Tapestry, Inc. (TPR) Q1 2011 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; and Mike Devine, Coach's CFO. Mike Tucci, President of North American Retail, is also joining us for a holiday preview. 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 of fiscal year. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon risks and uncertainties, such as expected economic trends or our ability to anticipate consumer preferences. Please refer to our latest annual report on Form 10-K for a complete list of these risk factors. Also please note that historical growth trends may not be indicative of future growth. Now let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our first fiscal quarter 2011 results and will also discuss our progress on global initiatives. Mike Tucci will review our key programs for the holiday season. Mike Devine will conclude with details on financial and operational highlights for the quarter. Following that, we will hold a question-and-answer session that will end shortly before 9:30 a.m. We will then conclude with some brief summary comments. I'd now like to now introduce Lew Frankfort, Coach's Chairman and CEO.

Thanks, Andrea, and welcome, everyone. As noted in our press release, we posted an excellent quarter as key financial metrics show double-digit growth and bottom line results that well exceeded top line sales. All of our business units posted strong performances despite muted consumer spending as the merchandising, marketing and pricing strategies, we put into place in FY '10, continued to drive growth. In addition, we made continued progress against our global business initiatives including international expansion, men's and digital media. We experienced strong response to our collections, and our pricing and assortment strategy continued to resonate with consumers worldwide. Beyond the top line, we were also very pleased with our high-level of profitability and substantial cash generation in the first quarter. Looking forward, we're very pleased the current trends we're experiencing in the business and are well positioned for the upcoming holiday season. While I would get into further detail about current conditions and the outlook for our business shortly, I did want to take the time to review our quarter first. Some highlights were: First, net sales totaled $912 million versus $761 million a year ago, an increase of 20%; second, earnings per share totaled $0.63, up 43% from prior year; third, direct-to-consumer sales rose 19% to $775 million from $654 million in the prior year; fourth, North American same-store sales for the quarter rose 8.5% from prior year while total store sales rose 17%; fifth, sales in Japan rose 14% in dollars and 3% on constant-currency basis despite the difficult environment; and finally, in China, we continue to generate very strong sales growth with a continuation of significant double-digit comps. During the quarter, we opened three North American retail stores, including one in the Newmarket for Coach, Corpus Christi, Texas. In addition, we opened seven factory stores, including our first five Men's stand-alone factory stores. At the end of the period, there were 345 full price and 128 factory stores in operation in North America. Moving on to China, we opened eight locations, all in the Mainland during the quarter, bringing the total number to 49 locations. And in Japan, two locations were added during the quarter, including our first Men's stand-alone factory location. At quarter end, there were 169 total locations in Japan with 20 stand-alone full Price stores including eight flagships, 116 shop-in-shops, 27 factory stores and six distributor-operated locations. Indirect sales, which the context now represents about 12% of Coach's sales on an annualized basis, decreased 27% to $136 million from $108 million in the same period last year. This gain reflected significant growth in shipments into U.S. department stores and international wholesale locations, given positive POS sales notably in our international businesses and expectations for a stronger holiday season for Coach. Specifically, sales at POS in U.S. department stores rose slightly for the quarter. At the same time, international Retail sales grow sharply, driven by both distribution growth and comparable store sales. The international traveler represents a meaningful growth opportunity as Coach's global awareness and presence expands. We estimate that the addressable U.S. handbag and accessory category rose about 5% to 10% last quarter, similar to the increase we experienced in the first six months of the calendar year. At the same time, Coach's bag and accessories sales rose about 16% across all channels in North America over the same period. In our own stores, handbag and accessories sales rose 20%. It's worth noting that our customers' future purchasing intent is at the highest level we have seen in the last two years. Our total revenues in North America rose 18% for the quarter, with our directly-operated stores up 17% as distribution growth augmented the positive comp performance. As noted, total Q1 same-store sales rose 8.5% fueled by conversion, and we were very pleased with the positive comps posted for both channels. In Full Price stores, both conversion and ticket rose, partially offset by traffic. In Factory, conversion and traffic rose, partially offset by average transaction size. As noted in Japan, we posted a 14% increase in dollars on a 3% increase in constant currency. Our market share further expanded against a very weak category backdrop. Coach now holds a 16% yen share of the Japanese imported accessories market. This share growth in the very tough Japanese market reflects the strength and relevance of our accessible luxury positioning with the Japanese consumer who has become more value-oriented. Once again, I want to call out China, our fastest growing business, which represents the single largest geographic opportunity to Coach. During the quarter, our sales rose sharply from prior year, fueled by distribution and significant double-digit comps. Clearly, the Coach proposition is resonating with this consumer who was participating in this category in rapidly increasing numbers. While Mike Devine will get into more detail on our financials and I will discuss our outlook in some detail, I wanted to give you this recap. As you know, Mike Tucci has joined us today to discuss our product performance for Q1 and our holiday sales initiatives. Mike?

