Earnings Call: Q3 2016

Apr 26, 2016

Good day, and welcome to the Coach Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Global Head of Investor Relations and Corporate Communications Head Coach, Andrea Shaw Resnick. Good morning and thank you for joining us. With me today to discuss our quarterly results are Victor Luis, Coach's Chief Executive Officer and Jay Nielsen, Coach's CFO. Before we begin, we must point out that this conference call will involve certain forward looking statements, including projections for our business in the current or future quarters or fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon a number of important factors, including risks and uncertainties, such as expected economic trends or our ability to anticipate consumer preferences, control costs, successfully execute our transformation and operational efficiency initiatives and growth strategies or our ability to achieve intended benefits, cost savings and synergies from the Stuart Weitzman acquisition. Please refer to our latest annual report on Form 10 ks and our other filings with the Securities and Exchange Commission for a complete list of risks and important factors. Please note that historical trends may not be indicative of future performance. Also certain financial information and metrics that will be discussed today will be presented on a non GAAP basis, which you may identify by the terms non GAAP constant currency, excluding the negative impact of foreign currency or excluding charges associated with financing short term purchase accounting adjustments, contingent payments and integration costs. You may find the corresponding GAAP financial information or metrics as well as the related reconciliation on our website, www.coach. Com/investors and then viewing the earnings release posted today. Now let me outline the speakers and topics for this conference call. Victor Luis will provide an overall summary of our 3rd fiscal quarter 2016 results and will also discuss our progress on global initiatives across markets. Jay Nielsen will continue with details on financial and operational results for the quarter and our outlook for the business for the balance of the year. Following that, we will hold a question and answer session where we will be joined by Andre Cohn, President, North America. This Q and A session will end shortly before 9:30 am. We will then conclude with some brief summary remarks. I'd now like to introduce Victor Luis, Koch's CEO. Good morning. Thank you, Andrea, and welcome everyone. As noted in our press release, we are very pleased with our Q3 performance, which was consistent with our expectations and reflects a return to growth for Coach across the key financial metrics of sales, operating profit and EPS. We drove further sequential improvement in our North America direct business with both channels strengthening similarly, while the Internet also contributed to results this quarter. Our international businesses posted strong growth on a constant currency basis, highlighted by double digit increases in Mainland China and Europe, as well as sales gains in Japan and other Asian countries. We were especially gratified by our ability to drive this inflection for the brand against the backdrop of macroeconomic and promotional headwinds and amid volatile tourist flows globally. Overall, our results continue to give us confidence that the cumulative impact of our actions will continue to drive top line growth this fiscal year and positive North American comps in the 4th fiscal quarter. Importantly, during quarter, 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. Our elevated Coach 1941 assortment resonated in our retail stores globally as well as in key new specialty retail accounts having debuted in Nordstrom, Saks Opening Ceremony, Fred Siegel and Jeffrey, New York as well as Colette in Paris, Louisa Via Roma, Lumada Hankyu in Japan, Gallery West in Seoul and Lane Crawford in Greater China. In outlet, our Snoopy fashion vignette was particularly well received and we will continue to surprise and delight the consumer in this channel with increased levels of innovation. We continue to transition the fleet into our modern luxury concept, driving comp improvement. Finally, our new heritage marketing campaign focused on originality and authenticity highlights Coach's key competitive differences separating us from the landscape of both legacy European luxury and American accessible brands. We are also pleased by Stuart Weitzman's results this quarter. As noted in our press release, we expect to close on the acquisition of the brand's Canadian distributor in the Q4. Longer term, we continue to believe that Stuart Weitzman has significant potential and the integration to date reflects our ability to operate as a multi brand company. And as Jane will discuss in more detail, we also announced an operational efficiency plan today focusing on creating a more agile, streamlined corporate structure, enabling us to be more responsive to rapidly changing business conditions. The plan includes the elimination of over 300 positions worldwide, representing about a 10% decrease in global corporate staff or about a 2% reduction in our total workforce. These actions will allow us to emerge as a global brand led company with fewer layers, larger spans of responsibility and a consistent global voice across merchandising and marketing. To this end, we are promoting 2 seasoned coach executives, Andre Kone and Todd Kahn. Andre is being promoted to President North America and Global Marketing, adding North America Wholesale as well as Global Marketing, customer experience and digital to his responsibilities. Todd is being promoted to President, Chief Administrative Officer and Secretary and will expand his scope to include IT, supply chain, global environments and procurement. They are both proven leaders with experience across many aspects of Coach's global business and are well prepared to address the opportunities ahead of us as we continue to transform. Most importantly, they have consistently delivered results for our brand and company in their respective 8 year tenures. In addition, Diane Mahady has assumed the role of Global Head of Merchandising for the Coach brand. In this new role, Diane will oversee merchandising for the entire Coach portfolio, including women's, men's and licensed categories. With these changes, Debhard Reiner, President and Chief Operating Officer and David Duplantis, President, Global Marketing, Digital and Customer Experience will be leaving Coach. I want to take this opportunity to thank both Gephardt and David for their important contributions to the company. Gephardt