Earnings Call: Q4 2014

Aug 5, 2014

Good day, and welcome to the Coach Conference Call. Today's call is being recorded. At this time, for opening remarks and I would like to turn the call over to Senior Vice President of Investor Relations and Corporate Communications at Coach, Ms. Andrea Shaw Resnick. You may begin. Thank you. Good morning. Thank you for joining us. With me today to discuss our quarterly results are Victor Luis, Coach's Chief Executive Officer and Jay Nielsen, Coach's CFO. Before we begin, we must point out that this conference call will involve certain forward looking statements, including projections for our business in the current and future quarters or fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon 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 K and our other filings with the Securities and Exchange Commission for completeness 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 4th fiscal quarter and annual 2014 results and will also discuss our progress on global initiatives. Jay Nielsen will conclude with details on financial and operational results for the quarter and year along with our outlook for FY 'fifteen. Following that, we will hold a question and answer session, where we will be joined by Francine Galavadia, President, North America Retail. This Q and A session will end shortly before 9:30 p. M. Victor will then conclude with some brief summary comments. I'd now like to introduce Victor Luis, Koch's CEO. Good morning. Thanks, Andrea, and welcome, everyone. As noted in our press release, the 4th quarter capped challenging year for the company, most notably in the North America women's bag and accessory business. However, it was also a year of many accomplishments for Coach, including the successful integration of our retail businesses in Europe, surpassing $500,000,000 in sales in China and driving men's to about $700,000,000 in sales globally. Most importantly, we laid the groundwork for our transformation to a modern luxury lifestyle brand across all key consumer touch points, product, stores and marketing. A crucial milestone was the arrival of Executive Creative Director, Stuart Beavers last September, who has already had a significant impact on the creative direction of the brand. This was highlighted by our 1st New York Fashion Week presentation in February and the editorial praise his inaugural collection received globally. We also developed our new retail concept inspired by our New York City heritage using an iconic materials palette that is distinctively Coach. And throughout the year, we continued to refine our global marketing message, just announcing our new campaign for fall. Most recently, at our Analyst Day in June, we presented our comprehensive long term strategic plan to reinvigorate our business and rewrite the Coach playbook to achieve growth and leadership. We are taking the key transformation actions to enable the strategic path forward, embarking on the execution phase of our journey. Turning to the results of last quarter, some key financials were: 1st, net sales on a reported basis totaled $1,140,000,000 versus $1,220,000,000 a year ago, a decrease of 7%. On a constant currency basis, sales declined 6% for the quarter. 2nd, earnings per share totaled $0.59 as compared to $0.89 in the prior year's 4th quarter, excluding transformation related charges in both periods. 3rd, international sales increased 7% to $414,000,000 from $388,000,000 last year. On a constant currency basis, international sales rose 9%. Sales in China remained very strong, increasing 20% with a continuation of double digit comps, while sales in our directly operated locations in Asia and Europe rose significantly as well. And 4th, North American sales fell 16% to 691,000,000 dollars from $825,000,000 last year on a 17% comparable store sales decrease. During the quarter, looking at distribution, the company closed 6 North American retail locations and opened 2 net new outlet locations. At the end of FY 2014, there were 332 retail and 207 outlet stores and about 160 outlet malls in North America. For the full year, we closed 5 net locations in North America. Moving on to China. During the quarter, we opened 6 net new locations, all on the Mainland, bringing the total to 153 locations, including 134 on the Mainland in 55 cities. This represented a net increase of 27 for the year. In Japan, we had one net closure during the quarter. This took us to 7 net openings for FY 2014. At year end, there were 198 directly operated locations, which include 151 retail and 40 7 outlet locations and about 30 outlet malls. Also in Asia, during the Q4, we opened one location in Malaysia, taking us to 5 net openings for the year and bringing the total to 97 directly operated locations in the balance of Asia, including 48 in South Korea, 27 in Taiwan, 13 in Malaysia and 9 in Singapore. In Coach Europe, we opened 1 directly operated door during the period for a total of 9 directly operated door openings during FY 2014. As of the end of the quarter, there were 27 directly operated locations in Europe across the UK, France, Ireland, Spain, Portugal, Germany and Italy. We also opened several wholesale doors. Moving on to sales by channel and geography and starting with our domestic businesses. Our total revenues in North America declined 16% for the quarter, with our directly operated businesses down 15%. As noted, total Q4 same store sales declined Q4 same store sales declined 17%. For the full year, sales in North America fell 11% with our directly operated businesses down 10% on a 15% comp decline. In department stores, our sales trend at POS were modestly above prior year during the Q4, while shipments into the department stores declined as expected. The outperformance