Earnings Call: Q3 2015

Apr 28, 2015

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 the Global Head of Investor Relations and Corporate Communications at Coach, Andrea Shaw Resnick. Good morning, and thank you for joining us. With me today to discuss our quarterly results are Victor Luis, COSI's Chief Executive Officer and Jamie Nelson, COSI'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 year. These statements are based upon a number of continuing assumptions. These results may differ materially from our December 27, 2014, and our other filings with the Securities and Exchange Commission for a complete list of risks and important factors. Also, please may not be indicative of future performance. Now let me outline the speakers' topics for this conference call. This in the week 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 to speak to help our financial and operational results for the quarter and our outlook for the balance of the fiscal year. Following that, we will hold a question and answer session. The Q and A session will end shortly before 9:30 a. M. We will then conclude with a brief summary of comments. I would now like to introduce Mr. Luis Cote, CEO. Good morning. Thanks, Andrea, and welcome, everyone. As noted in our press release, our Q3 results were in line with our expectations and annual guidance, adjusted for the stronger than expected dollar. We continue to see steady progress in our results with sequential improvement in our bricks and mortar stores in North America as we continue to make strides against our brand transformation agenda, including greatly reduced promotional impressions. International growth rates remained fairly stable, up mid single digits in local currency with China and Europe driving overall performance and offsetting the difficult compares in Japan this quarter as we were up against the pull forward in advance of the tax hike affected on April 1, 2014. Overall, we are pleased with our team's execution as we continue to gain traction on the strategic plan to reinvigorate growth and drive the Coach brand growth. In the weeks ahead, we look forward to completing the acquisition of Stuart Weitzman, which we announced last quarter, a luxury footwear brand that we believe has significant domestic and international growth potential. As noted previously, we will develop each brand separately. Over the longer term, we will learn from each other, driving synergies across our respective businesses. Specifically, we will leverage Coach's international infrastructure and expertise in handbags and accessories to develop Stuart Weitzman's handbags and accessories business. And in turn, Coach will benefit from the Stuart Weitzman team's expertise in footwear development, where they're proven leaders in fashion and fit. As we prepare for the integration of Stuart Weitzman, we have renewed Coach's women's footwear license with Gym Lock for the next 2 years. This will allow us to develop the multi brand infrastructure and systems necessary to bring the the and agreement with Inter Parfums upon expiration of our license agreement with Estee Lauder and expect to launch our first scent with our new partner in the fall of 2016. Before we get into a discussion of the quarter and our progress on Coach's transformation, I wanted to briefly touch on our global pricing strategy since the topic has become a focus for our peer group given the volatility in global currencies. Our pricing strategy has always been to provide exceptional value in local currencies to our global customers. We aim to be approximately 40% to 60% below our traditional luxury competitors. And at this time, we do not have plans to change Coach will continue to deliver on this modern luxury proposition, offering superb handcrafted products and superior customer service and image enhancing locations. Given our high level of fashion innovation, we price our products each season and always consider exchange rates at product launches, while taking into account the pricing structure of both domestic and international brands in each market. Now, as we've been doing since we unveiled our playbook last June, I thought we would share some of the actions we've taken in keeping with our plan, as well as our updated learnings and results across the 3 brand pillars. Starting with product. Stuart Beavis' designs represented virtually all of our retail stores women's offering during the Q3, led by our key silhouette swagger available in a number of sizes, colors and novelty including patches. In our outlet stores globally, Steward's impact was also noticeable for the first time with new group set collections, including Mickey, Ruby and Morgan complementing Phoebe, and Kalsi previous retail favorites. Margo, his first outlet design introduced for fall continued to be strong. Stewart's product represented about a third of our outlet stores women's assortment during the Q3. Most generally, our approach of providing value through product elevation has continued, putting more make and quality in the product has been very well received by outlook customers globally, giving us confidence in our long term direction to drive relevance across all channels. In addition, we held our 3rd New York Fashion Week presentation in February, showing our fall 2015 collection and once again garnered overwhelmingly positive reviews from both the editorial and retail communities. Following the fall 2015 presentation, we generated about 100 and 93,000,000 lifetime impressions in the market, up approximately 50% from our presentation of spring 2015 in September. And as the editorial community and fashion press has continued to react positively to our brands, we are also seeing continued progress with consumers. Our quarterly North America brand tracking survey, Theo visited in March, showed further improvement among category drivers that coaches perceived as less promotional, while our brand affinity remains strong overall. In our Q3, we continue to reaffirm that fashion was supported by marketing, drive high sell throughs as has been the case with the great success we have experienced with Swagger. On stores, during the quarter, we continue to renovate and open new stores globally in our modern luxury concept. By quarter end, we had 40 that reflected the new design, including our 1st modern luxury outlet stores in Asia. Naturally, we are adjusting the level of investment and renovation to the market, running the gamut from light touch warm ups to complete rebuilds, but always ensuring that we are differentiated from the competitive landscape in an authentic Coach way. The 4 North American stores reopened in November continued to post positive comps and well outpaced the balance of change. I will shortly touch more on the newer renovations in our discussion of the domestic business. Internationally, we have seen significant inflections virtually across the board following renovation from flagships in Taipei in London to our outlet in Yeoju, Korea. During the quarter, we conducted a