Earnings Call: Q2 2017

Jan 31, 2017

Good day, and welcome to this Koch 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 Christina Colom, Coach's Senior Director, Investor Relations. Good morning. Thank you for joining us. With me today to discuss our quarterly results are Victor Luis, Coach's Chief Executive Officer and Andrea Schall Resnick, Coach's Interim CFO. Andre Cohn, President of North America and Global Marketing is also joining us. 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 in constant currency. You may find the corresponding GAAP measure 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 2nd fiscal quarter 2017 results and will also discuss our progress on global initiatives. Andre Cohn will discuss our North America business in more detail. Andrea Resnick will follow with the financial and operational results of the quarter along with our outlook for FY 2017. After that, we will hold a question and answer session, which will end shortly before 9:30. Victor will then conclude with some brief summary remarks. I'd now like to introduce Victor Luis, Coach's CEO. Good morning. Thank you, Christina, and welcome, everyone. As noted in our press release, we are pleased with and proud of our performance this holiday season, particularly in light of the challenging and volatile global retail environment. Our team delivered top line growth in each of our segments, highlighted by positive comparable store sales in North America with solid demand across channels and overall gross margin expansion. We continue to grow our business internationally with notable strength in Europe and Mainland China, which represent significant opportunities for our brands. Importantly, we opened our 1st Coach House global flagship locations on Fifth Avenue in New York City and Regent Street in London, which represent the fullest expression of our modern luxury vision to date and celebrate our heritage and 75 year history of craftsmanship. And despite our deliberate pullback in the North America wholesale channel and unanticipated currency fluctuations, we delivered double digit earnings growth in the quarter. We were also thrilled with Stuart Weitzman's results this quarter as we continue to implement our strategic priorities for the brand. We advanced our leadership position in fashion boots and booties during the winter selling season, while driving global awareness and brand relevance through impactful marketing and the launch of key global flagships. This quarter's strength, which reflected strong growth in directly operated channels as well as the anticipated shift in wholesale shipments from the Q1 took brand sales growth to double digit for the first half. And we continue to expect Stuart Weitzman sales to increase at a double digit pace this fiscal year. More generally, we continue to execute the Coach brand transformation across the consumer touch points of product, stores and marketing. Our gifting assortment resonated with our customers globally across all price points and in all channels. We continue to transition more of the fleet into our modern luxury concept, while enhancing our customer experience. Finally, our holiday marketing was bold, innovative and fun, driving a dramatic increase in impressions globally. Also during the holiday period, we continue to elevate our brand through global celebrations of our 75th anniversary, including our first dual gender runway show in early December here in New York City. We also announced Coach's partnership with the actress and singer, Selena Gomez. Her work with Coach will be wide ranging and begin with her appearing in Coach's fall 2017 fashion campaign. It will also include a special product collaboration for launch in the fall across our global network and with major wholesale partners. Organizationally, we've announced 2 new leaders. 1st, Kevin Wills will join our team as Chief Financial Officer in the coming weeks. Kevin is a proven leader who brings nearly 30 years of broad based and relevant retail and finance experience to Coach. His expertise and strong operational track record make him a valuable addition to the leadership team. We're also delighted about the recruitment of Carlos Basile, coming in a newly created role of Chief Marketing Officer for the Coach brand. Carlos is joining us from Equinox, where he held the role of Chief Marketing Officer for the last 4 years. In his new role, Carlos will partner with Stuart Vevers and our global marketing teams to continue to innovate and bring our brand messages to broader audiences around the globe. I would like to take a moment to recognize and thank Andrea, who has held the position of Interim CFO over the last several months. She and our proven finance team ensured we continue to execute our strategies flawlessly. And I know you're all pleased to learn that Andrea will continue in her leadership role as Global Head of Investor Relations and Corporate Communications. Now, as has been our practice since we implemented our transformation strategy more than 2 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, in the holiday quarter, we successfully launched Heritage Gifts, a powerful year round dual gender gifting strategy grounded in glove tan leather featuring pops of color and a balance of emotionally novel giftables. Retail also continued to focus on elevation and fashion in Q2 with the expansion of Coach 1941 Handbags and the launch of our first ever all door pre spring collection. Building upon product innovation, 1941 continues to be Coach's vehicle to deliver playful, iconic, Americana inspired themes. In outlet, as we touched on during our last call, we kicked off the quarter with a very successful outlet only Pac Man collaboration. Metallics, florals and patents and dressy silhouettes were also well received. In addition, the exclusive playful holiday prints anchored by our animated Coach Beers collection drove consumer engagement via strong messaging to our outlet customers, including windows, mailers, emails and in store experience. Men's continued to be a major focus for outlet and is on plan to be over 20% of the channel by the end of the fiscal year. On stores, we're continuing to establish our modern luxury concept globally, renovating and opening 46 locations during the quarter, including 4 in our directly operated North America business, taking us to about 540 modern luxury locations globally across all channels. This is very much 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 significant inflections from previous trends and comps, which exceed the balance of the fleet in the vast majority of stores around the world. Of course, as we've said before, the in store customer 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 shopper scores are key metric that demonstrates how well we deliver our unique modern luxury experience, we're up again in the 2nd quarter at over 85% as compared to about 75% in last year's holiday quarter. 