Earnings Call: Q1 2017

Nov 1, 2016

Good day, once again, and welcome to the Coach Conference Call. Today's call is being recorded. And at this time, for opening remarks and introductions, I'd like to turn the call over to the Senior Director of Investor Relations of Coach, Ms. Christina Colon. 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 Shaw Resnick, Coach's Interim CFO. Andre Cohn, President, North America is also joining us to discuss initiatives for the holiday season. 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 within the meaning of the Private Securities Litigation Reform Act of 1995. 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 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 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, constant currency or excluding the negative impact of 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 1st fiscal quarter 2017 results and will also discuss our progress on global initiatives. Andre Cohn will speak to our North America business, product performance and review our key programs for the holiday season. Andrea Resnick will follow with details on financial and operational results for 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 very pleased with our performance in the quarter, highlighted by continued positive comparable store sales in North America and growth internationally, including double digit increases in Mainland China and Europe, as well as sales gains in our directly operated businesses across Asia outside of Greater China and Japan. We remained focused on elevating the Coach brand through compelling product, differentiated store environments and emotional marketing. At the same time, we implemented the strategic actions necessary to reposition the brand and streamline our distribution in the promotional North American department store channel. Despite this deliberate pullback, we achieved growth across key financials, including sales, gross profit and operating income, as well as double digit earnings growth. Overall, our results give us confidence that the cumulative impact of our will drive top and bottom line growth per our guidance for the fiscal year. As we've outlined previously, for fiscal 2017, our 4 strategic priorities for the Coach brand include, reenergize our brand in the category by continuing to innovate and establish our unique modern luxury proposition, continue the brand's elevation through a fuller expression of Coach 1941 in stores and online while driving our men's business even further across all channels Focus on raising brand awareness and relevance globally through the rollout of flagships and key fashion capitals, while continuing to renovate our existing store base and differentiate Coach through a combination of fashion and heritage marketing campaigns, distorting investments to key regions and ensuring the message is relevant and increasingly aspirational to the broader market. This included the relaunch of Coach Fragrance with our partner Inter Parfums in September. And for Stuart Weitzman, we will drive our leadership position in fashion boots during the key winter selling season, augment our leadership in boots by developing iconic styles in pumps, sandals and flats, while also laying the foundation for the relaunch of brand's handbag assortment drive global awareness and brand relevance through impactful marketing and the launch of New York and London flagships during the holiday quarter. Leverage new leadership both on the management and creative side to bring the Stuart Weitzman brand into its next chapter of growth as a multi category player. Now moving to our results. During the Q1, we delivered on our plan across businesses and geographies, while continuing to successfully execute our brand transformation across the key consumer touch points of product, stores and marketing. Most generally, we continue to elevate our retail offering globally with the Coach 1941 assortment resonating in our own stores as well as top tier specialty and department store accounts. Of course, we continue to transition more of our fleet into the modern luxury concept driving comp improvement. Finally, our fall campaign photographed by Steven Meisel featured actress Chloe Grace Moretz against the backdrop of New York, beautifully capturing the spirit and energy of the city. We also ran our first ever TV commercial for the launch of the new Coach fragrance together with our partner Interparcel. At Stuart Weitzman, we're driving global awareness and brand relevance, gaining traction with the important international and millennial consumer. During the quarter, we continued to drive key investments in management and creative talent, as well as infrastructure to support the long term multi category growth. Wendy Kahn officially joined as Brand President and CEO in September and we also hired Elite Footwear Designer, Daniele Mcketti, who starts this week and will report to Executive Creative Director, Giovanni Morelli upon his arrival this spring. Wild brand sales were essentially even with the prior year this quarter, primarily due to shipment timing and repositioning of our UK business ahead of the opening of our first retail store on Regent Street, we continue to expect a double digit sales increase in fiscal year 2017. Indeed, we are extremely pleased by our performance in the early fallwinter season as our strength in boots gains momentum across channels and geographies. 