Thanks, Lew. During the first quarter, as always, we maintained a high level of product innovation and distinctive newness. In addition to a relaunch of Poppy in July, we brought in Mia, a new soft-tailored collection which featured Maggie, our most popular hobo, as well as the carryall silhouette. We also delivered new choices in Madison and Kristin. Madison and Poppy continued to be our lead collections for the period, with both collections performing well. More generally, the merchandising and pricing strategies we initiated one year ago to create a more balanced and productive handbag assortment are proven sustainable growth drivers in North America. Both handbag and women's accessories achieved positive comps in the quarter with handbag penetration holding at 57%, with a slight increase in average unit retails. Earlier this month, we started flowing in our holiday assortment, including a relaunch of the Madison collection, featuring the new Sophia satchel in core leather, gathered leather and novelty applications, along with a fresh dotted Op Art logo. The initial reception has been excellent. You will continue to see a high level of newness over the next few months, with updates to Poppy and new colors in Madison and Kristin. In mid-December, we'll be introducing the Alexander tote to capture peak sales with new products just before the holiday. We're also excited about the trends in small bags, which will be great gift-giving items and help to balance our price offer. In addition to our holiday product will be supported by a comprehensive marketing plan, building on the successful elements of the campaigns of the last year. We will execute a targeted strategy beginning in mid-November to highlight a powerful gifting message for the holiday shopping season. The emphasis of our marketing will be product- and item-driven across handbags, women's accessories and other gifts ideas. Our efforts will span coach.com, digital media and compelling print and in-store marketing to drive traffic. I'd also like to take this opportunity to provide an update on our digital media strategy, and the benefits that we're deriving from it. As mentioned in previous calls, coach.com is our most important marketing tool. Our primary objective online in North America is to build top-of-mind brand awareness and drive store traffic, while also maximizing e-commerce opportunities. In addition, our digital presence expands far beyond our own website. Social media has become an important component of our marketing strategy, including Facebook, where we now have over 1 million fans who enthusiastically engaged with our relevant messaging and exclusive offers such as product reviews and free shipping. We've also expanded our digital footprint in advertising, highlighted by our recent Poppy project campaign, and our rich media takeover adds featuring the Sophia bag. These are just the few of the initiatives that drove double-digit year-over-year increases in sales and traffic to our North American site in Q1. Building on our strong digital platform, visitors to coach.com this holiday will be able to engage with our virtual gift guide, featuring a robust selection of compelling gifts. They'll pick their favorites, add it to a wish list and even share it through social media. We're also excited about enabling customer comments and likes for our Poppy product pages. Inviting our guest to participate in our brand message becomes viral, ultimately driving traffic and sales to our website and stores. Finally, we'll soon introduce our e-Gift card feature, perfect for last-minute shoppers. While this is a snapshot of our North American digital business, our web presence is global. During the quarter, we launched coach.com informational sites in 10 important countries such as Singapore, Taiwan, Korea, France and Spain. This brings our total web presence to 14 countries, three of which are e-commerce platforms. We will continue to use our digital capability as an enabler in customer touch points as we expand the Coach brand globally. Moving back to our stores, as Lew mentioned, we opened three new retail stores in Q1, which are performing well and ahead of plan and seven new factory stores, including our first five Men's stand-alone factory stores. Updating our Men's store opening plans for fiscal year '11 and full price based on the initial success of our first store on Bleecker Street, we will be opening a few additional Men's retail stores later this fiscal year, as we secure premium locations in our most productive centers in North America. On the Factory side, our new Men's stores located in dominant factory centers such as Woodbury Commons, Riverhead, Chicago Premium, Ontario Mills and Orlando, are off to a great start. We believe the initial strong response reflects the strength of the Coach brand and the consumers focus on value and function. It underscores our belief that there is a large opportunity for Men's domestically in our factory channel as well. During the remainder of FY '11, we'll open at least five more Men's factory locations. In summary, we're excited with the progress we've made in our Full Price productivity improvement and our Men's initiative. We're feeling great about the holiday season, given current sales trends in both our Full Price and Factory channels. With that, I'll turn it back to Lew for a discussion of our strategies and opportunities for growth. Lew?