vis a vis our retail stores was consistent with prior quarters and reflective of the overall channel and generally better traffic trends than the malls at large. For the year, our department store sales at POS were slightly lower. For both the quarter the year, our women's handbag and accessory business was challenged, facing both increased competition and intensified promotional activity, while the overall category continued to grow. Overall, we estimate that growth in the North American premium women's market, excluding moderate brands, grew at a high single digit rate, topping $11,000,000,000 as bags and accessories continue to represent a growing portion of her ward roping spend. The premium men's market in North America demonstrated continued momentum from a much smaller base, growing at a low double digit pace to over $1,000,000,000 Therefore, the combined North American premium women's and men's market rose about 9% in FY 2014 to over $12,000,000,000 with Coach representing a combined market share of about 23%. Similar to what we've done over the last few quarters, I want to provide some underlying texture to the comp performance, both in those areas where we've seen progress and those areas where we see the opportunity to improve our positioning in North America. As was the case industry wide, in store traffic continued to decline with the ShopperTrak Retail Traffic Index, which includes outdoor lifestyle and outlet malls, still down about 8% for the but an improvement from the double digit decline in the March quarter helped by the Easter shift into April and better weather. The NRTI focused on indoor malls having less of a weather impact was up slightly, 2% in the quarter after declining slightly in the previous quarter. In aggregate, conversion and transaction size were neutral to our store business, while traffic drove the comp declines. As noted on our previous calls during this fiscal year and as expected, our online business dampened our overall North America comp in the 4th quarter by about 3 percentage points. Specifically, our year over year comparisons continue to be impacted by our strategic decisions to both eliminate third party flash events this fiscal year and limit access and invitations to our outlet flash site. Excluding these factors, our Internet comp would have contributed to our aggregate performance. There were some sustained themes in our North American women's business throughout the year, including our Q4. Leather continues to outpace logo across all channels and we are designing into this trend. It's a long term shift that favors Coach given our heritage in leather goods. Small bags also continued to trend well. In addition, we saw relative strength in our elevated product in our retail stores. More generally, the above $400 price bucket grew in penetration and represented 21% of handbag sales versus roughly 16% last year. Outside of handbags, we continue to see relative strength in our lifestyle categories in Q4. Footwear, which relaunched last March in about 170 retail locations, held its penetration at last year's level at about 12% of retail store sales, while we're also seeing a positive response to our expanded men's and women's footwear assortments and outlet stores. We remain focused on building our market share within the fragmented nearly $25,000,000,000 global premium footwear category through both distribution, adding international and wholesale doors and by maximizing footwear productivity through mix, increasing AURs and overall penetration levels across our businesses. At the end of Q4, about 285 Coach International retail locations offered the updated women's fashion collection and the response from customers has been excellent. We remain confident that Coach's increasing fashion credibility being built through Stewart's collections will provide a much stronger platform for our brand's development of footwear and other lifestyle categories. Turning to men's, which represents 18% of the global category spend or about $7,000,000,000 today and is expected to grow faster than women's at about a 10% rate over the next 5 years. As we've discussed, we're also continuing to drive our men's business globally through new standalone and dual gender stores. In the Q4, Coach's sales of men's bags and accessories continued to rise, taking the year to about 7 $100,000,000 globally. Looking ahead, we remain bullish about the prospects of our men's global business. However, given the announced brand transformation initiatives, including slower global distribution growth and the planned pullback in our North America e outlet business this year, we are now targeting $1,000,000,000 in sales in FY 2017, 1 year later than our original target. Turning now to our International segment, which represents about a third of Coach's business. Sales rose 9% on a constant currency basis in the 4th quarter and 7% on a reported basis, primarily impacted by a weaker yen on a year over year basis. As mentioned, China sales rose about 20% from prior year, taking the full year to $545,000,000 fueled by double digit same store sales and distribution growth. We are pleased by the continued development of this market, which bodes well for our global travel retail businesses, where Mainland Chinese tourists play an increasingly important role. Further, Coach is already recognized both as a dual gender and lifestyle brand as men's products and women's outside of China and Japan, South Korea, Taiwan, Malaysia and Singapore also posted strong aggregate growth, increasing at a double digit rate for the quarter with comparable store sales gains. We posted a 6% decrease in constant currency due in large part to the impact of the April consumption tax increase. Dollar sales declined 10%, reflecting the weaker yen. In Europe, where our brand is small but growing rapidly, we generated significant sales growth at POS and double digit comp 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. As mentioned, during our Analyst Day in June, we announced our long term strategic plan and have taken significant steps to set the foundation for a return to strong growth by streamlining our businesses, continuing to optimize our store fleet in North America and committing to additional brand investments as we begin to execute our comprehensive transformation plan. Importantly, our focus remains on the long term growth initiatives we have previously shared. 