Earnings Call: Q4 2012

Jul 31, 2012

Good day, and welcome to the Coach Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd 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 and fiscal year end results are Lou Frankfort, Coach's Chairman and Jay Nielsen, Coach's CFO. Before we begin, we must point out that this conference call will involve certain forward looking statements, including projections for our business in the current or future quarters 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 ks and our quarterly report on Form Q for the quarterly period ended December 31, 2011, for a complete 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 through this conference call. Lou Frankfort will provide an overall summary of our 4th fiscal quarter and annual 2012 results and will also discuss our overarching strategy. Jay Nielsen will continue with details and operational results of the quarter year. Following that, we will hold a question and answer session, where we will be joined by Mike Tucci, North American Group President Victor Luis, International Group President and Jerry Strzky, our President and Chief Operating Officer. This Q and A session will end shortly before 9:30 am. Lou will then conclude with some brief summary comments. I'd now like to introduce Lou Frankfurt, Coach's Chairman and CEO. Thanks, Andrea, and welcome, everyone. As noted in our release this morning, our double digit sales and earnings gains in the 4th quarter capped another strong fiscal performance for Coach highlighted by excellent top and bottom line growth. We were also very pleased with profitability levels in both the quarter year as we manage the business to balance productivity gains and margin improvement. Diversify our supply chain, expanding our manufacturing base globally. Importantly, we made significant progress on all of our growth initiatives. Moving on to some key highlights of our quarter and fiscal year. Our performance in FY 2012 was highlighted by increases of 15% in revenue, 17% in operating income and 21% in earnings per share. It was a year of several milestones. 1st, we continued to leverage the international opportunity for Coach, growing organically through distribution and productivity, while accelerating the acquisition of key Asian domestic businesses to our direct control. In China, Coach sales exceeded $300,000,000 up 64%, ending the year with nearly 100 locations. 2nd, our men's business doubled in FY 2012 to over $400,000,000 as we continued to open dedicated standalone and dual gender locations globally, while also rolling out a broader expression of men's to nearly 1 third of our North American retail stores by year end. 3rd, we successfully expanded our digital initiatives, driving double digit online sales growth, while also exploring new ways to communicate with our consumer and grow our And 4th, we increased our quarterly dividend by a third, demonstrating our financial strength, cash flow generation and our commitment to shareholder return. This annual performance was capped off by a strong Q4. Some key metrics were: 1st, net sales totaled $1,160,000,000 an increase of 12%. 2nd, earnings per share totaled $0.86 up 20 7% from the $0.68 in the prior year. 3rd, direct to consumer sales rose 13%. 4th, North American same store sales for the quarter rose 2% on a comparable basis from prior year, while North American total direct sales rose 7%. 4th, China sales rose 60% as we continue to generate distribution growth and significant double digit comps in China. And finally, sales in Japan rose 18% in dollars and 16% in constant currency, anniversarying the 2011 impact of the earthquake and tsunami. During the Q4, we opened 4 net new North American retail stores, while also opening 7 factory stores, including 5 dedicated men's stores. At the end of FY 2012, there were 354 full price and 169 factory stores in operation in North America. This was an increase of 9 full price stores, including 3 men's retail stores, as well as 26 factory stores, including 16 men's stores from the end of FY 2011. Total square footage grew 10% for the year. In addition, as forecast in our 3rd quarter conference call, we accelerated the rollout of men's to an additional 50 locations in Q4. Therefore, at year end in North America, there were 30 men's stand alone factory stores, 50 stand alone men's retail stores and over 85 men's retail shop in shops I'm sorry, 5 stand alone men's retail stores and over 85 men's retail shop in shops. Moving to China, during the quarter, we added 11 net new locations, 9 net on the Mainland and 2 in Hong Kong. At the end of the quarter, there were 96 Coach locations in China, including 79 locations on the mainland in 36 cities. Additionally, there were 14 locations in Hong Kong and 3 in Macau. In aggregate, there was an increase of 30 net new locations for the fiscal year for a square footage increase of 58%. In Japan, 187 total locations in Japan with 23 standalone full price stores, including 8 flagships, 122 shop in shops, 35 factory stores and 7 duty free locations. In total, a net of 11 locations were added in Japan during FY 2012 and 3 were expanding, yielding total square footage growth of about 6%. Finally, I wanted to mention our 2 other direct businesses in Asia acquired this