notably for his work on the successful integration of Stuart Weitzman over the last year and most recently for his leadership in our restructuring and efficiency initiatives. And David, who has made significant contributions to Coach over his 18 year tenure and roles spanning North American Merchandising, e Commerce and Digital and Global Marketing. He was a key player in building Coach into a leading global lifestyle brand, establishing our digital footprint and most recently in our brand transformation. The entire Coach team has great admiration and respect for Gephardt and David's significant accomplishments and we wish them the best. Now, it has been our recent practice, I'd like to share some of the actions we've taken to build momentum across the 3 Coach brand pillars of product, stores and marketing. Starting with product, where Coach is clearly emerging as the house of modern fashion design. During the Q3, as in the first half of the year, essentially all of our retail channel assortment, both men's and women's were Stuart Viver's designs. It was however the Q1 that included Coach 1941 and emphasized our elevation strategy. This was a pivot from holiday where we distorted the under $300 price point in our gifting assortment. The Rogue, Saddle and Dinky have all performed well with price points up to $800 and above. The Swagger family, which anniversaried its original launch in February 2015, comped the comp with the new Mercer satchel also contributing to results. Essentials, while deemphasized, were highlighted by the introductions of the turn lock EDI, EDI-thirty 1 and Prairie. In outlet, the offering of Stewart's designs and updates represented over 90% of the assortment with key new styles in women such as the Sierra Satchel, the City Zip Toe and the Minnie Bennett performing well, along with the reimagined Phoebe and Christie groups. On the men's side, the strong group of bags and backpacks drove our business. We also had an exceptional response to the Snoopy fashion vignette as mentioned, proving that this customer will respond to innovation and novelty. After the success of our first complete runway show in September and the Coach 1941 launch, we followed up in February at New York Fashion Week introducing our 1941 fall collection. Once again, it received significant attention from the fashion press as well as top tier specialty retailers and luxury department stores. On stores, we're continuing to establish our new modern luxury concept stores globally, renovating and opening 40 during the quarter, including 6 renovations and 2 new modern luxury stores in our directly operated North America business, taking us to about 290 across all channels worldwide. We remain on target to end the year at over 400 of our doors, including wholesale in the new format. Consistent with plan, these renovations have been driving significant from previous trends and comps, which exceed the balance of fleet in the vast majority of stores around the world. We're especially excited about the ongoing positive comps we're driving in our renovated North America retail stores, including those stores that have now anniversaried their remodels. In North American department stores, we renovated 8 shop in shop locations to modern luxury in the Q3. Finally, we have about 35 shop managers in place today and have seen a significant impact versus the balance of doors and expect to hire another 15 by the end of the year. On the marketing front, we remain focused on creating desire for our brand, amplifying our fashion positioning and our 75 year legacy of design innovation, craftsmanship and quality, building emotional connections with consumers globally. In February, we debuted our heritage campaign featuring Coach icons and starting with the Saddle Bag followed by the Dinky Bag in March. This global brand campaign is a key vehicle to communicate our authentic history as America's original house of leather with taglines such as, we got our heritage the old fashioned way, we inherited it, setting us apart from the direct competitors who are often inspired by our archives. Also positioned to amplify our brand heritage, we are very pleased with the response to our Coach Vintage initiative, a collection of highly coveted bags from the 1970s 80s that we reclaimed, masterfully restored and hand embellished by Coach Artisans, modernizing them for today and making each a one of a kind. The collection was a big hit during its debut launch at Colette in Paris in December and later saw success at Barney's New York. Our next installations will be available in premium locations in Beijing, Tokyo and Hong Kong with a global online auction completing the initiative later this fall, further amplifying our storied heritage and fashion credibility to a cool audience. Our fashion advertising campaign supported the launch of Coach 1941, Focused on the saddlebag and shot by photographer Steven Mizell, it has captured the attention of consumers worldwide through our bold positioning in social, out of home and print. And resonating with our broad audience and primarily positioned through the digital channels, Chloe Grace Moretz and Kid Cudi continued to be the faces of our celebrity campaign. Once again, our runway shows were highly engaged and amplified through social media with our London Men's Show in January garnering over 150,000,000 impressions and our February New York Fashion Week Show driving over 700,000,000 impressions and ranked number 3 of the top mentioned hashtags by WWD during New York Fashion Week, reflecting the increasing vibrancy of our brand. And our online InstaShop the runway initiative featuring the Rogue bag sold out within an hour. On coach.com, we're further enhancing our emotional bonds with our visitors through a series of personalization initiatives, including the recent introduction of our customizable story patch. We've also evolved our suite of monogramming initiatives and introduced a feature that allows for adding a charm to bags to making them even more personal. Looking forward to the balance of calendar 2016, we will continue to amplify our fashion positioning while celebrating our 75th anniversary focusing on our distinctive brand proposition. No other American brand in our space can claim the unique combination of heritage and craftsmanship that is our DNA used with the modern fashion sensibility of Stuart's vision. As a result of these efforts, we're seeing continued progress with consumers. Importantly, in our quarterly North America brand tracking survey fielded in March, we saw an increase in category drivers as a percentage of Coach consumers and strength in our overall brand