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 relevance 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. The key retail strategies we are implementing include the continued elevation of the assortment with the further rebalancing between Coach New York and 1941 and a move from 12 to 8 deliveries in our retail channel, first to better align with the fashion calendar, notably with the higher end specialty retail and also to drive improved productivity as we align deliveries with seasonal marketing. During the quarter, our women's retail performance was driven by leather goods and growth in 1941 silhouettes. The Rogue, Saddlebag and Dinky, as well as the novelty Tea Rose and Varsity Patch platforms. Also during the quarter, we introduced the Drifter family and the smaller version of Mercer. Mickey, which had successfully launched late in FY 'sixteen, built into early Q1 before selling through in most silhouettes. In outlet, men's continued to be a major focus for the business and is on plan to be over 20% of the channel by the end of the fiscal year. New style launches and outlet during the Q1 included the Tyler tote, the Charlie backpack and the mini Charlie. Signature and leather exotic mixed platforms and dressy silhouettes were well received and we had a strong customer response to seasonal neutrals. On stores, we are continuing to establish our modern luxury concept globally, renovating and opening 40 locations during the quarter, including 3 renovations in our directly operated North America business, taking us to nearly 500 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 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, transforming our stores is more than just the I'm delighted that our mystery shopper scores, our key metric that demonstrates how we will deliver our unique modern luxury experience, was up again in Q1 at over 80% this quarter as compared to 70% when we started tracking them a year ago. 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 to be introduced throughout 2017. Across the global fleet, there were 17 craftsmanship bars installed as of the end of the quarter. We also just launched Coach Journey, an online multi language learning platform, which is globally scalable. It is designed to engage and develop our store associates into knowledgeable modern luxury brand ambassadors through a robust development program and monthly product, service and styling skill training. In our 75th year, we are very excited about our global flagship focus. We view these stores very much as key 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 opening this month in time for the important holiday season. We will also open our first flagship in Milan, Italy by the end of the fiscal year on the prestigious Via Monte Napoleone. In North American department stores, where we are repositioning the brand, we did not do any renovations this quarter. We did continue to implement our shop manager program and see a significant impact versus balance of doors in key accounts. As noted on our August call, one of our strategic initiatives this year is elevating the Coach brand in the North America wholesale channel. As discussed previously, through 1941, we have already started adding new locations in top tier specialty retail 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 the Q1, we closed the first group of these locations, about 120, and expect to close the remainder in our Q3 this upcoming spring season. On the marketing front, the quarter kicked off with a successful launch of our Mickey collaboration. We were also thrilled about the reaction to our 3rd ever 1941 runway show this past September, which garnered positive editorial feedback while generating close to 1,000,000,000 impressions globally. More generally, during the quarter, we remained focused on creating desire for our brand, amplifying our fashion positioning and our 75 year legacy of design innovation, craftsmanship and quality. This year, we want 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 for Coach New York Cool, familiar American culture interpreted with a twist from New York's original house of leather design. As a result of these efforts across customer touch points, we are seeing continued progress with consumers. Importantly, in our North America brand tracking survey fielded in September, Coach's perception of positive brand momentum increased among category drivers versus a quarter ago, while our brand affinities were strong with consumers overall. In addition, category drivers view of the Coach brand as original increased versus a quarter ago, reflective of our product and marketing strategies. 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 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 category trends. As we look ahead to the balance of fiscal year 2017, there is no doubt that the challenges that exist today affecting the category in specific and consumer spending in general will persist. The macroeconomic environment is uncertain. Currency crosswinds continue to affect tourist flows and geopolitical events are negatively impacting sentiment. As a result, visibility into the category growth remains limited as the landscape continues to rapidly shift. This volatility was evidenced throughout FY 2016 and in the most recent quarter. Overall, 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 September quarter, which we believe has been 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 over to Andre for a discussion of North America. Andre? Thanks Victor. As you read in our release for the quarter, total North American Coach brand sales decreased 3% on both a reported and constant currency basis, reflecting our deliberate department store pullback, while direct sales were flat. Importantly, September quarter marked a continuation 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 modestly. Overall, our aggregate comp was