Earnings Call: Q1 2015

Oct 28, 2014

Good day and welcome to List 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 at Coach, Andrea Shaw Resnick. Good morning and thank you for joining us. With me today to discuss our quarterly results are Victor Luis, Coach's Chief Executive Officer Francine DellaVadia, President, North America Retail and Jay Nielsen, Cocha'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. These results may differ materially from our current expectations based upon risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences, please refer to our latest Annual Report on Form 10 ks and our other filings with Securities and Exchange Commission for a complete list of risks and important factors. Also, please note that historical trends may not be indicative of future performance. Now let me outline the speakers and topics for this conference call. Victor Luis will provide an overall summary of our first fiscal quarter 2015 results and will also discuss our progress on global initiatives. Francine DellaVadia will speak to our North America business, product performance and review our key programs for the holiday season. Jay Nielsen will conclude with details on financial and operational results for the quarter and our outlook. Following that, we will hold a question and answer session. The Q and A session will end shortly before 9:30 am. We will then conclude with some brief summary comments. I'd now like to introduce Victor Luis, Coach's CEO. Good morning. Thanks, Andrea, and welcome, everyone. As noted in our press release, our first quarter results were in line with expectations and our annual guidance, as continued international growth was offset by our North American handbag business, where we have strategically reduced promotional events. Importantly, we made progress on transformation plan outlined during our Analyst and Investor Day this summer to address brand challenges and bring greater fashion relevance to Coach across the 3 pillars of product, stores and marketing. The launch of Stuart Viver's first collection in September was a significant milestone in this journey and we look forward to building on our early success over the upcoming seasons. While we recognize that many of our initiatives will take time to be evidenced in our financial results, our performance to date has been unplanned and we are confident that we have the creative direction, team and resources to execute our brand transformation. Before we get into the details of the quarter and as promised, I thought we would share some of the actions we've taken in just the last 3 months. Starting with product. As mentioned, we launched fall 2014 collection in retail stores globally on September 12, as planned with the full assortment including ready to wear introduced in approximately 40 global flagships also as planned. While it is early days, the fall 2014 product introductions are performing to expectations. In addition, we held our 2nd ever New York Fashion Week presentation in early September, showing our spring 2015 collection to the fashion press. And once again, the press was overwhelmingly positive, building on the response to fall 2014 and driving fashion, credibility and buzz, a key to elevating the brand perception in the mind of the consumer. We are also on track to launch Stewart's product and outlet stores globally this spring. And in North American department stores, we continue to grow our exclusive product program. While we are looking forward to our first stores to open or reopen with our new modern luxury concept, starting tomorrow with our flagship in Shinjuku in Tokyo. These stores represent a more complete expression of our transformation. Over the next few weeks, we will be reopening our store at Time Warner Center in New York City and our Rodeo Drive flagship in Beverly Hills. Prior to holiday, we expect to have a total of 20 stores opened globally in the new concept, including 2 more here in the U. S, Fashion Valley in San Diego and American and Manhasset, Long Island. And we are on track to renovate a total of 150 retail locations in FY 2015 and opened 60 new stores globally in this new concept. In North American department stores, have already completed 140 projects, installing open cell environments and replacing the old case lines and have seen an improvement versus the balance of doors. We now expect to convert over 300 locations from case line presentations to open sell this fiscal year. We also successfully launched the shop manager program in the wholesale channel, adding approximately 25 managers in key doors, with the goal of adding a total of 50 shop managers in fiscal 2015. We are in the process of finalizing negotiations to close approximately 70 retail locations with the majority of closures occurring shortly after the holiday season. And we remain on track to fold 13 men's only outlet locations into existing stores, leveraging the team and the cross shopping opportunity. We expect that these will happen after holiday to minimize disruption during the busy selling season. We also expect to close the 2 outlet stores identified in key markets as part of our learning agenda during the second half. On the marketing and customer experience front, we dramatically increased our print advertising pages with improved positioning, notably in the September fashion books. We also saw significant increases in editorial mentions and rank in all 3 major markets, North America, Japan and China. And as we increased our positive brand impressions, we also pulled back on promotional activity. As announced, we adopted a semi annual sales model back in June, consistent with the luxury fashion brands and had no preferred customer In addition, we reduced the cadence of EOS flash sales from 3 a week last year to once a week this quarter. By the end of FY 2015, we expect to be down to 1 to 2 events per month. We are continuing to evolve our customer experience model to align with the evolution of the product and the new store concept. So while there is much heavy lifting remaining in front of us, we are very pleased with what we've accomplished this quarter and we'll continue to update you on these initiatives as we move forward. Turning to the results of the last quarter, Some key financials were: 1st, net sales on a reported basis totaled $1,040,000,000 versus $1,150,000,000 a year ago, a decrease of 10%. On a constant currency basis, sales declined 9% for the quarter. 