affinities. So as our plans unfold and the momentum builds, 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 retailer and accessories brand to a true house of fashion design defining modern luxury. We are excited to see our creative vision and direction gain traction and we'll continue to update you on these initiatives as we move forward. Turning now to a discussion of category trends. Overall, we estimate that the North America premium women's handbag and accessories market grew at a low single digit rate in the March quarter. Our quarterly survey also showed a higher handbag purchase intent among the broad premium purchasers versus 6 months ago. Importantly, Coach's sales of women's bags and accessories once again improved sequentially in North America. And of course, as a lifestyle and multi brand category company, we also participate in categories outside of women's bags and accessories. Men's, which represents about 17% of global net sales on an annual basis, posted strong results in the quarter. We continue to believe it is a growth opportunity for the brand and is still forecasting mid single digit growth during FY 2016. Over our planning horizon, we believe men's remains a $1,000,000,000 opportunity. In North America, we have tested and intensified men's focus in key stores, which entailed increased marketing support and enhanced assortment in the more prominent location in store. With the strong response from consumers, we will be expanding our men's presence in the Q4 and specifically we'll be rolling out men's to over 25 more retail and 40 more outlet doors. And of course, we also remain focused on building Coach Inc. Market share within the fragmented men's and women's $27,000,000,000 global premium footwear category, which we estimate will grow at a mid single digit pace over our planning horizon. Looking ahead, we see significant growth opportunities for the Stuart Weitzman and Coach brands in this category. While Jane will provide additional details on sales and distribution by geography, we wanted to touch on some current trends and strategies by market, starting with North America. As you read in our release for the quarter, our total Coach brand sales and direct business in North America were up both 1% as reported and 2% in constant currency. In aggregate, we drove another significant improvement in the Q3. Comp trends in both retail and outlet stores accelerated, while the Internet contributed to aggregate comp as well. Overall, our comp was flat, led as expected by retail, including the slightly positive impact of our e commerce business, which contributed less than 1 percentage point. Higher ticket and higher conversion were offset by a decline in traffic, which was hurt in part by the overall weak mall trends. As a reminder, we have now fully anniversaried the pullback in EOS and in preferred customer events, which impacted both our coach.com and retail businesses. Therefore, going forward, we would expect our online business to move at least in line with our store trends. Now looking at results sequentially, as planned improvements in both conversion and traffic from the 2nd quarter drove results with tickets still positive. While the Easter shift excuse me, while Easter contributed to our comp, this was offset by a shorter winter sale period, which ended about 10 days earlier than last year. Importantly, our performance underscores our confidence in delivering a positive North America comp by the 4th quarter. Now turning to our retail performance and the metrics we traditionally share on product. The above $400 price bracket rose in penetration, saw another positive comp on a sales and unit basis and reported about 40% of handbag sales, up from about 30% last year. The increases showed continued progress of our elevation strategy, driving our handbag AUR to over $300 in the quarter for the first time since FY 'nine. As planned, we deemphasized the entry price point gifting assortment coming out of holiday and therefore saw a decline in the 300 and below handbag price segment. And after several years of decline in logo penetration and gains in leather, our North America logo business has stabilized at less than 5% in retail and about 25% in our outlet channel similar to the prior year. We will continue to monitor consumer preferences and fine tune this balance as needed. Now on stores. As mentioned, we've been very pleased with the performance of our modern luxury stores, particularly in the North America retail channel, where comps remain positive with now 67 stores renovated, including 15 added in the last 9 months. As noted, we are especially excited about the ongoing positive comps we're driving in those stores that have now anniversaried their remodels. In the outlet channel, as noted previously, our results have been more mixed and we have not seen the same level of inflection given the newer store base notably in men's standalones. To date, we have completed 31 outlet renovations, including 17 in FY 2016 and opened a total of 7 outlet stores in the new format, 3 in FY 2015 and 4 year to date. We remain on target to renovate about 60 North American stores this year. In terms of elevating our customer experience, this quarter we made significant progress in leveraging our leather services to differentiate the coach experience and to drive conversion, while opening 3 new craftsmanship bars globally. So Shinsegae, Yungdumppo, Sendai, Japan and King of Prussia in Philadelphia. Turning to event marketing. In FY 2016, we've continued to evolve and optimize our events with the goal of further reducing the number of days on promotion. And as previously mentioned, our plan included 2 closed or targeted events this fiscal year, the first of which was held in September and the second of which occurred in March, consistent with prior year's timing. We will also run 2 shorter duration open sales events over key traffic periods, Black Friday and Mother's Day. We've been encouraged by the behavior of new customers acquired during sales events, who subsequently engage in full price purchasing at the same rate as new customers acquired during the non promotional periods. Looking ahead to spring summer. In retail, we're excited about introducing our first ever pre fall collection grounded in handbags and ready to wear with new animations and sizes of the best selling Rogue and new novelty platforms in the iconic Coach Dinky and Saddle Bags. We will continue to implement our elevation and fashion strategy in all doors with additions to the popular Swagger family in a rainbow of fun fashion colors and unique colorful exotics. Additionally, we have SKU ads in the Mercer