Thanks, Mike. Our overarching strategies remain largely unchanged. We're focusing on expansion opportunities, both here and 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. Mike just discussed our Men's initiative, which we're confident will be a significant contributor to top line sales in the seasons and years ahead, both in North America and international markets. As we noted in August, the Men's global premium bag and small leather goods market is estimated to be about $4 billion today or 15% of the total premium accessories market, with the addressable market much larger. At the same time, Coach's Men's sales represent only 3% to 4% of our total sales today. Given our long-standing heritage in Men's, including a diversified archive of iconic styles, we're well positioned to grow in this category. Clearly, we have a significant opportunity for Coach to substantially increase its share in the Men's accessories market. In Japan, where the male consumer is more brand- and fashion-oriented than in the U.S., we have introduced a comprehensive Men's assortment in key full price locations and have open two stand-alone stores. This quarter, we opened our first freestanding Men's factory store, which is off to a great start. We believe that over time, our share of the Men's market in Japan can equal our total market share of about 16%. Beyond North America and Japan, we believe that Men's will be a major growth driver for international business, especially in China and other Asian markets. We are currently accepting opportunities in these markets and plan to introduce a broad and comprehensive Men's assortment in all new Coach locations where size permits. Moving on to distribution growth. As mentioned in August, we expect that our square footage globally and across all channels will increase about 10% this year compared to 8% in FY '10. Starting in North America, we will open about 30 new stores this year, including the 10 locations we opened in Q1. In total, we expect North American square footage growth of about 8% this year, similar to last year. As we've said many times, outside of North America, China is clearly our largest geographic opportunity, as luxury accessories are expected to double from about 10% of the global market today to about 20% during the next four or five years, contributing the majority of worldwide category growth. Last year, our sales at Retail doubled in China to over 100 million as the market grew rapidly and we increased our share from 4% to 5%. This year, we're accelerating new store openings with about 25 new locations planned, up from the net of 13 open last year, increasing square footage by about 60%. All of these locations will be in Mainland China. In Japan, the overall consumer market remains very challenging, and the category continues to contract. Our goal continues to be market share gains, and we have done this quite well in our core Women's business. As elsewhere, we're now also focusing on Men's where we have seen some significant early successes. This year, we expect to open about seven net new locations in Japan, including the two opened in the first quarter. They include three Men's and one Poppy location. In total, we estimate that net square footage growth in Japan will increase by about 5% this year, similar to FY '10. Earlier this month, we announced the creation of a new international retail organization with three major Asian hubs: Japan, Mainland China and other Asia markets. We also announced the addition of three senior executives who will enable Coach to capitalize on the significant growth opportunities that exist for the brand in the region. Key in this new organization has been the promotion of Victor Louis to the newly created position of President, Coach Retail International, with responsibility for all of Coach's directly-owned businesses outside North America. Finally, beyond our directly-owned international businesses in China and Japan, we have significantly been growing distributor-run businesses in other Asian countries. During this fiscal year, we expect to open about 40 net new international wholesale locations, including the three opened last quarter, bringing our total number to over 220. As most of you know, in April, we announced the two-pronged approach to address Europe through the establishment of a joint venture with Hackett for distribution in the U.K., Spain, Portugal and Ireland, and a wholesale distribution agreement with Printemps for France. To date, we opened three boutiques in Printemps Department Stores in France, including a 1,700 square foot location on the main floor of Printemps' iconic flagship on Boulevard Haussmann last June. We've seen excellent early results where the shop is attracting both local consumers and tourists. We expect to open an additional five locations within Printemps during the balance of the fiscal year. We're also very pleased to announce our initial stores in London. Our stand-alone store in the Westfield White City Mall coming in early spring and a 5,100 square foot flagship on New Bond Street, our first global flagship store in the region coming next summer. Finally, in Spain, we opened our first boutique in El Corte Inglés in Madrid earlier this month and two others in Barcelona and Valencia just last week. During the balance of the fiscal year, we plan to open at least three more Coach shop-in-shops within El Corte Inglés, and we're exploring additional opportunities as well. Beyond the opportunities in the Coach concept and brand, we just launched Reed Krakoff in September. The Reed Krakoff brand is targeted at the rapidly evolving luxury market. It has an opportunity to define new American luxury and engage a customer who was looking for exclusivity and limited distribution. The brand was launched with a few boutiques in the U.S. and Japan, including a store in Madison Avenue and shop-in-shops in Saks Fifth Avenue as well as two prestigious international specialty retailers such as Lane Crawford in Hong Kong and Colette in Paris. While it's still very early days, we are pleased that the product is appealing to the targeted pinnacle luxury consumer. 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 presence. At this time, I will turn it over to Mark Divine, our CFO, for further detail on our financials. Mike?

