Earnings Call: Q3 2017

May 2, 2017

Good day, and welcome to DISCOACH's Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. At this time, for opening remarks and introductions, I would like to turn the call over to the Global Head of Investor Relations and Corporate Communications at Coach, Andrea Shaw Resnick. Good morning and thank you for joining us. With me today to discuss our quarterly results are Victor Luis, Coach's Chief Executive Officer and Kevin Wills, Coach's CFO. Before we begin, we must point out that this conference call will involve certain forward looking statements. This includes projections for our business in the current or future quarters or fiscal years. Actual results could differ in a material manner. Additional information about risks and other important factors that could cause results to differ from those in the forward looking statements can be found in our latest annual report on Form 10 ks and our other filings with the Securities and Exchange Commission. Also, certain financial information will be presented on a non GAAP basis. These non GAAP measures exclude certain items related to our transformation plan, operational efficiency plan and Stuart Weitzman acquisition related charges as well as the impact of foreign currency fluctuations where noted. You may identify these non GAAP measures by the terms non GAAP and constant currency. You may find the corresponding GAAP measures as well as the related reconciliation on our website, www. Coach.com/investors and then viewing the earnings release posted today. Now, let me outline the speakers and topics for this conference call. Victor Luis will provide an overall summary of our 3rd fiscal quarter 2017 results and will also discuss our progress on global initiatives across markets. Kevin Wills will continue with details on financial and operational results for the quarter and our outlook for the business for the balance of the year. Following that, we will hold a question and answer session where we will be joined by Andre Kone, President, North America. This Q and A session will end shortly before 9:30 a. M. We will then conclude with some brief summary remarks. I'd now like to introduce Victor Luis, Koch's CEO. Good morning. Thank you, Andrea, and welcome, everyone. Our solid performance this quarter was very much in line with our expectations and continued to reflect our strategic initiatives. In a volatile and complex global environment, we delivered continued positive comp store sales for the Coach brand in North America and gross margin expansion in each segment, while tightly controlling costs. We continue to drive growth in our directly operated Europe and Mainland China businesses, which represent the most significant geographic opportunities for our brands. And despite our deliberate pullback in North America wholesale channel and the impact of calendar shifts, we delivered earnings growth. At Stuart Weitzman, we are executing on our plan, driving global awareness and brand relevance and gaining traction with the millennial consumer. The response to spring newness has been particularly strong, and we continue to expect sales to increase at a double digit pace for both the Q4 and the year. We are also making key brand investments in management, creative talent and infrastructure to support long term multi category growth. To this end, we are especially excited about the arrival of Giovanni Morelli, who joins the brand this week as Creative Director. In addition, we announced a new leadership structure and strengthened our Coach brand team during the quarter, a critical step in Coach Inc. Evolution as a customer focused multi brand organization. I'm particularly excited about the addition of Josh Schulman, who will join us next month in the newly created role of Coach Brand President and CEO, as well as the elevation of Ian Bickley to a new coaching position as President of Global Business Development and Strategic Alliances spanning all businesses and brands. Separately, Andre Kohn will be leaving Coach at the end of June to return home to Asia with his family. Andre has been a great partner to me and a strong leader of our businesses in Asia and North America. I deeply appreciate his friendship and contributions over the last 9 years, but naturally we respect his family's decision to return home to Singapore. Now, as has been our practice since we implemented our transformation strategy almost 3 years ago, I'd like to share some of the actions we've taken to drive performance across the 3 Coach brand pillars of product, stores and marketing. Starting with product, where Coach has emerged as a house of modern fashion design. In retail, we continue to successfully expand our assortment of 1941 handbags, complemented by a broader offering of 1941 wallets and small leather goods, driving brand elevation and innovation across categories. We built upon leather craft through expanding our T. Rose platform in impactful new color combinations and fashion embellishments like studs, fringe and florals. We saw a very strong customer appetite for the neon pink and black tea rose combination, which performed well for the season. We also relaunched the EDI shoulder bag with functionality enhancements, along with the new larger size, the EDI 42. In outlet, we followed up our exclusive holiday collection with new limited edition assortments for spring, inspired by our own rich brand heritage. We introduced the New York City Stories collection, featuring the city skyline that inspires our team every day, along with other playful and emotional New York City icons. This was followed by our Bonnie Cashin Collection, featuring Coach's 1st Creative Director, whose influence can still be seen in our brand today. Finally, we launched our floral collection, inspired by our own 1941 collection with print seen in our very first runway show at New York Fashion Week in September of 2015 and introduced last spring in retail. These playful patterns were featured on our best selling leather goods along with our new petal shoulder bag were extended throughout our dual gender lifestyle categories, including ready to wear and footwear. The Coach outlet take on spring featured a whimsical floral message that leveraged our runway assets to great success and executions