fiscal year. 1st in Singapore, we now operate 7 locations, Fibril acquired last July and we've opened 2 additional stores during the fiscal year. And second, Taiwan, where we transitioned 26 locations to our direct control in January and opened a new store this quarter. Shortly after the fiscal year ended, we acquired our domestic businesses in Malaysia, which included 10 locations generating annual sales of about $30,000,000 at retail. Indirect sales, which represents about 11% of Coach's sales annually were even with prior year on a comparable basis, adjusting for the transition of Singapore and Taiwan. Sales were driven by international wholesale shipments, while shipments into U. S. Department stores declined as we continued to tightly manage inventory in this channel given retail sales trends. At POS, international sales rose significantly, driven by both distribution and same location sales gains, while in U. S. Department stores, sales decreased moderately on a year over year basis in the quarter. We estimate that the addressable women's North American handbag and accessory category grew at least 10% in FY 2012. Coach continued to participate in the market growth performing similarly in our own direct channels. As you know, we're also continuing to drive our men's of side by side stores and by dedicating more space for a broader men's assortment in existing retail stores. In FY 'twelve, Coaches sales of men's bags and accessories doubled in North America, driving the overall men's premium category, which grew about 25% to nearly $800,000,000 Over the Q4, the economic backdrop in the U. S. Clearly softened as consumer confidence and sentiment declined. However, our research shows that our customers' intention to purchase Coach over the next year continues to be strong with more than 2 thirds of consumers surveyed noting they probably or definitely would purchase a Coach product in the next 12 months. Our revenues in North America rose 5% with our directly operated businesses up 7%, driven by a 2% comp. As noted in our press release, an increasingly promotional environment in North America led to slower growth than expected in factory stores, which was entirely As a result, we responded by reinstating our prior practice of in store couponing in a cross section of factory locations late in the period. It's important to note that we have significant flexibility and a variety of marketing levers available to us in this channel, which allows us to balance productivity gains and margin improvement. The primary driver of our overall retail comp gain was an increase in average transaction size. The trends in our full price stores and overall e commerce channels were consistent with the prior quarter. Our factory store comp was impacted by the elimination of in store couponing throughout most of the quarter and also by slowing traffic to factory malls. Outside of North America, we saw very strong growth in our international markets. We achieved our strongest top line growth in China, which remains our largest geographic opportunity given both the size of the market and the rate of growth. During the Q4, our sales again rose sharply, up nearly 60% year over year, consistent with the prior quarter and fueled by distribution and significant double digit same store sales growth. As I noted upfront, this took our full year sales to over $300,000,000 up over 60%. For the quarter, as mentioned, we posted a 16% increase in local currency in Japan and an 18% gain in dollars as we anniversary the impact of last year's earthquake. Japan is a mature market where we are focusing on the men's opportunity and gaining share in the women's category. Moving on to product. During the Q4, as always, we maintained a high level of product innovation and newness with the launch of the Hamptons weekend collection introduced in April and updates to Poppy and Madison throughout the quarter. Looking forward, we're excited about the distinctive new look you will see in our stores with a dual gender legacy lifestyle collection, which is being introduced over the next month globally. Inspired by our heritage, grounded in leather and featuring distinctive Coach targeting multi generational consumers, whom are both classic and stylish in their preferences. As we've discussed, the legacy launch is driving new merchandising strategies, including 1st, presenting a bolder lifestyle story for our brand incorporating categories such as outerwear, jewelry, small accessories, watches and scarves. 