modern luxury store intercept and shop alone survey in both the U. S. And Japan with over 100 customers in each market. We found that 1, customers are reacting very positively to the new environment as about 75% of those interviewed said that the modern luxury store makes them want to shop at Coach more often. And 2, our modern luxury stores are resonating with customers as sophisticated, luxurious, comfortable and inviting across both markets. This new store environment is especially appealing to the category drivers who found the store fresh, elegant and having a more elevated feel. As we continue to negotiate temporary locations with landlords for directly operated stores, work with our international wholesale partners for appropriate spaces and co tenancies and work through lease negotiation, a number of projects have now shifted into FY 'sixteen. Specifically, while our North America projects about 70 renovations and 5 new stores are on plan, approximately 50 international renovations and 10 new international stores have moved into fiscal 2016. We are now targeting about 1 100 global renovations in fiscal year 'fifteen and to open about 40 to 50 new stores globally in this concept for a total of 140 to 150. As expected, this means we will have a very back loaded year in terms of store investments with approximately 75 renovations and about 25 to 35 new openings this quarter. Through the Q3, we closed 56 North American retail locations, most in January, as mentioned on our last earnings call, and we're on track to close approximately 70 for the full year. In addition, we closed 13 outlet stores through the Q3, including 10 men's only outlet locations, which we folded into existing stores, leveraging the team and cross shopping opportunity. And as noted on our last call, we also closed the 2 outlet stores identified as a part of our learning agenda at the end of January. In North American department stores, we have already completed well over 200 projects over the 1st 9 months, mostly installing open cell environments and replacing the old case lines and have seen an improvement versus the balance of doors. We still expect to convert over 300 total locations from Capeline presentation to open sell this fiscal year. We are also on target with the shop manager program in the wholesale channel with approximately 30 managers in key doors today with the goal of adding an additional 20 shop managers by the end of fiscal 2015. We are taking the learnings from our successful new stores and are using them to inform the development of the modern luxury concept for other channels. As noted, our first outlet stores have opened internationally during the Q3. And just about 2 weeks ago, we opened our 1st new modern luxury outlet store in North America, Savannah, Georgia. We are also working on both the wholesale store and travel retail concept and have done our first set of warm up stores that are not getting the full expression of modern luxury. On the marketing and customer experience front, continuing with our comprehensive marketing strategy, recording artist, Kid Cudi. Together, they brought a more relatable and understandable approach to the campaign. We supported our Coach Swagger bag with a compelling and holistic global print and digital campaign, including our viral Once Your Swagger, driving over 250,000,000 impressions, traffic and sales. Earlier this month, we garnered over 100,000,000 impressions during the Coachella Music Festival with our Coach Backstage concert attended by global celebrities. We also saw increases in editorial mentions in all 3 major markets: North America, Japan and China, while our editorial rank rose in North America and Japan, while holding in China. And as we increased our positive brand impressions, we've also continued to pull back on our North American promotional activity. Consistent with our previously announced strategy, during the spring quarter, we held only one invitation only customer event in mid March around spring break. We also reduced the cadence of EOS flash sales from 3 a week last year to about 2 a month this quarter, thereby meeting our goal to be down to about 2 events per month by the end of the fiscal year. In addition, there were no close days in North American department stores during the Q3 as compared to an average of approximately 30 days across wholesale accounts in the Q3 of 2014. So while much of our journey remains in front of us, we are very pleased with what we've accomplished thus far in FY 'fifteen, and we'll continue to update you on these initiatives as we move forward. Turning to the results of last quarter, some key financials were. 1st, net sales on a reported basis totaled 9 $29,000,000 versus $1,100,000,000 a year ago, a decrease of 15%, including a 3% negative impact of currency. 2nd, earnings per share totaled $0.36 excluding transformation related charges as compared to $0.68 in the prior year's Q3. 3rd, international sales increased 4% on a constant currency basis and decreased 3% in dollars to $428,000,000 from $441,000,000 last year. China sales rose 10% in constant currency and 8% in dollars with positive comparable store sales, while sales in our directly operated locations in Asia and Europe rose in constant currency as well. In 4th, North American sales fell 24% to 493,000,000 dollars from $648,000,000 last year on a 23% comparable store sales decrease as expected given the further reduction of EOS sales. During the quarter, looking at distribution and consistent with our annual guidance, there was a significant decline in our global directly operated door comp, reflective of our North America retail store closures, the majority of which as planned fell in January. In total, our global location count was down 48, including a net decline of 54 in North America, 2 net closures in Japan, 4 net openings in Mainland China and 4 net openings in the rest of Asia. As you know, we are primarily focused on replatforming our stores, elevating brand perception, optimizing our store fleet and opening new locations selectively in key markets. Moving on to sales by channel and geography, starting with our domestic businesses. Our total revenues in North America declined 24% for the quarter, with our directly operated businesses down 23%. As noted, total Q3 same store sales declined 23% with a further reduction in EOS events to twice monthly, pressuring total comp by about 11 percentage points as store comps declined 12%, a sequential improvement from the 16 percent increase posted in Q2 and 19% decrease in Q1. As expected in department stores, our sales trends at POS were well below the company's directly operated stores, reflecting both the elimination of Coach Days, as I mentioned, and the heightened promotional activity in the category. Shipments into the channel declined to a somewhat greater degree than POS sales. It's worth reiterating that while we've been pleased with the relative outperformance of the locations we've converted to open sub, these were amongst our smallest stores