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 Senior Vice President of Investor Relations and Corporate Communications at Coach, Ms. Andrea Shaw Resnick. You may begin.

Thank you. Good morning. Thank you for joining us. With me today to discuss our quarterly results are Victor Luis, Coach's Chief Executive Officer; and Jane Nielsen, Coach's CFO. Before we begin, we must point out that this conference call will involve certain forward-looking statements including projections for our business in the current or future quarters or fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences. Please refer to our latest Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission for a complete list of risks and important factors. Also, please note that historical trends may not be indicative of future performance. Now, let me outline the speakers and topics for this conference call. Victor Luis will provide an overall summary of our fourth fiscal quarter and annual 2014 results, and will also discuss our progress on global initiatives. Jane Nielsen will conclude with details on financial and operational results for the quarter and year, along with our outlook for FY '15. Following that, we will hold a question-and-answer session, where we will be joined by Francine Della Badia, President, North America Retail. This Q&A session will end shortly before 9:30 AM. Victor will then conclude with some brief summary comments. I'd now like to introduce Victor Luis, Coach's CEO.

Good morning. Thanks, Andrea, and welcome everyone. As noted in our press release, the fourth quarter capped a challenging year for the company, most notably in the North American women's bag and accessory business. However, it was also a year of many accomplishments for Coach, including the successful integration of our retail businesses in Europe, surpassing $500 million in sales in China and driving men's to about $700 million in sales globally. Most importantly, we laid the groundwork for our transformation to a modern luxury lifestyle brand across all key consumer touch points, product, stores and marketing. A crucial milestone was the arrival of Executive Creative Director, Stuart Vevers, last September, who has already had a significant impact on the creative direction of the brand. This was highlighted by our first New York Fashion Week presentation in February, and the editorial praise his inaugural collection received globally. We also developed our new retail concept, inspired by our New York City heritage, using an iconic materials palette that is distinctively Coach. And throughout the year, we continue to refine our global marketing message, just announcing our new campaign for fall. Most recently at our Analyst Day in June, we presented our comprehensive long-term strategic plan to reinvigorate our business, and rewrite the Coach playbook to achieve growth and leadership. We are taking the key transformation actions to enable the strategic path forward, embarking on the execution phase of our journey. Turning to the results of last quarter, some key financials were: first, net sales on a reported basis totaled $1.14 billion versus $1.22 billion a year ago, a decrease of 7%. On a constant currency basis, sales declined 6% for the quarter. Second, earnings per share totaled $0.59 as compared to $0.89 in the prior year's fourth quarter, excluding transformation-related charges…

Thanks, Victor. Victor has just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our fourth quarter and fiscal year results, as well as our outlook for FY '15. Our quarterly revenues declined 7% with North America down 16% and international up 7%. As noted, on a constant currency basis revenues decreased 6% overall with international sales up 9%. For the fiscal year, sales decreased 5% totaling $4.81 billion with North America down 11% and international up 6%. On a constant currency basis total sales declined 3% for the year with international sales up 12%. Excluding transformation and other related charges, net income for the quarter totaled $164 million with earnings per diluted share of $0.59. This compared to net income of $254 million and earnings per share of $0.89 in the prior-year's fourth quarter, excluding restructuring and transformation related charges. For the quarter, operating income totaled $231 million versus $371 million last year on a non-GAAP basis, while operating margin was 20.4% versus 30.3%. During the quarter, gross profit totaled $789 million as compared to $892 million a year ago, while gross margin was 69.4% versus 73%. SG&A expenses as a percentage of net sales totaled 49% compared to 42.6% in the year-ago quarter, all on a non-GAAP basis. For the full year FY '14, operating income totaled $1.25 billion on a non-GAAP basis compared to $1.58 billion in the year-ago period. Also on a non-GAAP basis, operating margin was 26% versus 31.1% last year. Non-GAAP gross profit totaled $3.38 billion from $3.7 billion a year ago with gross margin rate of 70.3% versus 73% a year ago. SG&A expenses, as a percentage of net sales, totaled 44.3% compared to 41.9% in fiscal 2013. As I turn to…

(Operator Instructions) The first question today is from Bob Durbil with Nomura Securities.