2nd, presenting men's and women's together in a powerful store environment. And thirdly, driving major color stories in handbags and accessories to highlight key items. In support of the launch, we're rolling out new visual merchandising enhancements to about 100 of our leading stores in North America, as well as key international locations. This is providing a vibrant new backdrop for the collection driving consumer interest. Legacy launched in North America just about 10 days ago. So with only a week's worth of sales results, we can tell you that we are pleased with the collections performance. Thus far, the duffle and the Candace Carryall are the top handbag styles as planned. The vibrant colors are being very well received in both handbags and women's accessories and prints and fashion styles are bestsellers. Of course, we plan to support legacy through a greater investment in integrated marketing communications featuring bold new creative across print, digital and outdoor. These major marketing initiatives are timed to coincide with the publication of the September fashion books when they drop in mid August. Naturally, I also want to update you on men's, a key global initiative. As mentioned, men's doubled again in FY 2012 to over $400,000,000 globally, and we're experiencing success across all concepts and store types, including dedicated stores, shop in shops, dual gender locations and expanded assortments in existing stores and across all geographies and channels. Outside of the U. S. Where the male consumer tends to be more style conscious, we've also opened a number of men's dedicated stores as well as dual gender stores. At the end of the year, an expanded assortment of men's was available in about half of our directly operated Coach locations globally, as well as in many key distributor operated locations. This performance underscores our confidence in men's as a significant growth driver for Coach. We continue to believe it will continue it will contribute 25% or more of the company's growth over the next several years. As we enter FY2013, our overarching strategies remain largely unchanged. First, leveraging the global opportunity by aggressively growing our international businesses through both distribution expansion and productivity gains. 2nd, continuing to build our women's business in the North American market. Category, which I've already touched on. And 4th, harnessing the growing power of the digital world. Starting with distribution, we expect that our square footage globally and across all channels will increase about 12% in FY 'thirteen, consistent with last year. Beginning in North America, we will open at least 30 new stores in FY2013, including about 10 new full price locations and at least 20 factory outlets of which about 10 will be men's stores. 1 of these new full price locations will be a concession shop at Macy's Herald Square opening early this fall, the first of its kind for Coach in the U. S. We are very excited about this important department store location, which will feature a flagship base designed for us by renowned architect, Rem Koolhaas, who will also be designing our Amotisando flagship in Tokyo next spring. In addition, we're planning to expand about 20 locations by full price and 15 factory to create side by side stores with a separate entrance and dedicated men's shop. In total, we expect North American Square Footage growth of at least 10% this year similar to last year driven by our expanding men's business. Turning to China, as you know, we're committed to opening about 30 new locations a year, Finding the right people to manage and staff our stores to provide the right coach in store experience constrains us from more rapid distribution growth. In FY twenty thirteen, we again expect to open about 30 new stores, bringing the total to around 125 locations at the end of the year. All of these openings are planned to be dual gender stores due to the size of the men's opportunity. In total, square footage in China is expected to grow about 35% in FY twenty thirteen. And we expect sales to total at least $400,000,000 driven by both distribution and comparable location sales. In terms of our other direct markets of Singapore, Taiwan and Malaysia, our primary focus is driving productivity as we continue to invest in training, merchandising, store environments and systems, creating a brand right experience. This will also be true of Korea, where we are acquiring the domestic retail business from our current distributor within the next few days. As a reminder, Coach's current annual sales in Korea are about $120,000,000 including global travel retail or about 5% of the $2,600,000,000 premium bag and accessory market. The domestic retail business generates about $60,000,000 across 48 locations. In addition, there are 14 Korean travel retail locations, which will continue to be managed by 3rd party duty free operators and are not part of this agreement. In Japan, the overall consumer market remains challenging and the category continues to be fairly stagnant, although fully back to pre earthquake levels. Our focus continues to be on gaining market share and we have done this quite well in our core women's business. During this fiscal year, we expect to open about 10 net new locations in Japan, most of them dedicated men's doors. We're also particularly excited about our 5,000 Square Foot Amotisando flagship scheduled to open next spring. In total, we expect that net square footage growth in Japan will increase by about 10% this year compared to about 5% in FY businesses in Asia, we do have significant and growing distributor run businesses in other countries. Brazil, Kuwait and Vietnam were all new markets for Coach in FY 2012. Finally, beyond our directly owned businesses in Asia, we're focusing on expanding through distributor partners in 3 regions. 