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 being introduced throughout the year. Across the global fleet, there were 26 craftsmanship bars installed as of the end of the second quarter, and we expect to add 12 more in the second half of the fiscal year. We remain very excited about our global flagship focus. We view these stores as important retail and marketing investments for the Coach brand. These flagships include our Coach houses on Fifth Avenue in New York City and Regent Street in London, both successfully opened during the Q2 in time for the important holiday season. Earlier this month, we opened the Kuala Lumpur Pavilion Flagship in Malaysia and will soon open our 1st flagship in Milan, Italy during February Fashion Week. In North American department stores, where we're repositioning the brand, we did 4 renovations last quarter and continued to see positive results from our shop manager with outperformance versus the balance of doors and major accounts. As noted, when we entered the fiscal year, one of our key strategic initiatives is elevating the Coach brand into North America wholesale channel. Through 1941, we've added some new locations in top tier specialty stores in North America and globally. We are now also in the process of rationalizing our North American department store distribution, taking our door count down by about 25% or by over 2 50 locations over the fiscal year, as well as reducing promotional events in the channel. In fall, we closed the 1st group of these locations, about 120, while the number of days on sale in department stores were reduced by about 40 percent. And we remain on track to close the balance of targeted doors this spring season. On the marketing front, we held events across the globe, celebrating the culmination of our anniversary year. Our global influencer driven campaign was our most significant one yet with over 2,600,000,000 global impressions, up 160% from last year's holiday season. Color was important in creating visual impact, highlighted by our heritage gifting program. Large scale experiential marketing, including events in Europe and in Japan, such as our Covent Garden pop up installation also drove engagement. Similarly, multiple brand moments around celebritybursts, Coach House opening events and hashtag Coach75 extended the life of our anniversary campaign. And to cap our anniversary year, as mentioned, we held our 1st dual gender runway show in December in New York City, generating excitement and brand buzz globally. More generally, during the quarter, we remained focused on creating desire for our brand, highlighting our fashion positioning and our 75 year legacy of design innovation, craftsmanship and quality. Our goal is to enhance brand perception and make the category exciting for consumers with a singular message that cuts through. Coach's unique modern luxury proposition, focusing on leather craft and Stewart's vision of Coach New York cool. Familiar American culture and culture, which is now being celebrated with a twist from New York's original house of leather design. Of course, signing Selena Gomez as the new face of Coach will amplify the Coach message given her very substantial global following, especially on social media. As a result of these efforts across customer touch points, we are seeing continued progress in consumer perception. Importantly, in our U. S. Brand tracking survey fielded in December, Coach's repurchase intent with category drivers increased versus a year ago, while our brand affinities were strong with consumers overall. In addition, fewer consumers viewed the brand as promotional versus a year ago, which we believe reflects our deliberate pullback in events over the last 2 years. We are delighted with our 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 leather and accessories brand to a true house of fashion design. We are excited to see our creative vision and direction gain traction and as has been our custom, we'll continue to update you on these initiatives as we move forward. Turning now to a discussion of category trends. As we look ahead to the balance of FY 'seventeen, we believe the challenges that exist today affecting the category in specific and consumer spending in general will persist. This volatility was evidenced throughout FY 'sixteen and the first half of FY 'seventeen, impacted by the U. S. Election this fall and the significant strengthening of the dollar over the last few months. Overall, with limited data points given the delayed year end reporting for several brands, we estimate that the North American premium men's and women's bag and accessories market was flat to up low single digits in the December quarter, which we believe has continued to be impacted by negative trends seen in the U. S. Department store space. While Andrea will provide additional details on sales and distribution by geography, we wanted to touch on some current trends and strategies by market. So I'll turn it over to Andre for a discussion of North America. Thanks, Victor. As you read in our release, for the quarter, total North American Coach brand sales increased 2% on both the the quarter. Importantly, the 2nd quarter marked the 3rd consecutive quarter of positive