up approximately 2% with e commerce, notably lower EOS flash sales impacting results. Generally, our coach.comretail site demand is similar to our retail stores. For most of the category, the dotcom channel is overwhelmingly a promotional one with most of our competitors having perpetual sale shops available. As you're available 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 stores rose during Q1 with declines in Chinese tourist traffic more than offset by other nationalities, notably Japanese and Korean visitors. Now turning to our retail performance and the metrics we traditionally share on product. We continue to drive brand elevation with the above 400 price bracket rising in penetration to over 50% of handbag sales, up from about 30% last year and generating another positive comp on a sales and unit basis. This drove handbag AURs to over $300 Turning to event marketing. As noted on the last call, we came out of FY 2016 comfortable with the cadence and type of events we'd hosted. We held a preferred customer event for September, anniversarying the prior year, though slightly shorter in duration and which excluded 1941 products. And we'll hold a Black Friday event followed by our semi annual winter sale in December. Looking ahead, our goal is to be the destination for gifting with a compelling assortment and broad offering across price points. We'll incorporate fashion elements such as studs and hologram platforms with a strong nod to our archives featuring Glove Tanned Leather across all categories for both men's and women's creating an emotional and compelling offering for the season. Specifically in retail, we will: 1, continue our elevation strategy with further animations of Rogue 2, establish Coach as a year round gifting destination 3, continue to leverage our unique leather craft, which is exemplified by appliques and quilting in our Coach New York offering and through the use of distinctive materials and techniques such as embroidery and beading in our 1941 collection. And finally, launched several major new platforms, including our iconic 1941 duffle, reinvented with increased functionality and Brooklyn, a reimagined carryall with increased functionality addressing the business bag opportunity. As we move into holiday in North America outlets, we'll accelerate our strategy to drive more innovation and emotion in the channel through limited editions, collaborations and the launch of new silhouettes and platforms. We're also focused on continuing to grow the men's category, and we'll celebrate our 1st holiday season with men's available in all of our outlet centers. In October, we kicked off the Q2 with a dual gender limited edition Pac Man collection in all our North American Outlet doors. This was our first collaboration strictly for the channel and we've been extremely pleased with the results. Building on the success of the introduction of Tyler, we're continuing to launch new silhouettes like the Central Satchel and City Zip Tote. For holiday, outlet launches a bold expression of 5 key prints and a wide array of metallics across multiple categories. Gift sets and novelty items continue to be big drivers for the season. And for Black Friday, we launched another dual gender limited edition leather bear collection in all our doors. We've seen great success with these disruptive playful moments in our stores both in bags and in novelty categories. We'll be supporting these holiday initiatives and expressing the playfulness of the season in our advertising. The holiday campaign is all about our Coach dinosaur, Rexy. Buzz has been building around her for months, beginning with London Collection Men's in January by Celebrity Dressing and a collaboration with Colette. Building on this excitement, this week, we're launching a global Rexy campaign with a video where she comes to life in the workshop, linking this pop character to our heritage of leathercraft. The campaign continues with our celebrity friends amplifying Rexy and our emotional heritage gifting assortment across multiple platforms including digital and social media. In summary, we're encouraged by our performance and excited for holiday. We believe that our initiatives across the brand pillars will continue to drive positive traction in North America. And now turning it back to Victor for international. Thanks, Andre. Moving on to Coach Brands international performance. As noted in our release, in the Q1, international Coach brand sales rose 7% on a reported basis and 3% 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 5% driven by double digit growth and positive comparable store sales on the Mainland, offset in part by continued weakness in Hong Kong and Macau. In Japan, sales rose 11% on a reported basis, benefiting from the stronger dollar, while constant currency sales decreased 7%, impacted by a decline in Chinese tourist spend as we lapped last year's dramatic excluding Paris, where our business continues to be impacted by weak tourist traffic. Post the Brexit vote, we've actually seen very strong results in the UK benefiting from the currency weakness and increased traction with the local consumer. In our other directly operated Asian markets outside of China and Japan, namely South Korea, Taiwan, Singapore and Malaysia, sales rose low single digit 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 modestly, driven by strong domestic performance, offset in part by relatively weaker tourist location results. On a net sales basis, revenue also increased over the prior year. Now, I will turn it over to Andrea for details on our financial results and guidance for the year ahead. 