1st, other emerging markets in Asia, such as Vietnam and Indonesia 2nd, Latin America, including Brazil, Venezuela, Colombia, Panama, Chile and Peru and third, the Middle East, where Kuwait has been our newest addition. These are in addition to the significant global travel retail opportunity that continues to exist for Coach. Touching on Europe, we've begun to build the foundation for long term growth with 25 locations across the UK, France, Ireland, Spain and Portugal. 1st, in the UK, we have started our multi channel model. We had 5 locations opened at the end of FY 2012, including 2 London flagships. We're continuing to gain traction in this market as the UK consumer is embracing Coach and the majority of our business is domestic. 2nd, in France, where we have partnered with PrintOn, we've opened 9 locations to date. Importantly, our key Boulevard Houseman women's and men's shop in shops are performing well with Parisian shopper. Altogether, we expect to add about 5 locations in Europe during FY2013. I've just reviewed our strategies to drive our growth at a double digit pace given the continuing strength of the Coach brand and our increasing global expansion. We have significant runway ahead of us, both in North America, which remains a growing market and worldwide, while our focus on men's and digital provide additional opportunities for growth. At this time, I will turn it over to Jane Nielsen, our CFO, for further detail on our financials and investment plans. Jane? Thanks, Lou. Lou has just taken you through the highlights and our indirect segment is consistent with prior year. Net income for the quarter increased 24% and totaled $251,000,000 with earnings per diluted share of 0 point 8 the fiscal year, sales rose 15% totaling $4,760,000,000 We saw leverage to the bottom line with earnings per share at $3.53 up 21 percent and net income of $1,040,000,000 up 18%. For the quarter, operating income totaled $371,000,000 on a non GAAP basis, 19% above $312,000,000 reported in the year ago period, while operating margin was 32.1% versus 30 point 3% for the prior year. During the quarter, gross profit rose 13% to 830 $8,000,000 from $741,000,000 reported a year ago, while gross margin was 72.6 versus 71.8%, primarily due to channel mix and sourcing cost improvement. SG and A expenses as a percentage of net sales totaled 40.5% compared to 41.5% reported in the year ago quarter. We were pleased that we were able to gain 100 basis points of leverage in the quarter as settlement to net income and earnings per share. Therefore, on a GAAP basis, operating income for the 4th quarter was $352,000,000 with a 30.4% margin and an SG and A expense ratio of 42.1%. On a non GAAP basis, for the full year, operating income totaled $1,550,000,000 17% above the 1 point $33,000,000,000 reported in the year ago period, while operating margin was 32.6% versus 32.0 percent. For the year, gross profit rose 15 percent to $303,470,000,000 from $3,020,000,000 a year ago. Ago. As expected, gross margin was 72.8 percent versus 72.7%. SG and A expenses as a percentage of net sales totaled 40.2% compared to the 40.7% reported in fiscal 2011. During both FY 2012 and FY 2011, we recorded certain items including favorable tax settlements. As a result and in both years, we made charitable contributions which precisely offset the benefit of these tax settlements to net income and earnings per share. Therefore, on a GAAP basis, operating income for the fiscal year 20 12 was $1,510,000,000 with a 31.7% margin and an SG and A expense ratio of 41.0%. This compared to fiscal year 2011 operating income of 1,300,000,000 on a GAAP basis with an operating margin of 31.4 percent and an SG and A expense ratio of 41.3%. Moving on to the balance sheet. Inventory levels at quarter end were $504,000,000 up 19 0.6% from FY 2011 year end, consistent with our expectations. This inventory level allows us to support distribution growth and to maximize sales this summer and fall. Cash and short term investments stood at $917,000,000 31% above the $702,000,000 a year ago after $700,000,000 of share repurchases in the interim twelve months. During the 4th fiscal quarter alone, we repurchased and retired about 2,500,000 shares of our common stock at an average cost of $67.79 spending a total of $169,000,000 At the end of the year, $262,000,000 remained under our present repurchase authorization. Net cash from operating activities in the 4th quarter was $283,000,000 compared to 221,000,000 dollars last year during Q4. Free cash flow in the 4th quarter was an inflow of $210,000,000 versus $164,000,000 in the same period last year. Our CapEx spending was $73,000,000 versus 57 $1,000,000 in the same quarter a year ago. For the full fiscal year 2012, net operating activities was $1,200,000,000 compared to $1,000,000,000 a year ago. Free cash flow in fiscal year 2012 was an inflow of $1,000,000,000 versus $886,000,000 in fiscal year 2011. CapEx spending totaled $184,000,000 for the year compared to $148,000,000 in the prior year. It's important to note that based on our current plans for FY2013, we expect that our CapEx for next year will be up in the area of $250,000,000 primarily due to new store openings and expansions across all geographies, elevating our store environments within our existing stores and investments in the technology and infrastructure necessary to enable global expansion. Consistent with our practice over the past several years, we are not