comps in North America. Our bricks and mortar comps rose approximately 4% in the quarter, driven by ticket and conversion, while traffic was down moderately. Overall, our aggregate comp was up approximately 3% with e commerce impacting quarterly results. As you're aware, we have a clear strategic direction to limit our promotional stance online given the negative impact on long term brand health. Finally, our business to international tourists in our North America stores was essentially even during Q2 with declines in Chinese tourist traffic once again offset by other nationalities, notably Japanese and Korean visitors. Generally, international tourists are less significant to the category and to luxury in general during the holiday season, given the increased gifting purchases by domestic customers. Now turning to our retail performance and the metrics we traditionally share on product. We continue to drive brand elevation with 1941 representing approximately 1 third of handbag sales in our top tier retail stores consistent with plan. The penetration of the above $400 price bracket increased to nearly 50% of handbag sales, up from about 30% last year and generated another positive comp on a sales and unit basis. And as noted, we were also excited by the performance of our retail gifting assortment across categories. The iconic Dinky Bag at $2.95 resonated with consumers, while novelty giftables increased over prior year and exceeded expectations. Turning now to event marketing. In the Q2, we again held a Black Friday event, this time with a fixed percentage off offer, but importantly excluding 1941, a significant part of our assortment as mentioned. This was followed by our semi annual winter sale. In the Q3, we would again expect to hold a closed preferred customer event in March. Looking ahead to spring, our goal is to continue to elevate and differentiate the brand by offering innovation and emotion through our product assortment, marketing and the in store experience. We'll also continue to position Coach as a year round gifting destination. Specifically in retail, we will continue to reinforce our craftsmanship through reinterpretation for Coach New York of our Western Rivets, which first launched on the runway in Coach 1941. The cool kid aesthetic of 1941 takes on a more feminine flair with beautiful semi precious stones embellishing these highly wearable styles. In 1941, we will launch the new Rogue Tote at $6.95 which builds on the success of the now iconic Rogue bag with structured luggage handles, Bombay stitching details and a cool edgy all day look. We'll also expand the T. Rose platform with Wild T. Rose, its boldest expression yet with a mix of leather, resin and metal flowers. Finally, we relaunched our best selling ED shoulder bag with a whole new look, plus a new larger size, the ED42. And for outlet, as we transition into spring, we're excited to refresh the color palette and infuse retail inspired looks with bright colors, trend right color blocking and runway chic floral prints. In addition, we're launching 2 limited edition collections where we pay homage to our hometown of New York City and to our iconic designer, Bonnie Cashin. Men's will continue to grow via expanded lifestyle assortments to additional centers with increased marketing support. We look forward to our floral explosion in March when we introduce our new feminine petal bag, a drawstring silhouette designed to resemble the flower in bloom. And in the Q4, we're very excited about the launch of Disney for outlets, which was our strongest ever collaboration in retail. I'll now turn it back to Victor for a discussion of international. Thanks, Andre. Moving on to Coach Brands international performance. As noted in our release, in the 2nd quarter, international Coach brand sales rose 3% on a reported basis and 1% on a constant currency basis. By geography, Greater China sales were essentially even with prior year in dollars in the quarter. On a constant currency basis, sales rose 6% with positive comparable store sales overall. We continued to drive strong results on the Mainland, while Hong Kong and Macau experienced significant improvement in the quarter. In Japan, sales rose 9% on a reported basis, while constant currency sales decreased 2%, impacted by a decline in Chinese tourist spend as we lapped last year's dramatic increase. In Europe, our sales grew at a double digit pace in the quarter, driven by new distribution and positive double digit comps. We've continued to experience very strong results in the U. K, benefiting from the currency weakness and increased traction with the local consumer. We were particularly pleased to open our Coach House location on Regent Street in London during the quarter, where results to date have been strong and above expectations. In Paris, our business for the quarter continued to be impacted by weak tourist traffic, though we did see relative improvement in December as we anniversaried the negative impact resulting from last year's tragic terrorist attacks. In our other directly operated Asian markets outside of China and Japan, namely South Korea, Taiwan, Singapore and Malaysia, sales decreased low single digits in dollars and in constant currency. Our results were impacted by softness in Korea, where macroeconomic headwinds have pressured spending from domestic consumers. Excluding Korea, our business our other directly operated Asian markets in aggregate rose mid single digits in dollars and in constant currency. Finally, I would point out that we're continuing to see disparate results in our international wholesale businesses, which while small, are important to growing brand awareness. For the quarter, our overall sales at POS increased slightly, driven by strong domestic performance, offset in part by relatively weaker tourist location results. On a net sales basis, revenue also increased over prior year. Now I'll turn it over to Andrea for details on our financial results and guidance for the balance of the year. Andrea? Thanks, Victor. Victor and Andre have just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our 2nd fiscal quarter results as well as our outlook for FY 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. We are very pleased with our financial performance in the 2nd quarter, particularly in light of the volatile backdrop. Our sales increased over prior year in each of our segments highlighted by positive comps in North America, continued growth internationally and strong performance at Stuart Weitzman. And on this higher level of sales, our gross margin expanded significantly over prior year. We also made important investments in our brand and business as projected and delivered double digit growth in net income and earnings per share despite the strategic repositioning of the Coach brand in the North American wholesale channel and headwinds associated with currency. 