Satchel and market tote coming in May. Men's trend strength continues into the 4th quarter driven by ongoing traction in leather goods, ready to wear and footwear with enhanced store placement and marketing distortions. And in June, we will be celebrating our 75th anniversary with a special collaboration with another storied American brand to be announced later this spring. In outlet, we are heading into Mother's Day, which will feature elevated floral novelty via leather applique details and print. Our gift offering is robust, including boxed sets, color breadth and small bags and small leather goods and newness in jewelry. In May, we launched a rainbow color story aligned with our retail featuring some of our strongest new styles that launched in the Q3, including the Sierra Satchel. Just in time for Memorial Day, we will reintroduce our reversible tote, which was a best seller during the holiday season. In June, we tell an Americana story featuring an update to our best selling Badlands print in totes and small bags, which are important key drivers for the summer season. And we're also excited to roll out men's to all outlet locations anchored by leather backpacks, messenger bags and an assortment of wallets and belts. And now moving on to international. In Greater China, our 3rd quarter sales rose 2% in constant currency, driven by double digit growth and positive comps on the mainland, Hong Kong and Macau on the mainland, excuse me. Hong Kong and Macau remained weak and continues to be impacted by a dramatic slowdown in inbound tourist traffic, notably from the mainland. At this juncture, with very limited visibility to an evolving macroeconomic environment and tourist spending flows, we are updating our annual forecast to be in the area of $600,000,000 to reflect continued softness in Hong Kong and Macau. Importantly, and despite near term volatility, we remain optimistic on the prospects for this market over the long term as the drivers we have consistently mentioned are more relevant than ever. It's important to note that we see the Chinese consumer as an increasing part of our total business. During the Q3, our global business with the Chinese continued to grow. Declines in travel flows into North America and Europe, notably France, along with continued softness in Hong Kong and Macau were more than offset by strong domestic spending and growth in Chinese tourist spend and other key travel destinations, including Japan, Korea and Southeast Asia. To that end, sales in Japan were up 7% on constant currency basis and 8% on a dollar basis, reflecting the strong yen despite a decrease in square footage. Sales again benefited from increased PRC tourist flows and the positive response to our new modern luxury stores from Japanese consumers and tourists alike seen most notably in conversion in these locations. We would expect some slowdown in the constant currency growth of our Japan business in the Q4 as we anniversary the dramatic increase in Chinese tourists last spring. In Europe, our brand is continuing to grow rapidly through new directly operated stores, wholesale locations and comps. Our overarching focus continues to be building the brand awareness with both local domestic consumers as well as tourists. In the Q3, our business grew at a double digit pace, driven by both distribution and comparable store sales. As many brands have referenced, we did experience relative softness in France in the quarter due to weaker tourist traffic following the tragic terrorist attacks. Overall, and despite these headwinds, we are maintaining our FY 2016 sales outlook of about $125,000,000 Over our planning horizon, our goal is to achieve over a $500,000,000 in sales at retail, representing a mid single digit share of the premium men's and women's bag and accessory market. In our other directly operated Asian markets outside of China and Japan, namely South Korea, Taiwan, Singapore and Malaysia, sales growth was solid across the entire region in local currency, but declined in dollars. Here too, we are focused on driving productivity through our transformation initiatives. Finally, I would like to point out that we're seeing disparate results in our international wholesale businesses, which while small are important to growing brand awareness. In the 3rd quarter, our overall sales increased moderately, driven by strong growth in those distributor operated locations focused on the domestic consumer, while travel retail though up was relatively weaker due to volatility of tourist spending flows globally. On a net sales basis, revenue grew modestly in the quarter, driven by shipment timing with the Q2. In closing, we are encouraged with the momentum of our business across all of our regions and the return to growth for the company. Most importantly, we are proud of the progress we have made along our transformation journey and the evolving perception of the Coach brand and Coach Inc. As we move from a specialty retailer to a house of modern luxury brands. Now I will turn it over to Jane for details of our financial results and guidance for fiscal 2016. Jane? Thanks, Victor, and good morning. Victor has just taken you through the highlights and strategies. Let me now take you through some of the important financial details. Please note, the comments I'm about to make are based on non GAAP results, Corresponding GAAP results as well as the related reconciliation can be found in the earnings release posted on our website today. Overall, we are very pleased with our performance in the Q3, which marks a return to growth for the company with an inflection across the key metrics of sales, operating profit and earnings. These results clearly reflect the positive impact of our transformation strategy augmented by the Stuart Weitzman business. Consolidated net sales totaled $1,030,000,000 for the 3rd fiscal quarter, an increase of 11% versus prior year. On a constant currency basis, total sales increased 13% for the period. Net sales for the Coach brand rose 3% in dollars and 4% on a constant currency basis, with both the North America and International segments up on a year over year basis. Stuart Weitzman brand sales were $79,000,000 in the quarter. Total gross profit was 713,000,000 dollars an increase of 7% compared to the year ago period, while gross margin was 69% versus 71.6% last year, negatively impacted by foreign currency and the inclusion of Stuart Weitzman in this year's margin. Coach brand gross margin was 69.9 percent and included approximately 110 basis points of pressure from currency. In terms of trends by segment, North America gross margin declined on a year over year basis, but to a