2nd, earnings per share totaled 0 point $3 increased 4% to $381,000,000 from $365,000,000 last year. On a constant currency basis, international sales rose 6%. As expected, China sales rose 10% with positive comparable store sales, while sales in our directly operated locations in Asia and Europe rose as well. And 4th, North American sales fell 19% to 634,000,000 dollars from $778,000,000 last year on a 24% comparable store sales decrease. During the quarter, looking at distribution and consistent with our annual guidance, there was little change in our global directly operated door count. In total, adding 5 net locations worldwide, 1 in North America, 1 in Japan, 2 in Mainland China and 1 in Europe. As you know, we are primarily focused on re platforming 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 and starting with our domestic businesses. Our total revenues in North America declined 19% for the quarter with our directly operated businesses also down 19%. As noted, total Q1 same store sales declined 24% with the reduction in EOS events pressuring total comp by about 5 percentage points. Fran will provide further context around our North American business shortly. In department stores, our sales trends at POS were similar to the company's directly operated stores, while shipments into the channel declined to a lesser degree, reflecting receipt of new fall product at quarter end. As mentioned, consistent with our own retail stores, we curtailed promotional activity. Overall, we estimate that the North American premium women's handbag and accessories market rose at a high single digit rate the September quarter in line with recent trends as the category continues to benefit from the secular shift into accessories from apparel. Turning to men's, which represents 18% of global category spend or about $7,000,000,000 today. As we've discussed, we are also continuing to drive our men's business globally, primarily through new dual gender stores. As expected, in the Q1, Coach's global sales of men's bags and accessories rose slightly, impacted both by the yen and the pullback of promotion and EOS in North America. 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 2017. Before we discuss international sales, Francine Della Badia has joined us today to provide some more insight into our North American and initiatives for the season ahead. Fran? Thanks, Victor. The Q1 marked the implementation of many initiatives we outlined at Analyst Day to change and elevate brand perception in the minds of our consumers. And though early days, the impact of these actions played out as expected, both globally and in North America. Domestically, we kicked off our semiannual sales strategy at the end of Q4 and ran it through the 1st couple of weeks of July. Q1 was the Q1 that we curtailed preferred customer events. As forecast, this impacted conversion rates for the quarter, while traffic trends remained weak on a year over year basis. Given the shift in the type and cadence of promotional activity and as anticipated, average unit retails rose as did average transaction size. Bear in mind that the new product arrived in stores in week 11 of the 13 week quarter, so it had little impact on results. In outlet stores, the overall environment was definitely more promotional, especially in our space, with our competitive set becoming even more aggressive. Traffic levels were weak and conversion was negative, while ticket was up slightly. We did see a very positive consumer response to our new Colette collection, which carried a higher AUR underscoring the premise that emotion can trump price even in outlet. As planned, our store comp was down high teens with our total comp pressured an additional 5 points by EOS as we pulled back from 3 flash sales events a week to only one event per week. Over the year, we expect our store comp trend to improve as new product penetration grows across both channels, more stores are re platformed and marketing intensifies. However, our Internet comp will worsen as we further curtail events. As discussed, evolving brand perception is critically important in North America, notably for our Women's Bag and Accessory business, where we've been the most challenged. During the Q1, we presented a more focused assortment of handbags in retail stores with SKUs down about 25% from prior year and saw handbags increase as a percent of our women's business. Within our handbag business in retail stores, we saw absolute strength in our elevated product. More generally, the above $400 price bucket grew in penetration, saw a positive comp and represented 30% of handbag sales versus roughly 21% last year. At the same time, we maintained a balanced assortment with small bags continuing to trend well and our overall handbag AUR is remaining consistent with prior year. More broadly, leather continues