giving specific guidance for FY 'thirteen. We are mindful of balancing the impact of the muted consumer environment in North America and a softening global macroeconomic outlook with our optimism around the launch of legacy, men's growth and the strong international expansion opportunities for Coach. As noted, FY 2013 will be an investment year for us as we amplify our actions to drive long term growth. Our most significant investment is accelerating our international growth through the acquisition of the domestic retail operations of our key Asian distributors and the further development of infrastructure to support this global growth. In FY investments in the digital space to expand and deepen our engagement with consumers. In addition, we will increase our marketing spend towards strengthening our brand positioning with distinctive new products and elevated store environments across all channels and geographies. Some of these initiatives will be in the form of CapEx, as I mentioned, while others will result in higher operating expenses, such as those associated with the transition of the Asia retail businesses, including Taiwan, which we won't anniversary until January 2013, and then Malaysia and Korea, which will be required in Q1. So while our core businesses are expected to continue to deliver modest operating leverage, we expect that together these investments with the increased brand support will result in some deleverage in FY 'thirteen, while providing a platform to accelerate our earnings growth in the years beyond. Therefore, when you're thinking about the year, keep in mind the following. 1st and most generally, we do expect to achieve double digit sales growth. Our sales will be driven in part by lowtomidsingledigitcomps in North America, where our comparisons will be more difficult in the first half. 2nd, our gross margin is planned to improve modestly as channel mix and our sourcing initiatives continue to contribute to profitability. On balance, we expect gross margin to remain high and in the 73% range for the year. 3rd, on SG and A, international in store enhancements and marketing programs for legacy will have a more pronounced impact in the Q1. 4th, 4th, therefore taken together, we would expect some compression in the operating margin to about 31%. Notably, we expect our core businesses to continue to deliver leverage. And 5th, our tax rate is likely to be in the area of 33% for the year as we further refine our international tax strategy. Therefore, when you're modeling out the quarters, I would like you to remember that the Q1 will be the most challenging in terms of both top line as we're up against very strong North American comp and a larger currency benefit, and bottom line due to the disproportionate impact of the investments and brand spend. In summary, FY 2012 was an excellent year, demonstrating our ability to manage our business nimbly while advancing our key growth initiatives. We're exploring new geographies and capitalizing on the increasing popularity and recognition of the Coach brand with discerning unchanged. We remain committed to achieving double digit top and bottom line growth over our planning horizon. 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. Our first question comes from Kimberly Greenberger. You may ask your question and please state your company name. Great. Thank you. Good morning, Morgan Stanley. Andrea, can you hear me okay? Andrea? Hello? One moment, please. Apologies. We seem to Hello? One moment please. Andrea, it's Kimberly. Can you hear me okay? One moment please. Go ahead with your question. Andrea, it's Kimberly. Can you hear me okay? Andrea? Yes. It's Kimberly. Can you hear me okay? Yes, we can now. Kimberly, there was a little technical problem, but please go ahead with your question. Okay. Sorry about that. Morgan Stanley, I wanted to see if you could help us understand the differential between the factory comp and the full price comp here in the Q4 and how that changed relative to Q3? And then just looking forward, as you dynamically manage your promotions, how would if you can just talk to us about the different strategies you're expecting to employ as you work toward that low to mid single digit comp in the upcoming year? That would be helpful. Thanks. Sure. Mike Tucci will answer the question. Sure. Remain steady. We did see a change in run rate in factory. And what we saw was the success of our pricing strategy in Q3 against a less promotional environment with more robust traffic trends was successful. We were able to maintain high rates of productivity and comps. And that changed late in Q4 as we anniversaried a more promotional environment in factory. And we saw a change in the factory tempo in terms of traffic levels in factory stores. We responded to it. We took action. We pushed a stronger value message into our stores. We revamped our signage and presentation programs in the stores to show a more pronounced level of newness and value, and we continue to do that as we enter into July. And the learning for us is that as we see a more promotional environment, as we are up against a heavier promotional cadence in factory stores, We have to be nimble. We have to use a variety of levers in terms of messaging and pricing. And we have to run