Thank you, Lew. Lew has just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our first quarter results. As mentioned, our quarterly revenues increased 20% with direct-to-consumer up 19% and indirect up 27%. Excluding the currency benefit during the quarter, sales rose 17%. Net income for the quarter totaled $189 million, up 34%, with earnings per diluted share of $0.63, up 43%. This compared to net income of $141 million and earnings per diluted share of $0.44 in the prior year's first quarter. Our operating income totaled $286 million, 28% above the $223 million reported last year while operating margin was 31.3% versus 29.3% last year. Naturally, we were extremely pleased with this level of growth and our higher level of profitability. During the quarter, gross profit totaled $676 million versus $550 million a year ago, an increase of 23%. Gross margin rate was 74.2% versus 72.3% a year ago. The year-over-year change in rate was a function of sourcing cost improvements, notably in the factory channel where mix continued to favor higher margin made for factory products. We were pleased with our expense ratio in Q1 as SG&A expenses as a percentage of net sales totaled 42.8% compared to the 42.9% reported in the year ago, a 10 basis point improvement despite heavier investment spending. Inventory levels at quarter end were $459 million, 36% above the $338 million reported at the end of last year's Q1 but up only 14% on a two-year basis. This planned inventory build supports strong underlying business trends to maximize sales this holiday. Further, this inventory level allows us to support the 17 net new North American stores, six net new locations at Coach Japan and 16 net new Coach China stores, as well as our new Asia distribution center, all of which are increases from the year-ago period. Cash and short-term investments stood at $712 million as compared with $995 million a year ago. During the first quarter, we repurchased and retired nearly 3.6 million shares of common stock at an average cost of $38.35, spending a total of $137 million. This brought our trailing 12-month repurchased total to nearly 34.3 million shares equaling about $1.3 billion. At the end of the quarter, approximately $420 million remained under the company's present repurchase authorization. Net cash from operating activities in the first quarter was $177 million compared to $241 million last year during Q1. Free cash flow in the first quarter was an inflow of $154 million versus $221 million in the same period last year. Our CapEx spending was $23 million versus $20 million in the same quarter a year ago. As we stated on our August call, based on our current plans for the year, we expect that CapEx will rise to about $150 million, driven by the timing shift of certain projects but primarily for the opening of new stores across all geographies. Naturally, we were very pleased to report these strong financial results. And as Lew and Mike have said, we feel we're very well positioned for the holiday quarter and the remainder of the year. While we do not give specific guidance, I believe it will be helpful for you modelers out there to keep a few things in mind when looking at the year. First and most generally, we expect to achieve double-digit sales increases in North America and globally, with double-digit earnings growth. And given the strength in our business, we now believe that we'll achieve mid-single digit comparable sales growth in North America for the balance of the fiscal year, up from last quarter when we projected low to mid-single digit growth. Second, we are encouraged by the rate of profitability improvement in Q1 and excited about our top line sales growth. And while our previous comments regarding second half gross margins still stand, this sales growth coupled with controlled spending will help offset cost pressures, enabling Coach to deliver in FY '11 an operating margin at about last year's level. And third, our tax rate is likely to be in the area of 34% for the balance of the year as we further refine our international tax strategies. In summary, we feel our first quarter results clearly demonstrate the vibrancy of the Coach brand and our ability to manage our business nimbly while investing prudently for the longer term. We're accelerating our distribution plans to leverage the emerging market opportunities with a 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 the business model that generates significant cash flow and virtually no debt, we are in a position to take advantage of growth opportunities while continuing to returning capital to shareholders. Thank you all for joining us on our conference call today. And now Lew, Mike, Andrea and I, will be happy to take questions followed a brief comment from Lew.