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. Coach Inc. Net sales totaled $1,320,000,000 for the 2nd fiscal quarter, an increase of 4% on a reported basis, including a positive impact of 40 basis points related to currency translation, a smaller benefit than originally anticipated given the significant strengthening of the U. S. Dollar. In addition and as expected, the company's strategic decision to elevate the Coach brand's positioning in the North American wholesale channel through a reduction in promotional events and door closures negatively impacted sales growth by approximately 100 basis points in the quarter. Coach brand sales increased about 2%, including positive North America comp store sales and continued international growth as both Victor and Andre have discussed. Stuart Weitzman brand sales rose 26% as expected. Consolidated gross profit totaled $906,000,000 an increase of 6% versus prior year, while gross margin increased while gross margin increased 130 basis points over prior year to 69% even, which included a benefit of approximately 30 basis points from currency. By segment, total North America gross margin increased over prior year, including our directly operated business where we grew both gross profit dollars and gross margin rate over prior year. International segment gross margin increased over prior year both on a reported and constant currency basis. Stuart Weitzman brand gross profit was 26% while gross margin rate was even with prior year. As projected, total SG and A expenses increased 7% to $612,000,000 and represented 46.3 percent of sales as compared to 45.1% in the year ago period, reflecting in part the impact of currency and investment in Stuart Weitzman as well as higher marketing spend versus prior year. Coach brand SG and A expenses increased 4% and represented 46.5 percent of sales compared to 45.4% in the year ago period. Stuart Weitzman brand to SG and A expenses were $53,000,000 compared to $38,000,000 a year ago due to an increase in store occupancy costs associated with new openings, the timing of marketing expenses as well as the company's strategic investments in team and infrastructure. Coach Inc. Operating income rose 3 percent to $294,000,000 while operating margin was 22.3% essentially even with prior year's 22.4%. Coach brand operating income increased 3% while operating margin increased 20 basis points over prior year to 22.5%. Stuart Weitzman brand operating income was 23,000,000 dollars or 19.8 percent of sales versus $22,000,000 or 23.6 percent of sales in the prior year, reflecting key investments to support long term multi category growth as discussed. Net interest expense was $5,000,000 in the quarter as compared to $6,000,000 in the year ago period. Total net income for the quarter increased 12 percent to $211,000,000 with earnings per diluted share of $0.75 up 11% versus prior year. Now moving to global distribution, in total we opened a net of 8 Coach brand locations globally in the Q2 to end the period with 9 60 directly operated locations worldwide. In addition, we opened 5 net Stuart Weitzman directly operated stores 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 our retail and outlet channels. Internationally, we expect a mid single digit increase in square footage led by significant growth in Europe and a mid single digit increase in Mainland China, partially offset by a low double digit square footage decline in Japan, as well as a modest unit decrease in Hong Kong and Macau. In our other directly operated businesses in Asia, we expect little change in both units and square footage. Finally, turning to Stuart Weitzman distribution, year to date we've opened a total of 7 net new locations and do not expect any additional openings for the balance of the fiscal year. Moving on, net cash from operating activities in the Q2 was $366,000,000 compared to $302,000,000 the prior year. Our CapEx spending was $54,000,000 in Q2 versus $106,000,000 last year. Free cash flow in the quarter was an inflow of $312,000,000 versus $196,000,000 in the same period last year. As expected during the quarter, we received approximately $125,000,000 in net proceeds related to the sale of our previous headquarter buildings. Inventory levels at quarter end were $465,000,000 compared to an ending inventory of $438,000,000 a year ago. At the end of the fiscal quarter, cash and short term investments stood at $1,800,000,000 as compared to $1,300,000,000 a year ago. Our total borrowings outstanding were approximately $600,000,000 at the end of the fiscal Q2 compared to approximately $900,000,000 a year ago, reflecting the pay down of our term loan in the Q1 as previously discussed. Turning to our capital allocation policy, which has not changed. Our first priority is to continue to invest in our brands as we have a compelling opportunity to drive sustainable growth and value creation and we're putting our capital against this opportunity. Our second priority, strategic acquisitions is also about growth. While there is nothing imminent, we want to have the flexibility to act if and when it's in the best interest of Coach Inc. And our shareholders. And third, capital returns. We are committed to our dividend and expect our dividend to grow at least in line with prior