and therefore haven't provided a significant overall contribution. We expect the Q4 will remain challenging at POS in this channel given the planned decrease in year over year promotional activity for the spring season. Overall, we estimate that the North American premium women and handbag accessories market rose at a mid single digit rate in the March quarter, showing a slight moderation from recent trends, while the overall growth reflects an ongoing benefit from the secular shift into accessories from apparel. We continue to believe that the category will grow at about a 7% compound annual growth rate over in horizon. Turning to men's, which represents 18% of the global category spend or about $7,000,000,000 today. As we discussed, we're also continuing to drive our men's business globally, primarily through new dual gender stores. In the Q3, Coach's global sales of men's bags and accessories were up slightly, impacted by the weekend and the pull back up promotion and EOS in North America. That pack and our new Hudson bag with the modern business sensibility have been particularly strong. And as noted on our last call, we were delighted with the response to Stewart's first men's lifestyle presentation during Fashion Week at London Collection Men in January and look forward to his collection arriving in stores this fall. Therefore, looking ahead, we remain bullish about the prospects for our global men's business and are continuing to target $1,000,000,000 in sales in calendar 2017. Before we discuss international sales, I wanted to provide some more insight into our North American business and third quarter results. In aggregate and as planned, our total store comp was down low double digits at negative 12%, with higher ticket offset by a decline in traffic, which was pressured by the overall weak mall trends as well as lower conversion, which was greatly impacted by the reduction in promotion days in our retail and wholesale channels. Our total comp was pressured an additional 11 points by EOS as we pulled back from 3 flash sale events a week in last year's Q3 to about 2 events a month this spring. Looking at results sequentially, average transaction size in both channels rose and was the primary driver of the 4 point comp improvement in bricks and mortar stores as elevated fashion and compelling novelty drove improved handbag performance. And while mall traffic continued its secular decline during the spring as measured by shopper traffic, we did see a relative sequential improvement in our traffic from the holiday quarter despite the weather. Meaning, while still a drag to our overall comparable store sales, it was less onerous than in the 2nd quarter. Conversion impacted by the pullback in promotional activity continued to be pressured as expected. And those who did not have any additional North America stores in our new concept open for the quarter, the 4 stores renovated and reopened during the holiday Time Warner, Rodeo Drive, Fashion Valley and Man Access continue to comp very positively individually and in aggregate well above the balance of the retail fleet. Over the last few weeks beginning in mid March, we did complete several renovations of Barron's scope from warm ups to more significant upgrades on 13 retail locations and also opened our 1st new modern luxury stores in San Juan, our only retail opening in FY 'fifteen. While early days for these locations, we're pleased with initial performance. By the end of the fiscal year, we expect to have completed about 35 additional renovations. We also continue to see relative outperformance in the 12 MSAs in North America where we are most focused and where we are distorting our attention. I know many of you are also interested to hear about the impact of those 56 retail store closures on revenues and in turn sales transfer to the existing fleet. As a reminder, and as noted in our Analyst Day presentation last June, these were the least productive stores in our fleet. So their impact to overall revenues and operating income is very small. Similarly, the sales transfer and impacts the comp in those markets where other retail stores were present was also expected to be small. Since January, when the bulk of these stores closed, the results have been inconsistent across markets. In some cases, such as Miami and New Jersey and also Southern California, we have seen a lift, notably in traffic. In other areas such as Chicago, we haven't seen any change yet. Given the short time period since our closures, we will continue to monitor results. We are also working on specific actions to steer and guide customers to other doors in their respective markets. As mentioned, we also closed 10 men's outlet stores, which were successfully folded into women's location in the same mall, as well as 2 core outlet stores as part of our learning agenda originally discussed at our Analyst Day. These closures both in January were executed to better understand crossover between outlet and retail stores as well as our ability to influence purchase behavior. While very early days, thus far, we have not seen any transfer from outlets to retail stores in these markets. At this early stage, it appears that customers are dedicated to their channel and mall, and there is little transfer even to other outlets if we close the customers' primary store. Of course, we will continue to monitor these shoppers over the longer time period to see if these very early takeaways remain valid. Drilling down a bit more on our retail performance. While we've now anniversaried the tighter assortment of handbags, we continue to see absolute strength in our elevated products. More generally, the above $400 price bucket grew in penetration, saw another positive comp and continued to represent over 30% of handbag sales versus roughly 23% last year. More broadly, leather continues to outpace logo across all channels and we are designing into this trend. It's both a shift that favors Coach longer term given our heritage in leather goods and elevates our impression in the marketplace. In the 3rd quarter, logo across all categories represented less than 5% of retail sales compared to less than 10% a year ago. And in outlet was down below 30% versus 40%. Importantly, this trend has also resulted in significant increases in average handbag price points for traditional luxury brands. Due to their previous reliance on vinylized canvas and or jacquard fabrication and the necessity to pass on increased cost of using leather to their consumers, thereby creating additional white space in the market in a further widening in our relative price points and value perception. Outside of handbags, we continue to see relative strength in our lifestyle categories in the Q3. Women's footwear again increased its penetration from last year's level of about 8%, growing to about 10 percent of North America retail sales in those stores carrying a full offering. Men's footwear introduced last fall was also well received in retail stores. In addition, we are seeing a