that were understandable and very appealing to the broader outlet consumer. On stores, we are continuing to establish our modern luxury concept globally, renovating and opening 50 locations during the quarter, including 17 in our directly operated North America business, taking us to nearly 600 modern luxury locations globally across all channels. This is in line with our target to end the year with over 700 doors in the new format, representing the vast majority of our traffic. Consistent with the plan, these renovations have been driving comps, which exceed the balance of the fleet in the vast majority of stores around the world. Of course, as we have said before, the in store experience is a key component of our brand elevation strategy, which is based upon, 1st, differentiating the Coach experience through leather and craftsmanship and secondly, developing personalized clienteling and customer events. I am delighted that our mystery sharper scores are key metrics that demonstrate how well we deliver our unique modern luxury experience. We're up again in the Q3 at over 85% as compared to about 75% in last year's Q3. In addition, it's great to see how clients are responding to our new leather services, such as monogramming and leather conditioning, with new services such as unique emoji stamps and a customizable bag program being introduced throughout the year. Across the global fleet, there were 28 craftsmanship bars And our made to order Rogue custom bag service has been a resounding success at our Fifth Avenue Coach House. Also, after a successful Q2 North American rollout of Coach Journey, our innovative and interactive service training program, we expanded it in Q3 to include all our directly operated stores in Japan, Hong Kong, Singapore, Taiwan, Malaysia and South Korea and are implementing it in China. We remain very excited about our global flagship focus. We view these stores as important retail and marketing investments for the Coach brand. Early in the quarter, we opened the Kuala Lumpur Pavilion flagship in Malaysia and opened our first flagship in Milan, Italy during February Fashion Week, which was followed by our flagship in Florence, Italy. As noted, when we entered the fiscal year, one of our key strategic initiatives is elevating the Coach brand in North America wholesale channel. To this end, we've renovated 60 doors to date and have continued to see positive results from our shop manager program. Importantly, through 1941, we've added new locations in top tier specialty stores in North America and globally. At the same time, we have also rationalized our overall North America department store distribution, taking our door count down by about 25% or by over 2 50 locations, as well as reducing promotional events in the channel. As you know, in the fall, we closed the first group of these locations, about 120, while the number of days on sale in department stores were reduced by about 40%. We closed a net of more than 140 during the Q3 and expect another few to be closed in the Q4, while spring season to date, February March, our days on promotion are down 35 percent. On the marketing front, for the first time at New York Fashion Week in February, we held a dual gender runway show to significant critical acclaim. To this end, we were thrilled when Coach Creative Director, Stuart Vevers was awarded the distinguished honor of 2017 Designer of the Year by the American Apparel and Footwear Association at the American Image Awards last week and are equally excited that in his 1st year of eligibility, Stuart has been nominated for the CFDA Accessory Designer of the Year. As you know, we recently began working with Selena Gomez, the new face of Coach. The reaction on social media was instantaneous and electric with her first two posts for Coach getting very high engagement, garnering nearly 5,000,000 and 6,000,000 likes, respectively, on Instagram. Our first events with Selena were in tandem with Step Up, an organization supported by our Coach Foundation focused on empowering young women from underserved communities and encouraging them to dream big. These events drove 1,700,000,000 impressions globally. She has also collaborated with Stuart on a custom handbag, which will be in our retail stores and select department locations globally later this fall. Most importantly, our first global handbag advertising campaign with Selena will hit in July and run through this fall winter and will be followed by a second campaign in springsummer 2018. As a result of these efforts, we are seeing continued progress with consumers. Importantly, in our North America quarterly brand tracking survey fielded in March, we saw strength with the broad premium market across key emotional and functional attributes, while discount perceptions, an important measure of brand health, declined once again this quarter. So as our plans unfold and the momentum continues to build, we are delighted with the progress and proud of all that our team has accomplished to drive Coach's transformation. The Coach brand is very much on its way to evolving from a specialty retailer and accessories brand to a true house of fashion design, defining modern luxury. We are excited to see our creative vision and direction gain traction, and we'll continue to update you on these initiatives as we move forward. Turning now to a discussion of North American category trends. Clearly, the challenges impacting the category in specific and consumer spending in general have persisted in 2017. This volatility was evidenced throughout calendar 2016 impacted by the U. S. Election in the fall and the significant strengthening of the dollar over the last several months. We estimate that the North American premium men's and women's bag and accessories market was again flat to up low single digits in the March quarter, which we believe has continued to be impacted by negative trends seen in U. S. Department stores as brands, including ours, have pulled back from the channel. While Kevin will provide additional details on sales and distribution by geography, we wanted to touch on some current trends and strategies by market, starting with North America. As you read in our release, for the quarter, total North American Coach brand sales decreased 5% on both a reported