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

Lew, I guess the first question I'm going to have is were there any surprises for you this quarter, given the surprising strength in the trends of the business overall?

I think the only, if we want to call it a surprise, the wind was at our back. And we actually found that the category group 5% to 10% in North America, and we were able to grow at a much faster rate in the category. And what's most interesting about that is that after six quarters of decline in the premium handbag and accessory category, last quarter was the third quarter in a row where we grew 5% to 10% led by Coach, and that's obviously very encouraging. But more generally and overarchingly, we did have, of course, had an excellent quarter and what that did for us as a team is reinforce our confidence that the road map that we've articulated as a growth company can and will be achieved.

And then, I just have a question on inventories and just sort of the outlook for the holiday. On the inventory side, Mike, can you talk about units versus pricing, and if you have opportunity for higher averaging at retails in the holiday season? And you talked a little bit about, feeling great about Full Price and Factory. Was there a sequential improvement or anything we could talk about throughout the quarter into October so far?

I'll take -- you got a lot in there, Bob. It's Mike T. I'll take a few of those, and then I'll hand it to Mike Devine. On the business overall, we did see an important mix shift in the Factory side, again, capitalizing on made-for-factory opportunity. They had drove higher penetrations in handbags, gave us a lot of productivity opportunity, and we do see that as an opportunity going into Q2. More generally and on the Full Price side, we were pleased with conversions as well as average unit retails in handbags, which were up slightly. That's a nice opportunity for us in Q2. And on the inventory side, I think, from a business unit perspective, there are a few really important points to make. One is that we are very clean. We have extremely low levels of clearance in the stores, and we're driving very productive sales in our factory stores through better mix. Our two-years stack on inventory, Bob, is actually up about 14% where we feel last year we were light going into the holiday quarter. And in fact, we did an enormous amount of pull forward of factory products, spring products that we've pulled forward last year to sell in Q2. We've corrected that this year. Additionally, we have more flow in the quarter, so the inventory supports that. And of course, you've heard about some increase in door account with the Men's strategy and some of the global initiatives that we have on new stores. And that, specifically, is driving some of the inventory increase as well. So we're in very good shape. We feel good about what we're seeing in the business today in October. We did see a strong finish in the quarter with the launch of Madison at the end of September. And that, of course, carries forward. Mike?

So Bob, to answer to your mathematical question, coming out of Q1, the increase in inventory is overwhelmingly skewed towards the increase in unit. We have a low single-digit increase in average unit costs, right and so, of the year-over-year inventory dollar growth. The vast majority of it is, in fact, units, which Mike spoke to. I'll also add on that, of course, since a year ago, we've opened the Asian distribution center, which has required a inventory investment, but now allows us to operate far more nimbly and take advantage of growth opportunities in regions in Asia.

