Earnings Call: Q2 2014

Jan 22, 2014

Good day, and welcome to the Coach Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Senior Vice President of Investor Relations and Corporate Communications at Coach, Ms. Andrea Shaw Resnick. You may begin. Good morning, and thank you for joining us. With me today to discuss our quarterly results are Victor Luis, Coach's CEO and Jay Nielsen, Coach's CFO. Francine DellaVadia, President, North America Retail is also joining us. Before we begin, we must point out that this conference call will involve certain forward looking statements, including projections for our business in the current or future quarters or fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon risks and uncertainties, such as expected economic trends and our ability to anticipate consumer references. Please refer to our latest annual report, some forms and paper to list of these risk factors. Also please note that historical growth trends may not be indicative of future growth. Now let me outline the speakers and topics for this conference call. Victor Luis will provide an overall summary of our 2nd fiscal quarter 2014 results and will also discuss our progress on global initiatives. Francine DellaVadia will discuss our business in North America in more detail. Jane Nielsen will conclude with details on financial and operational highlights for the quarter. Following that, we will hold a question and answer session, where we will be joined by Lou Frankfort, Coaches' Executive Chairman. This Q and A session will end shortly before 9:30 am. Victor will then conclude with some brief summary remarks. I'd now like to introduce Victor Luis, Deutsche's CEO. Good morning. Thanks, Andrea, and welcome, everyone. As we enter the new calendar year, I couldn't be more excited to be greeting you today as CEO of Coach, succeeding our Executive Chairman, Lou Frankfort. It is an honor to have truly unique moment in time. We are faced We are at a truly unique moment in time. We are faced with a new competitive landscape, evolving consumers and changing shopping patterns. We are seizing the opportunity to define modern luxury by driving innovation, emotion and relevance into the Coach brand. Change and a sense of urgency are not new to our history. Many of you know that we talk about Coach's history in chapters. In our first chapter, Coach defined luxury leather goods for the American consumer. In our second chapter, we created the accessible luxury handbag and accessories category in North America and key Asian markets. And now I together with Stuart Beavers, our new Executive Creative Director and our seasoned Coach team are excited to write Coach's 3rd chapter, our transformation into a global lifestyle brand anchored in accessories. We will accomplish this by focusing on our key brand equities of authenticity, quality, craftsmanship and value. As noted in our press release, during the holiday quarter, total sales fell slightly in constant currency as weakness in our North American women's bag and accessory business offset strong growth in men's footwear and robust sales in emerging Asian markets in Europe. We continue to be disappointed by our performance in North America, which was impacted substantially by lower traffic in our stores and by our decision to limit access to our e factory flash sale site. At the same time, China results remained resilient with total sales growing about 25% and comparable store sales rising at a double digit rate. Importantly, we continue to advance our transformation initiatives and position Coach to launch Stewart Beaver's first collection in September. Before getting into the final details of the quarter, I want to start with key milestones in our transformation journey. As you know, we are focused on the 3 primary aspects of brand experience product, stores and marketing. Starting with product, we continue to see strength in men's and footwear, 2 categories that have undergone significant evolution in previous years and quarters. The story this quarter was the introduction of capsule, notably the success of the Burrow Bag, a prelude to a comprehensive replatforming of our women's assortment across bags, accessories and lifestyle categories. Stuart has made significant progress leading Coach's design team to re platform our assortment to both imbue more emotion in the product and elevate the brand. In fact, we're presenting Coach's first ever collection in February during New York Fashion Week. The presentation will be a series of 1 on 1 or small group appointments over a 5 day period. The goal of presenting in this format is to create the opportunity for Stuart to present the fall collection and personally share his inspiration and vision for the brand with the fashion community in an intimate and informative environment. Moving on to stores, there are a few areas of progress to note. The highlight of the quarter was the unveiling of a new store concept in 2 key flagship locations in New York and Southern California. In addition, our holiday store windows, a brilliant season, reflected our move toward installations rather than simply monthly product backdrops. And finally, on marketing, we launched a new fully integrated marketing campaign, Coach New York Stories, showcasing top fashion models wearing Coach set against recognizable New York backdrops. While our journey has just begun, we have confidence in our vision of what we need to do and have the strategies in place to realize that vision. As was the case with our former transformations, we recognize that this is a multiyear endeavor, which requires single mindedness, tenacity, nimbleness and patience before it will be fully reflected in our financial performance. Turning to the results of the last quarter, some key financials were: 1st, net sales on a reported basis totaled $1,420,000,000 versus $1,500,000,000 a year ago, a decrease of 6%. On a constant currency basis, sales declined 3% for the quarter. 2nd, earnings per share totaled $1.06 dollars as compared to $1.23 in the prior year's Q2. 