerry Stritzke. Jerry?

Thanks, Lew. To begin, I want to touch on our Asia Distribution Center in Shanghai. As you may know, the DC just opened in May. We successfully scaled up to handle 100% of the volume related to our Greater China Domestic business. Similarly, by fiscal year-end, we expect to be fully supporting our Asian Coach International Wholesale business as well. Finally, as we move into next year, we will be in the position to start providing services to Coach Japan from this Distribution Center. The Asia DC is already allowing us to better manage logistics in the region while reducing cost. We will obtain a significant advantage in speeds of market [ph] (43:57) and enables us to provide value-added services in regions, such as pick-pack [ph] (44:02) for China and other Asian countries. Of course, we could be much more nimble using one common inventory for Asia held in-region, taking advantage of the duty-free status to hold products until our demand forecasts are finely tuned by market. Simply put, the Asia DC provides the ability to flow inventory as needed to optimize sales in the region. Developing Asia DC in the duty-free zone, and in close proximity to our manufacturing base, has allowed us to optimize our tax and corporate structure as well. In addition to developing distribution and logistics capabilities in-region, we have used the last 12 months to establish a systems platform in China for planning, financial, data warehousing and CRM [Customer Relationship Management]. This systems platform, together with the Asia Distribution Center, will create the nucleus of what will be our shared service center in Shanghai to provide support to Asian markets in-region. This year, we will add procurement functionality as well as HR and finance capabilities. In addition to supporting China and Japan, it will allow us to seamlessly integrate new direct market as they come online, such as Singapore and Malaysia. While we're on the subject of global operations, I thought I would discuss some of the work we're doing to address sourcing opportunities. Like every company in our space who manufactures in China, we’re now facing rising raw material prices and increasing labor costs. As always, we continue to design and engineer product with the goal of improving costs without compromising quality or value. Specifically, we are experiencing our raw material capabilities in areas such as leather, fabric and hardware. We have consistently sourced both alternative sources for raw materials, such as lower cost tanneries and fabric mills, while also developing alternative fabrication. Today, we're enhancing our capabilities to source raw materials close to manufacturing by investing in strong, on-the-ground presence. We’re also accelerating the diversification of our manufacturing outside of China. We've already made excellent progress in developing a manufacturing base in Vietnam, which will account for 7% of our finished goods production FY '11. In India, we are intensifying our efforts to bring more facilities online and we continue to look at other opportunities, primarily in Asia. In order to effect this diversification, we have created a dedicated team which is solely responsible for bringing new sourcing facilities and countries online. In summary, we have made significant strides in becoming a more sophisticated global operator. The Asia Distribution Center, systems platform and emerging service capabilities will enable the growth that we have planned in Asia, while improving our costs associated with delivering that support. At this time, I'll turn it over to Mike Devine, our CFO, for further detail on our financials. Mike?