and constant currency basis, including the negative impact of our deliberate department store pullback. Direct sales declined 2% in the quarter. As a reminder, this decline was in line with our expectations given the Easter shift, which hurt us in Q3 and will be a benefit in Q4, as well as the loss of the important post Christmas week, which fell into our 2Q results this year. Importantly, the 3rd quarter marked the 4th consecutive quarter of positive comps in North America. Our bricks and mortar comps rose slightly over 3% in the quarter, driven by conversion and ticket, while traffic was down moderately. Overall, our aggregate comp was also up over 3%, with e commerce having a negligible impact on quarterly results. Finally, our business with international tourists in our North American stores was slightly lower during Q3, negatively impacting comp by under a point, with declines in Chinese tourist traffic once again mostly offset by other nationalities, notably Japanese and Korean visitors. Now turning to our retail performance and the metrics we traditionally share on product. The penetration of the above 400 price bracket increased to over 55% of handbag sales in North America, up from about 40% last year and generated another positive comp on a sales and unit basis. The increase was driven from success in both Rogue and Swagger silhouettes. As planned, 1941 handbags represented about 40% of handbag sales in our top tier retail stores. We also experienced strength in small bags and accessories, driven by cross bodies, clutches and wristlets, which offer a high level of versatility and functionality at compelling price points. Turning now to event marketing. Our semi annual sale concluded early in the quarter, and we held our closed preferred customer offer in March, which anniversaried the same event last year, but excluded 1941, a significant part of our assortment as mentioned. In the Q4, we would again expect to hold a short duration sale around Mother's Day and kick off our semi annual summer sale. Looking ahead to the balance of spring and early summer, our goal is to continue to elevate and differentiate the brand by offering innovation and emotion to our product assortment, marketing and the in store experience. We will also continue to work to position our assortment and Coach as a year round gifting destination. Specifically, in retail, we will 1st offer a compelling Mother's Day story anchored by souvenir embroidery, a fun and playful platform with trend right embroidered patches supported by a disruptive campaign. We also launched the Bowery Crossbody, a feminine and sharply priced small bag with a delicate chain strap as the perfect gift for mom. 2nd, we launched Coach Space, a fun and out of this world capsule that celebrates space exploration's role in the American imagination. We have created instantly iconic product that features bright and graphic space themed patches on key 1941 silhouettes, including Dinky, Rogue and the Saddle Bag. 3rd, we introduced the new Bandit Hobo, a wearable soft and streamlined shoulder bag. The BANDIT is a chic functional bag that highlights the natural drape of our beautiful leathers. Unique detailing includes a detachable interior pouch that can convert into a second bag, offering a premium 2 in-one functionality. Finally, we will debut the Swagger Shoulder Back 20, driving innovation below $400 The Swagger Shoulder Back 20 is a sleek, sophisticated and on trend addition to the iconic Swagger family that easily transitions from day to night. And for outlet, as we transition into summer, we are excited to launch a fresh take on our Mother's Day novelty assortment, with gifting items across all price points and even offering hang tags, bag charms and small leather accessories that drive impulse shopping and allow for fun personalization opportunities for all customers and for all occasions. Following Mother's Day, we will have a full launch of a Disney and Coach product collection for Outlet, our largest ever collaboration in this channel, which will span all of women's and men's leather goods and lifestyle categories. We have taken inspiration from our best selling retail styles from our successful collaboration with Disney a year ago and translated them to a broader assortment for the outlet customer. Rounding out Q4, we will have our first ever Father's Day mailer as we introduce our new men's bond backpack and a range of exciting boxed gift items. And now, moving on to international results for the Coach brand. As noted in our release, in the 3rd quarter, international Coach brand sales declined about 4% on a reported basis, including about 70 basis points of pressure related to currency translation. By geography, Greater China sales declined 2% versus prior year in dollars and increased 2% on a constant currency basis, driven by strong growth and positive comps in Mainland China, partially offset by continued softness in Hong Kong and Macau. In Japan, sales rose 2% on a reported basis, while constant currency sales decreased 1%, impacted by a decline in Chinese tourist spend as we have not yet fully lapped last year's dramatic increase. In our other directly operated Asian markets outside of China and Japan, namely South Korea, Taiwan, Singapore and Malaysia, sales decreased low double digits in dollars in constant currency. Our results were primarily impacted by continued softness in South Korea, where macroeconomic and geopolitical headwinds have pressured spending from domestic consumers and tourists. In Europe, our directly operated sales grew at a double digit pace in constant currency during the quarter, while the wholesale business was negatively impacted as planned by a shift in shipment timing related to the change in fashion deliveries. This shift is expected to benefit Q4. Therefore, total sales in Europe increased slightly in constant currency and declined modestly in dollars. Finally, I would point out that we are continuing to see volatile results in our international wholesale businesses, which while small, are important to growing brand awareness. For the quarter, as planned, our sales declined double digits on a net sales basis, impacted by shipment timing, which we expect to reverse in Q4. Sales also declined on a POS basis in Q3. In