1st and most broadly, growing our business in North America and worldwide by transforming into a lifestyle brand. 2nd, leveraging the global opportunity by aggressively growing our international businesses. 3rd, tapping into the large and growing men's accessory market and other lifestyle categories. And 4th, harnessing the growing power of the digital world. We've also discussed our holistic strategy to position Coach as a global modern luxury brand, further differentiating ourselves from the accessible luxury positioning that we defined. From a business perspective, this centers on our product, stores and marketing. As we look to FY 2015, we're investing to achieve long term sustainable growth and a return to best in class profitability during our planning horizon. We are particularly excited about the replatforming of our brand with the launch of Steward's first collection starting this fall. We will also be introducing our new modern luxury retail concept in several key locations during holiday. Our global brand message will reinforce our distinctive positioning of effortless New York style through the use of iconic brand elements dynamic landscape as backdrop. Taken together, these initiatives will pave the way for the celebration of our 75th anniversary commencing in September of 2015. To this end, there are several key strategic priorities that we are now focused on and will implement across our distribution network throughout next year. 1st, in North America, where our priority is restoring productivity, we will close our underperforming stores and rebuild through flagships in our top 12 markets. In addition, we will broaden our presentation in U. S. Department stores, including moving to more open, accessible and fully branded displays, changing our product offering, driving relevance and making Coach more shoppable. We will be further developing our outlet strategy to maximize our modern luxury merchandising strategies, product flow and leverage our new store concept. And finally, we will evolve our North American promotional strategies to continue to reduce the volume of promotional messaging and sales through our e outlet store events. Internationally, we remain focused on our largest growth opportunities and the implementation of our brand transformation, including in China, where we are fine tuning our strategy given the shifting marketplace. In addition, other key Asian markets and Europe offer significant potential for the Coach brand. In line with our plan, over the next 2 or 3 years, we will be making significant investments in building new flagship stores and renovating existing flagships to our new concept with a key focus on international cities. So looking at our FY 2015 plans globally and starting with distribution, we expect that our square footage globally and across all channels will increase about 2% in FY 2015 compared to 7% in FY 2014, a marked slowdown reflecting our North American fleet optimization. Our overarching focus will be on renovations and remodels to drive productivity. To this point, in North America, our directly operated square footage will be down around 5%, given the 70 retail 15 outlet closures, offset by the number of expansions within the context of our transformation and a number of outlet store openings mentioned during our Analyst Day presentation. In retail, we expect to execute on the majority of store closures in the first half of the fiscal year. Store investment activities will be timed to follow the launch of our product, marketing and customer experience initiatives this fall, with our first new retail concepts debuting in November. In outlet, our store closures will take place throughout the fiscal year, with Steward's product for outlet launching in the second half. Separately, reductions in our EOS event cadence began this quarter and will be phased in over the year. And in wholesale, 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 4% square footage, while converting about 250 to 300 locations from case line presentations to open cell, a move we delayed from FY 2014 to align with the launch of our new retail concept. Turning to China. As mentioned at our Analyst Day, market dynamics are changing with the emergence of many new large scale shopping malls and there will be clear winners and losers among retail developments going forward. Given these shifting dynamics and the rapidly evolving macro and competitive environment, we are refining our growth strategies and investing in brand transformation to solidify our leadership position. Importantly, we will concentrate on fleet renewal in Shanghai and Beijing, impacting 80 percent of traffic by FY 2016 and 100% by FY 2017. We will also open regional flagship doors and reinforce Tier 1 and Tier 2 city distribution, where we while we continue to capitalize on Tier 3 and Tier 4 opportunities that are sufficiently developed. In terms of outlets, we will continue to be highly selective with our openings, focused on the best managed and brand appropriate developments. Through marketing, we will build awareness and