to outpace logo across all channels and we're designing into this trend. It's both a shift that favors Coach longer term, given our heritage in leather goods and elevates our impressions in last year. Outside of handbags, we continue to see relative strength in our lifestyle categories in Q1. Women's footwear held its penetration at last year's level at about 9% of North America retail sales in those stores carrying a full offering. We are also 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. Before I move on to holiday initiatives, know that you want to hear about how the new fall 2014 product is checking since its mid September launch and what our key learnings are. While it's only been 6 weeks, we've been pleased with the reception to the new line. Our handbag assortment represents Stewart's hip and modern take on the brand, punctuating the essence of Coach's DNA. We have seen excellent response to novelty across all price points and are definitely seeing more new customers, especially in collection doors carrying the full assortment. Editorial products featured in our marketing were picked up in the fashion press such as the Ryder 33 handbag, the Apollo sweater, the shearling coat and the Urban Hiker boot have all been standouts. Anecdotally, we're hearing from our store teams that these early adopters of Stewart's collection product are highly fashion engaged and new to the brand. They're buying multiple pieces, including ready to wear, bags and shoes. In addition and importantly, we're also seeing success in the fashion execution of core products, such as the Crosby Carryall, which marries great function with great style in neutrals, vibrant colors and animal prints. Edie is a best seller in a refined pebbled leather with enhanced branding and Kelsey a great value at $228,000,000 in Signature Jacquard and $258,000,000 in leather. Turning to holiday. We continue to focus on increasing the level of distinctiveness across all product categories, adding emotion, while strengthening fashion credibility and relevance to the brand. New products launched last Friday, including Gramercy, our top handle satchel and Ranger, a great fashion shoulder bag as well as cold weather accessories. For holiday, we also have a new shoulder bag, Scout, at a $3.25 price point delivering right before Thanksgiving. In outlet Phoebe, last year's best seller in retail, was just introduced last week, while Margo, a new carryall across multiple fabrications, comes in, in early December. As discussed during Analyst Day, our approach to customer events, formerly known as PCE, will be far fewer events annually, focusing specifically on our best customers during key holiday periods such as Black Friday. We will be more tailored in our segmentation, selectively extending invitations. This approach will support sustained sales growth and build our brand, reinforcing our full price positioning. At the same time, we're also enhancing our store environment. As Victor mentioned, we're excited about our first new retail concept stores during holiday, which will represent the true manifestation of modern luxury across all aspects of the customer experience, environment, products and service. In addition to the new architecture, furniture and fixturing, our in store initiatives include new music, updated packaging and an elevated clienteling program in key flagship. In summary, we're pleased with the initial steps we've taken to reposition Coach, notably in the North America women's business, adding more emotion and excitement to the product offering and around our brand. With that, I will turn it over to Victor for a discussion of our international business, strategies and further opportunities for growth. Victor? Thanks, Fran. Turning now to our International segment, which represents about a third of Coach's business. Sales rose 6% on a constant currency basis in the Q1 and 4% on a reported basis, primarily impacted by the weaker yen on a year over year basis. As mentioned, China sales rose 10% from prior year with positive comparable store sales and slower distribution growth in line with our forecast. We remain very optimistic on the prospects for this market over time as long term drivers remain intact, including a rapidly growing middle class, an overall shift from pure status to value favoring the affordable luxury segment and the evolving retail landscape with the development of new luxury shopping malls. However, we understand that there will likely be be impacting trends in China and some key tourist markets, notably Hong Kong and Southeast Asia. While we are still targeting China sales of about $600,000,000 for FY 2015, driven primarily by distribution growth, current conditions are limiting visibility to PRC consumer travel and shopping patterns, especially in Hong Kong, driving more variability on a quarterly basis. To this point, our other Asian direct businesses outside of China and Japan, South Korea, Taiwan, Malaysia and Singapore posted positive aggregate growth, though the region experienced a slowdown in traffic impacted by shifting trends in PRC consumer travel, as well as weak inbound travel into Malaysia given the sustained impact from the airline disasters. As expected, in Japan, we posted a 7% decrease in constant currency, due in large part to the continuing impact of the April consumption tax increase. Dollar sales declined 12%, reflecting the weaker yen. In Europe, where our brand is small, but growing rapidly, we generated significant sales growth in double digit comps in the quarter. 