lesser extent than in the first half of the year as planned. Margin continued to be negatively impacted by increased promotions in the outlet and wholesale channels in response to heightened discounting activity. These decreases were partially offset by the impact of an improved mix of elevated product sales and higher initial markups, primarily in our outlet stores. International segment gross margin increased from prior year, excluding the negative impact of foreign currency. Stuart Weitzman brand gross margin was 58.2% in the quarter and pressured overall consolidated gross margin by 90 basis points as expected. Consolidated SG and A expenses were $561,000,000 an increase of 8% versus prior year. As a percentage of net sales, SG and A totaled 54.3% compared to 55.8% in the year ago quarter. Coach brand SG and A expenses increased 1% consistent with expectations and totaled 54.8% as a percentage of sales. Stuart Weitzman SG and A expenses were $39,000,000 or 48.9 percent of sales. Total operating income for the quarter increased 4% from last year to $152,000,000 while operating margin was 14.7% versus 15.8%. Operating margin for the Coach brand was 15.1% in the quarter. Importantly, we were pleased with our margin results in Q3 and are confident in our path to operating margin expansion beginning in the Q4 of fiscal 2016. Operating margin for the Stuart Weitzman brand was 9.3% and pressured Coach Inc. Consolidated operating margin by 40 basis points in the quarter. Net interest expense was $7,000,000 in the quarter as compared to $1,000,000 in the year ago period. Net income for the quarter totaled $124,000,000 with earnings per diluted share of 0.4 $4 up 24% and 23% versus prior year respectively. This included a contribution $5,000,000 or $0.02 per share from Stuart Weitzman. The charges under our previously announced transformation plan have totaled $313,000,000 to date, including $9,000,000 in the Q3 as outlined in detail in this morning's press release. We continue to expect to incur the balance of these charges by the end of FY 2016, primarily related to global store closures and organizational effectiveness, bringing the total multi year charge to about 325,000,000 dollars Now moving to global distribution. As you know, our overarching focus continues to be replatforming our stores, elevating brand perception, optimizing our store fleet and opening new locations selectively in key markets. In total, we closed 9 net Coach brand locations globally, primarily related to store closures in North America as planned. In addition, we opened 1 Stuart Weitzman directly operated location in the quarter. Looking to the full year, in FY 'sixteen, we continue to expect our Coach brand directly operated square footage to be up low single digits globally. This guidance continues to assume that Coach brand square footage in North America will be essentially unchanged. Internationally, distribution growth will be led by Europe and China, where we continue to project double digit increases in square footage. In Japan, we continue to estimate a mid single digit decline in square footage as we take a portfolio approach to optimizing our fleet. And in our directly operated businesses in Asia, outside of China and Japan, we continue to focus on developing our current store base and expect only modest square footage growth this fiscal year. Closing with Stuart Weitzman distribution, we continue to expect to open approximately 10 new directly operated locations in FY 2016. Moving to the balance sheet. Inventory levels at quarter end were $464,000,000 including $27,000,000 of inventory associated with Stuart Weitzman. This compared to ending inventory of $457,000,000 for the Coach brand in the year ago period. Therefore, inventory rose 2% on a Coach Inc. Consolidated basis, but was down 4% for the Coach brand. Cash and short term investments stood at $1,300,000,000 as compared to $2,000,000,000 a year ago. Given our debt issuance in the Q3 of FY 'fifteen and the subsequent closure of the Stuart Weitzman acquisition, our total borrowings outstanding were approximately $900,000,000 at the end of the fiscal quarter. As previously shared, we expect to use these proceeds to cover our working capital needs in light of investments in our business and the new corporate headquarters. Net cash from operating activities in the Q3 was $199,000,000 compared to $167,000,000 last year. Free cash flow in the quarter was an inflow of $98,000,000 versus $122,000,000 in the same period last year. Our CapEx spending was $101,000,000 versus $45,000,000 in the same quarter a year ago. Now turning to our outlook. As noted in our press release, we are maintaining our overall fiscal 2016 guidance for both the Coach and Stuart Weitzman brands. Starting with our outlook for the Coach brand on a standalone 52 week non GAAP basis for FY 2016. Coach brand sales are still expected to increase at a low single digit rate in constant currency in fiscal year 2016. Based on current exchange rates, currency headwinds are expected to negatively impact annual revenue growth by 225 basis points to 250 basis points. We are still projecting a low single digit aggregate comp decline in North America in FY 2016, while reaching positive comps in the Q4. Gross margin for the Coach brand is still projected to be in the range of last year's margin of about 69.5 percent on a constant currency basis, with negative foreign currency effects expected to impact gross margin by 90 to 100 basis points. SG and A expenses, net of savings, are still expected to grow at a low single digit rate in constant currency, while growth is expected to be roughly flat in dollars. We continue to expect at least $50,000,000 in incremental cost savings from our previously announced transformation initiatives. This guidance also includes the expected small positive impact from savings related to the operational efficiency initiatives as outlined in today's press release. Taken together, operating margin is still projected to be in the mid to high teens. Interest expense for the year is estimated to be the area of $30,000,000 And finally, our tax rate is still expected to be in the area of 28% for the year. The expected rate reduction on a year over year basis is primarily attributable to the geographical mix of earnings, the ongoing benefit of available foreign tax credits, the anticipated closure of certain audits and the expiration of statutes in 2016. In addition, we are continuing to forecast Stuart Weitzman brand sales to be in the area of 340,000,000 dollars on a dollar basis for fiscal 2016, an increase of about 10% from FY 2015, driving Coach Inc. Consolidated revenue