desire, leveraging our new marketing campaign and promotional model to build brand awareness and drive traffic. Therefore, looking to FY 2015 and given these changing priorities, we are planning distribution somewhat more conservatively. We are planning to open about 20 stores and could have about 10 closures, resulting in around 10 net openings. And we would expect China sales of over $600,000,000 driven by both distribution and positive comps, given the deceleration in square footage with a higher proportion coming from expansions than in the past and a focus of new unit openings in existing markets. While we expect to open a few stores in our other direct Asia markets outside of China and Japan in FY 2015, our portfolio approach is focused on maximizing productivity with only modest growth of our footprint. We have been realizing the benefits of Coach's direct management in these markets and are pleased with the development of both our teams and our brand. Turning to Japan, our largest market outside of North America, we will leverage our brand transformation to positively impact brand perceptions, reengaging our core consumer, while appealing to the category engaged and millennial. Led by retail, our brand transformation plans include renovation of key doors in Tokyo, representing over 70% of the traffic by the end of FY 2016, including a new flagship store in Shinjuku set to open in October, which will be our 1st modern luxury retail store in Japan. We will also renovate key locations in other important cities throughout the country, including our flagship stores in Ginza and Shibuya this spring. In FY 2015, we 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. Most generally, we would 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, which is a large and fragmented market representing about 20% of the total global men's and women's premium bag and accessory category and represents the largest white space for Coach. While our current business in Europe is very small with sales at retail of just over $60,000,000 we see a big opportunity for brands at our price point, which represents the fastest growing segment of the market. Our evolving design direction resonates with the European consumer. Our price positioning and quality offer compelling value, while our heritage linked to New York fashion creates a differentiated positioning. We see brand transformation as an opportunity to provide shoppers in this region with a clearer and more relevant alternative to the traditional luxury brands. In FY 2015, we expect to grow our business to over 100,000,000 dollars adding about 15 directly operated locations and more than 100 wholesale locations. Our goal is 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. As you know, we also have significant growing distributor run businesses in other countries. Our primary areas of focus for what we call domestic focused international wholesale are: 1st, other Asia Pacific markets 2nd, Central and South America and 3rd, the Middle East. 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. Before handing the call over to Jay Nielsen, our CFO, I wanted to reinforce the key points from our Analyst Day about the future of Coach. 1st and foremost, we are an amazing brand and we compete in a growing and very attractive category. At the same time, understanding that we compete on a playing field that is changing dramatically, we as a management team have clear awareness of this evolving market context and the clarity on how to address our challenges and capture the great opportunity that is ahead of us. Importantly, we have the right leaders, the history of operational excellence and the resources to execute our plan. While this will be a journey, the opportunities on the other side are compelling for our brands, our team and our shareholders. And as I stated, as we continue our journey, we are committed to helping you follow and measure our progress. Now I'll ask Jane to provide some additional details on our financials 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 4th quarter and fiscal year results as well as our outlook for FY 'fifteen. Our quarterly revenues declined 7% with North America down 16% and international up 7%. As noted, on a constant currency basis, revenues decreased 6% overall with international sales up 9%. For the fiscal year, sales decreased 5%, totaling $4,810,000,000 with North America down 11% and international up 6%. On a constant currency basis, total sales declined 3% for the year with international sales up 12%. Excluding transformation and other related charges, net income for the quarter totaled 164,000,000 dollars with earnings per diluted share of $0.59 This compared to net income of $254,000,000 and earnings per diluted share of $0.89 in the prior year's 4th quarter, excluding restructuring and transformation related charges. For the quarter, operating income totaled $231,000,000 versus $371,000,000 last year on a non GAAP basis, while operating margin was 20.4% versus 30.3%. During the quarter, gross profit totaled $789,000,000 as compared to $892,000,000 a year ago, while gross margin was 69.4% versus 73%. SG and A expenses as a percentage of net sales totaled 49% compared to 42.6% in the year ago quarter, all on a non GAAP basis. For the full year FY 2014, operating income totaled $1,250,000,000 on a non GAAP basis compared to $1,580,000,000 in the year ago period. Also on a non GAAP basis, operating margin was 26% versus 31.1% last year. Non GAAP gross profit totaled $3,380,000,000 from $3,700,000,000 a year ago with gross margin rate 70.3% versus 73% a year ago. SG and A expenses as a percentage of net sales totaled 44.3% compared to 41.9% in fiscal 2013. As I turn to GAAP metrics, let me recap key transformation and other related charges. For context, and as previously announced at our Analyst Day and its subsequent filings, we expect to incur pretax 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 the remainder to be substantially incurred during FY 'fifteen. These charges are related to inventory and fleet related costs, primarily in North America, including impairment, accelerated depreciation and severance associated with store closures. In total, we expect to capture $70,000,000 in savings related to our transformation initiatives in fiscal 2015 and approximately $150,000,000 in ongoing annual savings beginning in fiscal 2016. 