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. In FY 2015, we expect to grow our business to around 100,000,000 dollars from about $60,000,000 in FY 2014. Turning now to our global distribution plans. As our plans have not changed materially from what we outlined on our August earnings call, I will be brief. We continue to expect that our square footage globally and across all channels will increase slightly in FY 2015, reflecting our North American fleet optimization. Our overarching focus will be on renovations and remodels to drive productivity. To this point, as we 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've 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 modestly in FY 2015. We plan to add about 40 locations and about 3% to 4% square footage, while converting more than 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 around 10 net openings. While we expect to open a few stores in our other Asia direct markets outside of China and Japan in FY 2015, Our portfolio approach is focused on maximizing productivity with only modest growth of our footprint. Turning to Japan. In FY 2015, 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 the traffic by the end of FY 2016, including the new flagship in Shinjuku, Tokyo set to open tomorrow as I mentioned earlier. We will also renovate key locations in important cities throughout the country and our flagship stores in Ginza and Shibuya next spring. Most generally, we continue to expect a continuation of current trends in Japan given the ongoing drag from the consumption tax increase, which won't anniversary until next April. Moving to Europe. In FY 2015, as noted, we still expect to grow our business to about 100,000,000 dollars However, due to the shift in project timing, we now expect to add about 10 directly operated locations and more than 100 wholesale locations. Our goal is to achieve over $500,000,000 in sales at retail, representing mid single digit share of the premium men's and women's bag and accessories market over our planning horizon. Finally, we also believe there is a significant opportunity for the Coach brand in global travel retail, which represents the majority of our international wholesale sales. At the end of the quarter, we had a total of 204 international wholesale locations in 28 countries, which included 110 travel locations and expect to add about a net 30 additional locations by year end. Now, I'll ask Jane to provide some additional further detail on our financials and our outlook for the balance of the year. Jane? Thanks, Victor. Victor is just taking you through the highlights and strategies. Let me now take you through some of the important financial details of our first fiscal quarter results as well as our outlook for FY 2015. Our quarter revenues declined 10% with North America overall with international sales up 6%. Excluding transformation and other related charges, net income for the quarter totaled $146,000,000 with earnings per diluted share of $0.53 This compares to net income of $218,000,000 and earnings per diluted share of $0.77 in the prior year's Q1. For the quarter, operating income totaled $217,000,000 on a non GAAP basis versus $322,000,000 last year, while operating margin was 20.9% versus 27.9 percent. During the quarter, gross profit totaled $719,000,000 as compared to $827,000,000 a year ago, while gross margin was 69.3% versus 71.8%. SG and A expenses as a percentage of net sales totaled 48.4% on a non GAAP basis compared to 43.9 percent in the year ago quarter. Metrics, let me recap key transformation and other related charges. As previously announced, we expect to incur pre tax charges of approximately $250,000,000 to $300,000,000 associated with our transformation plan, a portion of which were reflected in our fiscal Q4 2014 results, and we expect the remainder to be largely incurred during FY 2015. These changes are related to inventory and fleet related costs, primarily in North America, including impairment, accelerated depreciation and severance costs associated with store closures. In total, we expect to capture $70,000,000 in savings related to our transformation initiatives in fiscal 2015 approximately $150,000,000 in ongoing annual savings in fiscal year 2016. As you may recall, during the Q4 of FY 2014, we recorded charges of approximately $130,000,000 for transformation and other related actions. These charges consisted primarily of the realignment of inventory, impairment charges and a portion of the costs related to store closures. In aggregate, these actions increased our COGS by $82,000,000 and SG and A expenses by $49,000,000 negatively impacting net income by $88,000,000 after tax or $0.31 per diluted share, all on a GAAP basis. During the Q1 of 2015, we recorded an additional $37,000,000 of charges associated with the transformation plan. These charges are primarily related to our organizational efficiency initiatives, notably the elimination of over 150 jobs announced in July, representing about a 6% decrease in global corporate staffing levels. In aggregate, these actions increased the company's SG and A expense by $33,000,000 and cost of sales by $4,000,000 in the period, negatively impacting net income by $27,000,000 after tax or $0.10 per diluted share. Moving on to the balance sheet. Inventory levels at quarterend were $597,000,000 down 6% from Q1 FY 'fourteen. Cash and short term investments stood at $907,000,000 as compared to 8 $55,000,000 a year ago, substantially held outside of the U. S. We continue to deploy international cash into high quality investments with higher yields and durations over a year. And in turn, there's a shift between cash and short term outstanding on our credit facility in order to cover our working