positive response to our expanded men's and women's footwear assortment and outlet stores. In total, we saw a significant increase in footwear sales across all directly operated channels in North America. In outlets, where the overall environment continues to be very promotional, the customer responded to the storytelling presentation throughout the store, along with supporting email campaign. Neon was a great example of this in March. As mentioned, we just opened our first modern luxury outlet store in North America in Savannah, where customers have been surprised and delighted by the elevated environment. As I've already talked to the global learnings around products, stores and marketing in my opening, I'll move on to our 4th quarter initiatives. We are very excited about the arrival of Colorburst which will be our Mother's Day key item and our festival style featuring plain stitch patterns across multiple silhouettes and retail stores globally. For Mother's Day, we brought back our hashtag my first coach social media and digital campaign, celebrating your first coach in life, your mom. In June, we have a new story to turn locked high in tote, shoulder bag and rub stack shapes. In outlet, our integrated Mother's Day floor set highlights our pretty pink floral. In June, we'll bring in a new Americana floral print available in the Tote transaction. As discussed during Analyst Day and subsequent calls, our approach to customer events formerly known as PCE are far fewer number annually, about 3, focusing specifically on our best customers during key holiday periods, such as our Black Friday event during the holiday and our spring break event in March. We expect to hold one event in the Q4 around Mother's Day, taking us to 3 for the year as planned. We are being far more tailored in our segmentation, selectively extending invitation. Separately, with 2 semiannual sales not under our belt, we will continue this practice moving forward with our next event scheduled to begin around Memorial Day and end shortly after July 4, taking advantage of the higher traffic during these holidays. This approach will support sustained sales growth and build our brand, reinforcing our multi channel positioning. Overall, we are pleased with the steps we've taken to reposition Coach, notably in the North American women's business, adding more emotion and excitement to the product offering and around our brand. Turning now to our international segment, which represents about a third of Cogent's business. Sales rose 4% on a constant currency basis in the 3rd quarter, but declined 3% on a reported basis, impacted by the stronger dollar. As mentioned, China sales rose 10% from the prior year in constant currency and 8% in dollars with positive comparable store sales and slower distribution growth in line with our forecast. We remain We remain optimistic on the prospects for this market over time as the long term drivers we've consistently mentioned remain intact, including a rapidly growing middle class, an overall shift from pure status to value as well as the recent anti corruption and anti extravagance campaigns favoring the affordable luxury segment and the evolving retail landscape with the development of new luxury shopping malls. While we are still targeting sales of $590,000,000 to $600,000,000 which now reflects the negative impact of the stronger dollar, we expect that there will likely be continued volatility in the near term due to both macro issues and geopolitical events, which are impacting trends in China and some key tourist markets. Consistent with our peers, we have seen continued and increasing traffic challenges in Hong Kong as new demonstrations have targeted cross border shoppers increasing key malls. We also experienced a pickup in Chinese tourist spending in Japan and Europe, especially around Chinese New Year aided by the compelling value the weaker yen and euro has provided to the Chinese shopper. At this point, our other Asia direct businesses outside of China and Japan, South Korea, Taiwan, Malaysia and Singapore posted positive aggregate growth in local currency. In Japan, we posted an 11% decrease in constant currency, somewhat better than expected as the difficult compare against last year's pre consumption tax pull forward and generally lackluster domestic spending was somewhat offset by the Chinese tourists, notably around Lunar New Year. Dollar sales declined 23%. In Europe, where our brand is small but growing rapidly, we generated significant double digit sales growth in the quarter, driven by both distribution and comp. We continue to believe that Europe represents a significant long term opportunity for Coach, both with domestic shoppers and the international tourists, notably in key European cities, where the affordable luxury segment is outperforming traditional luxury. We're maintaining our sales forecast for FY 'fifteen of about $90,000,000 and our goal to achieve over $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 over our planning horizon. Turning now to our global distribution plans. As they haven't changed materially from what we outlined on previous earnings calls, off the brief. We continue to expect that our square footage globally and across all channels will increase slightly in FY 'fifteen, reflecting our North American fleet optimization. Our overarching focus will be on renovation and remodels to drive productivity. To this point, and as guided previously in North America, our directly operated square footage will be down around 5%, given the 70 retail and 15 outlet closures, offset by a number of expansions within the context of our transformation and a number of outlet store openings. And in wholesale, as we noted, we're moving to more open, accessible displays and rolling out a shop manager program. We expect our footprint in department stores to increase slightly in FY 'fifteen. We plan to add about 30 locations, resulting in a low single digit increase in square footage, while converting about 300 locations from case line presentations to open cell. Turning to China, we are still planning to open about 20 stores and could have about 10 closures, resulting in about 10 net openings. While we expect to open a few stores in our other direct Asian markets outside of China and Japan in FY 'fifteen. Our portfolio approach is focused on renovating key impact doors with our new modern luxury concept in order to drive our brand transformation and maximize productivity gains with modest growth of our footprint. Turning to Japan. In FY 'fifteen, we continue to expect the total number of locations to remain the same with slight square footage growth from the new flagship and expansions of a few highly productive locations. Led by retail, our brand transformation plans in Japan focus on the renovation of key doors in Tokyo, representing over 70% of traffic in that metropolitan area by the end of FY 'sixteen, including the new flagship store in Shinjuku, which opened in October. We will also renovate key locations in