10 Earnings Call Transcript Good day and welcome to the Coach conference call. 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 everyone 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. Ian Bickley, President of Coach International, is also joining us. Before we begin I must note that this call will involve certain forward looking statements including projections for our business in the current or future periods. Future results may differ materially from our current expectations and historical growth trends may not be indicative of future growth based upon a variety of risks and uncertainties. Please refer to our latest Form 10 K for a complete list of these risk factors. Now let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our third fiscal quarter 2010 results and will also discuss our strategies Ian Bickley will then discuss the increasing globalization of the Coach brand. Mike Devine will continue with details on financial and operational results of the quarter. 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, Carteras Coach we were very pleased with third quarter results including excellent sales and earnings growth and a further strengthening of our full price businesses across all geographies. Our performance reflects the continued attraction of the product and pricing strategies we put into place this fiscal year and bodes well for the future. Beyond our recent performance we're also very pleased to announce the doubling of our dividend at the one year anniversary of its initiation signaling our confidence in our outlets. Finally we're encouraged with the progress we're making in transforming Coach into a Coach wallets on sale global brand. As Andrea just mentioned we've asked Ian Bickley to join today's call to talk about our initiatives notably in Asia, and our development strategy for Europe, initially focusing on the UK, France, and Spain. 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 quarter first. Some key highlights of our third fiscal quarter were, first, earnings per share rose 40% to $0.50 compared with $0.36 in the prior year. Second, quarterly net sales totaled $831 million versus $740 million a year ago, an increase of 12%. Third, direct to consumer sales rose 15% to $726 million from $634 million. Fourth, North American same store sales for the quarter accelerated rising 5% from prior year while total North American store sales rose 16%. Fifth, sales in Japan declined 1% in constant currency and rose 2% in dollars. And finally, we continued to generate very strong sales growth and significant double digit comps in China. During the quarter we opened two North American retail stores, Coach factory outlet locations both in new markets for Coach, Burlington, Ontario, and Brownsville, Texas and closed two others. We also opened one factory store. So at the end of the period there were 343 full price and 119 factory stores in operation in North America. Moving to Japan, we opened our first men's location as well as the factory store and [inaudible] location. At quarter end there were 166 total locations in Japan, with 20 full priced stores including eight flagships, 116 shop in shops, 24 factory stores, and 6 wholesale duty free locations. Indirect sales decreased 1% to $105 million from $106 million in the same period of last year. This decline was due to the slightly reduced shipments into US department stores. We continue to manage Coach Bag inventories into this channel carefully although we've seen significant improvement at retail as sales at POS rose 11%, the first quarterly sales gain in two years. International POS sales also rose in the period driven primarily by distribution. We estimate that the addressable US handbag and accessory category rose at least 5% in the first calendar quarter continuing the improving trend noted over the back half of calendar 2009. Coach's bag and accessories sales rose about 15% across all channels in North America over the most recent quarter. In our own stores, handbag and accessories sales rose 18%. Our total revenues in North America rose at a similar pace as our overall top line, up 13% with our directly operated stores up 16% driven by both distribution growth and positive comp performance. As noted Q3 same store sales rose 5% reflecting a further strengthening of our full price business. Fueling this total retail comp gain was significant gains in cheap Coach shoes conversion from prior year while in aggregate traffic was equal Coach bag sale to last year's levels. We were particularly pleased with the conversion improvement as it is the driver that we have the most control over through product and service. And full price stores average transaction size was slightly lower compared to prior year as increased handbag penetration offset most of the impact of lower handbag and accessory pouches. Traffic trends improved from the second quarter and were only slightly down from the prior year. In factory where we continued to leverage the flexibility inherent in our business model to drive sales through pricing we saw increases in both traffic and conversion while ticket Coach factory online outlet declined slightly. While most of the quarter remains ahead of us we're tracking well and Coach handbag sale our excited about Mother's Day and the rest of the spring season. Its also important to note that Coachfactory.com online sale 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 in retail stores. As you know we have resale price maintenance 365 days a year, Coach website a full price proposition. As noted in Japan we posted a 2% increase in dollars on a 1% decline in constant currency. Our market share further expanded against a continued very weak category backdrop and reflect the relevance of our acceptable luxury positioning with the Japanese consumer who is becoming much more value oriented. We were also very pleased with our performance in China where our proposition of New York fashion and accessible luxury clearly resonated with both domestic consumers and with tourists and our Hong Kong and Macau stores. Clearly our double digit comp store sales growth further demonstrates Coach's great potential with this emerging consumer group. Finally as mentioned in our press release our sales are trending a year ahead of our original plan unveiled two years ago when we announced our intention to take control of this business. Moving on to products, during the third quarter we maintained a high level of product innovation and distinctive newness. Beginning on December 26 we transitioned to spring with the introduction of a Peyton collection offered across multiple fabrications and silhouettes anchored by both our carry all and shoulder bag styles. This was followed by the relaunch of Poppy in February and the new Kristin collection in March. With its new and distinctive hardware and soft feminine styling Kristin represents another [inaudible] design evolution for Coach and was supported by our spring ad campaign. Just this month we introduced a collection of new [inaudible] along with new floral, graffiti prints, and Poppy. And yesterday we launched Julia, a modern tote and hobo story featuring new branding and leather op art and print concepts along with fresh colors and patterns in Madison which are the key statements for Mother's Day. In addition coachbag this July on its anniversary, we will relaunch Poppy, in new and updated styles, new materials, patterns, and prints, with a comprehensive and integrated marketing campaign. Our strong product offerings and rebalanced assortment strategy continues to resonate with consumers. [inaudible] prices are down about 12% this quarter, similar to the first half of the year. These factors were the primary drivers of our conversion improvement in full price as handbag unit sales rose 22% on a comp store basis. Handbags represents a 59% of sales in our North American retail stores in the third quarter, up about 10% or five points from the 54% handbags represented in the same period last year. Moving to factory our business remained strong. Here we are focused on maintaining very high levels of productivity through the introduction of innovative factory exclusive products combined with in store and direct marketing initiatives targeted at our best factory customers. Of particular note our factory business was a significantly higher penetration of factory exclusive products at 80% compared to last year's 60% levels. This improvement in mix favoring made for factory products as well as improved manufacturing costs resulted in significantly higher profitability in this channel. More broadly our strategies remain largely unchanged focusing on expansion opportunities both here in the North America and increasingly in international markets. In addition as Coach bags cheap 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. Starting in North America we plan to open an additional five stores this quarter bringing the total to 20 new American retail stores for the year. discount Coach handbags In addition we will open two factory stores. In total we expect North American square footage growth of about 8% this year, down from about 13%. I'd now like to introduce Ian Bickley, President Coach International to talk about our abundant opportunities outside of North America.