closing, we are proud of the progress we've made along our transformation journey and the evolving perception of the Coach brand and Coach Inc. As we move from a specialty retailer to a house of modern luxury brands. Now, I turn it over to our new CFO, Kevin Wills, for details on our financial results and guidance for fiscal 2017. Kevin? Thanks, Victor. It's a pleasure to be with you on my first Coach earnings call. Victor has just taken you through the highlights and strategies. Let me now take you through some of the important financial details of the Q3 results as well as our outlook for fiscal year 2017. Please note the comments I'm about to make are based on non GAAP results. Corresponding GAAP results as well as the related reconciliation can be found in the earnings release posted on our website today. Overall financial performance in the Q3 was consistent with our expectations despite the volatile backdrop. Our sales were down in the quarter, as projected, impacted by calendar shelves and the deliberate pullback in the department store channel in North America as well as wholesale shipment timing internationally. That said, we drove positive comps for the Coach brand in North America and gross margin expansion in each reportable segment, while tightening controlling costs and continuing to invest in our brands. Taken together, we delivered another quarter of solid earnings growth. Importantly, our balance sheet remains extremely healthy with a clean inventory position and sufficient cash to support our strategic initiatives while returning capital to shareholders through our dividend. Now turning to the details. Consolidated net sales totaled $995,000,000 for the Q3, a decrease of 4% on a reported basis and 3% on a constant currency basis. In addition, and as expected, the company's strategic decision to elevate Coach Brands' positioning in the North American wholesale channel through a reduction in promotional events and door closures negatively impacted sales growth by approximately 150 basis points in the quarter. As expected, Coach brand sales decreased approximately 4% in aggregate, but increased in North America on a comp store basis. Stuart Weitzman brand sales rose 1%, while being negatively impacted by wholesale shipment timing. Consolidated gross profit totaled $706,000,000 a decrease of 1% versus prior year, while gross margin increased approximately 190 basis points to 70.9%. Coach brand gross profit decreased 2%. However, gross margin expanded 180 basis points over the prior year, including approximately 20 basis points of benefit from currency to 71.7%. Stuart Walsman brand gross profit rose 8% and gross margin rate increased approximately 3.90 basis points over the prior year, reflective in part of channel mix, the benefit of currency and lower promotional levels. Total SG and A expenses decreased 3% to $544,000,000 and represented 54.6 percent of sales as compared to 54.3 percent in the year ago period. Coach brand SG and A expenses decreased 4% to $500,000,000 and represented 54.6 percent of sales compared to 54.8% in the year ago period. Stuart Weitzman brand SG and A expenses were $44,000,000 compared to $39,000,000 a year ago due to an increase in store occupancy costs associated with new openings as well as the company's strategic investment in team and infrastructure. Consolidated operating income rose 7% $162,000,000 while operating margin was 16.3%, an increase of 160 basis points versus prior Coach brand operating income increased 8%, while operating margin increased 200 basis points over the prior year to 17.1%. Stuart Wossman brand operating income was $6,000,000 or 6.9 percent of sales versus $7,000,000 or 9.3 percent of sales in the prior year, reflecting key investments to support long term multi category growth as discussed. Net interest expense was $4,000,000 in the quarter as compared $7,000,000 in the year ago period. Total net income for the quarter increased 5% to $130,000,000 with earnings per diluted share of 0.46 dollars up 4% versus prior year. Now moving to global distribution. In total, we closed 5 net Coach brand locations globally in the Q3 to end the period with 955 directly operated locations worldwide. In addition, we ended the quarter with 82 Stuart Watsman directly operated locations, no change from the previous quarter. In fiscal year 2017, we continue to expect our Coach brand directly operated square footage to grow low single digits globally. This guidance assumes that Coach brand directly operated square footage in North America will decline slightly with net store closures in both and outlet locations. Internationally, we expect a mid to high single digit increase in square footage. Finally, turning to Stuart Weitzman directly owned distribution. Year to date, we've opened a total of 7 net new locations and we expect to close one location in the 4th quarter. Moving on. Net cash from operating activities in the Q3 was $202,000,000 compared to $199,000,000 last year. Our CapEx spending was $70,000,000 in Q3 versus $101,000,000 last year. Free cash flow in the quarter was an inflow of 131,000,000 dollars versus $98,000,000 in the same period last year. Inventory levels at quarter end were 4.70 $9,000,000 compared to ending inventory of $464,000,000 a year ago, representing an increase of approximately 3% in support of planned sales growth in the 4th quarter. At the end of Q3, cash and short term investments were $1,900,000,000 as compared to $1,300,000,000 a year ago. Our total borrowings outstanding were $592,000,000 at the end of Q3, compared to $869,000,000 a year ago, reflecting the pay down of our term loan in the Q1 as previously discussed. Now turning to our capital allocation policy, which has not changed. Our first priority is continue to invest in our brands in order to drive sustainable growth and value creation. Our second priority is strategic acquisitions, looking for great brands with opportunities for expansion. And 3rd, returning capital to shareholders with a focus on dividends. As always, underpinning these priorities are our guardrails for allocating capital effectively, which are maintaining strategic flexibility, strong liquidity and access to the capital markets. Now let me address our outlook for fiscal year 2017 on a non GAAP 52 week versus 