capital needs in light of investments in our business and new corporate headquarters. Net cash from operating activities in the Q1 was $139,000,000 compared to $164,000,000 last year during Q1. Free cash flow in the Q1 was an inflow of $99,000,000 versus $118,000,000 in the same period last year. Our CapEx spending was $40,000,000 versus $46,000,000 in the same quarter a year ago. We continue to expect CapEx for FY 'fifteen to be in the area of $350,000,000 excluding the costs associated with the new headquarters, which are expected to be approximately $100,000,000 in FY 2015 as previously announced. And we anticipate maintaining our dividend at an annual rate of $1.35 for FY15. Turning now to our financial outlook for FY15. As our annual plans have not changed from those shared during our June Analyst Day meeting and reiterated on our 4Q 'fourteen earnings call, I'll be brief. First on sales, we expect to deliver a low double digit decline both in constant currency and on a reported basis in fiscal 2015, largely due to our reduced promotion and store closure activity. We are projecting a high teens comp decline in our North American stores with EOS pressuring the aggregate North America comp by an additional 10 points. This equates to a mid to high 20% decline in aggregate comps. Over the course of the fiscal year, we would expect store comp to improve as the product and store initiatives roll out, while the pressure from EOS will intensify as we continue to reduce the cadence of events. Gross margin is still projected to be in the 69% to 70% range for the year, with higher sourcing costs largely offset by favorable channel mix and lower promotional activity. SG and A expenses are still expected to grow at a lowtomidsingledigitrate, reflective of our increased marketing spend and transformation initiatives. Importantly, while our Q1 SG and A expenses actualized below our expectations and were down from prior year, this is more a function of timing than any change in our full year plans. Our 2Q and 3Q compares will show the most significant increase given the prior year declines and the timing of our marketing spend in FY 2015. Taken together, we would expect operating margin to be in the high teens. Finally, our tax rate is expected to be in the area of 32% for the year as we do not expect to anniversary some of the one time tax benefits we generated in the second half of FY 'fourteen. We have a strong and flexible balance sheet with about $1,000,000,000 in cash and investments and low leverage. We can continue to access the capital markets at attractive rates as needed to fund our headquarters investments. In closing, I'd like to reiterate Victor's early remarks. We laid out a very clear plan this summer and its execution is underway. You heard this morning about our brand transformation progress around 3 pillars: product, stores and marketing. And I will add that we are also on track from an investment and restructuring including rightsizing our inventory levels. We're investing in replatforming our stores and wholesale doors and are on track to spend about $570,000,000 over the next 3 years. We've begun to realize our cost savings running a leaner, more efficient organization. Therefore, looking further ahead, we expect to realize an overall annual financial improvement beginning in FY 'sixteen with FY '17 being the year when we return to growth in line with the category. 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. The first question is from Bob Drbul with Nomura. Hi. Good morning. Good morning, Bob. I guess the question that I have is beyond Q1, how has the response to the new product been in retail stores? Specifically, have you seen a change in retail store comp trends? Good morning, Bob. Thanks for your question and for being with us as usual. We have, of course, been following the performance very closely. As Fran mentioned, we've seen and are very pleased with our performance, which really reflects the initial signs to product across the channel. When we look at the performance in the Q1, it's very difficult of course to read clearly because of the shift that we have taken in our promotional activity. As we mentioned, we had our semi annual sale the 1st 2 weeks of the quarter and no promotional events for the remainder of the Q1. As we come into October, what we have seen is continued great performance across the new product. We, as Fran mentioned, have seen positive signs in performance across the new styles and fashion, novelty in core and positive comp across the above $400 performance, but very difficult to see with the shift in promotion. Okay. Thank you. Thank you. The next question is from David Schick with Stifel. Hi, good morning. Could you talk I know you just said there's a lot of moving parts in answer to Bob's question, but any estimation of the impact on sales or comp from the reduction of the coach days in the EOS in North America? In terms of the reduction of EOS, as Jane mentioned, it was the impact is 5 comp points. The coach days were only in our wholesale channel, David. I'm sorry, yes. Yes, which really was an impact of depending on the chain anywhere from 20 to 25 days that we reduced to approximately 1 third of almost 1 third of total days where we had promotion last year that we didn't have this year. And in general, as we mentioned in our speakers' notes, the performance was pretty much in line with what we saw in our own stores where we also reduced all of the PCE events from last year. Okay. You mentioned the comp positive above $400,000 Could you talk about how that looked a year ago and over the last year? And how much of a change in