important cities throughout the country, along with our flagship stores in Tokyo this summer. As a reminder, now that we have anniversaried last year's consumption tax increase, which was affected on April 1, 2014, we would expect to see a rebound in our 4th quarter. Of course, reported sales will be substantially lower given the yen weakness. Moving to Europe, we plan to add about 10 directly operated locations and more than 100 wholesale locations. Finally, and as we've expressed in the past, we also believe there is a significant opportunity for the Coach brands in global travel retail, which represents the majority of our international wholesale sales. At quarter end, we had a total of 215 international wholesale locations in 31 countries, which included 113 travel locations and expect to add about 25 net additional locations by year end. Now I'll ask Jane to provide some additional detail on our financial and outlook for the balance of the year. Jane? Thanks, Victor. Victor has just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our 3rd fiscal quarter results as well as our outlook for the 4th quarter. Our quarterly revenues declined 15% with North America down 24% and international down 3%. As noted, total sales would have been 3% higher, excluding the impact of currency, with international sales up 4% on a constant currency basis. Excluding transformation and other related charges, net income for the quarter totaled $100,000,000 dollars with earnings per diluted share of 0 point 3 $6 This compares to net income of $191,000,000 and earnings per diluted share of 0.68 dollars in the prior year's Q3. For the quarter, operating income totaled $146,000,000 on a non GAAP basis versus $253,000,000 last year, while operating margin was 15.8% versus 23.9%. During the quarter, gross profit totaled $665,000,000 as compared to 7.81 $1,000,000 a year ago, while gross margin was 71.6% versus 71.1 percent. As expected, gross margin benefited from the reduction in North American promotional activity and was helped by outperformance in Japan relative to our expectations. SG and A expenses as a percentage of net sales totaled 55.8% on a non GAAP basis compared to 47.2% in the year ago quarter. Absolute SG and A dollars were essentially flat to prior year and well below our expectations despite a $10,000,000 increase in marketing spend. There were 3 primary drivers in the variance to our forecast. 1st, our fleet had lower than expected depreciation and occupancy expense given the shift in timing of renovations and new store openings, notably flagship into FY 'sixteen. This will also impact our 4th quarter, which I'll speak to shortly. The second is currency, as SG and A costs in the quarter benefited from the impact of the stronger dollar. 3rd, restructuring savings, As we continue to capture savings related to our restructuring sooner than originally anticipated and now expect savings closer to $100,000,000 in FY 'fifteen. As I turn to GAAP metrics, let me recap key transformation and other related charges. With the realization of our restructuring savings, we now expect to incur pre tax charges in the $300,000,000 range associated with our transformation plan. $210,000,000 of this charge has been taken over the last 4 quarters. As previously announced, these charges, which will be largely completed by the end of FY '16 are related to inventory and fleet related costs, including impairments, accelerated depreciation and severance associated with store closures. In total, we now expect to capture about $100,000,000 in savings related to our transformation initiatives in fiscal 2015 and approximately $150,000,000 dollars in ongoing annual savings in fiscal year 2016. During the Q3 of FY 'fifteen, the company charges consisted primarily of accelerated depreciation for renovations, lease termination costs related to store closures and organizational efficiency costs. These actions increased the company's SG and A expenses by 23,000,000 dollars negatively impacting net income by $12,000,000 after tax or $0.04 per diluted share in the 3rd quarter. Therefore, during the 1st 5 months of fiscal 2015, the company's recorded total transformation related charges of $80,000,000 and acquisition related costs of approximately $4,000,000 These charges increased SG and A expenses by approximately $79,000,000 in total and cost of sales by $5,000,000 reducing net income by $56,000,000 after tax or $0.20 per diluted share for the current 9 month period. Moving on to the balance sheet. Inventory levels at quarter end were $457,000,000 down 22% from Q3 of FY '14. Cash and short term investments stood at $2,020,000,000 as compared to $775,000,000 a year ago. As expected during the quarter, we announced the closing of an underwritten public offering of 4.25 percent senior unsecured notes with an aggregate principal amount of $600,000,000 In addition, we amended our existing revolving credit facility to borrow up to $1,000,000,000 up from $700,000,000 previously. This amendment included the issuance of a 5 year senior unsecured $300,000,000 term loan. Therefore, in total, we had borrowings of approximately $900,000,000 outstanding as of the end of the 3rd quarter. As previously shared, expect to use these proceeds to cover our working capital needs in light of investments in our business, the acquisition of Stuart Weitzman and the new corporate headquarters. Net cash from operating activities in the Q3 was $167,000,000 compared to $105,000,000 last year during Q3. Free cash flow in the Q3 was an inflow of $122,000,000 versus $54,000,000 in the same period last year. Our CapEx spending was $45,000,000 versus $51,000,000 in the same quarter a year ago. Based on renovation and flagship project timing, we now expect CapEx for FY 'fifteen to be in the area of $275,000,000 to $300,000,000 excluding the cost associated with the new headquarter. The capital costs associated with our new headquarters are now expected to be approximately 15,000,000 in FY 'fifteen, driven by construction timing. And we are maintaining our current dividend at an annual rate of 1 $0.35 Before I discuss our financial outlook, I want to touch on the pending Stuart Weitzman acquisition. As Victor mentioned, the deal is on track to close next week. While I cannot provide more details at this time, as disclosed, we expect the Stuart Weitzman business to be accretive from year 1, exclusive of transaction related charges, including anticipated purchase accounting adjustments and contingent payments related to the transaction. We expect to use our cash to fund the purchase price. Also, keep in mind that outlook for the balance of the year excludes the impact of Stuart license, consistent with our previous guidance. Next quarter, post deal flow, we will be in a position to provide details on the acquisitions impact on 4th quarter results in addition to providing fiscal 2016 guidance for both Coach and the Stuart Weitzman brand. Turning now to our financial outlook for FY 'fifteen. Overall, our annual guidance has not changed for FY 'fifteen, although the noted project shifts and stronger dollar will impact reported sales and SG and A dollar spend. 