52 week basis. We are maintaining our operational guidance for the year and continue to project revenue to increase at a low single digit rate, including the impact of currency. This guidance continues to imply strong top line growth in Q4 on a 13 week versus 13 week basis, benefiting in part from the calendar and shipment timing shifts, which negatively impacted us in Q3. As a reminder, these impacts include the shift in the Easter and the inclusion of the week leading up to the July 4th holiday, as well as the shift in Coach International wholesale shipment timing due to the change in the delivery calendar in fiscal year 2017. Importantly, this guidance continues to assume at least a positive low single digit comp for the Coach brand in North America for the year and in the 4th quarter. We also continue to project double digit revenue growth for Stuart Weitzman for the year. We are maintaining our consolidated operating margin forecast of between 18 point 5% and 19% for fiscal 2017. This guidance incorporates the negative impact of both Stuart Weitzman and the strategic decision to elevate Coach brand positioning in the North American wholesale channel. We now expect interest expense to be approximately $20,000,000 for the year based on the lower interest expense actualized today. The full year fiscal 2017 tax rate is still projected at about 26% with a return to a significantly higher tax rate in Q4 versus Q3 consistent with our typical cadence. And we continue to expect our average diluted shares outstanding for the year to be approximately 283,000,000. Taken together, we are still projecting double digit growth in both net income and earnings per diluted share for the year. And we now expect consolidated CapEx to be approximately $300,000,000 in fiscal year 2017. In closing, we are pleased with our performance in the quarter and the consistency of our execution against the volatile backdrop, building on the successes we have achieved thus far in our transformation. Importantly, we continue to expect fiscal 2017 to be the year when we return to both revenue and earnings growth. Overall, we remain confident in our ability to drive sustainable and profitable growth for Coach, Inc. Over the long term. I'd now like to open it up for Q and A. Operator? Thank you. Our first question comes from Bob Drbul with Guggenheim. I was wondering if you could just talk a little bit more about the North terms of comp? And if you could also just address, you mentioned traffic, but any big variation on the traffic side on either segment would be helpful. Sure. Good morning, Bob. Andre? Good morning, Bob. So as we're pleased with the performance in both our channels actually. And as you know, it's we're starting to see the impact of the transformation taking hold. So in retail, brand elevation is really taking hold with a broader distribution of $400 and above AUR bags are up on a comp basis. They represent more than 55% of our business. We're seeing in outlets as well innovation increasing with taking inspiration from our own retail collections with for example last quarter our floral explosion that did very well. So pleased across both channels. No major difference in traffic between channels. Great. Thank you very much. Thank you, Bob. Our next question comes from Ike Boruchow with Wells Fargo. Hi, good morning everyone. Thanks for taking my question. Congrats on a nice quarter. Thanks, Ike. I guess, Victor, so Victor, you touched on the North America wholesale channel and the door closures that have taken place this year. Just kind of curious if you could give us how you're thinking about next fiscal year potential future door closures within the wholesale channel? And then just tying that together, how could are there any impacts on the Coach brand margin that we should keep in mind for next year and just the trajectory of the Coach brand margin recovery? Thank you so much. Sure. I'll ask Andre to speak a little bit about obviously the closures that we talked about in our speakers' notes and thinking go forward. So by the end of this fiscal year, we would have closed about 2 50 doors. We continue to look at our wholesale channel and to pull out of doors that we feel don't make sense from our perspective and the perspective of our partners. And we want to continue to look at promotions very carefully and to partner with our department store wholesale partners to continue to reduce promotional pressure. In terms of margin, as you know, the wholesale businesses represents a very small part of Coach's overall business. So we don't see a material impact from that perspective. Great. Thanks. Thanks, Alex. Our next Alex. Our next question comes from David Schick with Consumer Edge Research. Hi, good morning and thanks for taking my question. Wanted to build off of Bob's question around some of the tickets. So you've talked about the success of 1941, impressive mix. It's been, I guess, part of store investments and clienteling. It's all coming together with the work you've been doing. Is there any more granularity or any other ways you can slice this than the above $400,000,000 We see the price points and the editorial that it's generating. Anything that could help us understand what's happening inside that business that's really doing well above 400 would be helpful. Let me touch on that. Good morning, David. Certainly, look, there's been a tremendous level of innovation across full price handbags in 1941. We've benefited from that. I think the consumer is perceiving the value at those price points, which speaks to both design, quality of the leathers and obviously make. And of course, as you mentioned, the total store experience with our sales teams benefiting tremendously from the Coach journey and modern luxury sales training that we've put in place. And we've seen that impact our Secret Shopper scores, as we mentioned in our speakers' notes, up from 75% about a year ago now to over 85%, which really speaks to consumers engaging, understanding the transformation. Certainly, as we go forward, there's still opportunity for us to be innovative across the lower price points in the full price category. And I think you'll continue to see us, as we mentioned in the speakers' notes, work very hard to make our full price business a year