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 in the period, negatively impacting net income by $88,000,000 after tax or $0.31 per diluted share. In July, following our fiscal year end, we announced the elimination of over 150 jobs related to our organizational effectiveness initiatives, representing a 6% decrease in global corporate staffing levels. This plan will drive efficiencies across our business by streamlining our organization and leveraging our global capabilities, resulting in savings that will in part fund key investments related to our transformation. In the Q4 of FY 'thirteen, the company recorded charges of $53,000,000 for restructuring and transformation. In aggregate, these actions increased the company's SG and A expenses by $48,000,000 and cost of sales by $5,000,000 in the period, negatively impacting net income by $33,000,000 after tax or $0.11 per diluted share. Therefore, including these charges, reported net income for the Q4 of fiscal 2014 totaled $75,000,000 with earnings per diluted share of $0.27 bringing total year net income to $781,000,000 and earnings per share of $2.79 This compares to FY2013 4th quarter net income of $221,000,000 with earnings per diluted share of $0.78 bringing the total year FY2013 net income to $1,030,000,000 and earnings per share of $3.61 on a GAAP basis. Moving to the balance sheet. Inventory levels, including our inventory realignment actions last quarter end were $526,000,000 about even with FY 'thirteen year end. Cash and short term investments stood at $869,000,000 as compared to $1,100,000,000 a year ago, substantially held outside the U. S. As noted earlier this year, we continue to deploy international cash into high investments with higher yields and durations over a year. And in turn, there is a shift between cash and short term investments into other non current assets. As expected, we ended the 4th quarter with $140,000,000 outstanding on our credit facility in order to cover our working capital needs in light of investments in our business and new corporate headquarters. During fiscal 2014, we repurchased and retired over 10,000,000 shares of common stock at an average cost of $51.27 spending about 525,000,000 dollars At the end of the year, approximately $835,000,000 remained under the company's current repurchase authorization. As noted in our press release, the Board declared a quarterly cash dividend of $0.3375 per common share, payable in late September, maintaining our annual rate of $1.35 We remain strongly committed to our dividend and as our transformation takes hold, we expect to resume increasing our dividend at least in line with net income growth. Net cash from operating activities in the 4th quarter was $316,000,000 compared to $375,000,000 last year during Q4. Free cash flow in the 4th quarter was an inflow of $254,000,000 versus $293,000,000 in the same period last year. Our CapEx spending was $62,000,000 versus $81,000,000 in the same quarter a year ago. For the full fiscal year 2014, net cash from operating activities was $985,000,000 compared to $1,400,000,000 a year ago. Free cash flow in fiscal year 2014 was an inflow of $766,000,000 versus $1,200,000,000 in fiscal year 2013. CapEx spending totaled 220,000,000 dollars for the year compared to $241,000,000 in the prior year. The decline from previous guidance of about $250,000,000 to $260,000,000 related to a further shift in the timing of retail store and wholesale remodels and conversions into FY 2015. We expect CapEx dollars headquarters, which are now expected to be approximately $100,000,000 in FY 2015 given construction timing estimates. Turning now to our financial outlook for FY 2015. As our annual plans have not changed from those shared during our June Analyst Day meeting, I'll be brief. 1st, 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 North America stores with our e outlet pressuring the aggregate North America comp by an additional 10 points. This equates to a mid to high 20% decline in aggregate comps. Gross margin is projected to be 69% to 70% for the year with higher sourcing costs largely offset by favorable channel mix and lower promotional activity. SG and A expenses are expected to grow at a lowtomidsingledigitrate, reflective of our increased marketing spend and transformation initiatives. When modeling the year, bear in mind that our second and third quarter compare will show the most significant increase given the prior year dollar decline and the timing of our marketing spend in FY 2015. Taken together, we would expect operating margin to be in the high teens. And 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 twenty fourteen. As we aggressively invest in our business, it's important to keep in mind that we are embarking on this journey from a position of financial strength. We plan to fund investment activities from current cash flows while maintaining our dividend. 