I had two questions, quick questions, related questions on the dividend and the repurchase plans. There has been just a lot of discussion about the sustainability of the dividend at the current levels, given your low level of U.S. cash, your domestic cash flow generation, and the expenditure on your New York headquarters. Can you just reaffirm whether or not you see the dividend being at risk, and sort of what could lead to a change in dividend policy? And the second question that I have is just more housekeeping, but it does sound like the share repurchase program is on hiatus for now, like what share count should we be modeling in the FY '15 numbers?

Sure. Thanks Bob. We have taken a careful look at, as we laid out in Analyst Day, at our cash flows and our investments needs across our business. And our cash flows and strong balance sheet really allow us to fund our transformation investment and maintain our dividends at our current level. So the $1.35, the annual dividend that we talked about today with our dividend announcement was an attractive yield now at 4%. As we have indicated, we'll fund our headquarter building, a long-term asset with long-term debt. And at the current attractive interest rates we expect that that's a strong capital plan. We have spent about $210 million on our headquarters and have another $540 million to fund over the next few years. And we factored that into our planning. So we feel strongly about our ability to continue to support our dividend. We're committed to our dividend. And as we said, as our transformation takes hold, we'd expect to grow our dividend with our net income growth, and that's our long-term outlook. As you think about next year, Bob, we closed the year with 277 million shares outstanding. And I would expect with options that modeling about 278 million shares will put in a great stead for FY '15.

The next question is from Oliver Chen with Citigroup.

Regarding the road to becoming a modern luxury company, the evolution there, your comments on the outlet opportunity in the second half, could you just share with us some details on how you see the product portfolio evolving there? And what are the biggest opportunities? And also just as a follow-up, as you engage in the opportunity for lower promotional pressure, what's the timing on that happening?

Oliver, its Fran. I'll take this question. Stuart's product that he's been working on in designing is set to really launch during the second half in outlet. And as we have talked about, what you'll see very consistently is us lessening our dependence on logo product, putting more emphasis on leather and really incorporating all of the design codes from our brand DNA that will be reflected in more updated and relevant product for the outlet channel. At the same time, that newness will allow us to create more value for customers and put that product into the market at slightly higher average unit retails than where we are today. The biggest opportunity in terms of lessening promotional strategy is really EOS. That's the most significant strategic initiative that we have. And we know, we've been putting out a lot of promotional impressions in the marketplace by pulling that back. We'll really reduce the amount of promotional impression that are out in the market.

And Jane, on the comp guidance for FY '15, is average unit retail, how do you see average unit retail evolving? Is it higher due to the lower use of EOS?

The biggest impact in terms of AUR that we're modeling, we are going to see some movement as you've seen in our above $400 handbag, we'll see some movement in price point. And then lower promotional activity, both in-store and EOS will be a factor in terms of lower discount rates in terms of realizing a higher AUR.

The product in Paris in the department stores looks great, so best of luck.

The next question is from Barbara Wyckoff with CLSA.

Can you talk about the sales in China versus the United States, strength by classification, men's versus women's, regular price versus outlet? And is there a significant difference between what's working in Hong Kong versus Greater China?

In terms of what's working between Hong Kong and Greater China is vastly driven by the very large percentage of Mainland Chinese stores, so I would say there was a dramatic difference. The local Hong Kong consumer market is quite small. And of course, we do have one or two locations, which do specifically cater to that consumer where we do tweak the assortment. The consumer there tends to be a little bit more, I would say, fashion-engaged with current trend. And certainly, the team on the ground there is catering to them through assortment, not only, of course in our women's, but also in our men's collections as well. As I touched on in my prepared notes, Barbara, in terms of the categories in China, both, and I would call it Greater China, Mainland, Hong Kong and Macau, which we refer to as Greater China at Coach, the penetration of men's and lifestyle categories together is at about a-third, which compares to approximately 20% here in the U.S. That is driven not only by men's itself, but also with by very good penetrations, which are increasing in our outerwear businesses as well as in our very nascent, but developing footwear business as well. And we started with those strategies very early on. We're still a very small, and I would say, developing brand in China in many ways. From an awareness perspective, our netted awareness in China is only 18%, which compares with, say 58% in Japan, 76% in the U.S. So the opportunity for us is truly boundless in that market.