round gifting destination with innovation across all price buckets. Thank you. Thank you, Dave. Our next question comes from Erinn Murphy with Piper Great. Thanks. Good morning and welcome, Kevin. I guess my question is for Victor. You've made a number of key talent hires of late. The Coach brand is tracking well. I would love if you could expound upon some of your comments you made earlier on building a customer focused multi branded portfolio. Could you just talk about kind of what's next? And with the success of 1941, does that change or kind of impact your decision of what brands could fit well within your portfolio? Thanks. We've been pretty consistent, Erin. Obviously, we've talked just about great brands. I wouldn't comment any more specifically than the comments that we've laid out in our speakers' notes and what we've talked about in the past. Obviously, we're looking to leverage the strengths that we have as an organization, whether that be our supply chain or whether that be, of course, our ability to develop and grow brands globally and leverage the teams that we have across the world who are very gifted and proven in growing brands at retail. At this point, I simply would not comment any further on acquisition activity and won't do so unless and until there's something specific to announce. Fair enough. Thank you. Thank you. Our next question comes from Oliver Chen with Cowen and Company. Hi, congratulations. Victor, on the people changes in the organization that you're creating for the long term, the global business development and strategy what will some of the key priorities be there? And why did you see the need for that role? It sounds like a nice opportunity as you think about Coach over the next 5 to 10 years. And just a minor question, we were curious about how average unit cost trended and if there's anything we should know in terms of how you're balancing the AUC and giving features to the customer in the context of innovation versus managing promotional levels prudently? Thank you. Okay. Thank you, Oliver. It was a bit difficult to hear you. But if I understood correctly, I think your first question was specifically on Ian and his role as President of Global Business Development. And then your second question was on AUCs. I'm going to ask Kevin in a minute to speak on AUCs. In terms of Ian's role, he'll play a very important role supporting both of our brands. We obviously believe that each brand has a very unique positioning, but there is an opportunity for us to leverage know how whether that be, of course, in relationships with our landlords globally as well as working with licensing partners and others as we look to develop both the Stuart Weitzman and the Coach brand and of course any future acquisitions that we can make. It will set us well to provide some leverage on the front end of the business as Ian partners with both the CEO of Stuart Weitzman, Wendy Kahn, as well of course as the CEO of the Coach brand, Josh Schulman, who joins us in June. A specific example of that, for example, could be in the case of Stuart Weitzman supporting that organization, the take back of certain markets, which is a skill that obviously we have very strong experience in from past work that we've done at Coach and specifically which Ian has led in his career. Kevin? Sure. Good morning, Oliver. On the if I understood your question around the average unit cost and related to margin versus the increased cost, obviously, there's a balancing act there. As we are elevating part of the 1941 product, there's more cost that go into that, but we're balancing that. If you think about the components of bags, whether it's the leather, the tanning, the hardware, each have their own individual kind of inflationary, deflationary factors. So it's again, it's a balance and we're looking at that across the chain. And I think you're seeing that balance work itself out in our gross margin rate performance. Thank you. Best regards. Thank you, Oliver. Thank you. Our next question comes from Anna Andreeva with Oppenheimer. Great. Thanks so much. Good morning, guys. And let me add my congrats as well. Good morning, Anna. Thank you. Good morning. Good morning. A follow-up on Oliver's previous question. Really strong results on the gross margin line. Maybe talk about expectations for the 4th quarter and just puts and takes on this line item as we think about 2018? And quickly also, what was the Easter shift headwind to the Q3? Just trying to gauge the benefits to expect for 4Q? Thanks. Sure. I'll let Kevin jump in on that one. Well, good morning, Adam. I think we outlined basically our expectations for the balance of for the full year and given the Q3 year to date results, you can see it affecting what we're expecting for the Q4. We're continuing to expect improved performance in the 4th quarter. On the Easter shift, there's a number of kind of puts and takes on the sales line in the quarter, but that was probably about a, let's call it around a point impact in the Q3 versus the 4th is an imprecise science, but we'd estimate around a point in the gross margin. We probably will not see improvement in the 4th quarter. Terrific. Thanks so much. Our next question comes from Omar Syed with Evercore ISI. Thanks. Good morning. I wanted to ask a follow-up question on the M and A strategy. More broadly speaking, a couple of quarters ago, I believe you mentioned that one of the kind of categories or criteria was trying to avoid turnaround situations. And I wanted to push you a little bit on this, especially given the transformation that you guys have executed for the Coach brand over the last few years, kind of shrinking to grow, reducing proportionality, elevating the brand, bringing it into more fashion and innovation globally. Is that a skill set you think you can apply, especially as you look across the landscape to other brands where there might be a strong underlying brand asset, but there's a lot of struggles and challenges going through the evolution of all the changes that are happening in retail and wholesale channels and things like that. I wonder if it's something you think about a core competency having gone through what the company has gone through so successfully that you could apply in other similar branded situations in the