growth to high single digits on a constant currency basis and adding about $0.12 to earnings per diluted share, excluding charges associated with financing, short term purchase accounting adjustments, contingent payments and integration costs. Keep in mind, we continue to project a negative impact of about 70 basis points and 20 basis points on a consolidated gross margin and operating margin respectively from the inclusion of Stuart Weitzman given the margin profile of the business. As mentioned, we are also excited to announce the purchase of Stuart Weitzman's Canadian distributor, which is expected to close in Q4 and have an immaterial impact on this year's results. As a reminder, fiscal 2016 will include a 53rd week in our fiscal Q4, which is expected to contribute approximately $75,000,000 to $80,000,000 incremental revenue and 0.06 dollars in earnings per diluted share on a non GAAP basis. We expect CapEx for FY 2016 for Coach Inc. To be in the area of $250,000,000 excluding the capital costs associated with the new headquarters, which are expected to be approximately $175,000,000 in FY 'sixteen. Before concluding, I did want to provide you with an update on the status of our investment in our new headquarters building at Hudson Yards. As you know, together with our partner related companies, we are exploring options to sell our interest in the Hudson Yards joint venture, while securing our future need for space by entering into a long term lease there. It remains unlikely that any sale of our interest or other transaction would close prior to our fiscal year end. Importantly, our capital allocation policy remains unchanged. And over the next few years, our first priority is to continue to invest in our business 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 3rd, capital returns. As I've stated before, we are committed to our dividend and expect our dividends to grow at least in line with net income growth as our transformation takes hold. Underpinning all three of these priorities are our guardrails for allocating capital effectively, maintaining strategic flexibility, strong liquidity and access to the capital markets. In closing, we are very pleased with our progress to date. Our 3rd quarter results mark the return to top line, operating profit and earnings growth and underscore our ability to drive sustainable growth for the Coach brand and Coach Inc. To this end, we continue to expect FY 'seventeen to be the year when Coach brand returns to growth across all financial metrics, leveraging top line growth that is expected to be in line with the category. We remain committed to driving process improvements to be a more agile, focused and effective organization, while also creating the flexibility to pursue our creative vision and drive growth across our brands. In support of this goal and as Victor mentioned, today we announced a series of operational efficiency initiatives focused on creating an agile and scalable business model. In aggregate, we expect to incur pretax charges associated with these actions of approximately $65,000,000 to $80,000,000 which will be reflected beginning in the Q4 of fiscal 2016 and will be substantially complete by the end of fiscal 2017. The significant majority of these charges will be recorded in SG and A expenses. Importantly, combined with other key measures previously implemented under our transformation plan, these initiatives are expected to enable us to reach our previously stated goal of about a 20% operating margin for the Coach brand in fiscal year 2017, despite increased category and macroeconomic uncertainty and while continuing to invest in our growth strategies. With that, I'd like to open it up to Q and A. Thank you. We will now open it up for questions. Our first question comes from the line of Bob Drbul. Sir, you may ask your question. Hi, good morning. Good morning, Bob. Good morning, Bob. Good morning. I have a 2 part question on sales really. Given that you mentioned January was impacted by the shorter winter sale and your comp was flat for the quarter, wouldn't that suggest that you were already running a positive comp for the last 2 months, February March? And the second part of it is, taking that one step further, when you think about your guidance for the positive North American comp in the Q4, would that suggest you're running a positive comp right now as well? Thanks for the question, Bob. It's certainly hard to argue with the math. And I think that you can certainly safely assume that we did indeed have positive comps in February March as you suggest. In terms of the Q4, look, we still have a couple of months ahead of us, but certainly as a team, we remain confident in our guidance of positive North America comps for the quarter. Great. Thank you very much. Thank you. Thank you. And our next question comes from the line of Ike Boruchow of Wells Fargo. Your line is now open. Hi, everyone. Good morning. Thanks for taking my question. Good morning, Ike. So I guess Bob took sales, I'll take margin. So I just wanted to dig into the fiscal 2017 margin comment about 20% for the Coach brand. So that's pretty impressive step up from what looks like will be something around 17% to 18% this year. Can you just kind of walk us through the drivers there maybe bucket the biggest opportunities as you see it? And conversely, what do you think are the biggest headwinds you face on the margin front as you get into next fiscal year? Sure. As we've stated, our operating margin guidance for fiscal FY 2017 is really premised on the return to growth in line with the category of the Coach brand. We now expect the category to be in the low to mid single digit range, a very stable gross margin on a constant currency basis of 69% to 70%, so stable gross margin, top line growth and then we'll leverage SG and A to get to the operating margin expansion. That leverage of SG and A fully incorporates what we called out in our original transformation plan, which was the restructuring that we will conclude with this fiscal year and a small benefit from the operational efficiency initiatives that we announced today. Great. Thanks. Thank you. Thank you very much. Our next question comes from the line of David Schick of Consumer Edge Research. Your line is now open. David? Can you hear me? Yes. Okay. Sorry about that. Thanks. New phones. So I'll go back to sales on a longer term basis. You talked about e commerce impacting the comp positively and also you talked about the net effects of the Chinese consumer in different markets. Could you talk about how you think about e commerce impacting your comp over the long term going forward? And again, sort