3rd, international sales increased 2% to $425,000,000 from $418,000,000 last year. On a constant currency basis, international sales rose 11%. Sales in China remained strong, increasing about 25% with the continuation of double digit comps, while sales in our directly operated locations in Asia ex Japan and Europe rose sharply as well. And 4th, North American sales fell 9% to $983,000,000 from $1,080,000,000 last year with direct sales declining 8% on the 13.6% comparable store sales decrease. During the quarter, looking at distribution, the company opened 1 North American full price location and opened 7 factory stores, including 1 men's freestanding store. At the end of the period, there were 351 full price and 205 factory stores and about 155 outlet malls in North America. Moving on to China, during the quarter, we opened 10 net new locations with 2 locations in Hong Kong and 8 on the Mainland, bringing the total number to 142 locations, including 122 on the Mainland and 51 Cities. In Japan, as expected, we did not open any new locations during the quarter. There are 196 directly operated locations, which include 149 full price and 47 factory locations Also in Asia, during the Q2, we opened 2 locations in Malaysia, 1 in Korea and 1 in Taiwan, bringing the total to 98 directly operated locations in the balance of Asia, including 49 in Korea, 28 in Taiwan, 12 in Malaysia and 9 in Singapore. In Coach Europe, we opened 4 directly operated doors, including Serrano, our first flagship in Madrid 2 shop in shops and Galleries Lafayette in Paris and a shop in shop in El Corte Ingles. As of the end of the quarter, there were 24 directly operated locations in Europe across the UK, France, Ireland, Spain, Portugal and Germany. We also opened several wholesale doors in the UK, Germany, France and Italy. Moving on to sales and productivity, our total revenues in North America declined 9% for the quarter with our directly operated businesses down 8%. As noted, total Q2 same store sales declined 13.6%. While men's and our relaunched footwear categories continue to perform well, we remain disappointed by our overall performance in women's handbag and accessories. Fran will provide some additional granularity to our retail businesses in a moment. In department stores, sales trends at POS were slightly below prior year, while shipments into department stores declined as planned. The outperformance vis a vis our retail stores was reflective of the overall channel and generally better traffic trends than the malls at large. Overall and consistent with the September quarter, we estimate that the North American premium women's handbag and accessories market again rose at a high single digit rate in the 2nd quarter. Turning to men's. As we've discussed, we're also continuing to drive our men's business globally through new standalone and dual gender stores through new standalone and dual gender stores and by dedicating more space for a broader men's assortment in existing retail stores. In the 2nd quarter, Coach's sales of men's bags and accessories increased nearly 20% globally. Looking ahead, we remain bullish about the prospects for our men's global business, where we're continuing to target about $700,000,000 in sales in FY 'fourteen, up about 20% from last year and $1,000,000,000 in sales in 3 years. Turning now to our international segment, which represents about a third of Coach's business. Sales rose 11% on a constant currency basis in the 2nd quarter, but only 2% on a reported basis, primarily due to the weak yen. As expected, China sales rose about 25% from prior year, fueled by double digit same store sales and distribution growth. We are very pleased by the the continued development of this market, which bodes well for our global travel retail business, where Mainland Chinese Tourist plays an increasingly important role. Further, as Coach is a relatively young brand in China, we are already recognized as both dual gender and lifestyle, as men's products and women's lifestyle categories taken together represent over a third of sales. Our other Asia direct businesses outside of China and Japan, Korea, Taiwan, Malaysia and Singapore also posted strong aggregate growth, increasing at double digit rate for the quarter with robust comparable store sales. As a reminder, we anniversaried the purchases of our retail operations in Malaysia and Korea during the Q1. So our business is now apples to apples, no longer benefiting from a wholesale to retail step up. In Japan, we posted a 2% decrease in constant currency, while sales in dollars were down 21%, reflecting the significantly weaker yen. In Europe, where our brand is small, but growing rapidly, we generated significant sales growth at POS and strong 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 accessible luxury segment is outperforming traditional luxury. While Jane will get into more details on our financials and I will discuss our outlook in some detail shortly, I wanted to give you this recap. Francine Della Badia has joined us today to review our holiday season and discuss our business in North America in more detail. Fran? Thanks, Victor, and good morning. As Victor mentioned, we continue to feel pressure in our North America business and traffic in our retail stores impacting women's handbags and accessories. Simply put, we were dissatisfied with our performance in these categories. As I did last quarter, I'm going to give some underlying texture to the comp performance, both in our successful and strong product initiatives, which are resonating with consumers and where we see the opportunities to strengthen our product positioning in North America. As was the case industry wide, in store traffic decelerated further from Q1 levels as the national retail traffic index posted the steepest holiday season decline in at least 6 years. Similarly, in factory malls, which are primarily open air, in traffic, notably in the key weeks leading up to Christmas, we did not experience the build that we expected. On these lower levels of foot traffic throughout our store base, overall