Your next question comes from David Schick. [Stifel, Nicolaus]

Lew, a very sort of long-term or structural China question for you. You've just talked about your share going from 4% to 5% and the market itself is growing. Just structurally, as you look at your place in that market, I know you've talked about 16% share in Japan and your share is higher here. Five or 10 years out, what's the right share to think about for where you guys should be in the China market?

Well, I mean the higher, the better, of course. But I think that it's realistic for us to assume that if we continue on our trajectory and enjoy the same level of success that we've enjoyed in other new markets that we've penetrated then we could achieve our 15% market share.

And there's been, it's just been a quarter but there's been no change in the pace of market growth there, it sounds like?

No. The market is moving. Quickly, Coach is growing much faster than the market but the market is, as we said earlier, it's going to double over the next four to five years.

David, I'll just remind you, sorry, Lew, to jump in here, but when we took over the Coach Japan business in '01, we had about 2% market share. And as we just reported, we're at 16% today. So we're excited about the opportunity that it kind of represents.

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

I was just hoping for an update on the sourcing environment. I know you mentioned margins would be down in the back half, but if you could just talk about the specific drivers here? And then also in the context of the higher handbag AUR in the full line stores, is this your strategy for offsetting some of the cost increases? And will we see continued higher prices going forward?

I'll tell you what, I will take the sourcing cost question, and then I'll have Mike Tucci to answer the AUR question. But obviously, coming out of the quarter, we're absolutely thrilled with the levels of profitability in the business, gross margin and SG&A, both delivering 200 basis points of operating margin improvement. But as we've been talking about for three quarters now, we do anticipate seeing inflationary cost pressures that will impact our gross margin rates. We spent a lot of time on the last call going through a number of the initiatives we have in place to look and offset those, longer term, things like counter-sourcing, moving to production to Vietnam, to India, et cetera. So all of those activities continue ahead at full speed, and we just are enormously encouraged by the quarter that we just put in the books and feel that we can keep the top line growth going. We can deliver SG&A leverage that will help it offset some of these gross margin pressures and deliver very, very strong operating margin to the bottom line, similar to last year's level in spite of the pressures.

Sure. on the AUR side, particularly within handbag, what we're experiencing is very balanced growth in handbags. We had a nice comp performance in handbags in Q1, and we're positioned well in Q2. There is some opportunity to raise or to get higher handbag AURs and we're very, very much focused on achieving that. It's mostly a function mix and how we own the goods. And what we're seeing is a very strong response to leather, to gathered leather, to novelty leather applications. Those, by nature, carry higher retails and the customer is voting yes on those. So while we're very committed to protecting our opening price point positioning, we're also seeing some upside in some of the elevated products. And we do believe that there's opportunity for us to nuance that going forward, and we'll take full advantage of it.

[Operator Instructions] Our next question comes from Christine Chen. [Needham & Company]

This is Paula Torch calling for Christine. I wanted to ask a question about Europe. What is the long term potential there? And do you intend to have your own stores eventually besides flagship, or just through partnerships? And also if I may, on Europe, I wondered if you could give us a little bit more color on the customer. I know you said that she's a local and a tourist, but wondering more so what her purchases are like? How often does she shop? Any sort of price point differences, and anything that stands out in terms of collections that she's resonating towards versus the U.S. customer?

There's a lot of talk to that. Let me begin by saying that Europe does represent a very substantial opportunity for Coach. Each market has its own unique differences over, on most generally, we will enter Europe with a multichannel strategy as we have in other countries. So you will see us having flagship stores, freestanding stores, shop-in-shops and outlet locations in addition to, and Internet presence. The way in which we're looking to establish the brand initially, it's through flagship locations in such markets as London and in Paris, whether the flagship is within a prestigious department store such as Printemps, or freestanding location. We are working with our local partners who have considerable know-how in the market, and we will continue to do that. I'm very pleased with the way things are going. I actually was in Spain and France just the other week, and it was exciting for me to visit our first shop which opened in Madrid and have a chance to see our little jewel and speak to consumers. And the consumers surprisingly, actually, have a very high awareness of Coach, and they did because of international travel. They appreciated the quality, the styling, the pricing, certainly, and the overall in-store experience. In addition, we're also benefiting from our growing awareness globally in the form of international travelers. So when we were in Printemps, just a day or two later, we saw a very broad mix of consumers, including, of course, substantial French consumers, but also international travelers particularly from China and Japan. And we believe that will help us form a very profitable business from the inception.