the business for a balance of sales productivity and margin improvement. And that's the approach that we're taking going forward. Thank you. Thank you. Our next question comes from Lorraine Hutchinson. You may ask your question. Please state your company name. Thank you. Bank of America Merrill Lynch. Just to follow-up on Kimberly's factory question. Did you find that once you change the promotional cadence, you saw the comp pick back up? And is that what the guidance is based on going forward? And just to follow-up on legacy, happy to hear that things are going well or according to plan. And just any more color you could give us on the outlook for the full price store comp? Okay, sure. The reality is that we did see an improvement in our factory business when we went back to a more aggressive stance in the stores. And it's a channel where we have to constantly find the right balance between pricing, value, newness and achieving the right levels of margin. I think long term, our objective is to continue to deliver growth in this channel. And that's our approach going forward. We do see in the front half of our FY twenty thirteen, a fairly promotional compare as well as an environment that we think will become increasingly promotional from a macro standpoint. So we have to be prepared and we're working the business to drive results, hence our guidance for FY twenty thirteen. I'm going to pass it to Lou to speak to legacy on a global level and then I can add some color here in North America. Sure. We're just getting legacy out. I mentioned it's in our North American stores for about a week. We just launched it in China and most Asian markets. In Japan, it won't be launched for another few weeks even though we're in some pre sell activities. Overall, the collection is doing well and it's meeting our expectations. It's early days for us to talk to what it will mean overall globally for the business and we are taking a more cautious approach considering the macro environment. And are you ready for the next question? Yes. Thank you. Our next question comes from Erica Maschmeyer. You may ask your question. Please state your company name. Hi, Robert W. Baird. I guess to follow-up on legacy, could you talk about how big you expect it to ultimately be? How long do you expect the lifespan of the launch to be? Sure. As we've indicated, the legacy collection is inspired by very great success of product from our archives. And what we've done is create a modern interpretation that is relevant and stylish today and we are confident we'll be relevant and stylish tomorrow. Our intention is for this to be a multiyear dual gender platform that will allow us to more strongly differentiate ourselves against competitors since the branding materials, detailing, styling is unique and authentic to Coach. We have a real confidence that legacy will be embraced by both women and men worldwide. I think to add to that, in terms of how we're planning the cadence of the launch, the marketing launch in the marketplace, both from a digital as well as traditional media standpoint, really begins to hit mid August. We have just launched here in North America our first product flow across our department store channels and our retail stores. We are also refreshing with new styles and colors monthly. We have a significant investment in legacy as part of our holiday gifting strategy and our Q2 strategy, which is our most important quarter. And then, we will begin to nuance legacy in the second half of the year, our fiscal year, with additional elements such as a weekend concept and additional expressions from a category standpoint to round out multi category platform within legacy. So it's ongoing throughout the year and it's seasonally enhanced. Thank you. And are you ready for the next question? Yes. Thank you. Our next question comes from Barbara Whitekopf. You may ask your question and please state your company name. Hi, everybody. CLSA. How is the performance in Tier 2, 3 and 4 cities in China evolving as new store opens and as sort of the economy sort of changes a bit. Could talk about last year and then how you think it's going to play out this year? Alexa? Sure. Hi, Barbara. As we have talked about last quarter, we continue to have a performance in Tier 2 and 3, which continues to exceed our expectations actually. We're now, as Lou mentioned in his remarks, in 30 6 cities, of which 15 locations now in Tier 3 cities. So really a small percentage of the 79 total locations across China. So still tremendous opportunity ahead for us with approximately 120 cities as we know with a population of 1,000,000 or more. So we continue to be excited about the distribution opportunity. And how are the factory stores starting to work out? Today, we still have a small number of factory locations. We are in 11 locations, including 2 in Hong Kong and Macau. So 9 on the mainland. A tremendous amount of interest in the channel from developers, both domestic and international. And we are seeing the Coach proposition resonate extremely well and we're very excited about the long term opportunity for that channel in that market, especially as more and more traditional luxury brands as well become interested in the channel and help to raise its awareness with the Chinese