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 1st fiscal quarter 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. We're pleased with our financial performance in the Q1, which marks continued progress against our transformation plan and momentum in our business. Our sales increased over the prior year, driven by positive comps in North America and continued growth internationally and despite the strategic repositioning of the Coach brand in the promotional North American wholesale channel. Operating margin expanded significantly over prior year once again this quarter fueled by higher gross margin while we continue to invest in our brands. Taken together, we generated double digit growth in net income and earnings per share and 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 $1,040,000,000 for the 1st fiscal quarter, an increase of 1% on a reported basis and a decrease of 1% on a constant currency basis, including approximately 150 bps of pressure related to the company's strategic decision to elevate the Coach brands positioning in the North American wholesale channel. Coach brands sales increased 1% including positive North America comp store sales and continued international growth as Victor and Andre have discussed. Stuart Weitzman brand sales were essentially even with prior year in Q1 impacted by wholesale shipment timing. To this end, and as expected, 2nd quarter to date Stuart Weitzman brand sales are up double digits. Total gross profit totaled $715,000,000 an increase of 3% versus prior year, while gross margin increased 120 basis points to 68.9%. Coach brand gross profit increased 3% while gross margin increased 120 basis points over prior year to 69.8 percent which included about 40 basis points of pressure from currency. By segment, total North America gross margin increased over prior year including our directly operated business where both gross profit dollars and gross profit rate grew over prior year. International segment gross margin increased over prior year excluding the negative impact of currency. Stuart Weitzman gross profit rose 2% while gross margin increased approximately 100 basis points over prior year. Total SG and A expenses increased 1% approximately in line with sales to $538,000,000 and represented 51.9 percent of sales as compared to 51.7% in the year ago period. Coach brand SG and A expenses decreased 1% and represented 51.9% of sales compared to 52.7% in the year ago period, an improvement of 80 basis points. Stuart Weitzman brand SG and A expenses were $45,000,000 compared to $36,000,000 a year ago due to store occupancy costs and the timing of marketing expenses as well as the company's strategic investments in team and infrastructure. Coach Inc. Operating income rose 7% to $177,000,000 while operating margin increased 100 basis points over prior year to 17% even. Coach brand operating income increased 13%, while operating margin increased 200 basis points over prior year to 17.9 percent. Stuart Weitzman brand operating income of $7,000,000 was down versus prior year based on the timing of net shipments as well as key investments to support long term multi category growth as discussed. Net interest expense was $6,000,000 in the quarter as compared to $7,000,000 in the year ago period. Total net income for the quarter was $126,000,000 compared to $113,000,000 a year ago with earnings per diluted share of $0.45 up 10% versus prior year. Now moving to global distribution. In total, we closed a net of 2 Coach brand locations globally in the Q1 to end the period with 952 directly operated locations worldwide. In addition, we opened 2 net Stuart Weitzman directly operated stores to end the quarter with 77 locations. In FY 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 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 high single digit square footage decline in Japan as well as a modest unit decrease in Hong Kong and Macau. In our other directly operated business in Asia, we expect little change in both units and square footage. Closing with Stuart Weitzman distribution, we expect to open 5 to 10 net new directly operated locations in fiscal year 2017. Moving on, inventory levels at quarter end were $547,000,000 compared to ending inventory of $575,000,000 a year ago, a decrease of 5%. Net cash from operating activities in the Q1 was an outflow of $38,000,000 compared to an inflow of $8,000,000 last year. Our CapEx spending was $68,000,000 in Q1 versus $69,000,000 last year. Free cash flow in the quarter was an outflow of $106,000,000 versus an outflow of $61,000,000 in the same period last year. During the quarter, we received approximately $675,000,000 in net proceeds associated with the sale leaseback of the Hudson Yards building. And as announced, we used a portion of these proceeds to pay down our term loan of approximately $300,000,000 with no prepayment penalty. As such, our total borrowings outstanding were approximately $600,000,000 at the end of the 1st fiscal quarter compared to approximately $900,000,000 a year ago. At the end of the fiscal quarter, cash and short term investments stood at $1,500,000,000 as compared to $1,300,000,000 a year ago. As a reminder, we expect to receive net proceeds of approximately $125,000,000 during this fiscal quarter related to the sale of our previous headquarters building on 34th Street. 