of on a net basis, what's the right way to think about the longer term trend in the Chinese tourist impacting all these different markets? Sure. In terms of e comm, we have now of course anniversaried all of the EOS pullback. So we would expect it to grow at least in line with what is happening in our store network. Of course, look, the consumers are continuing to shift online. So I would not be surprised if it is growing at a slightly faster pace than the store network from here on out now that we have comped all of the pullback. In terms of the Chinese consumer and the excitement, look, 1st and foremost, the long term opportunity with the Chinese consumer is as present as ever. I could not be more excited about what we're seeing in terms of even government policy still focused on domestic consumption. Continue to develop in the mainland, which is obviously helping domestic consumption as well, as well as the continued traction that our team is driving for the brand there. And it's absolutely vital, of course, because relevance on the mainland will mean relevance wherever the Chinese consumer chooses to shop as they travel globally. Today, what we are seeing most recently, as I mentioned earlier, is of course the impact of the terrorist attacks in France and specifically in Paris having a direct negative impact on Chinese tourist flows there. We're seeing slightly negative flows here into the U. S. As well of course as continued negative flows into Hong Kong and Macau. That is one area where we thought in the Q4 we would have seen now ourselves comping the fall from last year and we have not. And but that's more than being offset by the very strong growth that we've continued to see in Japan, Korea and increasingly in Southeast Asia. And although many of those markets are distributor run, we're very excited by what we're seeing in Thailand and in Australia as well. Thanks so much. Thank you, David. Thank you very much. Our next question comes from the line of Erinn Murphy of Piper Jaffray. Your line is now open. Great. Thanks. Good morning. I wanted to focus on the outlets actually. I realize they're lagging the full price and that's in part on plan. But maybe speak a little bit more about some of the initiatives you're working on to close the gap in performance between Full Price and Full Price, whether you can expound upon the upcoming vignettes that you have in this channel and then any tweaks that you're making now to the remodel strategies you've gone deeper into that? Thank you. Sure. We'll let Andre answer that for you. Sure. Good morning. Well, first, let me start by saying that both channels actually improved on a similar rate sequentially. So we're pleased with the performance both in retail and in outlet. We'd always said that retail was going to lead. So the retail performance in absolute terms is slightly ahead of outlet. Basically, a couple of main areas we've been working on in outlets specifically. 1 is design and innovation. We realized through the vignette, I think Victor mentioned in his prepared remarks on Snoopy, that when you've got real innovation and emotion, it trumps price. It was successful and it's something that we're planning to replicate over the next few quarters, both in terms of these one off sort of we call them play concepts and more generally in terms of putting more design and innovation in the outlet channel. In terms of the modern luxury renovations, they've not been as successful as in retail. We've not moved the needle that much. That said, we've got a number of learnings that we're currently addressing. We've used our Woodbury Commons store as a pilot, where we've done things such as moving product, more products to the floor. We realize that when there's too much product on the wall, not enough on the floor, it affects and feeds conversion. We've fragmented the store a bit too much, so you don't get a sort of 360 view when you enter the store, etcetera. So, loads of small operational improvements. The positive news is that in Woodbury, when we started these tweaks about 2 or 3 months ago, we have seen an improvement in the controllable metrics conversion and ADT. So good learnings, and we're going to keep implementing them throughout the chain. Great. Thanks, and best of luck. Thank you, Eric. Thank you, Eric. Thank you very much. Our next question comes from the line of Randy Konik of Jefferies. Your line is now open. Yes, thanks a lot. I guess just back on the outlets, you've done a great job in the full price channel, getting rid of those promotions and moving to a more full priced higher average ticket business. You talked a little bit about just a little bit about the increased promotions in outlet and wholesale. Can you give us some perspective on what inning we're in there, where you can potentially maybe walk a little away from those promotions? And just a little more flavor there would be very helpful. Thank you. I'll let Andre start with outlets, and then I'll take the wholesale channel. Sure. So we've certainly seen the environment become more competitive in outlet generally over the last couple of quarters, traffic has continued to drop and competitive intensity has increased. So we have been pragmatic in dealing with that. We've been promotional where we had to be. We pulled back where we could. Going forward, again, the plan is to innovate more, so just have a high consensus of newness, innovation and more emotional play concepts to offset the price pressures we've seen over the last couple of quarters. In terms of the wholesale channel, look, I think all of you who travel to the department store world where we're present here in North America, obviously very aware of the environment. You may also follow a lot of the brand trackers that are out there in terms of sales to understand what is happening with promotions and AUR in that channel. And I would say that we're in the very early innings there of our transformation. As many of you know, we've invested now in and I just mentioned in my prepared remarks in 12 locations in the new concept. That's out of 1,000 that we have across North America. We're investing in the shop manager program for the top 50 locations by the end of this fiscal year. And in both of those cases, we are seeing an inflection versus the rest of the fleet. In addition, of course, we have made very significant progress in our penetration with the Tier 1 department stores with 1941, while also pulling back on those coach specific promotional days. Irrespective of all of that, the absolute number of chain wide sale days continues to be an issue in that channel. And we continue as a team to have discussions with our partners about a couple of issues a couple of areas. 