years operational net income growth as our transformation gains further momentum. As always, underpinning all of these priorities are our guardrails for allocating capital effectively, maintaining strategic flexibility, strong liquidity and access to the capital markets. Now turning to our outlook for fiscal 2017 on a non GAAP 52 week versus 52 week basis. We are maintaining our operational outlook for FY 2017, while adjusting our revenue guidance based solely on current exchange rates. As you know, our previous fiscal 2017 revenue guidance was for an increase of low to mid single digits, including an expected benefit from foreign currency of approximately 100 to 150 basis points. Given the significant strengthening of the U. S. Dollar, we are now projecting revenue to increase at a low single digit rate, including an expected negative impact from foreign currency of 50 basis points for the full year, therefore representing a 150 basis points to 200 basis point swing from previous guidance. This implies that currency will pressure top line results by over 100 basis points in the second half of the fiscal year based on current exchange rates. This guidance continues to assume a positive low single digit comp for the Coach brand in North America for the year and in each quarter. We also continue to project double digit revenue growth for Stuart Weitzman for the year. As an aside for you modelers out there, while we're projecting overall low single digit revenue growth in the second half of the year, we're forecasting top line variability by quarter. Specifically, our nominal revenue is expected to decline in the 3rd quarter based on 1st, the negative currency impact of about 100 basis points. 2nd, calendar shifts in North America, including the later timing of Easter, which falls into the Q4 this year versus the Q3 last year. 3rd, our strategic North America wholesale initiative with the continued reduction in promotions and the next tranche of door closures planned for 3.2. And finally, an expected shift in Coach International wholesale shipment timing from the Q3 into the 4th quarter based on our visibility into second half orders. Offsetting this, we're projecting strong top line growth in Q4, benefiting in part from those identified calendar and shipment timing shifts and despite an expected negative impact from currency of over 200 basis points. Most importantly, we are maintaining our operating margin forecast for Coach Inc. Of between 18.5% 19% for fiscal 2017. This guidance incorporates the negative impact of both Stuart Weitzman and the strategic decision to elevate the Coach brand's positioning in the North American wholesale channel. We continue to expect interest expense to be in the area of $25,000,000 for the year. The full year fiscal 2017 tax rate is now projected at about 26% with a significantly lower tax rate forecasted in 3Q versus 4Q consistent with our typical cadence based on the anticipated expiration of statutes in the Q3. And we expect our average weighted diluted shares outstanding for the year to be in the area of 283,000,000. So taken together, we're still projecting double digit growth in both net income and earnings per share for the fiscal year. And we continue to expect CapEx for Coach Inc. To be in the area of $325,000,000 In closing, we're very pleased with our performance in the quarter and the consistency of our execution against a volatile backdrop building on the successes we have achieved thus far in our transformation. Importantly, we expect we continue to expect FY2017 to be the year when we return to growth across all financials, leveraging top line growth and supported by our operational efficiency initiatives which have allowed us to become a more nimble organization. Overall, we remain confident in our ability to drive sustainable and profitable growth for Coaching over the long term. I'd now like to open it up to Q and A. Thank Our first question comes from Bob Drbul with Guggenheim Securities. Hi. Good morning. Good morning, Bob. Good morning. I just have two quick questions for you, please. The first one, can you provide a little more color on the Q2 North American comp by channel? And then the second question is, can you provide a little more granularity exactly on the Q3 versus the Q4 and the big movements there? Sure. I'll take the North America comp question and then Andrew will jump in with the guidance question. Bob, we're obviously very pleased with our performance in the Q2 in North America where we saw demand grow across all of our direct channels with an expansion in our gross margin. As you know, in the Q1, we had a total comp of 2%. We saw that grow to 3% with our bricks and mortars comp being 4% for the holiday quarter, really benefiting from all of the actions that we have been taking over the last couple of years to drive our transformation across both channels. In retail, we're seeing our elevation take hold with the broader distribution of Coach 1941 and the continued rollout of our modern luxury concept. And I couldn't be prouder of the engagements of our teams with our consumers across both channels as well. And in outlets, we are seeing a level of innovation from our design teams at a level that we haven't seen in the past and that's really beginning to resonate. Of course, that includes, as we suggested during our prepared remarks, some of those wonderful collaborations that we have seen. In terms of our 3rd versus 4th quarter guidance, I think the first thing I'd point out is we maintained our operational outlook for the year, including the expectation of a low single digit North America comp in both 3Q and 4Q. Obviously, as we discussed, we expect some variability between the quarters along with pressure from FX in the second half. In the third quarter, as I enumerated, our top line is being negatively affected by a number of timing items, including the shift of Easter into the 4th quarter, as well as our international wholesale shipments, which are in turn are being driven by the change in our deliveries to better match the fashion calendar. In