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 we have nothing planned imminently, 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're committed to our dividend and expect our dividends to grow at least in line with prior year's operational net income growth as our transformation gains 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 year We still expect total revenues for Coach Inc. In fiscal 2017 to increase by low to mid single digits including an expected benefit from foreign currency of approximately 100 basis points to 150 basis points based on current exchange rates. This continues to assume a positive low single digit comp for the Coach brand in North America for the year and in each quarter. As a reminder, we would expect Stuart Weitzman top line variability quarter to quarter given the nature of the business and its high penetration of wholesale. In addition, we are maintaining our operating margin forecast for Coach, Inc. Of between 18.5% and 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. As an aside for you modelers out there, we should note that our 2Q will likely include SG and A dollar growth ahead of sales due to the timing of our 75th anniversary celebrations, notably marketing activities surrounding the opening of Fifth Avenue and Regent Street. 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 still projected at about 28%. And we expect our average weighted diluted shares outstanding for the year to be in the area of $283,000,000 Taken together, we are projecting double digit growth in both net income and earnings per diluted share for the year and we continue to expect CapEx for Coach Inc. To be in the area of $325,000,000 in FY 2017. 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 in our first 2 years of transformation. Importantly, we continue to expect fiscal 'seventeen 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 Coach Inc. Over the long term. I'd now like to open it up to Q and A. And apologies for any technical All right. And our first question comes from Mr. Bob Drbul from Guggenheim. Sir, your line is now open. Hi, good morning. Good morning, Bob. I don't think you talked about comp by store channel in North America. I was wondering if you could provide some additional color there and specifically on the Internet business in North America? Sure. As you know, Bob, we saw a comp of nearly 4% this quarter across channels in bricks and mortar, which is the strongest comp that we've seen in over 3 years. And I couldn't be happier with our performance across both channels and, as Andrea mentioned, with the expansion in gross margin that we saw in our direct business. In retail, distribution of Coach 1941 that we've been working on over the last couple of quarters, especially, of course, the continued rollout of our store concept as well as the great work being done by our sales associates with the enhanced service experience. In outlets, as we look to engage with the broader consumer, really proud of the level of innovation and the team as the team has been leveraging a lot of inspiration, both from our retail stores and, as we mentioned, even a few very specific outlet specific innovations such as Pac Man, which has gotten us off to a very good start earlier this quarter and couldn't be more excited by the level of innovation that we have actually, especially in the back half of this year. In terms of your question online, Bob, as you know, most of the category uses .com as a promotional channel with perpetual sale on their sites. We have a very clear strategy to limit our promotional stance online. We have no 20 fourseven sale on coach.com. Generally, I can share with you that coach.comretail site demand was similar to our retail stores. Great. Thank you very much. Thank you. And our next question comes from Ike Boruchow from Wells Fargo. Your line is now open. Hi, good morning everyone. Congrats on a very solid quarter. Thank you, Ike. So pretty impressive Coach brand gross margin performance in the quarter. So congrats there again. Just hoping to dig through that a little more. Maybe Andrea specifically, could you talk about the North America margin in the quarter? Maybe how much of a benefit was there to gross margin from the wholesale repositioning? And then your outlook for the remainder of the year incorporate any kind of improvement in the outlet margin performance that you've been seeing in the past quarter or so? Sure. So when you look at gross margin in the quarter, for overall the Coach brand, there were a couple of areas of benefit and a couple of areas of hit. So starting off on channel mix, channel mix was a positive in the quarter to us. Product mix and cost were actually a very large positive, which we in turn returned to consumers in terms of pricing and value, not a complete offset, but a partial offset there. And then in terms of the currency impact, currency was a negative impact in the quarter. We talked to about 40 basis points. Interestingly, there was an impact of the yen, and that's really about OCI and the yen hedge loss position in the quarter as well as the negative impact on other Asian currencies and on the RMB in terms of the China currency impact. For North America specifically, North America gross margin improved in the quarter for the same reasons that I discussed. I'm sure one of the things you're interested in specifically, our outlet, North America store, gross margin was actually up in the quarter. So glad that we were able to take the benefit of lower cost and, as I said, return some but not all of that to the consumer. We did have a small hit in North America from currency. And our guidance for the year does bake in these continued benefits from both AUC or average unit cost as well as an overall impact of returning that to the North America retail and outlet consumer in terms of pricing. So a nice balance there as we move through the year. Thanks so much. Appreciate all the color. Congrats. Sure. And our third question on queue comes from David Schick from Consumer Edge Research. Your line is