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 headquarter investment. Over the next few years, our first priority is to invest in our business as we have a compelling opportunity to drive sustainable growth and value creation, And we're putting our capital against this opportunity. Our second priority, strategic acquisitions, is also about growth. While we have nothing planned imminently, we want to have the flexibility to act if and when it's in the best interest of Coach and our shareholders. And third, capital return. As I stated before, as our transformation takes hold, we expect to resume growing our dividend at least in line with net income growth. Underpinning all three of these priorities are our guardrails for allocating capital maintaining strategic flexibility, strong liquidity and access to the capital market. In closing, our transformation required substantial investment and focused execution. We have a clear strategy and articulated implementation plan for FY 'fifteen. We expect to realize a positive impact on the annual financials beginning in FY 2016 with FY 2017 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. We will now begin the question and answer session. The first question today is from Bob Drbul with Nomura Securities. Hi, good morning. Good morning. Good morning, Bob. I just have I have 2 questions and quick questions related questions. On the dividend and the repurchase plans. There's been just a lot of discussion about the sustainability of the dividend at the current levels given your low level of U. S. Cash, your domestic cash flow generation and the expenditure on your New York headquarters. Can you just reaffirm whether or not you see the dividend being at risk, sort of what could lead to a change in dividend policy? And the second question that I have is just more housekeeping. But it does sound like the share repurchase program is on hiatus for now. Like what share count should we be modeling in the FY 2015 numbers? Sure. Thanks, Bob. We've taken a careful look at as we laid out in Analyst Day at our cash flows and our investment needs across our business. And our cash flows and strong balance sheet really allow us to fund our transformation investments and maintain our dividends at our current level. So the $1.35 dollars that the annual dividend that we talked about today with our dividend announcement was an attractive yield now at 4%. As we've indicated, we'll fund our headquarter building, a long term asset with long term debt. And at the current attractive interest rates, we expect that that's a strong capital plan. We've spent about $210,000,000 and have on our headquarters and have another 540,000,000 dollars to fund over the next 2 years. And we factored that into our planning. So feel strongly about our ability to continue to support our dividend. We're committed to our dividend. And as we said, as our transformation takes hold, we'd expect to grow our dividend with our net income growth, and that's our long term outlook. As you think about next year, Bob, we closed the year with 277,000,000 shares outstanding and I would expect with options to that modeling about 278,000,000 shares would put you in good stead for FY 2015. The next question is from Oliver Chen with Citigroup. Regarding the road to becoming a modern luxury company or the evolution there, your comments on the outlet opportunity in the second half, could you just share with us some details on how you see the product portfolio evolving there and what are the biggest opportunities? And also, just as a follow-up, as you engage in the opportunity for lower promotional pressure, what's the timing on that happening? Thank you. Hi, Oliver. It's Fran. I'll take this question. Stuart's product that he's been working on and designing is set to really launch during the second half in outlet. And as we've talked about, what you'll see very consistently is us lessening our dependence on logo product, putting more emphasis on leather and really incorporating all of the design codes from our brand DNA that will be reflected in more updated and relevant products for the outlet channel. At the same time, that newness will allow us to create more value for customers, and put that product into the market at slightly higher average unit retails, than where we are today. The biggest opportunity in terms of lessening promotional strategy is really EOS. That's the most significant strategic initiative that we have. And we know we've been putting out a lot of promotional impressions in the marketplace. By pulling that back, we'll really reduce the amount of promotional impressions that are out in the market. Okay. Thank you. And Jane, on the comp guidance for F515, is average unit retail, what's the how do you see average unit retail evolving? Is it higher due to the lower use of the OS? The biggest impact in terms of AUR that we're modeling, we are going to see some movement as you have seen in our above $400 handbag. We will see some movement in price point and then lower promotional activity both in store and AOS will be a factor in terms of lower discount rates in terms of realizing higher AUR. Thanks a lot. The product in Paris and the department stores look great. So best of luck. Thank you, Oliver. Thank you. The next question is from Barbara Weikauf with CLSA. Hi, everybody. Good morning, Barbara. Hi. Can you talk about the sales in China versus the United States, strength by classification, men's versus women's, regular price versus outlook? And is there a significant difference between what's working in Hong Kong versus Greater China? Thanks. Sure. Thank you, Barbara. In terms of what's working between Hong Kong and Greater China, it is vastly driven by the very large percentage of Mainland Chinese tourists. So I would say there is not a dramatic difference. The local Hong Kong consumer market is quite small. And of course, we do have 1 or 2 locations, which do specifically cater to