Thanks, Jerry. Lew and Jerry have just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our fourth quarter results. As mentioned, our quarterly revenues rose 22% with Direct-to-Consumer, which represents about 88% of our business, up 23%; and our Indirect segment, up 15%. Net income for the quarter rose 34% and totaled $196 million, with earnings per diluted share of $0.64, up 40%. This compared to net income of $146 million and earnings per diluted share of $0.45 in the prior year's fourth quarter. For the fiscal year, earnings per share were $2.33, up 22%, compared to $1.91; while net income totaled $735 million, up 18%, versus net income of $623 million reported in FY '09. The 53rd week in FY '10 contributed about $70 million to sales and $0.08 to earnings. Excluding that extra week, sales would’ve risen 13% for the quarter, while sales for the year would’ve been up 10%. Similarly, EPS would’ve increased 23% for the quarter and 18% for the fiscal year. For the fourth quarter, our operating income totaled $297 million, 45% above the $205 million reported last year, while operating margin was 31.2% versus 26.3%. For the full fiscal year, operating income was $1.15 billion, an increase of 18% from $972 million generated a year ago. Operating margin for the year was 31.9% as compared to 30.1% a year ago. During the quarter, gross profit rose 27%, $697 million, versus $547 million a year ago. Gross margin rate, which exceeded our expectations, were 73.3% versus 70.4% a year ago. SG&A expenses, as a percentage of net sales, totaled 42.1% compared to the 44.1% reported in the year-ago quarter. For the full year, gross profit rose 13% to $2.63 billion from $2.32 billion a year ago. Gross margin rate was 73% even in FY '10 versus 71.9% posted in FY '09. SG&A expenses, as a percentage of net sales, totaled 41.1%, compared to the 41.8% reported in fiscal 2009. The primary driver of our substantial gross margin expansion in both the quarter and the fiscal year was lower manufacturing costs. Product mix, notably the increased sell-through of handbags in our Full Price stores and the increase of higher-margin made-for-factory product in Factory stores, was also a contributor to the year-over-year improvement. As we noted in our press release, we reported a number of unusual items, which impacted both the fourth quarter and full-year results in FY '09. Excluding these unusual items in the prior year's fourth quarter, FY '10 operating income rose 35% from the $220 million reported in FY '09, while FY '10 operating margin expanded to 31.2% from 28.2% in the prior year. SG&A expenses, as a percentage of net sales, totaled 42.1% in both periods on the same basis. Net income in the fourth quarter rose 43% from $136 million reported in the prior year, while earnings per share increased 49% from $0.43. Similarly, for the full year, excluding the impact of unusual items in the FY '09 results, operating income rose 15% in FY '10 from the $1 billion flat reported in the prior year, while operating margin expanded 90 basis points to 31.9%. SG&A expenses, as a percentage of net sales, totaled 41.1% compared to 40.9% last year. Net income in FY '10 rose 18% from $622 million reported in the prior year, while earnings per share increased 22% from $1.91. Before I leave the P&L, I did want to touch on the tax rate, which for the quarter came in below 35%, bringing the full year to just over 36%, versus the 36¾% we've been accruing for the first three quarters of 2010. There were two primary factors which improved the FY '10 tax rate. Firstly, higher profitability in lower tax rate jurisdictions; and second, a lower effective state tax rate. Inventory levels at quarter end were $363 million, up about 11% from FY '09 year end, consistent with our expectations. This inventory level allows us to support 22 net new North American stores, six net new locations at Coach Japan from the year-ago period, as well as our 41 Coach China stores. Cash and short-term investments stood at $696 million as compared with $800 million a year ago. During the fourth quarter, we repurchased and retired nearly 10.9 million shares of common stock at an average cost of $41.43, spending a total of $450 million. For the full fiscal year, we repurchased and retired nearly 30.7 million shares of common stock at an average cost of $37.48, spending a total of $1.15 billion. At the end of the year, approximately $560 million remained under the company's present repurchase authorization. Net cash from operating activities in the fourth quarter was $182 million compared to $270 million last year during Q4. Free cash flow in the fourth quarter was an inflow of $152 million versus $245 million in the same period last year. The primary factor impacting cash flow was a $90-million swing in cash for inventory, as we build inventories to support our growing business this year versus reducing inventories in last year's Q4. Our CapEx spending was $29 million versus $26 million in the same quarter a year ago. For the full fiscal year 2010, net cash from operating activities was $991 million compared to $809 million a year ago. Free cash flow in fiscal year '10 was an inflow of $910 million versus $569 million in fiscal year '09. For the year, CapEx spending totaled $81 million. This compares to CapEx of $240 million in the prior year, which included the purchase of our company headquarters here in New York City. It's important to note that based on our current plans for FY '11, we expect CapEx for next year will be up substantially in the area of $150 million, driven by the timing shift of certain projects, but primarily for the opening of new stores across all geographies. While we're not giving specific guidance for FY '11, I believe it will be helpful for you modelers out there to keep a few things in mind when looking at the year ahead. I would add that all of my comments are on a comparable 52 week-to-52 week basis, given that we have provided the sales and earnings contribution of the 53rd week in FY '10. First and most generally, we do expect to achieve double-digit sales and earnings growth as mentioned in our press release and in Lew's remarks earlier. Our top line will be driven in part by low-to-single digit comp store sales in North America, which will of course fluctuate from quarter-to-quarter due to calendar timing differences. Second, our gross margin is likely to expand in the first half of the year versus FY '10. The second half will be more difficult as we'll face headwinds on the raw materials and labor cost side and tougher second half compares, which will be offset in part by channel and product mix, as well as FX. Third, on SG&A, we would expect the expense ratio for the full year FY '11 to be about flat to FY '10 even, even as we ramp investment spend to include Reed Krakoff, Europe and building the infrastructure for global growth, while continuing to deliver leverage across the balance of the business. Taken together, the investments will impact FY '11 earnings per share by about a $0.05 more than investment spend did in FY '10. Fourth, our tax rate is likely to be in the area of 35% for the year, as we further refine our international tax strategies. Separately, I do want to note that we expect further increases in inventory at the end of next quarter as we build inventory against current trends to maximize sales this holiday season. In summary, our fourth quarter and FY '10 results demonstrate our ability to manage our business nimbly, while investing prudently in longer-term opportunities. We're accelerating our distribution plans to leverage the emerging market opportunity with the particular focus on China, while also exploring new geographies, capitalizing on the increasing popularity and recognition of the Coach brand with discerning consumers globally. And with a business model that generates significant cash flow and with virtually no debt, we're in a position to take advantage of profitable growth opportunities globally, while continuing to return capital to shareholders. At this time, I'd be happy to open the call to question-and-answer.