The next question is from Brian Tunick with JPMC.

I guess two questions. Was wondering from a marketing and product perspective, could you just maybe remind us sort of, it doesn't sound like this quarter obviously is going to be a big inflection, but you talked about the second quarter, third quarter. Can you talk about sort of when we're going to see or the customer is going to see a bulk of the marketing Stuart's product hitting the stores? Just maybe walk us through that thought process? And then, secondarily, on the 70 retail store closings, can you maybe remind us sort of, what's the productivity of those stores that are closing versus the chain average? Are you assuming transfer? Just give us some idea of how you think the 70 retail closings are going to play out?

So we start with the retail closures.

Yes, Fran will start with the retail closures.

Sure. Brian, as we said on the Analyst Day, we got to the number of 70 store closures, because they're the least productive stores in the fleet. So their impact on the overall topline from a profitability perspective will be very minimal. We expect to see a little bit of transfer to other stores, but it will have a small impact on comp improvement.

In terms of the rollouts of our transformation initiatives across products, marketing, as well as our store renovations, Brian, it really does start in the second quarter. Product will commence hitting in early September on certain locations, and be across the world by mid-September. Marketing will also hit at approximately the same time. And then store renovation start later in the second quarter, with first locations opening here in North America as well or in Shinjuku, Japan that I mentioned earlier in the October-November time period. I would suspect that right now our planning is showing approximately 15 to 16 locations, should there not be any shift in the new concept by holiday. And then across the world, we will have in FY '15 16 new open doors in the new concept and approximately 150 doors that will be moved into the new concept, if you will, renovate it in the new concept by the end of FY '15.

I'm just going to add one thing, Brian, there. If you remember, we actually had SG&A dollar decline in both our second quarter of FY '14 and our third quarter of FY '14. And so when we referenced that those were going to be higher SG&A dollar growth quarters, we were looking at that versus the FY '14 decline, so they'll look higher in the SG&A dollar growth in Q2 and Q3 of FY '15.

The next question is from Ike Boruchow with Sterne, Agee.

Victor, you've talked about the strategy to move away from the online factory sales this year. I was just wondering if you could give us a little more color as to help us kind of understand the impact. Maybe could you tell us what percent of U.S. sales accounted for EOS last year and where you're trying to lower that penetration too? And then also, when does that initiative really accelerate? Because you said it was a 3 point hit this quarter, but you're expecting a 10 point negative hit for next year. So just kind of curious when we build out our quarterly models, when would the impact start to become greater?

As mentioned, decrease in the cadence of events is really being phased in throughout the year. And it has started this quarter, where we're right now at approximately four events per week. That then decreases further in the second quarter. And by the second half of the year, we will be at approximately one event per month. EOS or e-outlet business was over 15% of North American sales at about $0.5 billion.

And if you're thinking about comps, we expect that our in-store comps will improve moderately, as we move through the year, but the impact of EOS will be greater as we move through the year. So the aggregate comps will be relatively stable over the course of the year.

The number I gave you, the $0.50 billion, is representative of total e-commerce sales including EOS.

The next question is from Ed Yruma with KeyBanc Capital Markets.

I was wondering if you could delineate more specifically the inventory component of the impairment and then more specifically I guess how do you think about when you impair inventory versus just flowing it through the P&L as a normal markdown.

So, Ed, the way we look at inventory was consistent with our transformation. We look at all of our product inventory and looked at certain products that we thought were not consistent with the brand image that we were trying to move into, as we moved into Stuart's design aesthetic and looked at whole product, whole SKU lines that we eliminated from inventory and took those as a write-off rather than flowing them through the outlet channel and moving them into the market. So we really looked at where we're headed, where is the inventory not consistent with that direction, and we took the opportunity to write-off that inventory into the fourth quarter. We will destroy that inventory consistent with the write-off charge. And just as a reminder, the inventory charge were shadowed both at Analyst Day and previewed in our 8-K filings prior to today.