that consumer where we do tweak the assortment. The consumer there tends to be a little more, I would say, fashion engaged with current trend. And certainly, the team on the ground there is catering to them through assortment, not only of course in our women's, but also in our men's collections as well. As I touched on in my prepared notes, Barbara, in terms of the categories in China, both and I would call it Greater China, Mainland, Hong Kong and Macau, which we refer to as Greater China Coach. The penetration of men's and lifestyle categories together is at about but also with by very good penetrations, which are increasing in our outerwear businesses as well as in our very nascent, but developing footwear business as well. And we started with those strategies very early on. We're still a very small and, I would say developing brand in China in many ways. From an awareness perspective, our unaided awareness in China is only 18%, which compares with say 58% in Japan, 76% in the U. S. So the opportunity for us is truly boundless in that market. Great. Thank you. Thank you. Thank you. The next question is from Brian Tunick with JPMC. Thanks. Good morning. I guess two questions. Hey, Victor. I was wondering from a marketing and product perspective, could you just maybe remind us sort of doesn't sound like this quarter obviously is going to be a big inflection, but you talked about the Q2 and Q3. Can you talk about sort of when we're going to see or the customer is going to see the bulk of the marketing, Steward's product hitting the stores? Just maybe walk us through that thought process. And then secondarily, on the 70 retail store closings, can you maybe remind us sort of what's the productivity of those stores that are closing versus the chain average? Are you assuming transfer? Just give us some idea of how you think the 70 retail closings are going to play out? So we start with the retail closures? Yes. Brian, let's start with the retail closure. Sure. Brian, as we said on Analyst Day, we've got the number of 70 store closures because they're the least productive stores in the fleet. So their impact on the overall top line and from a profitability perspective will be very minimal. We expect to see a small impact on comp improvement. In terms of the rollout of our transformation initiatives across product, marketing as well as our store renovations, Brian, it really does start in the Q2. Product will commence hitting in early September in certain locations and be across the world by mid September. Marketing will also hit at approximately the same time. And then store renovation start later in the Q2 with first locations opening here in North America as well as the flagship store in Shinjuku, Japan that I mentioned earlier in the October, November time period. I would suspect that right now our planning is showing approximately 15 to 16 locations should there not be any shift in the new concept by holiday. And then across the world, we will have in FY 2015 60 new open doors in the new concept and by the end by the end of FY 2015. I'm just going to add one thing, Brian, there. If you remember, we actually had SG and A dollar decline in both our Q2 of FY 2014 and our Q3 of FY 2014. And so when we referenced that those were going to be higher SG and A dollar growth quarters, We were looking at that versus the FY 2014 decline. So they'll look higher in the SG and A dollar growth in Q2 and Q3 of FY 2015. All right. Very helpful. Good luck. Thanks very much. Thank you, Brian. Thank you. The next question is from Ike Boruchow with Surnagie. Hi, everyone. Good morning. Thanks for taking question. Good morning, Ike. Victor, you've talked about the strategy to move away from the online factory sales this year. I was just wondering if you could give us a little more color just to help us kind of understand the impact. Maybe could you tell us what percent of U. S. Sales accounted for EOS last year and where are you trying to lower that penetration to? And then also when does that initiative really accelerate? Because you said it was a 3 point hit this quarter, but you're modeling you're expecting a 10 point negative hit for next year. So I was kind of curious when we build out our quarterly models, when would the impact start to become greater? Thanks so much. Thanks, Ike. As mentioned, it's the decrease in the cadence of events is really being phased in throughout the year. And it will start has started this quarter where we're at right now at approximately 4 of an event per week. That then decreases further in the second quarter. And by the second half of the year, we will be at approximately one event per month. EOS or our E outlet business was over 15% of North American sales at about $500,000,000 Great. Yes, Ike, if you're thinking about comps, we expect that our in store comps will improve moderately as we move through the year, but the impact of EOS will be greater as we move through the year. So the aggregate comps will be relatively stable over the course of the year. Mike, the number I gave you, the $500,000,000 is representative of total e commerce sales, including EOS. Okay. Thank you. Thank you. The next question is from Ed Yruma with KeyBanc Capital Markets. Hi. Thanks for taking my question. I was wondering if you could delineate more specifically the inventory impair inventory versus just flowing through the P and L as a normal markdown? Thank you. So Ed, the way we looked at inventory was consistent with our transformation. We looked at all of our product inventory and looked at certain products that we thought were not consistent with the brand image that we were trying to move into as we moved into Stewart's design aesthetic and looked at whole product, whole SKU lines that we