addition, while not a comp impact, our Q3 of last year 2016 included the post Christmas week, this year due to the calendar shift that fell into 2Q and will not be included in 3Q. Of course, in North America wholesale, we're closing that next tranche of doors to get us to over $250,000,000 this quarter. And in the Q4, where we started to pull back last year, we'll begin to anniversary that impact of those strategic actions, so less of an impact on the year over year basis. Therefore, we're projecting very strong top line growth in Q4, benefiting in part from these calendar and shipment timing shift and despite a negative impact from currency, which will if current rates hold impact us by about 200 basis points. So very strong 3rd 4th quarter. Great. Thank you very much. Good luck. Thank you. Our next question comes from Ike Boruchow with Wells Fargo. Hi, good morning everyone and congrats on a nice quarter. Thank you. So just taking a step back focusing on the Coach brands profitability. So I imagine high 60s gross margins are probably not planned to move much higher from here over time. So I just kind of wanted to ask a big picture. Where you see the Coach brand margin longer term and kind of how do we get there? I don't think anyone expects 30% margins again, but how high is high today? And I'm just asking because you deleveraged SG and A this quarter and I think you did in Q1 as well within the Coach segment. And just wondering how you're planning out the investments needed to drive the top line at Coach brand versus your goal of taking the operating margins higher over time? Thanks. Sure. I think you're absolutely right there. In terms of gross margin, when you look back to 2014, when we originally gave our guidance, we absolutely assumed that our gross margin would stay in the 69% to 70% rate, ex currency impact. And the real question at the time was the SG and A leverage. And as we said, as we return to positive comps, we'll begin to overall leverage that SG and A spend, which we absolutely expect. I think that the since 2014, the necessity to invest in our brand, higher overall occupancy costs, etcetera, for all brands has probably brought down the upper end of that best in class profitability. But we're still focused on driving our profitability for these from these levels. We're very comfortable with it. We've shown the ability to lever as we achieve the top line growth. So we do expect our operating margin to continue to move higher from here and we're very comfortable with that guidance. Great. Thank you. Thank you, Ike. Our next question comes from David Schick with Consumer Edge Research. Hi, thank you. Good morning. Good morning. I'd like to put a couple of different comments together into one question. So Victor, you talked about Yes, one question, David. Right. House of Fashion Design, it's really one question, I promise. House of Fashion Design, you've done less distribution. You're having great success at the higher price points. I guess what I'm trying to say is your vision for Coach in 2020 beyond, there's a lot of street focus constantly on the category. Should we think less about the category and more about your core competencies of what you're doing across categories? Or how should we think about that? Not margin, but what Coach is now really good at and how that drives the long term future? Yes. Well, obviously, we're really great in our core category and that will remain a core competency going forward, David. We don't see ourselves becoming an apparel play, if you will. Obviously, we've also talked about layering on other categories and we've made a very important acquisition in Stuart Weitzman. That has made us a very significant player both here in the U. S. And increasingly internationally in footwear. We're going to be leveraging that know how of course for the Coach brand as well, especially as we take back our license later this calendar year and begin both the development, design and production of shoes in house to have footwear become an increasingly important part of the Coach brand go forward. As well, we do see outerwear as an area of growth for us. If you look at what we're doing with all of our runway shows and anything that you see within our stores, you will see that outerwear plays a very important part of our apparel play, if you will, of what we're doing in terms of giving context to the Coachwoman and the Coachman much more so than I would say a standard tops and bottoms, t shirt and jean type of business. We're not interested in getting into a Basics business. Those three categories combined represent an $80,000,000,000 global opportunity. Today at $4,500,000,000 we obviously have a very small stake in that. Within both the Stuart Weitzman brand where you will see us add with our new creative director a handbag business and then within the Coach brand as we add footwear and outerwear, you will see us take an increasingly large share of those three pieces of the pie. Thank you so much. Thank you. Our next question comes from Erinn Murphy with Piper Jaffray. Great, thanks. Good morning. You guys, as you've elevated the brand, can you talk a little bit more about what you're finding about the consumer who's been purchasing that 1941 collection? And then I think you said that you'd be introducing the Spring of Rogue at $6.95 I think it's a little bit of a sharper price point than you've seen in the balance of that Rogue collection. Maybe who do you view as the incremental consumer there? Thanks. Andre, I'll take that. Good morning, Aaron. Sure. So we're really seeing 2 groups of consumers brand in the past and who find that they're sort of more fashion forward, a bit understated aesthetic of 1941 really works for them. But what was more surprising for us is that we're finding a lot of lapsed consumers returning to the brand. Consumers who've lapsed in our sort of logo heyday who are coming back because of the leather understated leather aesthetic of 1941. So that was, I'd say, a positive surprise for us. In terms of price points, really, dollars 19.41 stretches from $2.95 for a dinky