[Operator Instructions] And first question comes from Bob Drbul [Barclays Capital].

I just had a question for this quarter's comp store sales results. Lew, can you talk maybe about the monthly progression throughout the quarter, including into July? And can you talk overall on whether or not there was a sequential improvement in the North American Full Price Retail stores versus the prior quarter?

First, our Q4 overall comps were better than Q3. And our performance was consistent throughout the quarter driven, as we said earlier, by a sharp increase in conversion. And that trend continues through today.

Getting to the second part of your question, while we don't disaggregate our comps, I think this was the first call in recent quarters where we did say both channels were positive during the quarter.

Our next question comes from the Neely Tamminga.

Just a question for Jerry since we have him on the call. It would be great to have him talk a little bit more about the sourcing headwinds and pressures, and just get his perspective as to the potential pressures from raw materials versus labor versus transportation, and overall in container cost. I mean, could you just size that for us between those three buckets, where the real headwind is?

It’s been a pretty dynamic environment in the last six months. The labor increases have already really taken place in China, I think. We, along with many others, have already kind of planned those in and incorporate them into our future costs. I also believe that the logistics costs have stabilized. If you follow that, there's quite a bit of press coverage and we’ve taken a much more cautious approach and feeling pretty good about what we can anticipate there. Raw materials is the piece that's still bouncing around. We've been a little more successful offsetting some of that by being judicious about what we're using, where we're using it. The Euro bounced it around. We've been opportunistic in blocking in cost to the extent that we’re buying product out of Europe, and to the extent that we can source product in places that offset raw materials costs. We're looking for opportunities to do that. So it's a bit of a mixed bag. It's an environment where we have to be very deliberate and more nimble, and even more thoughtful than ever to make sure that we're really looking at our key programs or we're making big investments, and that we're kind of wisely building our cost up. So you don't see a significant impact our business.

Your next question comes from Lorraine Hutchinson [BofA Merrill Lynch].

I just wanted to ask about pricing. I know you said you wanted to stay within that $200 to $300 sweet spot, but are there any levers you could pull here on the price points to offset some of these raw material pressures? And then a little bit of clarification on your back half gross margin guidance. Are you expecting margins to be down at this stage or do you think you can do enough to offset these pressures?

Let me answer the first part of your question. The $200 to $300 sweet spot is very powerful, and as I mentioned earlier, handbag unit penetration increased 25% this past quarter. A remarkable level. And we're very pleased with that. And for us, as we revitalize the Full Price business, we look at operating margins, not gross margins, and we would rather trade off some basis points in gross margin because we know the consumer will return it to us in multiple ways by buying more units if we keep the prices sharp. And so that's been a focus in addition to all of the sourcing initiatives that Jerry has mentioned. Mike, do you want to take the second part?