conversion rose and transaction size held. While in previous quarters and years, we were able to offset slowing in store traffic on the Internet, our online business did not contribute positively to our overall North America comp. Our year over year comparisons were impacted by our strategic brand health decision to both eliminate third party flash events as well as limit the access and invitations to our factory flash sites. Excluding these factors, our Internet comp would have experienced moderate growth. What we have found, as was alluded to earlier, is that when we do offer fashion innovation, our customers do respond. As Victor mentioned, the story this quarter was the introduction of Capsule. All of our full price stores in North America received a new Capsule handbag silhouette, the Burrow, in 2 sizes and 3 colors. A tiered offering of more fashion handbags in additional colors and materials were offered in select flagship locations with the full assortment, including ready to wear, available in 25 global flagships, including 11 in North America. This all store silhouette priced at $5.48 $7.98 experienced strong sell through surpassing our internal expectations. Importantly, we experienced no price resistance. More generally, the above $400 price bucket grew in penetration and represented 22% of handbag sales, with the strongest performance at the upper end of our range, $600 higher. Emotion clearly trumped price as our consumer is willing to pay more for style categories in Q2. Footwear, which relaunched last spring in about 170 full price locations, rose in penetration from about 5% to over 8% at higher AURs, reflective of the compelling assortment. This category performance highlights our consumers' desire for more emotional, trend right fashion products. We're seeing strong performance across heels, flats and booties. We remain focused on building our market share within the fragmented nearly $25,000,000,000 global premium footwear category. For holiday, we introduced more dominant fashion footwear assortments in our international and wholesale locations and continue to focus on building artsy items. We're evolving our mix and growing both AURs and overall penetration levels across all of our businesses. At the end of Q2, nearly 150 Coach International retail locations offered the elevated women's collection and response from customers has been excellent. In factory, after a strong Black Friday weekend, we did not experience the anticipated build in traffic in the weeks leading up to Christmas. However, similar to Full Price, we are seeing the consumer respond to distinctive newness and fashion innovation, as well as an overall shift to leather versus logo. Faux Exotics, Pearlized and Gathered Leathers performed better than we expected at above average price points. The fact that we're experiencing a strong appetite for more elevated product is exciting for us. We were also pleased with the performance of outerwear, footwear and the newly introduced watch and jewelry categories. We have also remodeled a majority of our factory stores into our new factory design concept, including enhanced visual merchandising and marketing elements. We are using elements of our New York Stories marketing in the windows, elevating the look and feel of these stores. In terms of our full price store design, Victor touched on windows and most importantly, our new full price concept stores on Lower Fifth Avenue and South Coast Plaza. These stores are a physical expression of transformation as we bring our brand positioning to life. They're modern, elevated, elegant and warm and offer our customers a more complete dual gender lifestyle experience. They invite customers into a much richer relationship with our brand, giving Coach greater relevancy and fashion credibility. In the weeks since they have reopened, we have seen our customers explore the stores and engage with our product and brand in new and exciting ways. We view these locations as laboratories. We will live in them, learn from them and ultimately be able to take key elements and roll them out more broadly across the fleet. This spring summer, you will see bolder, more feminine visual merchandising initiatives, especially in our most prominent flagship locations and concepts that will be represented in all stores, continuing to elevate marketing and our brand positioning. Our fall marketing campaign communicated a more aspirational and consistent brand story, reinforcing the bond with our existing consumer, while driving new customer engagement globally. During the holiday quarter, we evolved the campaign with new tastemakers, such as Misty Copeland, the first African American lead ballerina for the American Ballet Theatre Michael Chernow, a founder of the Meatball Shop and Gia Coppola, a photographer. They're all telling their own New York story featuring their favorite Coach product. In summary, we're confident in our roadmap to restore productivity in North America. While we recognize this will take some time and are clearly disappointed with our recent performance, we are focused on maintaining our operational excellence. We are making the necessary investments in our digital capabilities as the business becomes increasingly omnichannel. And we're reviewing our store fleet systematically, calling where necessary and investing where appropriate. With that, I will turn it back over to Victor for a discussion of our international business, strategies and further opportunities for growth. Victor? Thanks, Frank. Our strategic focus remains on the 4 pillars of growth that we have previously shared. First and most broadly, growing our business in North America and throughout the world by transforming into a global life style brand anchored in accessories. 2nd, leveraging the global opportunity by aggressively growing our international businesses. 