now open. Good morning. Thank you for taking the question. You talked about macro volatility. Obviously, we hear that a lot. We see it a lot. But could you talk about how the macro volatility you mentioned in your release plays out in the different businesses that you see? How should we think about if macro volatility were to increase going forward, how to expect that to impact the businesses? And then secondarily, the pre follow-up would be that how do you the category essentially categories in which you play have evolved? And so how do you see the different interplay of the categories to define the sort of aggregate category growth that would be of interest as well as you've done more in different sort of sub components of the categories? Thank you. Okay. In terms of your question on macro, David, obviously, very, very hard to predict. As we know, the geopolitical impacts most recently, whether it be terrorist attacks and where those happen and the impacts that can have are almost impossible to predict. They do lead most lead to, of course, shifts in tourist flows, especially as well as in some markets even short term to medium term impacts on domestic demand. The biggest impacts that we have seen outside of those short term geopolitical have been mostly currency swings. There's been a lot of talk, of course, about the Chinese tourists where they're increasing and where they're decreasing. We've seen with the appreciation of the Japanese yen decreases in tourist spending in Japan. We've seen pickups in Korea. And of course, we have seen a pretty strong drop off in mainland Europe, especially in Paris, which is a very important destination. In terms of the categories, we have just obviously with the acquisition of Stuart Weitzman made a bigger bet on footwear. We're excited about the long term opportunity in that category for us, a $28,000,000,000 opportunity. But generally into the medium and long term, we continue to believe there is no better space to be in fashion than the handbag and accessory space. We're excited about that as an opportunity, of course, not only in developed markets here in our home market, the U. S, Europe, which is really a greenfield opportunity for us. I could not be more excited about the team that we have on the ground there and the great work they're seeing. We're beginning to see decent traction now, especially with the U. K. Domestic consumer. And as well in developing markets, of course, where there's still so much untapped opportunity with growing middle classes globally. So that's, I hope, answered your question. And our next question on queue comes from Erinn Murphy from Piper Jaffray. Your line is now open. Great. Thank you. Good morning. I think you guys said in your prepared remarks that the $400 price point was at 50% penetration. Just to clarify, is that full price only or is that overall Coach Inc. And then or Coach brand? And then as you head into the Q2 where gifting is a key focus, how should we think about the penetration rate between that over $400 the under $300 price point? And then last, how many stores in North America have the 19.41 collection currently? Thank you, Aaron. We'll let Andre answer that. Good morning. So starting with the $400 price bracket that has grown, as you know, as we mentioned significantly this quarter. Going into the holiday quarter, we see a continuation of the growth of that $400 price bond bracket, but we've also significantly expand our assortment below $400 with a gifting focus. So and we're excited about that. The Heritage Gifting collection, it's called, that's hitting the stores in the days ahead. And we'll give some good balance to the assortment to take advantage of the gifting opportunity. In terms of the distribution of 1941, it's now in our full retail distribution. It's been in full distribution since August, and it's been performing, I have to say, very well at every level of every tier of store, not only our sort of more top tier stores. Yes. So Aaron, to your first question, it is just in the retail channel, not across both channels, of course. And as Andre mentioned, really excited year on year about the heritage gifting, which should probably lead to a decrease in that $500,000,000 slightly during the quarter. Got it. Thank you, guys, and best of luck. Thank you. And our next question on queue comes from Oliver Chen from Cowen and Company. Your line is now open. Thanks a lot. Victor, you made a lot of progress with the evolution of the to the words the House of Fashion Design and also the Stuart Weitzman acquisition. As you think about the long term in terms of what you're creating, what do you think about an American multi brand house and how you'll think about allocating capital and synergy opportunities as you may or may not create a multi brand kind of company? And then just curious, there was a lot of great commentary on bringing service back to stores. What are your high level thoughts about what the industry is facing with traffic and how you can continue to motivate the Generation Z and the new generations to come just to come into physical stores at large? Thanks, Oliver. In terms of the progress that we've made, of course, not only with the Coach brand, but now, of course, as a dual brand company, I couldn't be more excited about our ability to leverage the know how that we have in Coach to support, of course, Stuart Weitzman, Incredibly excited about the new talent that we've recruited to that brand, both the CEO, Wendy Kahn the Creative Director, Giovanni Marelli, who joins us in the spring and as we announced today Daniele Maketti, who joins us as the lead shoe designer reporting in to Giovanni. More broadly, in terms