eliminated from inventory and took those as a write off rather than flowing them through the outlet channel and moving them into the market. So we really looked at where we headed, where is the inventory not consistent with that direction and we took the opportunity to write off that inventory at the end of the 4th quarter. We will destroy that inventory consistent with the write off charge. Great. Thanks so much. And just as a reminder, the inventory charge was foreshadowed both in Analyst Day and previewed in our 8 ks filings prior to today. Thank you. The next question is from Dana Telsey with Telsey Advisory Group. Good morning, everyone. Good morning, Dana. Hi. Can you give us an update on the first ever sale that you had in the full line stores in June? How did that do? What were the learnings? How would it be different when you look to the January sale? And any update on the outlook performance versus the prior quarter? Thank you. Hi, Dana. Good morning. The semiannual sale met our expectations. So as you know, our strategy has to be is to be more surgical and strategic with how we're promoting in our retail stores. And in the past, we've done special preferred customer events. We really curtailed those events in the Q4 to set us up for the semi annual sale. So it's a different strategy that really aligns us with kind of the fashion industry and other luxury brands. So it met our expectations in terms of performance. And the goal of the semi annual sale really is to liquidate at end of season, fashion, colors, things that were very specific to the season. We're not looking at it as an overall liquidation strategy. And one of the most important things that we learned this season in our first ever is that it really brought new customers into the store. So we did have a high percentage of our sales that came from new customers into the brand and we did market to it in our windows, in stores and in print advertising. So we were very pleased with the results. Thank you. And then on the outlets, any update there? More specifically, Dana, in terms of? How are promotions tracking versus how they had been in the prior quarter? How you think how you're thinking of pricing in outlets versus the past? Yes. Okay. So, we continue to promote heavily in clearance in outlet during this past quarter, which has been consistent with the quarters before. That put a little bit of pressure on our margins. So we were promotional during the quarter. What we've been doing now is really tapering off that heavy level of promoting. And as we talked about also obviously taking into consideration our online business, the EOS business pulling that back. What we're doing is emphasizing newness in outlet, positioning ourselves at higher average unit retail prices going out with new product launches and we're finding that strategy to be very, very successful. So it is allowing us to lessen our dependence on clearance. We also have a number of pilots and testing in the market right now with different constructs to again reduce the level of promotional activity, while maintaining good levels of conversion. Thank you. Thank you. Our final question today is from John Morris with BMO Capital Markets. Thanks. Good morning, everybody. Following up on the, I guess, the outlets a little bit. I think back on the Analyst Day, you talked about experimenting or maybe kind of piloting a program where you might close a couple of outlets and then see what happens in the full price stores in similar proximity. Can you give us just remind us the numbers that you're looking at if there's any change there? Was it just a couple? When the any changes to your thoughts on that? And then just a quick comment about the launch of the men's footwear line when that might be happening and is that across all stores? Thanks. Okay. So no, we are still planning on closing 2 outlets consistent with what we said on Analyst Day. Those 2 outlet stores will be closing in the second half. And we really picked the 2 that we chose. They're part of the 12 MSAs, our metropolitan statistical areas that we're So it So it's going to with these closures allow us to measure the channel shift. And in these stores, there's also a competitive presence. And what we're going to be able to measure is will the consumer shift to another Coach channel? Can we influence or guide her to shift through targeted and strategic communication strategy? So that will happen in the second half, and we're still on target for that. In terms of men's footwear, we're launching men's footwear in the fall and it will be a small launch, but we plan to bring footwear to our men's locations and in about in retail specifically in about 50 locations for the fall half. Great. Good luck, guys. Thanks. Thank you. Thank you, John. Thank you. That concludes our Q and A. I'll now turn it back to Victor for some concluding remarks. Thank you, Andrea. Let me start by thanking all of you who did attend this at our attend our Analyst Day and as well of course for being with us today. I would just like to close by expressing my confidence in our plan, our brand and most importantly in our people. As a company, this team has an amazing track record of transformation, business success and driving shareholder value. And our management team has clearly understood and embraced the need for change, the need to innovate and to evolve in what is a rapidly changing market. Our plan is bold and I certainly could not be prouder of the steps we've already taken in bringing Coach the creative talent to innovate and to bring excitement and resonance to our brand across all of the consumer touch points that we have been sharing with you. As we look to FY 2015, it's a year of change and we all look forward to keeping you in