3rd, tapping into the large and growing men's accessory category, which we've already touched on and 4th, harnessing the growing power of the digital world to both drive e commerce and customer engagement globally. While focusing on productivity, we will selectively continue to expand our distribution As our annual plans haven't changed materially from what we shared in July and in October, I will be brief. We still expect that our square footage globally and across all channels will increase around 9% in FY 2014, consistent with prior guidance. In North America, our directly operated square footage will be up about 7%, driven by about 15 new store openings focused on factory, about 20 expansions within the context of our transformation and 15 to 20 previously announced full price closures. In China, as we discussed, we're on schedule to open about 30 net new dual gender locations, increasing our square footage by about 25%. And as noted in our press release, our sales remain on track to reach $530,000,000 this year, driven by both distribution and double digit comparable location sales. While we expect to open a few stores in our other direct Asia markets of Korea, Taiwan, Malaysia and Singapore, our primary focus remains productivity. 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. In Japan, we expect net square footage growth will increase slightly with the opening of about 5 to 10 net new locations, most of them dedicated men's doors. And in Europe, including the UK for FY 'fourteen, we still expect to open about 10 retail locations focused on key European cities and now plan to open about 30 total wholesale locations. As you know, we also have significant and growing distributor run businesses in other countries. Our primary areas of focus are: 1st, other Asia Pacific markets, including Australia, Indonesia, Thailand, Vietnam and the Philippines. 2nd, Latin America including Mexico, Brazil, Colombia, Venezuela, Panama, Peru, Chile and Argentina and 3rd, in the Middle East. I've just reviewed our transformation progress, ongoing strategies to reinvigorate growth, while taking steps to improve productivity in North America. Importantly, we are confident in our vision and we have the right team and resources to execute our transformation already underway. At this time, I will turn it over to Jane Nielsen, our CFO, for further details on our our financials. Jane? Thanks, Victor. Victor and Fran have just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our second quarter results. Our quarterly revenues decreased 6% with North America declining 9 percent overall, while international sales rose 11%. Net income for the quarter totaled $297,000,000 with earnings per diluted share of $1.06 This compared to net income of $353,000,000 and earnings per share of $1.23 in the prior year's Q2. Our operating income totaled $436,000,000 as compared to the $527,000,000 reported last year, while operating margin was 30.7 percent versus 35%. During this quarter, gross profit totaled 9.80 $3,000,000 versus the $1,090,000,000 a year ago. Gross margin was 69.2% versus 72.2% for the prior year. Our expense ratio in Q2 totaled 38.5% compared to 37 0.2% reported in the year ago quarter. Our SG and A dollars actually declined slightly on a year over year basis as we managed variable costs to the lower sales levels, adjusted our outlook for lower performance based compensation levels and benefited from the weaker yen. We also realized the benefit of our 4th quarter restructuring actions in the sale of RK, which were offset by higher spending on Coach brand marketing as well as the impact of taking Coach Europe in house. Inventories at the end of the quarter were $553,000,000 12% above the 494,000,000 dollars reported at the end of last year's Q2. As mentioned on our last call, we've planned for inventory levels to be up over the balance of the fiscal year based on several key factors, including distribution growth, the acquisition of Coach Europe, higher average unit costs and our expansion into lifestyle categories. In addition, sales growth that is below our expectations is also driving inventory levels. However, our operating model with a robust factory channel allows us to view our inventory as currency and our balances are high quality and current. Cash and short term investments stood at $799,000,000 as compared with $859,000,000 a year ago. On the balance sheet, we continue to deploy international cash into high quality 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. During the second quarter, we repurchased and retired about 3,300,000 shares of common stock at an average cost of $52.99 spending a total of $175,000,000 At the end of the period, about $1,000,000,000 remained under the company's repurchase authorization. Net cash from operating activities in the 2nd quarter was $400,000,000 compared to $628,000,000 last year during Q2. Free cash flow in the second quarter was an in flow of $340,000,000 versus an inflow of $567,000,000 in the same period last year. Our CapEx spending was $61,000,000 even with a year ago. Consistent with our guidance last quarter, we expect the CapEx this year will be in the area of $280,000,000 primarily due to new store openings and expansions across all geographies, elevating our store environment within our existing stores and investments in the technology and infrastructure necessary to enable our global expansion and transformation. Based on our 2nd quarter results, we've modified our outlook for the balance of the year as follows. We now expect to deliver low single digit sales declines in constant currency in the second half. Assuming the yen remains close to $104 this would equate to lowtomidsingledigit rate decrease in sales for the balance of the year in dollars. For the full year, this would take us down low single digits in constant currency and lowtomidsingledigits in dollars. Also, we are forecasting our North America comp run rate to be in the range of our Q2 levels for the balance of the year, with 3Q the more difficult compare given the Easter shift. Gross margin is projected at about 70% for both the back half and the year. The primary impact compared to last year will be increased factory promotion levels, the weaker yen, rising sourcing costs as well