trend you're seeing in the above $400,000,000 Sure. Fran? Hi, good morning. As we said on the call, the above 400 was about 30% of our sales this year versus 21% last year. So we are seeing a great response to the elevated products and we forecast that we'll continue to see this trend rate in this category going forward. I guess my question is, was the above $400 price point, if you could talk about over the last the prior 12 months, not the last quarter, but the prior 12 months, was that how was that trending as a contributor or a drag to comp now that it's obviously, if it's comping positive and you're comping where you're comping, it's a huge it's hugely different to the positive side. So where was that $400 and above comp over the prior year or so? Yes. So we've actually been talking about the positive response that we've been having to products above $400 for the past year. What we're seeing now is even stronger performance in that category. So it has been above 400 a category that has been performing well for us over the past year. And we saw, as we mentioned, the positive comp trends this quarter, which we wanted to call out as a response to the new product that we launched with Stuart's First collection. Right. Any sense of the magnitude and the difference between the prior and the now updated positive comp? That's really what I'm trying to get to. Yes. We're calling it a positive comp. So without any more specifics around it, we're very pleased with the performance in that bucket. Okay. Thank you. Thank you. The next question is from Barbara Wyckoff with CLSA. Hi, everybody. Could you talk about the product performance in the outlet stores in Q1 As the product has been cleaned up, can you talk about the comps excluding EOS? And then secondly, can you talk about China, the impact on stores in the Hong Kong area with the demonstrations? And then have you seen any transfer of business outside of Hong Kong? And could you recap the number of stores by city tier in China? Thanks for your multiple questions, Barbara, as usual. Let me start with China Asia overall, what we're seeing is very much what we're all reading in terms of the geopolitical and macro economic situation. We continue to target positive comps and about $600,000,000 in sales for this fiscal year as we said during our notes. But we are seeing tremendous variability in performance. And that of course is especially true in Hong Kong where we did have a couple of closures of a few key locations at certain points during the demonstrations. But the biggest impact, of course, has been in tourist flows across the region. What we're seeing is, of course, fewer tourists into Hong Kong and Macau as well as continued decreases into Southeast Asia, some of that again due to some geopolitical events in that region and of course in Malaysia due to still some impact from the airline disasters. We are seeing some uptick in tourist flows into Taiwan and into Korea, but truly not enough to mitigate the not at the same level as the decreases that we're seeing, especially in the key markets of Hong Kong. Saying all of that, Barbara, as you know, it's very resilient economies. I think that while there may be this short term variability, our confidence in the long term opportunities of China and especially of the Chinese consumer globally is very, very strong. We continue to see incredible growth in the middle class there. We continue of course to see very, very good development of the retail infrastructure, which offers a lot of opportunities. I'm constantly reminded of the fact that we bought our business back in 2,008 at the peak of the economic crisis and made very important decisions to invest. China will also benefit from all of the great work that we're doing in brand transformation and we're very much taking the same position of looking to invest and drive our brand relevance further in that market. I'll now pass on to Brent. I think you had Barbara one more question on distribution by tiers. We today have 136 locations on the Mainland. The vast majority of our doors are in Tier 1 and Tier 2 cities with 37 locations in Tier 3 and 4, the remainder in Tier 1 and 2. Thanks. Barbara, to answer the questions about outlet, just first as a reminder, we don't disaggregate comp performance in North America direct. So I will just go right to the product performance. Last month, we launched a new product collection called Collette, which was largely a leather based full price inspired product, which performed extremely well at the higher end of our AUR offering in outlet. And last week, we just launched Phoebe, again, a very strong leather based collection in array of colors. And we're seeing very, very strong performance in that product through this past weekend. In terms of Stuart's impact on factory, we had focused first on full price. His first design for outlet product will arrive in a small way right before holiday and then we will launch more Stewart designed product for outlet beginning in the spring half. Thank you. Thank you. The next question is from Ike Boruchow with Stern AG. Good morning, Ike. Hi. How are you doing? Good morning, everyone. Thanks for taking my question. I just my question was on the gross margin line. So you guys doing a very good job pulling back from the promotions at the private client events and the outlet, the EOS. So my question is, the core gross margin is still down 2 50 basis points. So there's clearly got to be an offset to the benefits you're getting from being less promotional. Is that sourcing? Is that off price sales? I mean, can you just help us understand exactly what's going on in gross profit? Thank