And just in terms of the collections so far, I mean, I realize that it's early. Maybe any price point preferences? Is she looking at a sweet spot?

In general, she likes leather, and she likes stylish products. And Mike said earlier that we've had a very strong success in North America in Madison, particularly with our gathered leather, the Sophia style. That is our runaway number one style around the world. And we're actually chasing inventory for it. So we're finding that she is more sophisticated, more stylish and is looking for product that meets her current needs.

Your next question comes from Brian Tunick. [JP Morgan]

Just two quick ones, for I guess, Mike Devine. First one on the flat EBIT margin guidance, does that include or exclude the 53rd week from last year? And when does the SG&A leverage point really start to come down here? When is the max spending quarter for the year?

Sure. That's a good question Brian. We really think about a 52-week compare in the main. Of course, that will only influence Q4, which during FY '10 was a 14-week quarter for us versus our usual 13 weeks. So as i speak to that, I really think it's appropriate to look at it on a comparable basis, so good clarifying question. In terms of at peak SG&A, actually, we're going to continue to open stores and invest in the business, so we'll continue the SG&A's dollar growth year-over-year. What I will say is that our second quarter, our December quarter, is obviously our most mature and evolved quarter. We've been a gift-giving resource for many, many years. So we'll be, this year as it has been in years past, the most difficult quarter to achieve SG&A leverage because we have so much leverage to begin with because of the high sales volumes. And where we'll really see that SG&A leverage kick in year-over-year as the top line continues to grow will be in the second half Q's 3 and Q4.

Your next question comes from Randal Konik. [Jefferies & Company]

Lew, is the consumer becoming less price-sensitive out there? What's your thoughts there? And then I guess to Mike Tucci, it sounds like we're getting a little bit closer to an inflection point on traffic in the Full Price business? Can we just get an update on where we are with that Full Price traffic trend, when we think it can reach that inflection point to a positive number?

Randy, the consumer is cautious and she is price-sensitive. And as we've said before, what we have found is that she's looking for a combination of innovation, relevance and value. And the modified merchandising, pricing and marketing strategies we put into place over a year ago were effectively through the rebalancing of our assortment, we lowered our average price by about 10%, is resonating extremely well. And that positioning is our long-term strategy, to give consumers great product that stylish, well-made, out of excellent materials, at a very compelling price point. Mike?

Sure. Randy, Q1 was encouraging to us from a traffic standpoint. We did see some improvement from a sequential standpoint coming out of Q4. And I believe that these trends are cyclical. We are starting to lap our repositioning strategy, and I think that, that's an important opportunity for us to continue to build traction. This is a long-term game. And as we've established much more balance in our assortments, and I believe our product from an innovation standpoint continues to improve, it feels like traffic is moving in the right direction. It's very difficult to put a stake in the ground and predict exactly when the inflection point will occur. But we're feeling very good from a Full Price standpoint that we are both impacting traffic with internal initiatives that we're putting out there, pilots and marketing initiatives, as well as seeing the long-term benefit from our repositioning.

Just to Lew, back on the pricing. It just seems that you're getting more response to some of these higher price-point products. You've talked a lot about the Madison collection, et cetera. It's been strong. Is it just a function of the fashion, the assortment's gotten a lot better from your standpoints, happens to be a little more priced? You get the leather in there. Is that what's really happening here?

I think the answer is yes. I mean, Randy, when you look at the closet of our customer and while on average, she might have 10 to 12 bags in active use, and even a Coach loyal consumer would have, let's say, a few bags from other brands, in many households where the consumer is not price-sensitive, she's also carrying European luxury brands. And what we're finding by rebalancing our assortment, as Mike T has indicated in giving consumer a wide range of choices, we're able to let the consumer vote in the store at what rate she wants to purchase. The key for us was to rebalance our assortment. The strength that we're experiencing in the higher price points comes from incredibly appealing product in leather that represents great value.