as inventory amortization from the JV acquisition in Coach Europe. We continue to expect modest mid single digit SG and A dollar growth in the second half with increased investments in Europe, marketing and other brand transformation initiatives generally funded by the restructuring actions taken in last year's Q4, but with some deleverage on lower on the lower sales forecast. Therefore, for the full year, SG and A will be up low single digits. Taken together, we would expect operating margin to be in the area of 26% to 27% for the year. Finally, our tax rate is expected to be around 32% for the year. Regarding the balance sheet, cash flow, capital and capital allocation, we expect to have strong we expect to continue to have a strong balance sheet and substantial operating free cash flow. We will prudently invest in the growth of our business while returning cash to shareholders through dividends coupled with share repurchases. Our current FY $700,000,000 in share repurchases, approximately equivalent to our prior 3 year average. Our long term commitment to growth and shareholder value are unchanged. We have a business model that generates significant cash flow and we are in a position to invest in our brand, while continuing to return capital to shareholders. I'd now like to open it up to Q and A. Thank you. The first question today is from Ike Boruchow with Stern AG. Hi, good morning everyone and thanks for taking my question. I guess Victor, I wanted to ask about some of the initial steps you've taken in this transformation both from a product perspective. I mean, sounds like the Burrow Bag has been a hit and the lifestyle stores look great, but both have been done on such a small scale. So I guess the question is, why wouldn't you be a little more aggressive from both the product and stores perspective on some of these changes that do appear to be working? And then a quick follow-up would be internally what gives you the confidence that Stewart's product will work and that the brand is still healthy? Thanks, Ike. Let me start with the second part of your question, which really is about confidence around the brand. I not only have the pleasure of leading the best team in luxury specialty retail, but also without a doubt, the leader in the space from a brand perspective. We are the original U. S. Luxury brand. We are the most authentic brand. And certainly, any piece of research that we see today and which I know many of you also do shows us as the most loved brand in the space. Of course, the environments around us have shifted. Consumer shopping behaviors are changing. There's a new competitive environment. We realize that. We're grasping that opportunity through our transformation and are very cognizant of the need for us to tell a richer story to our consumers and provide a richer context, which is what we're doing through our strategies and through transformation. And with Stuart Vevers as our Creative Director, we've undertaken that journey. He's been with us for 4 months. And just yesterday, internally, we showed the first collection. And I can tell you that the energy amongst his team was palpable. We are extremely excited by the initial steps we're taking. Stuart is providing us with a rich quality, great purity of design, understanding materials and craftsmanship, but also providing a fashion relevance for the brand like we've never had. So we're incredibly excited about that. In a minute, I'll ask Lou to give you his opinion as well because obviously having been in our journey for 35 years, he can certainly compare it with past years. In terms of the borough and the stores, we want to be, of course, learning on everything that is happening. The borough was developed by our team 12 months ago. And we made the initial buys. We've gone back in. You're going to see increasing presence of that specific silhouette across the fleets in North America and globally. In fact, from this floor set, if you were to visit stores today relative to holiday, you'll see an increased presence there. And in terms of the fleet rollouts of the new concept, the lifestyle concept that I know many of you have visited at Lower 5th and perhaps in South Coast Plaza. As Fran touched on the feedback from consumers and just our staff and their interaction with them has been very positive. So we're learning, we're tweaking obvious fixture programs and the like and over the next weeks months, we'll be making decisions on how extensively we roll that out based on the feedback. Lew, perhaps you want to give your comments on what you've seen in relation to Stewart's first development? Sure. Just for some context, our brand grew organically from our product. Before we had a great brand, we had a great product. And the attributes of the product, as Victor mentioned, authenticity, craftsmanship, quality and value were the cornerstones of our product and eventually became key brand equities. Today, when we look at the product that we're going to be launching in our first ever presentation well, first ever presentation next month launching in September, Stewart has been absolutely true to our underlying brand equities. The product is rich. It's elevated. It's original. He has interpreted and brought forward the many codes that consumers have come know and embrace for Coach. And in closing, the product is imbued with emotion. It resonates with quality and is quite appealing. The next question is from Oliver Chen with Citigroup. Hi, thanks for all the details on the guidance. Regarding the factory channel and the promotional nature of what's happening there. Could you highlight a potential catalyst for abatement there and what you're seeing competitively within the marketplace? And just as a follow-up, to help us set expectations for your business going forward, How do we think about timing for a better comp store sales? And what should we prioritize as the key drivers for that happening? Thank you. Hi, Oliver, it's Fran. I'll start with your factory question. In terms of factory stores, as we mentioned, we had a strong Black