1st on sales. We still expect to deliver a low double digit decline in constant currency in fiscal 2015. Given the strength of the dollar, we continue to expect sales to be down more on a reported basis. Overall, for FY 'fifteen, we expect continued pressure on sales due to our reduced promotions and store closure activities. This guidance assumes that 4th quarter sales will be down by similar levels as Q3 on both a constant currency and reported basis. In the Q4, we continue to expect an improvement in North America bricks and mortar comp despite the more difficult comparison. Our EOS pullback will pressure total North American comp by about 10 points. Coach Japan is expected to post positive growth in constant currency, benefiting from the lapping of consumption tax increase and higher PRC tourist flows. However, we do expect softness in the rest of Asia, specifically in Hong Kong and Macau based upon deteriorating conditions as has been noted in recent weeks. Keep in mind that in last year's Q4, we reported an increase in disposition sales, which we will not anniversary given our current and clean inventory position. Gross margin is still projected to be in the 69% to 70% range for the year, reflecting our usual seasonality between the 3rd and 4th quarters, with higher sourcing costs largely be similar to the prior year. SG and A expenses are now expected to be slightly below prior year, reflective of our increased marketing spend and transformation initiatives, offset by shifts in fleet actions, currency and the faster realization of savings than anticipated. Therefore, we expect SG and A A operating margins to be in the high teens for the year. Finally, our tax rate is still expected to be in the area of 32% for the year, so there may be some variability in the Q4. In closing, I would like to reiterate Victor's earlier remarks. We laid out a very clear plan last summer and its execution is well underway. You heard this morning about our brand transformation progress around product, stores and marketing as well as our key learnings and takeaways. And I will add that we are also on track from an investment and restructuring perspective. We've taken the majority of our total expected transformation related charges over the last 4 quarters, including rightsizing our inventory levels. Replatforming our stores and wholesale doors and are on track to spend about $570,000,000 over the next 3 years, though the timing of some projects have moved from FY 2015 as noted. We've begun to 'sixteen with FY 2017 being the year where we return to growth in line with the categories. We have the resources to fund our plan while maintaining our dividend during our heavy investment period. Ultimately, our objective is to restore Coach to a place of best in class profitability and sustainable growth. I'd now like to open it up to Q and A. Thank you. We will now begin the question and answer The first question today is from Bob Drbul with Nomura. Hi, good morning. Good morning, Bob. Hi, Bob. I guess the question that I have is, this was think, the Q1 with some of the newer products in the outlet business in North America. So can you just elaborate a little bit more what's going on in the outlet business? Did it in fact show sequential improvement from the Q2? Sure, Bob. The short answer is yes, it did. And as we've been very consistent in communicating, we really believe that transformation is about touching all of the consumer touch points, product, stores and marketing and doing so across all three channels, our full price channel, wholesale and outlet. And even if we do believe that, of course, the full price channel will lead, we've been focused on the outlet channel, as you mentioned, with approximately one third of the product in the outlet channel last quarter having been Stuart's designs. Specifically, we launched a collection called Margo in Q2, which in Q3 was joined as I shared in my notes by Mickey, Ruby and Morgan and we're very pleased with the performance there. And I would say most generally our approach in product is just providing value by putting a lot more make and quality into product has been incredibly well received and we've seen that in a very strong increase in our ADTs. In terms of the stores, I mentioned in our notes, we just recently a few weeks ago opened up our 1st modern luxury concept store in Savannah, Georgia. That is a new store. Many of you have seen our previous concept, most recently perhaps in Cabazon, which is our Deer Park concept. And I think that once you see the Modern Luxury outlet stores, you'll understand why we're really excited about this next evolution and certainly seeing that in Savannah, where the very initial results have been beyond our own expectations. And lastly, on the marketing front, while we don't outwardly, of course, market to the outlet consumer through advertising or social media or any other means, we do through direct email and of course, most importantly through our in store customer experience, visual merchandising and our windows. And there we're making great strides as well and continuing to elevate that experience as well. Great. Thank you very much. Thank you. The next question is from Matthew Boss with JP Morgan. Hey, good morning. So could you just help walk us through the bridge in your store comp between today and then your expectation for the return to growth at some point next year? Basis? From a promotional basis in terms of being apples to apples, it's really looking towards July. Once we get beyond, of course, our seasonal clearance, which we will have comped this past year as well as, of course, getting beyond the events. From a Q3 of 2016, we will be apples to apples on EOS, which of course we have reduced from what was in essence 3 a week now to as I mentioned on my call 2 per month on average. Okay. And then on the margin recovery, what type of sales recovery is needed to move EBIT margin, say back to mid-20s, which we saw only a few years back? And do we need to think about any kind of expense build next year given some of the it sounds like some of the store builds potentially shift into next year? Yes, Matthew, as we talked about in June when we laid out our long term transformation plan, We will right now in FY 2017, we'll return to growth in line with the category. And our guidance suggests that that's the point where we'll be back in that higher 20% margin range. As you look at FY 2016, what we've called out is that some of our store renovations and flagships have shifted into FY 2016. So that will put some SG and A pressure into FY 2016. Again, we're executing the plan as laid out. There's just a shift in timing here. Okay, great. Best of luck. Thank you. The next question is from Barbara Wyckoff with CLSA. Good morning, Barbara. Hi, everybody. Can you talk about the dynamic of the U. S. Full price stores versus outlet traffic conversions? You