The next question comes from Laura Champine. [Cowen and Company]

It seems that obviously, in the wholesale channel, that some of your customers are excited about holiday. It seems like you're stocking up as well in advance of holiday. What is it about your holiday assortment that makes you more positive going into the season?

There's a variety of factors. First and most importantly, it's product. And the product that we are introducing for holiday, we have done substantial pilots, and early reads show that it's selling extremely well. So the sell-through that we're experiencing in Madison, in particular, and the expectation we have to other groups that we'll be introducing in November and December, are quite strong. And it's product that gives us that confidence.

Michael Tucci. Let me just add something, and I'd encourage you guys to keep an eye on it in your channel checks. We have also built a slightly different flow strategy for Q2. And you'll see us updating our product assortments more boldly throughout the quarter. So as we typically front loaded the quarter with an enormous October repositioning, while we did that with the relaunch of Madison this season, we also have strong newness hitting over the course of the next eight weeks, eight to 10 weeks. And that's really important, particularly in December where we're flowing in Alexandra, which offers us a real opportunity to capture sales on newness going into our peak 10- to 14-day period.

And then just quick housekeeping for Mike Devine, is that 34% tax rate what we ought to model long term as well?

Yes. We feel like the strategies we've put in place largely around our international tax strategies should hold for the foreseeable future.

Our next question comes from Dana Telsey. [Telsey Advisory Group]

As you expand your channels and geographies, how do you see it changing the operating margin parameters over the long term? Does your business get back to its former operating margin levels? And also, as you think about next spring in this next year with innovation being so important, what do you see for spring '11 in terms of envisioning new assortments, maybe by category or by price? How is it changing?

Mike?

I'll take the first half of the question, Dana. And I think we're very optimistic about the trajectory and shape of the curve long term around our operating margins. And what we'll see is as Full Price business reinvigorates and as our international businesses begin to take a bigger share of the total sales pie, those two positive things will begin in the main move gross margins forward or higher. And in terms of delivering SG&A leverage, again, if we continue to see the top line growth that we enjoyed in Q1, it's clear that we'll be able to deliver additional leverage. During the quarter, Mike Tucci's P&L and our P&L in Coach Japan, delivered a tremendous amount of SG&A leverage, allowing us to show the 10 points of leverage across the whole company as we continue to investment spend. As an example, the Coach China P&L showed 15 points of SG&A leverage against itself from a year ago. We're still growing our spending there faster than the top line, so it was a modest de-lever for the company as a whole. But just as an example, as Coach China begins or continues to grow top line and their spending year-over-year slows, they will continue to deliver operating margin expansion. So will we get back to record levels of '07? It's probably a few years out into our long-range plan but definitely the direction that we will head over time.

Dana, on the products side, we're pretty focused on Q2 but just to foreshadow the back half, we believe Poppy and Madison, as anchor collections, have continued strength through the back half. We're also very excited about Colette and Kristin as platforms that we can build on. And they really target a very important sort of classic-tailored consumer. There's obvious opportunity for us to continue to build on the Men's innovation piece in our existing stores and our Men's concept stores and our freestanding stores. And directionally, I want to really emphasize that we do believe there is pricing opportunity for us not in an enormous way, but we are projecting AUR improvement in handbags in the back half. We also are extremely pleased with the strength of our women's accessories business, which is trending really, really well. And we put a ton of innovation and function into that category, particularly in wallets and small bags, and that's checking very, very well, and that will continue.

At this time, we're going to conclude our Q&A session so that we have time to have Lew make a couple of concluding remarks before the market opens today.

Thank you, Angie, and thank you everybody for participating in the call. I think the quarter speaks for itself. And as I said at the very beginning of the question period, the confidence that we have coming out of this quarter after several quarters of continued double-digit growth really reinforces our confidence as a team. That the road map that we've articulated, as a growth company looking to achieve double-digit top line and bottom line growth over the next several years, is well within our sights and within our reach. Thank you, everyone, and have a good day.

Thank you. This does conclude the Coach earnings conference. We thank you for your participation. At this time, you may disconnect your lines.