Friday weekend, and then we're disappointed by the deceleration of traffic post that in the weeks leading up to Christmas. We have been promoting more heavily, specifically on the clearance end of the business in factory to move through some inventory and manage our inventory as efficiently as possible. So the good news is that Maria's new product and the new design that we have in the stores is really checking with consumers and we are selling that product extremely well at above average factory price points. And so when we have the traffic, we are able to very effectively convert and actually move ticket. So as we are into the spring season, we anticipate holding that traffic that we should be able to continue down the path of being really proud of the product that we put into factory stores and continue to convert the customers that are walking in. And the second question was just more about setting appropriate expectations for the timing of the turnaround of the comp and which drivers would you prioritize for us as the most important aspect? Okay. Oliver, Victor is going to answer that second part. Thanks, Oliver. Certainly, we're committed to driving productivity as we have discussed and long term value for our shareholders. We have, of course, also guided that we will not forecast the change in the trend until we see it. There is, of course, the knowledge that traffic is a lagging indicator. We're going to see conversion being the main driver. We're excited about the fact that we have a tremendous amount of internal excitement already in what we're seeing in new products coming out for September. We know that while shopping behaviors are changing, all of our traffic is being impacted globally. This is truly about great brands. And we're focused on driving relevance for the Coach brand, getting back to the core, creating exciting shopping experiences for consumers, engaging with them online and in the stores in new and exciting ways, which is necessary in this changing environment and doing so, of course, through all of our marketing mediums, whether it be through traditional advertising, social media and the like. And we're on a journey. And we will take you along with us on that journey. And we're very focused, of course, on the fall as a very also the presentation of Stuart's first full collection in our full price channel where we will have the largest single introduction of new SKUs that we've ever had in one launch. Thank you. Best regards. Thank you, Alvaro. Thank you. The next question is from Liz Dunn with Macquarie. Hi. Thanks for taking my question. I guess my question is relative to your place in the marketplace. I guess you talked about the overall North American handbag market still being fairly robust, but obviously your business was tough, traffic was tough. Do you think it has to do with a shift to business online or where I'm just sort of struggling with how the overall market remains as robust as you see it being, but your problem is primarily traffic. If you could just help add context, is it that you're just not checking online to the same extent that your competitors are? Or where do you see what channel do you see losing the most share in, I guess? Liz, I think that most retailers today are seeing that the shopping mall channel is seeing the most pressure in terms of traffic overall. Our online business is more mature than perhaps some of the other competitors that we have. We've been in this space longer than most of our competitors. But saying that, as we discussed in our notes, we did take very important strategic decisions this past quarter to limit access, especially on our flash site as we look at driving brand equity moving forward. We know this is a long term journey. Specifically, we did not have 3rd party events via our flash web sales as we had this time last year. And we've been also very vigilant in ensuring that we try and keep resellers off of our flash web sales model because of the impact that it has, of course, through the parallel channels, both domestically and international. Our number one opportunity, of course, is in recruitments of consumers into the franchise here in North America, where we are still the leaders. We know that that's going to happen in an omnichannel way, both through the wholesale channel through our current partners where there's a definite opportunity for us to drive further relevance and a further strong presence for our brand, of course, through our own stores, and we realize that the full price channel has to lead. This is something we've shared with you, and we were very focused on driving relevance through that as our most important priority because of the halo that, that plays across the entire brand. And for those of you that have visited our Lower 5th Avenue store and you compare that experience with the rest of the Coach fleet, and you can imagine that across an entire fleet as we tweak it, develop it and perfect it, I think you see a Coach of the future. And of course, as well through the digital channel, which is not only an important channel for communication, but increasingly for e commerce. So it's really about the brand across all channels. Thank you. The next question is from Piyush Lune Boiner with JPMorgan. Hi, thanks for taking my question. It is very encouraging that you mentioned you did not see price resistance and higher price points performed better. So when we get Steward's first product in September, where should we expect AURs for that line compared to the collection it will replace? And then you mentioned that you limited access to the factory flash sale websites. I'm just trying to get a sense of how material that was. Was it a significant portion of customers or business you cut out? Thanks. Hi. In terms of average price points, in the over $400 bucket, as we talked about strength in that in the prepared remarks, we actually had a 7% increase in AUR over last year. So as we anticipate Stuart's collection and look forward to his fall, the newness in his product. We do anticipate that AURs will increase, and