global soft lines and accessories space? Thanks. Good morning, Omar, and thanks for the question. Look, certainly, we have a very gifted and talented team. And obviously, with the work that we've done with Coach, this isn't our first transformation. There are folks in this company who've been here 20, 25 years, who've gone through this in the past with our first what one could consider our first transformation just prior to our IPO and obviously also speaks to the fact that we have a great brand in Coach. Specific to your question around whether we're interested in turnarounds, 1st and foremost, Omar, we're looking for great brands, brands that have the potential for growth. Brand health and consumer perception for us is absolutely critical. We're not looking for brands that have, in essence, lost their way or need to be completely repaired or repositioned in the minds of consumers. Healthy brands that have a unique positioning and that certainly allow us to use the skill sets that you referred to, to diversify whether that be our consumer target or a specific consumer attitude or segments of the markets or perhaps a geography channel or category are what interests most and what we're most focused on. I think that Stuart Weitzman, of course, is an acquisition that we're extremely pleased with and is a good example of that. Thank you, Victor. Good luck. Thank you, Omar. Our next question comes from Dana Telsey with Telsey Advisory Group. Good morning and congratulations everyone and welcome Kevin. As you think about the penetration to the over $400 price point now being 55% or so, where do you see that and how do you see the portfolio price points emerging? And on marketing spend, it certainly is a big benefit. How do you see marketing spend contribution going forward? And will there be other variances in marketing spend? Selena Gomez has been terrific. And how do you see the events with her moving forward? Thank you. Good morning, Dana. First on Selena, we're really pleased obviously with our partnership so far. It's in its very, very early stages. And in fact, had a big day with Selena yesterday as she wore coach for the Met Gala and the play that we're seeing in both digital and traditional media, television to newspapers, magazines and of course all of their online channels has been absolutely terrific, if not electric in the last 24 hours. We expect Selena to really kick off, however, fully with the very first handbag campaign that will hit in July. That will then lead to through all of fallwinter and then later this year we will be shooting the campaign for next spring summer. And so we have a full year ahead really of activities and advertising that will hit featuring Selena and of course leveraging her very, very extensive online following where I believe today she's north of 116,000,000, 117,000,000 followers on Instagram alone. As it refers to the above and just to close on your marketing question, I would not expect total marketing dollars to change beyond what we are investing this year on a go forward basis. In terms of the penetration on the above $400 Dana, I would not expect significant additional growth in handbag AUR. Certainly, there's a potential for ticket growth as we launch other categories, whether that be ready to wear, of course, our soft accessories and footwear becomes an increasingly important category for us as well. Thank you. Our next question comes from Mark Altschwager with Robert W. Baird. Good morning. Thanks for taking the question. I also wanted to follow-up on gross margin, really nice performance this quarter. Can you give us a sense of outlet pricing environment and whether you think the tide is beginning to turn there? If so, what's driving it? And then bigger picture, Coach brand gross margin seems to be trending towards the higher end of that 69% to 70% range you've consistently discussed. So just wondering if you see potential for some upside there as we look into fiscal 2018 and any puts and takes we should be thinking about? Thank you. 1st on outlet, I'll let Andre jump in and then Kevin will answer your question on total gross margin. So we haven't seen the outlet pricing environment improve. If anything, it's become more competitive, more promotional over the last couple of quarters at least. And we've tried to manage that basically through an increased pipeline of innovation. And Mark, this is Kevin. On the gross margin, obviously, we're not providing any outlook or guidance as it relates to '18 at this point in time, so no specific comments on that. However, as we've clearly articulated, we do see there's an opportunity to increase the operating margin in this business over time. And all the actions we're taking, we hope we'll be able to improve the bottom line, but no specific comments at this time relative to 2018. Thank you. Our next question comes from Michael Binetti with UBS. Hey, guys. Good morning. Congrats on a nice quarter. Could you can I just ask you a quick modeling question and then a follow-up? But could you just help us bottom line where you think reported revenues land in the Q4? I think with all the shifts going on between the Q3 and Q4 and the extra week, there's a bit of confusion on I'd hate to get off the call without having a clear idea of where we're headed. I think the 53rd week is maybe a 2 point headwind to the year in the Q4, but maybe beyond that you could just help us clarify where you think the 4th quarter trend revenue reported revenue would land? Sure, Michael. This is Kevin. Obviously, as you noted, there are some puts and takes with some of the timing. At top line level, I would say somewhere around plus mid single digits versus the 13 week reported basis in 2016, which was at 1,070,000,000. Dollars I wasn't here, but I know in the press release last year in Q4, we did call out the impact of the 53rd week on the revenue. It was around $84,000,000 and I believe about 0.07 dollars a share. So between those 2, I believe you'll be able to back end an approximate number. And if I could ask one quick follow-up. Victor, I know at the Analyst Day, it was a long time ago and the category was much different than it is today, but you guys highlighted where you thought the Coach brand margins could go at that time into best in class in the category, I