bag, which has been one of our top sellers, especially across the holidays, all the way up to $1500 for rogue bags in Exotics. So we don't see it as being purely a high price point collection. It does drive the above $400 comp clearly, but it's not just the assets. It spreads across a wide range. Okay. Thank you. Thanks. Our next question comes from Oliver Chen with Cowen and Company. Hi, congrats on really solid results. Victor, we had a question regarding the long term path and strategic acquisitions. What are your thoughts about Coach in the future in terms of being a multi brand modern luxury house? You've done a great job with Stuart Weitzman. I'm just curious about your general thoughts around that framework. And on the gross margin line, which is very impressive, what should we model or think about going forward in terms of the Coach brand gross margin? It was really impressive this quarter. Just curious about some more details of the drivers. Thank you. Sure. I'll let Andrea answer the gross margin question in a minute. In terms of how we think of Coach Inc. Go forward, I believe that before the Stuart Weitzman acquisition, we've been clear that we see Coach Inc. Being larger than just the Coach brand. Obviously, we've made our very first and significant acquisition with Stuart Weitzman. We're really pleased with the results there. The team has done an amazing job continuing to drive that business. And obviously, we have continued to invest both in management and in design talent. And I'm very excited about the opportunity for Stuart Weitzman. And I would say before thinking about the larger vision beyond those two brands that our team is very focused on executing in our core business and our organic business and doing a terrific job in driving both the transformation of the Coach brand as well as in driving the Stuart Weitzman brand, which we see moving beyond footwear into a handbags and accessory player as well in the years ahead. As we think about acquisitions beyond Stuart Weitzman Oliver, we've been very, very consistent for years now in terms of our capital allocation strategy. Obviously, we've been very excited about thinking of the 3 categories as I touched upon earlier that we believe are the closest to us and are the most branded in the fashion space, handbags and accessories, footwear and outerwear especially. And that would be obviously part of our consideration set. We're not interested in turnaround plays. We're very interested in brands that are great brands and that growth potential where we can leverage both our skill set, our structure, our systems, our infrastructure, supply chain and the know how that we have in helping great brands develop globally. In terms of the Coach brand gross margin in the 2nd quarter, which was up 130 basis points, including about 30 basis points from currency, We once again had a benefit from channel mix in there. Probably the most significant was the ongoing lower product costs, which were somewhat offset, but not completely offset by our ability to pass that along to lower through lower prices to our customers. So product costs, a big positive impact. As we move forward through the balance of the year, we would expect in the second half for our gross margin for the Coach brand to continue to be expanding on a year over year basis, most notably in the Q3. Again, we would expect channel mix to actually be even a slightly bigger benefit in the Q3, ongoing benefits from product costs as well. And so at the end of the day, continued gross margin expansion for the Coach brand in the second half, notably in the Q3. Thank you. Great job on 1941 and the gifting looks really impressive. Thank you all. Thank you. Our next question comes from Ana Andrea with Oppenheimer. Great. Thanks so much and congrats guys on navigating the environment really well. Thank you. Thank you. Our question was on remodels in the outlet channel specifically. I think you had mentioned that the recent ROI was better than when this started initially. Can you maybe provide some color on that? How many stores have been remodeled currently? And how we think about the opportunity down the road? And then secondly, just quickly, the flash sale impact moderated this past quarter. How do we think about that headwind going forward? Sure. Good morning. So as we mentioned in I think last call, we've been doing research both through our consumer insights group and field teams to try and understand how consumers react to this new remodel. There are a few actions we took based on those findings a few months ago, that is starting to pay off where we're seeing improved results. So larger rooms, not so much segmentation within the stores, more tables to make the products more accessible. We've got new findings we're now acting on, particularly better signage in the stores, more visible windows that are being implemented as we speak. And we've seen strong performance actually these outlet modern luxury remodels. Overall, we've remodeled so far 69. Okay. In terms of the flash sales or EOS impact, as we call it internally, our e outlet store, which is, as you call the flash sales model, The impact in the Q2 was really a slight bump versus previous performance around Black Friday and gifting in general. Overall, as we have stated in the past, we are not actively recruiting new consumers into the database. We're only mailing those who shop within our outlet channel. And so I would again expect the database to continue to shrink and its performance to continue to shrink as well. Thanks so much guys. Thanks, Ana. Our next question comes from Michael Binetti with UBS. Hey, guys. Good morning. Great quarter. I think you were answering this. I was hopping over from another call, but I just wanted to get a little bit more detail on the margin outlook. I mean, I think you guys have done a really nice job of helping us think about the longer term outlook as I look through your PowerPoint from 2014 here. But a lot of that thinking was obviously at a time when the category is growing a lot faster. So I guess we know that prior peaks