talked about ADT being up in outlets. What about the full price stores? And then maybe touch on the mix a little bit. How has it changed? Sure. Pretty much consistent with what we've been experiencing last quarter, Barbara, and what we shared, which is performance really been driven by ADT across both channels. Even if we have seen a sequential improvement in traffic from the Q2 to the Q3, it still remains a drag. Of course, in full price, that's very much also driven by the broader pressure that we have seen across malls. In terms of other news in the full price channel, very pleased still with the performance that we're seeing in the above $400 price bucket, which as I mentioned in my notes is now still hanging at above 30% penetration compared to the 23 percent last year. Good performance in our footwear business across all channels full price included. And of course beyond that driven by a reduction in conversion, which as we have consistently communicated is of course, the promotional cadence year on year. In the full price channel, once we get beyond semi annual sales, so into July, we'll be on a like for like comparison with promotions. So there we should see, of course, a change in those trends. All right. Are you thank you. Are you going to still be not participating and doing Coach Days in department stores or was that just a test for the spring season? No, that has been our strategy for the whole year and that is our strategy go forward. Thank you. Thank you. Thank you. The next question will be Joan Pason with Barclays. Hi, good morning. Good morning, Joan. Hi. So just in terms of some of the dynamics we've been seeing with tourist traffic in the U. S, could you just touch on if that affected comps at all in North America? And then also just in terms of the overall category growth comments you had in terms of mid single digit growth, it looks like Coach has now been more focused on basically product over $200 So are you seeing any differences in category trends in the over $200 versus under $200 segments? Sure. In terms of the tourist flows, we have not seen dramatic changes in our North American business. As I did mention in our notes, the major change in flows of what we're seeing, especially in terms of the PRC consumer are really within Asia with especially Tokyo, Seoul, Taipei picking up increased tourist flows at the expense of a reduction in Hong Kong and Macau for all of the reasons that most of you know of course with the geopolitical conditions there. In terms of the North American category, we have not seen a necessarily a slowdown in the below $200,000 an increase in above $200,000 We've been speaking very much to our own strategies and to, of course, our own individual performance. In general, the slight slowdown that we've talked about in the category has really been the expense of the larger brands in the space, which of course is driven in part by our own pull down in our promotional activities that we have mentioned very consistently. Great. Thank you. Thank you. Thank you. Our next question is from Ike Boruchow with Stern AG. Hi. Good morning, everyone. Thanks for taking my question. Good morning, Ike. Hi. Victor, I just wanted to ask a higher level question regarding your traffic and profitability within the full price channel, so excluding EOS. So you're doing a great job right now holding back from discounts and markdowns within your stores, but some of your bigger competitors are building larger clearance sections and going deeper on their sale merchandise. Is there a point where you need to evaluate your thought process around how you balance sales and margins? I guess, basically, does your customer need more value to come back into the store to get the traffic positive again is what I'm asking? Yes, of course, I mean in many ways that is job description for us and we have to obviously continue to evaluate what is happening across all channels. EOS does not really impact the full price business. It has been a flash sales model focused on our outlet consumer database only. And in the case of the full price channel and what we're seeing with the competitors and how promotional they may be either seasonally or openly, For us, it's really about continuing to improve our own product assortment and looking to balance price points across all of the price buckets. So rather than producing and introducing a product that say $300 or $400 and having it on sale constantly in the Pro Choice channel for $30 or $40 off, our preference is to give the consumer value by giving them and creating consumer trust by giving them a great product at a suggested retail price. And then at the end of the season, that product which doesn't perform as is the case with most fashion brands will go on sale. And then eventually if it doesn't sell there, of course, into our outlet channel. So our focus is really on getting the balance at full price within all of those buckets. We've seen that over the last quarter and communicated it specifically at gifting periods, and that is something that we are developing into. I would just add, Ike, that as we move to semi annual sale, one of the benefits that we saw is that it did pull new consumers into the store as we switched from PCs, which went to our loyal consumers to semiannual sale. We saw new consumers enter the store during that period, which was a benefit. Got it. Thanks so much. Thank you. The next question is from Anna Andreeva with Oppenheimer. Great. Thanks so much. Good morning. Good morning, Anna. A question on inventories, very tightly managed, down 23%. Do you think any of that possibly constrained top line in North America? And how do you feel about inventory content heading into the Q4? And just curious on the gross margin expectation for 4Q being flat, why couldn't we see upside upside to that given that you're pulling back on promotions pretty successfully? Thanks. Sure, Anna. Just as we sit today, we're very pleased with our inventories. I think we're well positioned. We feel that we're well positioned to support our sales plan as we move forward and as we move into the Q4. Our inventory is fresh and in great shape. So we feel good about where we're at. We made a commitment to manage our inventories tightly as we came out of our transformation, and that's what we did. On your question on gross margin in the 4th quarter, we're really executing against our strategy, and that is to put make in our product or value in our product, pull back on promotion and balance the headwinds that we're seeing in rising sourcing costs and FX. And that's what you'll see play out in the Q4 as it's played out all year. There'll be pushes and pulls. We expect a little bit more pressure from FX and we'll see our production variances move more in line with what we had in the first half, which is about 50 basis points of pressure. Even though it's after 9:30, operator, we'll take a couple of more questions understanding that our prepared remarks went a bit long. So you can continue to take Q and A. Thank