1, 1st and foremost is the potential for the pullback on our promotions, which would include our exclusion and cooperation with our partners from the bulk of store wide events. And quite frankly, we're also looking at potentially exiting lower volume doors go forward. So these are considerations that we're taking right now. Helpful. Thank you. Thank you very much. Our next question comes from the line of Oliver Chen of Cowen and Company. Your line is now open. Thanks. Solid results, particularly in international. Regarding inventories, our question is regarding inventories and what are the thoughts regarding the next few quarters in holiday in terms of the context of this handbag sector and the promotional environment and also in context of how you're thinking about how your bucket prices with the 300 below versus the above 400 mix? Thanks. I'll let Andre start with 1st and foremost the bucketing strategy and dealing with seasonality in that area and then Jane will take total inventories. Yes. So as you know, in for Q2, our holiday quarter, we had beefed up our gifting assortment to be able to just offer a wider range of prices, and that strategy worked well. Coming out of Q2, we focused on our elevation strategy with 1941 launching across the bulk of the chain. We've seen a significant improvement in our $400 and above price point. It's now 40% of the business. Overall, our AURs for handbags have hit actually a record high, dollars 300 That's the highest we've been in handbags since fiscal 'nine. So the elevation strategy is working. Obviously, as we get into the more holiday periods, we will flex with, again, a wider gifting assortment at a wider range of price points. Oliver, as you look at inventory, we as has been our case, we always look to match inventory roughly in line with our sales growth outlets. So I think you'll start to see inventory some very modest growth in the 4th quarter and moving into FY 2017, but very much in line with our sales outlook and expectations. Thank you. Best regards. Thank you, Oliver. Thank you very much. Our next question comes from the line of Michael Binetti of UBS. Your line is now open. Hey, thanks guys. Congrats on a nice quarter. Thank you. I know there's been a few questions on the outlets. If I could just I guess if I'm just thinking a little bit more broadly about North America brand sales, as we think about your guidance next year, Jane, for low to mid single digit North America comp growth, roughly in line with category. I guess by channel, you sound clearly more comfortable with the sustainability of what you're seeing in Full Price. Do the outlets in your mind need to be positive to deliver that kind of low to mid singles on a sustainable basis for the blended comp? And if so, maybe just a few comments on what you're seeing that gives you confidence that that outlet channel contributes at the positive level into next year? So if I could just want to clarify that our guidance, just to be specific, is for North America will be our growth in globally in line with the category, which we now see to be low to mid single digits. As is our custom, we'll come back with more specific guidance in Q4. But what we've seen is a sequential improvement in both channels. They improved this quarter similarly, and we would expect to see continued improvement as we move into FY 2017. Okay. Thank you. Thank you very much. And our next question comes from the line of Anna Andreeva of Oppenheimer. Your line is now open. Great. Thanks. Good morning and congratulations to the team. Thank you. We were hoping to talk about the initial CapEx expectations in 2017. As the headquarter investment rolls off, should we think about the free cash flow generation in the business? And as we think about priorities for cash, could we, I guess, expect a dividend increase as net income is inflecting now? And just quickly follow-up on what sounds like positive quarter to date comp, are you seeing improvement in the outlet channel as well? Thanks so much. So why don't I take the cash flow and dividend and then I'll turn it over to Andre on the outlet channel. So as our net income grows and we complete the building the build out of our headquarter building, you will see a corresponding cash flow growth as we move into FY 2017 as expected. Our dividend is really a part of our priorities for cash. And our priorities for cash are really unchanged. 1st and foremost, investing in the organic growth of our business. 2nd priority being M and A, value creating acquisitions. As I said, nothing imminent, but we want to remain open and flexible should we find something that we believe will create long term value for Coach, Inc. And our shareholders. And then finally is the return of capital to shareholders with our commitment to the dividend. We look at our dividend annually with our Board in August as we talked about in April 2014. We look at we'll look at the dividend in August. That coincides with our year end results and our outlook for the following year and make a determination at that time. In terms of just the Q4, we're, look, we're on plan. We're still working towards a positive comp for the quarter. We've seen all the indicators that we saw at the end of the third quarter is still maintaining their momentum, and we're on plan. I'm not sure what more I can say at this point, but Thank you. That will conclude our Q and A as we're now past 9:30 and the market has opened. I will turn it over to Victor for some concluding remarks. Victor? Thank you, Andrea. Let me just thank everybody for joining us. A very important quarter for us this past Q3 as it marks the return to growth for the Coach brand. I could not be more excited with the momentum in our business. And as a team, we're obviously very proud of the evolving perception, not only of the Coach brand, but of Coach Inc. And our impact in the marketplace. The positive impact of our brand transformation augmented by of course Stuart Weitzman is clearly reflected in the overall financial performance with a terrific inflection across all of our key metrics with sales, profit and earnings growth for the first time since the Q4 of 2013. The turnaround, of course, that we've achieved today underscores our confidence in driving sustainable and profitable growth for Coach Inc. Over the long term. And I could not be prouder of our entire team for the work and commitment that they have put into driving our brand and the passion that they are showing to win in the marketplace. Thank you all. This does conclude today, the Coach earnings conference. We thank you for your participation.