of our capital allocation strategy and what could come next, we've been very consistent. We have a tremendous amount of work and opportunity within the Coach brand and the Stuart Weitzman brand. That is our first priority. Our second priority, as you've suggested, is to look at value additive acquisitions. Of course, we're going to be very selective in acquisitions that allow us to build platforms for long term growth, that allow us to leverage our global infrastructure and on organizational capabilities and our skill sets, which is obviously building brands and retail management and a terrific supply chain in our core space. Most importantly, we look for great brands. We're not as committed to any specific nationality. So I would keep that in mind. Thank you. And to all of our audience participants I have a second question. I'm sorry. I'm just being reminded in terms of the physical stores and service. I couldn't be, as I mentioned in my response to Bob's question, happier with what the teams are doing across both retail channels. As you've seen, we've driven a positive 4 comp nearly in our bricks and mortar stores. I believe that it's not one specific channel or one specific action, Oliver, that leads to the positive results. It's about a total brand experience. We're committed to being very active digitally and engaging with the millennial and indeed with the broader consumer that's increasingly engaging online. And we want to provide her with a great experience whether she decides to shop in our stores or online. What we're being very careful about is managing those promotional impressions, especially in the online channel, which we know is global, transparent and can create a tremendous amount of confusion. And therefore, a lot of the steps that we've taken, both in the online channel and as well, I would say, as we have shared repeatedly in the wholesale channel, where we're looking to manage our brand more effectively for long term growth. Thanks a lot for those comments. Appreciate it. Any additional questions beyond 9:30 given the technical issues that we had at the beginning of the call. And to all of our audio participants who are queuing up for the question, we are limiting one question per person. Once again, that's one question per person. And Our next question on queue comes from Ann Andreeva from Oppenheimer. Your line is now open. Great, thanks. Good morning and congratulations on navigating the environment really well. I guess one clarification and one question. First on the flash sales headwind that you experienced during the quarter, has that now been lapped or should we continue seeing some of that going forward? And then secondly on Stuart Weitzman, were operating margins up during the quarter, excluding the marketing shift? And how do we think about the profitability at this brand for the year? Thanks. I'll let Andrea discuss the Stuart Weitzman in a bit. In terms of the EOS, no further comments other than what I've said earlier. And I think the main driver there, as we've mentioned, is that we're not in a very active recruiting mode. It's a closed database to those that shop in our bricks and mortar stores and that have been in our database. And so therefore, we will continue to probably see some shrinkage in EOS go forward. In terms of the Stuart Weitzman operating margin, Anna, as you know, gross margin was up during the period on a year over year basis. And so was the SG and A expense line, which actually rose significantly during the period. We've called out part due to marketing expenses, but there were also additional items. For example, as you may remember, we bought in the Canadian distributor there. So we had those directly operated expenses of the Canadian stores that we did not have in the year ago period. We also had higher retail occupancy costs. Just like Coach, but of course, it's more magnified for Stuart Weitzman, we have the occupancy of both the Fifth Avenue and Regent Street stores hitting the P and L there in terms of occupancy expense where we have no sales yet. So we had those as well. There were a couple of other items that impacted it, but it was not only marketing timing, just keep that in mind. For the year, I would say that our operating margin for Stuart Weitzman should be in the realm of where it ended last year and that is what we had expected when we entered the year. Terrific. Best of luck, guys. Thank you. Go ahead, operator. Thank you. And our next question on queue comes from Randy Konik from Jefferies and Company. Sir, your line is now open. Yes, thanks a lot. So I want to just talk to the cyclicality of the margin structure, gross margin that is across the channels, Because it was very positive to hear was the it sounded like the gross margin was up in the outlet channel and the strategy has been more about, think, less about just driving units for units or revenues for revenues, but driving a healthier, better margin business and being smarter with the promotional cadence and so forth. So can we just get some perspective on where you where the just at a high level where we are in the cyclicality peak to trough between the channels? Because it seems to me there would be a lot more gross margin opportunity still left in the outlet channel. I just wanted to explore that a little further. Thanks. Yes. I think it's Randy, I think it's a good question. As you may remember, last year, I believe it was in our January call regarding our 2nd December quarter, we talked about outlet promotional activity ratcheting up. We saw that in the competitive environment, ours ratcheted up as well. So we don't lap that until, let's say, partway through this Q2. So we would continue