Sure. So we will be up against some very challenging gross margin rate compared to the second half. We recorded 74% in Q3 and north of 73% in this quarter we've just completed. So honestly, I think it's unlikely that we'll be able to hold to those levels in the back half, but we have all the confidence that we'll be able to continue to deliver gross margin rates in the 72% to 73% range, and likely have to have an opportunity, or let me say a chance, depending on how things fall out. Jerry said it's very dynamic. That year-over-year total year gross margin rate should approximate FY '10’s rates in FY '11, with favorability first half and less favorable compared to [ph] (1:04:33) back half.

Your next question comes from Christine Chen [Needham & Company] Christine Chen - Needham & Company, LLC: I wanted to ask about China. Can you talk a little bit in more detail about the customer? I mean, how often is she in the stores? Is the age range similar to here? Do you get an older customer, younger customer? And what is she buying? Is she also buying in that sweet spot? I know the prices there are higher, but I'm just thinking on a like-for-like bag.

She's primarily in here 20s and early 30s. She is a young professional. She values shopping as one of her favorite pastimes and she does look at value and innovation and brand. And she really has embraced Coach. When we look of what she's purchasing, she's purchasing in the main, what consumers are purchasing in other parts of the world. And for its equivalent, the price points are pretty similar to the $200 to $300 sweet spot, adjusted of course for the pricing in China. She actually has, on the mainland in Shanghai and Beijing, she actually has a household income of about $35,000, which is exciting. And the middle-class, as you know, is growing at a -- last year 40%. We don't have the more recent numbers, but it could very well continue at a 40% level. What we're also particularly pleased about as we go into the second-tier and third-tier cities, being the first imported luxury accessories brand, the first imported accessories brand, we're doing extremely well. A lot better than our pro formas, and it bodes well from very substantial distribution in China. And just for context, there are over 300 cities in China with more than 1 million people. Quite remarkable. Christine Chen - Needham & Company, LLC: And how many bags a year does she purchase, high-end bags, versus Japan?

She purchases one to 1½ bags a year, high-end, compared to more than two in the U.S.

Your next question comes from Brian Tunick [JPMorgan]. Brian Tunick - JP Morgan Chase & Co: I was hoping to get your perspective on the opportunities to drive continued productivity gains at the very impressive Factory channel. It seems that's the biggest concern that we hear from investors. So maybe if you could talk about either marketing or in-store promotions, discounting. Anything you could share on that front would help us get some perspective. And then on the Indirect channel side, I think there was some media reports last quarter about a possible deal to do a private label program with JCPenney. And just wondering if this was a growth area, using your expertise, that you would explore?

I'll answer the second part first. I saw the mention in Women's wear. I actually got lots of e-mails. And there's absolutely no truth to that. You can't believe everything you read. And in fact, it's not something that we're contemplating, private label. We have abundant opportunities organically to grow the Coach brand and that's what we're focused on in addition to the launch of the RK brand. I'm going to ask Mike Tucci to take the first part of your question, Brian.

Sure. Brian, it's not surprising that as our Full Price business strengthens, that people begin to worry about the sustainability of our Factory model. We really believe that our merchandising strategy, our positioning in Factory and the customer behavior in the Factory channel continues to show opportunities. Examples of that are the continued focus on shifting of mix to major Factory product, which offers a much more dynamic price leverage opportunity for us; innovation and newness in Factory products, which offers an opportunity for repeat purchase, multiple purchase, and also drives traffic and conversion. And then longer-term, looking at the Men's opportunity in Factory as a growth- and productivity-driver, not only for the new opportunity to grow the Men's category on a stand-alone basis, but also as an opportunity to further improve the productivity in our existing Factory base, which is stretched to capacity based on current traffic and throughput. So we feel very good out there and the model is very clean. We don't discount in our Full Price channel. If the customer wants value from Coach and wants Coach at a promotional price point, she knows she can get it in a very vibrant Factory environment with high service levels and very high product flow. And that seems to be really, really working for us. So we feel good about where we are there.

The next question comes from Dana Telsey.

As you think about product extensions and enhancing the productivity in the Full Price business, how is the Shoe business, Watches, Sunglasses, and any other product extensions we should be thinking about? And how the fragrance has done? And then lastly, Lew, you talk a lot about the Men's opportunity. How should we think of that eventually becoming a part, what percentage of sales, U.S. and globally, and the margin opportunities there?