consumer. Great. Thank you. Thank you. Our next question comes from Omar Saad. You may ask your question and please state your company name. Thanks. It's ISI Group. Good morning. Good morning. I wanted to ask you guys about it sounds like the category still is very strong. I think you cited 10% category growth for the full year. And it obviously is one of the largest players and the key players in the category. How are you guys thinking about this handbags, accessories market and the cycle that we appear to be in? It's been so strong in the last few years, especially relative to fashion and apparel, which has been a much weaker segment. Do you think that the consumer spending patterns have changed? Are you confident that the category growth will remain strong? Obviously, a key question given that you're the category leader. Thanks. Well, first, Omar, the category has been growing disproportionately for nearly 15 years now. There's been a real shift in women's spending patterns as she has consistently distorted her spending away from apparel towards accessories as a way to update her wardrobe. We expect that to continue. At the same time, we believe that there's a very substantial opportunity globally and as well as here in the U. S. In the men's accessories area where the category is experiencing outsized growth. We mentioned that the category grew by about 25% this year here in the United States and a majority of that growth came from Coach. So we do feel while the category like all discretionary consumer spending is subject to change based upon consumer sentiment, we believe that the changes will be less pronounced than in other categories. Thank you. Our next question comes from Liz Dunn. You may ask your question and please state your company name. Hi, good morning. Thank you, Macquarie. I guess my question relates to China profitability, men's profitability, some of the investment initiatives. Can you just update us on where those finished fiscal 2012 and what we should look for 2013 just as sort of discrete items or in combination what the dilution is and when some of these investment initiatives should sort of turn into positive territory from a contribution standpoint to the bottom line? Sure, Liz. First, when you think about China profitably, what we said and what we've seen is that China's four wall profitability is in the 40% range. So, the store contribution is in the 40% range. It is on path as it achieves growth and we scale some of the investments that we are making in infrastructure to be one of our most profitable markets. We don't talk about specific market profitability, but we're very encouraged with the progress we've made on our 4 wall profitability. Men's initiative overall is even with the rest of our business. So as we grow men's, it's just as attractive and it's profitable as our basic women's business. So we're very excited about that growth. Okay. And then just as we think about Asia ex profitability in total and some of the investment spending this year, like is this a multiyear thing? Or should we see some accretion from those businesses through 2014 beyond? So what you'll see Liz is in the year that and we called it out as a one time impact is the impact of our overall acquisitions of the distributors. So the happier impact of Taiwan and the impact of Korea and Malaysia will be a drag to overall operating profit and SG and A in the year. As we move through, we work through the inventory, which is written up and we work through some of the SG and A and reassort and get these businesses on growth, they are long term value creating and growth enhancing. Great. Thank you. Good luck. Thank you. Thank you. Our next question comes from Brian Tunick. You may ask your question. Please state your company name. Yes. Thanks. Good morning. JPMorgan. JPMorgan. Good morning, everyone. I guess, Jane, maybe some comments on the gross margin guidance this year and maybe beyond. Just trying to get an update on the sourcing initiatives and maybe how the couponing back in factory maybe changes your view of what you think the gross margin opportunity is? And then maybe someone on the product side can talk beyond legacy, what is the product introduction cadence look like in the coming 12 months versus the previous as you obviously invested in legacy and talk about the newness opportunities to drive continued growth in the full price business? Sure. Brian, let's start with gross margin. So first of all, let's take FY 2012. We were very pleased in the Q4. We had 80 basis points of expansion, largely driven by channel mix and our sourcing initiatives. As we've guided to, we expect to see continued gross margin expansion next year in the 73% range. That is going to be driven by, initiatives as we continue to diversify our manufacturing base, it's going to be driven by favorable channel mix and a prudent approach, as Mike called out, to drop in promotion in the factories. Those three factors together are what are giving us confidence to give you the guidance of an improved gross margin next year. Overall, in newness, we see legacy as a powerful collection and its gross margin will be about consistent with our existing business. So we expect no material impact up or down with legacy. Thank you. Our next question comes from Jessica Sean. You may ask your question. Hi. I was wondering as we think about the comp in the full line stores in the 4th quarter, I was wondering if you could talk about the impact of the rollout of the men's assortment and what that had on productivity and ASP for those stores? And also what is your expectation for the impact as we look to next year? Sure. A couple of things. 