to see that. Now we are experiencing lower average unit costs, higher initial markups, which is allowing us to fund, if you will, and pass that on to the consumer. But we start to lap that, to your point, through the Q2. I am fresh out of crystal balls right now, and I'm not sure that we're going to see a significant lessening in the environment in the second half of the year. But presumably, over time, we'll be able to actually keep some of those lower average unit costs on the outlet side. One thing I will mention is we are having and will have for the full year a small benefit associated with the reduction of our sales in our wholesale channel, so that will help. And obviously, we're experiencing lower average unit costs on the retail side as well, and we're seeing nice growth in both AURs and ADT, as Andre talked about. So I think that probably sort of explains what's going on, on the outlet side and what we're looking at for the balance of the year. As you know, we've reiterated our guidance for the year of 69% to 70%. Very helpful. Thank you. My pleasure. And our next question on queue comes from Michael Binetti from UBS. Sir, your line is now open. Hey guys, good morning. Congrats on a nice quarter. Just really quickly, I wanted to touch on the comment that tourism was, I guess, better or less bad. Was that could you clarify for me, was that related to the U. S? I know you made some global comments, but is your sense that tourism is getting better in the U. S? How meaningful of a change there? So, and then can you help us think about whether that tourism, the outlets I'm sorry, the outlet the tourist outlets are getting better or maybe if there's any kind of signs of improvement or trend change in the outlets that are largely shopped by domestic customers? I'll let Andre chime in on that. So without going into the detail by channel, we did see a slight growth in tourism in the Q1, a slight decrease in mainland Chinese tourists to North America, but actually more than offset by other Asian particularly Koreans and Japanese. Great. And then I think you mentioned that the category for premium accessories for men and women was flat, slightly positive. I think in the past you've spoken just on women's. Is there any way you could help us clarify between the 2? And if you saw a change in women's, that would be worth calling out as well? No, no major shift across channels. I mean, it's what we've talked about, which is basically the fact that the department store impact has been obviously a slight drag. And what we have seen, of course, is that all of the major luxury channels, of course, report with men's and women's together, and we've seen a little bit of an uptick with a few specific luxury players that are impacting both and therefore consolidate across all brands. Okay. Thanks a lot guys. Congrats, guys. Thank you. And our last question on queue comes from Mr. Brian Tanik from the Royal Bank of Canada. Sir, your line is now open. Hi, thanks. Good morning. Congrats as well. I guess you guys usually share with us what innings you think maybe we're in. So I was wondering if Victor, Andre could talk really about the factory channel and maybe talk about what inning you guys think we're in from a store model perspective, a product development perspective, including the men's growth? And then if you still believe the retail being the halo for factory will take a few more quarters to really set in from a brand perception perspective? Thanks very much. Well, I'm rooting for Cleveland tonight. There is 1 or 2 Chicago fans here in the room. But of course, Game 6, we're looking for an end this evening. Big Tito fan given my affiliation with the Red Sox. I'll just add that in before I answer your question. So to your baseball metaphor, I think obviously, look, if we're looking at the outlet channel, we're still in the very early stages in terms of the rollout of the modern luxury concept itself. Andre and the team leveraging a lot of the consumer insights work, tweaking that concept for it to be more effective. The major impact that we're seeing in that channel is really from the great level of innovation that Stuart and the team are putting into product and the overall halo impact of the brand as we continue to speak to the broader consumer more directly. And I think you'll see that pick up in the quarters ahead, specifically for holiday and even more so as we look at the 3rd and 4th quarters. I would say that from a store perspective, we're maybe in the 2nd inning, specifically to your question, from a product perspective, maybe we're in the middle innings. And of course, we don't market to that consumer outside of what happens either in the mall itself or in direct email communication with her. So I would say that there, we're pretty advanced. I think we've gone into extra innings here. So Kristina, you want to sum it up? Sure. That concludes our Q and A. I'll turn it over to Victor Luis for some closing remarks. Thank you. Let me just apologize again to all of you for taking a little bit of your time and apologize on behalf of our service provider. Just want to thank you all for joining us this morning. I want to again thank and congratulate both the Coach and the Stuart Weitzman teams for their hard work and the performance that they're driving on behalf of our shareholders in this rather volatile environment. Very excited about the quarters ahead. We have terrific bold product marketing and wonderful retail experiences planned ahead as we open this quarter in a few weeks, both Coach House here in New York as well as in London to cap our 75th anniversary. So thank you all and look forward to chatting live with many of you.