First, with regard to Shoes, as Shoes, Fragrance, Watches, Sunwear and the like, all of the categories are doing very well both at wholesale and, from our point of view, more importantly, in our own distribution. We're actually going to be expanding footwear into Asia with an Asian fit, which we know will be enormously helpful. Dana, in terms of Men's, we believe that Men's isn't going to be another major growth area for us. And it's early days, but we would be disappointed if the Men's global sales did not reach and exceed 10% of our overall sales over the next few years, up from the 3% to 4% this past year. So if you do the math, it’s going to add $300 million to our business as we approach $500 million. So it will be significant. As far as the margins are concerned -- just lastly, margins, we use the same rigor and the same approach, and the margins are consistent with the Women's side.

[Operator Instructions] Our next question comes from Erika Maschmeyer [Robert W. Baird]. Erika Maschmeyer - Robert W. Baird & Co. Incorporated: Could you talk a little bit about how your Full Price traffic compared to last quarter? And then also, did the differential between Factory and Full Price comps continue to narrow?

I think what we said all through the quarter and with the release is that we had positive comps in both Full Price and Factory that the channels performed very well. And more consistently, as that performance converges, it's obviously a positive for us in overall productivity. And as we saw traffic in Q4, very consistent with where we were for Q3. And while it's very early in the quarter, our trends in July have remained very consistent. We feel very good about where we are.

Our next question comes from Randy Konik [Jefferies & Company]. Randal Konik - Jefferies & Company, Inc.: Lew, just curious to get your sense on -- we had this call three months ago. What’s your view on the consumers today versus three months ago? And what's your kind of outlook on the consumer, especially for the Full Price mall business, heading into the back half of the calendar year here?

Well, first, for context, we just interviewed 5,100 active Coach users as part of a semiannual survey in June. And our consumers are feeling better than they have in over two years. And it’s quite encouraging that 30% of consumers, as an example, feel that the economy is getting better. And if you just roll back one year, it was only 8%. So for the first time in two years, a majority of consumers believe the market, the economy’s either going to stabilize or improve. And that's compared to a low point last year around the 20%. So consumers are feeling a lot better. I also feel that we will continue our moderate recovery. And even if we do slip into a slight GDP decline, we don't think it's going to materially affect the discretionary spending on Coach. Because what consumers are telling us also in the survey, that their intention to purchase Coach over the next 12 months has dramatically increased from six months ago, which bodes well. Lastly, of course, we are increasingly global and there's a lot of strong growth for us in Asia. Men's, we're in really the formative stages and you will hear us talking about Men's as another major platform in the months ahead. Randal Konik - Jefferies & Company, Inc.: So is it fair to characterize you feel that the U.S. consumer is better-positioned for the back half of the year? And then the Accessories business is even better than that? Or how should you think about the key [ph] (1:16:05) accessories?

Absolutely. I mean, there's a variety of ways to look at it. Compared to last year, she's far more optimistic and I think that will be reflected in spending; not necessarily across all brands and concepts, but those who innovate and call for good value. I also think sequentially, from the first half to the second half, we see also improvement.

At this time, I'll turn the call back over to Andrea Resnick.

Thank you, everybody, for joining us this morning. I'm going to turn it back to over to both Mike Devine and then Lew for their closing comments.

Thank you, Andrea. This is Mike. I just wanted to make a clarification from some of the prepared remarks that I gave earlier, particularly around expectations for our North American comp. I wanted to make sure that it was clear that our expectation has delivered low- to mid-single-digit comps for North America, and that they will fluctuate quarter-to-quarter as a result of calendar timing. So thank you. And, Lew, I'll turn it over to you.

I think our results speak for themselves. Our outlook is robust. We feel are coming out of this year extremely strong as a team. Wherever we travel and speak to consumers, we feel we've never been better-positioned for the future than we are today. So as I said last quarter, stay tuned. And thank you, and have a good day.

Thank you, everybody.

Thank you. And this does conclude the Coach Earnings Conference. We thank you for your participation.