important balance in the assortment is important. But seeing that we are performing well in the categories where we have very emotional product, the consumer is willing to pay for it, and we will price the goods accordingly. In terms of the Internet and the limitation of the flash sale sites, we did eliminate 3rd party, as we've said, and paid search as well, and the reseller impact. Those things taken together did have an impact on the overall performance of our Internet business. And if we took those out, we would have seen a moderate increase in Internet sales. Thank you. The next question is from Bob Drbul with Nomura. Hi, good morning. I guess I just had one question. What led to the decision to have an Analyst Day? And what do you plan to share with us on that meeting? Hi, Bob. Glad to have you back with us. We want to share in detail the vision that we have. Obviously, seeing is believing. You will all be able to see the product in all of its glory, meet the team that's here, which is, as I've shared and we believe strongly without a doubt, the best team in the space, and share with you our vision for the future. Great. Thank you very much. Thank you. The next question is from Kimberly Greenberger with Morgan Stanley. Thank you. Good morning. Victor, you mentioned the endeavor to restore brand equity. And I'm just wondering how do you think about that effort over time with the ongoing increase in square footage in factory? It would seem, in some ways that those two things work against one another, given that typically expansion in factory is not really brand enhancing. It certainly increases distribution opportunity, but having more discount product out in the marketplace would not really seem to be congruent with the effort restore brand equity. So I'm just wondering if you can help us with how you think about those 2 sort of opposing forces. Sure, Kimberly. It's obviously a question we get often. And what I would share is that we believe the brand, 1st chain. And what you see, again, in Lower 5th, what you see in South Coast Plaza in terms of a direction for the future of our fleet and the equity that we want to drive through that fuller lifestyle experience where consumers are engaging with the brand differently, without a doubt, we'll be both a business driver, but just as important, if not more so, the halo for the entire multichannel strategy that we have. Outlets in terms of their importance globally are unquestionably the fastest growing certainly bricks and mortars channel in the luxury space. That is not only true for U. S.-based multichannel brands. It is increasingly true for European and traditional luxury brands who are driving further relevance for the channel globally, whether it be here in the U. S. Where it's quite a mature channel, but of course, increasingly in Europe and now more than ever increasing in China and the rest of Asia as well. And so as that channel grows, we want to make sure that we participate in it and take our fair share there. Saying that, we're very cognizant of the need as a result of increasing competitive pressures in that channel as well to remain relevant there. Many of you have visited our Dare Park rollout, which is now our global rollout already, which we believe in that channel elevates the brand, provides a terrific experience. And I think just as you're seeing and will see increased value, not just through price, but through great product, emotional product in our full price channel, you will continue to see that moving forward in our factory channel. And that is the key. The key is not just to see it as a promotional channel, but to see it as a channel, which is of relevance to a certain consumer, who does not shop in other channels and where we have a leadership position and see continued growth moving forward. Thank you, Victor. Thank you. The next question is from Faye Lambis with Cowen and Company. Hi, good morning and thanks for taking my question. On the outlet thing, can you just give us some dimension? I'm trying to question first. You implied that you're going to be selling the excess full price products in the outlet channel just to get rid of the inventory you have right now. How quickly do you think you can clear that? Because as you've often indicated before, that's not the core of your outlet strategy? Hi, Faye, it's Jane. Our outlook is that we will return to we'll be able to move through a great deal of our inventory over the next several quarters. And given the size of the productivity of our factory channel and the volume that we move through there, we have a lot confidence that we'll be able to clear through our inventory profitably over the next several quarters. Yes, it's great. Faye, I would just add that this is not new for us. Many of you who've been with us on our journey know that even during the 2,008, 2,009 prices, it didn't take us more than 2 to 3 quarters. This inventory is currency for us. It's no more than 5% of our total sales, and we've always sold full price deletes in our factory channel that adds to the relevancy of that channel. There are many consumers who are obviously looking for the hunt of what was in full price in previous months. And so we look to it as an opportunity and not necessarily as a negative. Okay. I just want to there are several drivers of inventory, some of which are one of which is our sales outlook that was lower than expectations. But some core drivers like our distribution expansion, our higher average unit costs and the acquisition of Coach Europe and our expansion into lifestyle categories has elevated inventory levels, some just based on the nature of the business. But in terms of that, which is excess because of our sales outlook, we'll move through that very quickly. Okay, great. Thanks. Thank you. The next question is from Laura Champine with Canaccord. Good morning. This is, I'm afraid, just an extension of what Liz has already asked, which is, can you talk about what is driving the strength in the category and how you diagnose the in the most important quarter of