think was high 20s was an earmark. I know we've beat this up with several analysts asking about this quarter and in past quarters. It is a little leaving us a little bit off balance, not having some kind of a North Star to think about for that brand and obviously the category is very volatile. But can you just help us with how you see the profitability of the brand evolving over the next few years, where you think best in class should land in the categories you guys are in with the brand and the position where you're at today and the price points where you're at today? Sure. First and most importantly, we expect to drive operating leverage in the Coach brand on our sales growth beyond 2017. As you suggested at our Analyst Day, we guided that Coach brand will get back to best in class by 2019. And at this juncture, given the lack of visibility in the current environment, putting a specific number out there for what best in class will be 2 years down the road would simply be an exercise in false precision. Look, of course, both Coach brand and Coach Inc. Today continue to evolve in terms of our channel mix, geographic mix, our category mix as we bring footwear and other categories in house to become a more important part of our business. And it's very likely that we will be a very different company by 2019. Our focus has been and will continue to be overall profitable Our next question comes from Andrea Yee with Wolfe Research. Good morning. Let me add my congratulations and congratulations to Stuart for the recognition. Thank you. You're welcome. My question is on inventory at the end of the June, at the end of Q4, how should we think about that given there's layering in a little bit more a higher AUC product for, 1941? And then if you can quickly comment on outlet, it sounds like there was a little bit better quality of sales. So the overall competitive and promotional environment at outlet relative to the holiday coming out of that when it was very challenging? Thank you very much. Sure. I'll let Andre speak to outlets and then Kevin will speak to total inventory. Product innovation. Frankly, we haven't seen an improvement in the competitive environment at all compared to Q2. It's remained as promotional, if not more so than in Q2. On the inventory level, we feel very good about where we ended the quarter. Obviously, we've commented on sales expectations for the Q4. So we believe inventory is in line with our sales expectation. And certainly from a currency and content perspective, we feel good about the inventory. Great. Thank you very much. Great job on the product. Thank you. Ladies and gentlemen, we have time for one final question this morning. Our final question comes from Brian Tunic with Royal Bank of Canada. Great, thanks. I'll add my congrats as well. I guess curious between the thanks, the 1941 collection and then Selena Gomez, are those 2 very distinct customers you're trying to get into the door? Are you seeing on the 1941 side customer reactivation from older Coach customers? Are they new customers? And then on the Selena side, is it to bring back the millennials? Just trying to think about how you're going to balance those 2 barbell thoughts. And then on the category, what do you think it's going to take to resume a mid single digit category growth kind of number? Is it we need to get past these wholesale pullbacks? Is it AURs? What is it going to take you think for the category to resume mid single digits? Sure. First on your question on 1941 and Selena, they're not definitely not looking at different strategies, if you will, both intended to drive brand relevance and engagements across a broad consumer. In the case of 1941, our initial strategy was very much focused on engaging the upper end of the wholesale channel, both here in North America and in Europe. But we're really pleased with the engagement that we're seeing in our entire full price fleet with all our Coach consumers, both lapsed and new consumers coming into the brand. The Selena strategy is very much about bringing the transformation message, leveraging, of course, a very strong digitally engaged celebrity across her channels as well as our own channels, not only here in North America, but globally in bringing more awareness of what we're doing to that broader consumer. Her collaboration with Stuart on a handbag, which launches this fall and a couple of other small items that we're very excited about should help as well. It is priced at a sharper price points than the traditional 1941 collection and handbags, which has been above 500. The Selena handbag will be below 500. On the category in mid single digits, I think the look the most certainly the pullback in department stores is one key factor. There's no doubt about that. And once we see some of the cross channel tensions, if you will, settle, one would expect the category to grow more robustly. Think at the end of the day, it's going to come down to innovation. It's going to come down to consumers engaging with great brands and everything that we're doing is very, very much focused on that. What I would share is, as I've shared with all of you very consistently, I just don't feel that there is a better category in the fashion space to be in as handbags and accessories continues to be the category that consumers use most as an investment item to express their individuality and everything that we're doing is focused on playing a leadership role in the space. Thank you. That will conclude our Q and A. Victor, over to you for some closing remarks. Thank you, Andrea. As has become our custom, I just want to close by congratulating our global teams, both within the Coach and the Stuart Weitzman brands for all of their hard work and dedication to our brands and to our consumers. I could not be prouder of them and their commitment for continuing to drive innovation, strong engagement with our consumers across the globe and excellence in execution of our strategies. It is truly thanks to them that I remain incredibly confident in our future as a house of consumer led brands that is focused on innovation and long term sustainable growth. Thank you. This does conclude the Coach earnings conference call. We thank you for your participation. You may now disconnect and have a wonderful day.