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

Can you give us an update on the first-ever sale that you had in the full line stores in June. How did that do? What were the learnings? How would it be different when you look to the January sale? And any update on the outlook performance versus the prior quarter?

The semiannual sale met our expectations. So as you know, our strategy is to be more surgical and strategic, with how we're promoting in our retail stores, and in the past we've done special preferred customer events. We really curtailed those events in the fourth quarter to set us up for the semiannual sale. So it's a different strategy that really aligns us with kind of the fasten industry and other luxury brands. So it met our expectations in terms of performance and the goal of this semiannual sale really is to liquidate at end of season; fashion, colors, things that were very specific to the season. We're not looking at it as an overall liquidation strategy. And one of the most important things that we learned this season in our first-ever, is that it really bought new customers into the store. So we did have a high percentage of our sales that came from new customers into the brand, and we did market to it in our windows, in-stores and in print advertising. So we are very pleased with the results.

And then on the outlooks, any update there?

More specifically, Dana, in terms of?

How are promotions tracking versus how they had been in the prior quarter? How you're thinking of pricing in outlets versus the past?

So we continue to promote heavily in clearance in outlet during this past quarter, which has been consistent with the quarters before. That put a little bit of pressure on our margins. So we were promotional during the quarter. What we've been doing now is really tapering off that heavy level of promoting. And as we talked about also, obviously, taking into consideration our online business, the U.S. business pulling that back. What we're doing is emphasizing units in outlet, positioning ourselves at higher average unit retail prices, going out with new product launches, and we're finding that strategy to be very, very successful. So it is allowing us to lessen our dependence on clearance. We also have a number of pilots and testing in the market right now with different construct to again reduce the level of promotional activity, while maintaining good levels of conversion.

Our final question today is from John Morris with BMO Capital Markets.

Following up on I guess the outlets a little bit. I think back on the Analyst Day you talked about experimenting or maybe kind of piloting a program, where you might close a couple of outlets, and then see what happens in full price stores in similar proximity. Can you give us just to remind us the numbers that you're looking at, if there is any change there or was it just a couple, when the timing of that might be? And any changes to your thoughts on that? And then just a quick comment about the launch of the men's footwear line, when that might be happening and is that across all stores?

We are still planning on closing two outlets consistent with what we've said on Analyst Day. Those two outlet stores will be closing in the second half. And we really picked the two that we chose they are part of the 12 MSAs, our metropolitan statistical areas that we're focusing on in terms of our transformation strategy. And there are retail and outlet stores within a 30-mile radius. So these closures will allow us to measure the channel shift, and in these stores there is also a competitive presence. And what we're going to be able to measure is, will the consumer shift to another Coach channel, can we influence her or guide her to shift though targeted and strategic communication strategy. So that will happen in the second half, and we're still on target for that. In terms of men's footwear, we're launching men's footwear in the fall. And it will be a small launch, but we plan to bring footwear to our men's locations and in retail, specifically, in about 50 locations for the fall half.

Thank you. That concludes our Q&A. I'll now turn it back to Victor, for some concluding remarks.

Thank you, Andrea. And let me start by thanking all of you, who did attend our Analyst Day and as well, of course, for being with us today. I would just like to close by expressing my confidence in our plan, our brand, and most importantly in our people. As a company, this team has an amazing track record of transformation, business success and driving shareholder value. And our management team has clearly understood and embraced the need for change, the need to innovate and to evolve in what is a rapidly changing market. Our plan is bold and I certainly could not be proud of the steps we have already taken in bringing Coach the creative talent, to innovate, and to bring excitement and resonance to our brand, across all of the consumer touch points that we have been sharing with you. As we look to FY '15, it's a year of change and we all look forward to keeping you informed of our progress. Thank you.

Thanks everyone.

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