you. Yes, Ike. So what you saw is about the 260 point decline in our gross margin. Importantly, while we are pulling back in promotion activities, we did see versus last year about 100 points of pressure from North America outlet and higher product and sourcing costs accounted for the other half. As we said in Analyst Day, we're continuing to invest in our product and innovation, quality and putting value in our product for our consumer and then FX was the remainder. Got it. Thank you. Thank you. The next question is from Omar Saad with ISI Group. Hi, thanks. Good morning, guys. I wanted to ask about the new product and how we should think about its flow through into the outlet channel and that consumer base going forward whether it's next year and how we think about the impact there? Sure. Omar, I think in reference to Bob's first question as well, the good news is that our product is basically performance truly per our plan. And so our plan was, of course, to take core styles such as the Eady, such as Crosby, which are really core styles that will be multi seasonal and bring in newness and novelty throughout the seasons. And then that seasonal product will then flow into outlet through following being in our semi annual sale 1st and foremost, which is a new part of our strategy compared to prior season. So what we are not doing through the PCE events, of course, will lead to some promotional activity through the open sale, which we will have at the end of each season. The first event of which we had at the end of Q4 beginning of Q1 where we had a lot of learnings that we're now leveraging of course into our next event. One of the key learnings there I might add was the recruitment of new consumers that we saw coming in through the open sale, which really bodes well of course for how that seasonal product can serve as a recruitment tool for that more value conscious consumer as well in key metropolitan areas. That's very helpful. Thanks, Victor. Thank you. The next question is from Oliver Chen with Cowen. Hi, thanks a lot. Regarding Stuart and the opportunity head in outlet, what are your thoughts on how he's going to evolve product with respect to pricing? And on your candid comments about the competitive set, what we've noticed is a lot of competitors competing really strongly on price. So what are your thoughts on the big opportunity in terms of the comp levers in this environment and outlet? Thank you, Oliver. Glad to hear from you. We of course are very conscious of bringing value to the consumer and that will happen through not only shop price points, but of course by bringing them value as well through quality. I think you heard Fran mention one of the wonderful collections that we've launched this past quarter, Colette, where we've seen truly great consumer reaction to has been at a much higher AUR than our other collections. But of course, we also are very focused and as a team, not only in the outlet, but also in retail and meeting the needs of our core consumer. In the case of outlet, we have increased newness coming through. Fran mentioned Margo, which launches in December. That will be followed by a series of other collections throughout the spring and it will be at various price points from the sharper ones at 100 and below right on up through suggested retails or I should say AURs at approximately $200,000,000 to $300,000,000 as well. Thank you. And we're pretty excited about the way the men's product looks. Could you just remind us about how you feel about the long term percentage of mix and where that can go? Thank you. Sure. So for us, we're in the 14% to 15% range today. The total market for men's represents approximately 18% of the $40,000,000,000 premium handbags and accessories markets. We see ourselves, of course, getting to that and targeting, as I mentioned in my notes, Oliver, by the end of 2017, dollars 1,000,000,000 in sales. Thank you very much. Best regards for the holiday season. Thank you, Oliver. Thanks, Oliver. Thank you. The next question is from John Morris with BMO. Thanks. My congratulations on your hard work and progress so far. Thank you, John. Question, I think for Jane on the SG and A just to go back and touch base on that. It looks like it was coming in below your expectations and below where the Street had modeling it. And what I heard was it was a lot of it had to do with timing. And so why what was it behind the timing? Was it that you decided the company decided to hold off on some of the marketing plans so far? Yes, just kind of what were the attributes that helped the SG and A come in a little bit lower than expectations? Yes, John. As you step back from it, a lot of it is about what was in the base last year. So, RK was in the base last year, and we were able to repurpose some of those RK expenditures to marketing in this quarter. Additionally, Coach Europe in the back half increased our expense level as we move through FY 2014 and it was not in our base in the Q1. But now in your planning, wouldn't you all have taken that into account? So just wondering kind of why it would have come in a little bit below your expectations then, the SG and A? Yes. So, obviously, we're right in track with our guidance for the full year for SG and A. In terms of SG and A growth, as we look at the pushes and pulls in that, it is we are continuing to have an outlook of spending $25,000,000 in marketing and we'll have some expenditures related to occupancy as we open up new international doors and some compensation related expenses as we look at performance based comp back on target, which we took down in the Q2 of last year. Okay, great. And then just