for your business aren't the best North Star for our models on the operating margin opportunity. But we've talked about the opportunity for the brand to return to mid-20s over time. And Andrew, I think you just said as I was chiming in that the best in class number that you gave at the Analyst Day has changed a little bit. Given what you know about the category and your growth rates today, is mid-twenty still an appropriate rate to think about over the next few years? And if so, what do you think are the biggest sources of leverages at the top line trajectory we see today? Okay. Michael, I think I gave that answer to Ike, but I don't mind recapping a little bit here. I think the biggest point of leverage is obviously the return to positive growth and positive comps. And so you've already seen that come through in our results. We expect it to continue to come through in our results. Our target has always assumed continued sales growth for Coach, stable gross margins and leverage in expenses, while we're going to continue to invest in our business. And those items really haven't changed and that's what we're going to maintain going forward and you've seen that leverage come through already. So I think the trajectory remains positive and as I already mentioned to Ike. Thanks. All right. I'll call Ike for the rest. Thanks. Or check the transcript. Thanks very much. Our next question comes from Mark Altschwager with Robert W. Baird. Good morning and thanks for taking the question. I was hoping you could provide a bit more detail on your current growth outlook for China. It's encouraging to hear the pressure has eased in Hong Kong, Macau. So I guess what inning are you in with rightsizing your mainland, just any current thoughts on where the store fleet stands today and how you're thinking about balancing brick and mortar versus digital growth longer term? Just what is the growth algorithm we should think about for Mainland China medium to longer term? Thank you. Thank you. Yes, there may be some confusion because you mentioned return to growth. We've been growing very strongly in China since we took that business back in 2,008, I believe it was, and have grown it from what was approximately a $30,000,000 business to over 600,000,000 dollars today. Team has done an amazing job in driving our distribution there. Today we're at approximately across Greater China which would include Hong Kong, Macau and Mainland China, 191 doors. We have 100 and 72 doors in China, still very much opportunity for growth in 2nd and third tier cities. As you may know, China has approximately 200 or more cities with a population of 1,000,000 or more. And given our more accessible price points, we believe we're going to be seeing continued opportunity for us to develop distribution beyond what the traditional luxury brands have and have tremendous opportunity of course to continue to grow within same stores there as the middle class continues to evolve in that market. And as we continue to see of course the population urbanizing. So the long term story within Mainland China is very, very exciting indeed. In terms of Hong Kong and Macau, we've seen a much better performance over the last quarter and that is very significant for us. It's a very important market, of course, especially for PRC tourists and it's 18 to 24 months since we saw the first protest from Occupied Central. And I think all of us in retail and in luxury retail especially are very happy to see that market stabilize and hopefully become a source of growth. Great. Thank you. Thank you. Our final question comes from Brian Tunic with Royal Bank of Canada. Pretty tough environment. I guess wanted to hear more about the factory channel perspective. Did you guys feel like the holiday overall was more promotional in the factory channel when you looked at your competition? Can you maybe talk about from a product perspective, what percentage today is Stewart Design and the halo you've talked about in the full price stores? And as we think about the comp improvement at the factory channel, how much should come from AUR versus conversion over the next couple of quarters? Thanks very much. Good morning. The factory channel was very promotional this Q2. We saw saw our competition go deeper than they'd ever gone. So the environment itself was deeply promotional. We were driven really by innovation, as Victor mentioned earlier, a couple of really impactful new launches that so PacMed was one of them. And then we had our best collection around Christmas that were highly successful. So I think we navigated the promotional environment focusing more on innovation really than just deep discounting. Most of the product today in factory is designed by Stuart. We have a small share of retail deletes that end up in factory, but it's primarily new designs. And I think we talked about a year ago about the factory outlet to war room. There was aim to fast tracking innovation. We're seeing the results of that over the last few months and very pleased with this. Traffic continues to be challenging in general in the channel. So we're counting on both conversion and higher ADTs, average tickets to drive growth and productivity. Thank you. That concludes our Q and A. I'll now turn it back over to Victor Luis for some closing remarks. Thank you, Christina. As is our custom, I just want to close by 1st and foremost congratulating all of our teams across the world, both in the Coach and the Stuart Weitzman brands for all of their hard work and dedication against what is a continuing volatile and unpredictable global market. I couldn't be prouder of all of them, their commitment to driving innovation, the strong engagement that they have with consumers across the globe. And it's truly their hard work that is reflected in our results. And I thank their commitments and their can do spirit. And thanks to them that we remain very optimistic about the long term opportunities for our brands. Thank you. Ladies and gentlemen, thank you for joining this Coach conference call. Please disconnect your lines and have a wonderful day.