you. The next question is from Oliver Chen with Cowen and Company. Thanks. Congrats on the progress of the brand management. Regarding Stuart and the outlet opportunity ahead, could you give us a yardstick from which he'll reach a half or three quarters? And then as we think about the metrics, is his main impact as he illustrates more progress in this assortment ticket or traffic or a combination of both? And then, Victor, I just had a question on the inventory composition with respect to the pricing spectrum. Are you happy with the freshness across your different price points including the access? Sure. Let me first touch on the inventory one and then I'll talk a little bit about outlet products from Stuart and how that flows in. On inventory, we're very happy both with the freshness of the inventory and with the sell throughs that we're seeing. We are really pleased with the product that we continue to launch in a full price channel. As I mentioned in my prepared remarks, especially what we're seeing with our new master style and swagger and some of those styles and certain fabrications were very much in chase mode and that is a collection that we will continue to develop into and have a lot of excitement and innovation that we're working into that line over the course of the next 12 months or so. In addition, we have been, as I mentioned in my reference to Ike continually in reference to Ike's question, continually developing into the key price buckets and functionalities. We have some key tote silhouettes coming out from June, another Keys carry off silhouette coming out in August and other smaller cross body, especially at shopper price points, but for the full price channel coming out throughout later in the fall and into spring and excuse me, into holiday and spring of next year. So very, very actively developing for balance across all price points. In terms of outlets and the continued rollout of Steward's product by fall and into holiday, the vast majority of outlet products will be new designs and even current designs that are there will get a certain fresh freshening up facelift, if you will, so that all products will have Stewart's influence in it. We're very pleased. And there again, our strategy continues to be to provide great value to the consumer at great price points, but certainly to continue to invest in giving the make and to continue to elevate the product. Thank you. Best regards. Thank you. Thank you. The next question is from Dana Telsey with Telsey Advisory Group. Good morning, everyone, and nice to see the improvement. I was in the Beverly Hills store last week, and I can tell you that it terrific. Thank you, Diane. As you think about the gross margin impact of fewer promotions versus higher leather goods, how should we because this is the first gross margin improvement we've seen in like 6 quarters. How should we see that gross margin continue to trend? And will more of the improvement come from the fewer promotions, higher leather goods? How are you seeing it? And are you seeing this penetration of product globally? Thank you. Thanks, Dana. So the way our strategy is to balance the pullback in promotions with the increased make that we're putting into the product. So that's sort of the strategy. We balance those 2. We have a very high gross margin. As we've called out through our transformation, we expect that to be in the 69% to 70% range. There'll be some pushes and takes in terms of sourcing costs and FX. But overall, we'll continue to have our tailwind benefit as international growth sets the growth pace and that will continue to be a tailwind for gross margin overall. But it's really balancing those 2 and managing the headwinds and tailwinds. Thank you. Thank you. Our final question today is from Erinn Murphy with Piper Jaffray. Great, thanks. Good morning. I just wanted to go back to your comments in the prepared script on higher promotional activity in the category. Are you seeing that across the board from your competitors? Is there a specific channel that that's showing up? And then in particular, and then if you take a step back, if the category remains increasingly promotional, are you worried about, kind of the timeline as you kind of work on improving your own promotional cadence and kind of elevating the product in terms of the turnaround? Thank you. Sure. Thanks, Erin. Yes, we have seen of course, the outlet channel by its very nature is a promotional channel. So there's nothing new there. It's always been promotional. And from our perspective there, the key is of course to engage and convert consumers step change that we're making across all of the consumer touch points in that channel with our new store concept, of course, most importantly, the new product, which is now across stores, as well as our new visual merchandising guidelines are proving to be the winning recipe there rather than providing further increased discounts at the moment. So very pleased there. In terms of the other channels, in our own full price channel in the shopping mall, I think there was some reference to some competitor brands potentially always being on sale. That is not our strategy. We both in our full price stores and in dotcom, we have the seasonal sales. We believe that that is the best way to build relationships with our consumers. In the case of the wholesale channel, we are not participating in our own coach days. And I believe that was the question asked earlier by Barbara in terms of coach only events. We've reduced those and that was a reduction of 30 this by 30 days compared to last year. Of course, there are other promotional days that are across the channel that we participate in to some extent, but wholesale is really it's 8% of our total business and we're really focused in driving the transformation plan for the strategy that we've laid out. Thank you. That concludes our Q and A. I will now turn it over to Victor for some concluding remarks. Thanks, Andrea. And I want to once again thank you all for following us and continuing to be on this transformation journey. As a team, we're incredibly encouraged by the positive signs that we're seeing in the execution of our strategies as we continue to drive 1st and foremost fashion relevance for the Coach brand as well as to differentiate it from the accessible luxury competition that has grown over the last 5 to 10 years. I want to recognize our entire Coach team for their commitment and most importantly for continuing to have the courage and the discipline to stay the course with our strategies, which are very much in the long term interest of our brand health and of our business. And I know that I speak for all of us at Coach as we prepare to welcome the Stuart Weitzman team to the Coach Inc. Family and looking up with great excitement to having them join us. So with that, I thank you all and look forward to seeing you over the course of the next few months. Thank you. Thank you. This does conclude the Coach earnings conference. We thank you for your participation.