one other quick one, if I may. Can you give us a feel for the performance in the full assortment stores relative to your expectations versus the performance in the rest of the fleet? In other words, are you seeing a divergence in terms of the performance as you would measure it in this 40 full assortment stores? Yes. I think overall as we mentioned, the total collection and total newness is really performing to our expectations and very much on our plan where we've seen truly great signs as we've talked about is in that above 400. We've seen terrific signs in the full collection doors as well. There is no doubt that we have a new consumer engaging with Coach across the more elevated, more fashion product and that is globally. We are also seeing better performance in the doors that received the fuller remodel, not yet the full concept because as I mentioned in my remarks today, actually this evening in Japan, our Shinjuku flagship is the 1st full store that is opening in the new concept followed by Rodeo and AOL Time Warner. But we did significantly touch up our stores at Bleecker Street, South Coast Plaza, which some of you have seen in the past is not yet the full new concept, but has an inspiration of it as well as Lower 5th. All of those stores are performing much better than the rest of the fleet. And as I mentioned as well, still very early days, but the over 100 locations in wholesale where we've moved to open sale, we're seeing better performance as well as the locations again very early days where we've added the store managers in wholesale. So where we are making the fullest expression of transformation visible, we are seeing the greatest impact. We're pleased with the reaction to fashion, and we're also very pleased with the 2 key core silhouettes that are out there, which are really our first core introductions, Eady and Crosby, with more to follow. Fran mentioned Scout, which follows in December. And then we also have a Town Car Tote, which comes in, in late January, early February, which are 2 other key core silhouettes at sharper pricing that we believe will resonate with our core consumer. Perfect. Thank you. Thank you. Thank you. Our final question today is from Joan Pason with Barclays. Hi, good morning. Thank you for taking my question. So focusing I guess on Japan, how do you think about that business for the rest of the year and when there might be a potential for rebound there? And then also I think you mentioned the logo mix for the full price stores being at 6% today. But what has that evolved to in the outlet business? And is there a target in mind for the factory stores compared to full price? Sure. Let me first touch on Japan and then I'll ask Fran to touch on outlet. Overall, in the case of Japan, results are very much consistent with our expectations and our annual guidance. Our planning was very much done both in the context of the environment that we have been seeing post the consumption tax, of course, as well as our own brand transformation strategy with a lot of work being done in key flagship stores across Tokyo and other key cities and products there as well, performing to expectations with certain really nice highlights, especially across the more fashion product where we've seen higher penetrations in Japan across Ryder and a few of the fashion bags than we have in other markets. And now I'll turn to Fran on outlet. Hi. In terms of the logo business in outlet, much more significant than it is in our retail business. It's running right now at about 40% of total sales. That's across all categories. Handbags specifically is about 26% of the business in Bags. So it's still an important category for us in outlet. Great. Thank you. And what's great there that you will see, I will just add, we are doing a tremendous amount of work in iterating across signature platforms. So you will see new signature platforms penetrating across both our full price channel, which we've just launched and outlet moving forward, as well as the wholesale channel. So we recognize that while signature and logo in general is down trending globally for all players, We see it as a key part of our strategy moving forward and a key part for Stuart and the team to innovate and drive further relevance. Thank you, everyone. That concludes our Q and A. As you know, we like to conclude prior to the markets opening. I will turn it back to Victor Luis for some closing remarks. Victor? Thank you, Andrea. I want to thank all of you for being with us today and we've outlined very clear and comprehensive strategies and plans this past summer to address all of Coach's brand challenges. We're in the very early execution of our journey and very confident in laying the foundation for our long term vibrancy and growth. In this Q1, I could not be prouder of our team and the steps that we have taken across all of the consumer touch points. And at this moment, I would also like to take the opportunity to recognize the retirement of our Executive Chairman, Lou Frankfurt, who truly has been a legend in all that he has achieved in his career at Coach. I and the team wish him a tremendous we inherit his legacy and we wish him a tremendous amount of success as he moves forward in his next chapter. And of course, I sit here incredibly proud of what we've accomplished in these early stages of our transformation, but more importantly, very confident as we move forward as a team in our next chapter. And I thank you all for being with us and look forward to seeing you during the course of holiday. Thank you. This does conclude the Coach earnings conference. 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