the year an acceleration in market share loss and what is being done specifically to address that other than obviously new product coming with Stewart's arrival? Thank you. Well, the strength in the category really speaks to the message that we've been putting out there for many quarters now, which is obviously that consumers are increasingly look to accessories as the most important part of their wardrobe. It's what they are doing and leveraging in essence to identify themselves as they spend less on apparel and more on accessories. This is a cyclical shift that has been going on for over a decade now. Obviously, as a result of our own success, as a result of this growth in the category, there's increased competition. That competition creates excitement in the category, which continues to drive it. The opportunity for us, of course, is to leverage our solid equities in our brands, the amazing team and know how that we have, and with new creative direction to drive relevance in our brands and take our fair share of the market as we have in the past, and that's what we intend to do. So our strategies for dealing with that are everything that we have been sharing with you in terms of transformation. We're excited about having you all together with us on June 4 when we will share not only with you the details of our vision, but of course, the strength of this team in terms of what we're doing and how we're going to execute moving forward. And just as a follow on, is there a concerted effort to elevate the brand? And how might that change the market size that you can address in North America, if I am hearing that right, that there is an effort to elevate the brand to higher price points? Yes. It's a terrific question. You will see some increased SKU count at the higher price points, but our strategy is not to change the range of our price points. Many of you will remember during the financial consumer confidence at levels that are much better and the increased consumer confidence at levels that are much better and the increased competition and excitement around the category is an opportunity for us to leverage our core strengths, our authenticity, quality, heritage and the respect that consumers have for Coach as the leader in the space to continue to elevate and rebalance our assortment now to more SKUs in the above $400 space. This is not about us becoming a European luxury brand tomorrow. This is about us driving desirability and driving, if you will, confidence in the brand, in the mind of the consumer through increased value through quality. Thank you. Thank you. The next question is from Randy Konik with Jefferies. Great. Thanks a lot. Can we just, I guess, follow-up on that with pricing architecture? Because you say you said, I guess, on the call that about 22% is done at the greater than 400 price point, which is doing well. But 80% of your business is below that. And when you look on the website, you're hit with price points right away that are $598,658,000 etcetera. And when you look at your core your key competitors, they're opening pages on their websites are $298,000, 328,000 to 4.58. So I guess I'm just curious about how you're thinking about pricing architecture and how to message that to the consumer because again, when I look at the website, it just looks like the prices are just not accessible as they have been in the past. And I just want to follow-up with your point that you're not going to alienate that lower price point offering. Just your thoughts there would be helpful. Thank you. That's a great question, Randy, because I think what you're looking at as you open up our website, of course, we always start with newness and what you're seeing on the top of the page, there's the borough. And thankfully, the borough is resonating incredibly well. As you go into the bottom of that first page or into Page 2 or 3, you'll see that we have not given up the $200 price bucket, dollars 300 or $400 price bucket and that we continue to be very active in that space. As well, I think what you'll see is that we will play across channels a little bit in a bit more targeted way. You're going to see us develop more specific products that will be in more price sensitive channels, such as that with our wholesale partners versus what you might find in the flagship store versus what you might find in a secondary market either here in the U. S. Or internationally. These are strategies that we've been leveraging globally quite successfully. There is, without a doubt a very substantial opportunity above the $400 price point bucket. We know that that is becoming increasingly attractive, not just here in the U. S. So I would ask us to think about that opportunity globally as we see the logo business challenged. What is increasingly happening globally is brands headed further into the leather space. As many of you know, our European competitors have a very hard time achieving price points below $1500 below $2,000 when it comes to leather handbags. And so the opportunity for us is not just to play with lower prices, but to play with increased value and perception through quality, and that's where we're going to look to change the value proposition in the months ahead. But doing so by rebalancing the assortment, not by shifting completely. Thank you all for attending our Coach Conference Call this morning. As is our custom, it is now 9:30, and I will turn it over to Victor for some concluding remarks. Thank you, Andrea, and thank you all for listening and for being on this journey with us. As we stated, while we are disappointed in our Q2 results and as Lou has stated in the past, we know that we are at a very specific moment in time. We have tremendous confidence in the strength of our brand, in our vision and our team, and we are very excited about partnering together as a team to execute the transformation already underway and to get us back on the road to a healthy track and long term growth. Thank you very much. Thank you. This does conclude the Coach earnings conference. We thank you for your participation.