1, in the stores that entered the quarter with men's fully positioned, that was about half of where we landed at the end of the quarter, men's was a significant driver of comp and productivity. The overall comp impact for the men's shops that we added in Q4 was less significant because they came in very late at the quarter. You'll see a bigger impact from men's as a comp driver in FY twenty thirteen as we go into Q1 virtually fully established. There are a handful of very significant shop installations happening in the first half of the year based on lease timing. But the majority of our men's work in terms of impacting shops in stores happened right at the end of the quarter and will have a bigger impact on FY 'thirteen. Our next question comes from Paul Lejuez. You may ask your question and please state your company name. Hey guys, Nomura. Hello, Paul. Hey. As you look at factory, how much of it was traffic versus a conversion issue? And Lou, I guess as you just take a step back and look at that factory business, how much do you look at the issues there being macro versus maybe having a less inspiring product assortment versus maybe just simply coming up against the ceiling of how many dollars you can move through those boxes? Thanks. It's a great question and it's something we think and about all of the time and work. First, there was an overall decline in the rate of traffic later in the quarter. And this is a Transcend's Coach, but it impacted us, particularly in June. And what we saw among other retailers starting really in May with an intensification of their promotional activities, including the perennial in store coupon to drive additional shopping. So we do see what occurred in our fleet late in the quarter heavily driven by the macro environment. And as Mike said, we were up against very strong very strong promotional activities last year. In terms of product, certainly product is a factor. We actually introduced a strong platform in the second half of June, recent deletes from our full price, Kristen and that coupled with a reinstatement of coupons on reinvigorated factory performance. We believe that when we look at factory, bricks and mortar, both on digital as an omni channel, we have huge opportunities to drive additional factory sales that is basically buying discontinued or made for discount. And the appetite, of course, among consumers to buy product at a discount is insatiable and growing. Lou, I think the only piece that I can add on the operational side of things, we do not we work very, very hard on throughput, productivity, managing transactions in stores. In we launched our first phase of mobile POS in factory stores on a pilot basis. We do not see a cap on productivity in our stores from a throughput standpoint. We've been through this for a number of years. We've been through multiple peaks around holidays and we still see tremendous headroom in terms of productivity and operational efficiency in our stores. And the only last thing I'll add is that we are going through a project to elevate the in store experience and we are in the midst of developing prototypes, which we plan to roll out during this year that will show a much more integrated broader coach experience, which will focus in addition to bags and accessories on other lifestyle categories such as sunwear wearables, jewelry, outerwear and to name several. Thanks guys. Good luck. Thank you. Thank you. Our next question comes from Jennifer Davis. You may ask your question. Please state your company name. Hi, Lazard Capital Markets. First, let me say that the legacy assortment looks amazing. So I can see why you guys were so excited about it. Thank you. And then a quick clarification, just want to make sure I heard correctly. Comps at full price stores in the 4th quarter increased around 6.7 percent, right? What we said was that they remain consistent with their level last year. We do not this last quarter, we do not disaggregate comps. And our overall comps were 6.7% in the 3rd, such as sunwear wearables, jewelry, outerwear and to name several. Thanks guys. Good luck. Thank you. Thank you. Our next question comes from Jennifer Davis. You may ask your question. Please state your company name. Hi, Lazard Capital Markets. First, let me say that the legacy assortment looks amazing. So I can see why you guys were so excited about it. Thank you. And then just a quick clarification, just want to make sure I heard correctly. Comps at full price stores in the 4th quarter increased or Such as some wearables, jewelry, outerwear and to name several. Thanks guys. Good luck. Thank you. Thank you. Our next question comes from Jennifer Davis. You may ask your question. Please state your company name. Hi, Lazard Capital Markets. First, let me say that the legacy assortment looks amazing. So can see why you guys were so excited about it. Thank you. And then just a quick clarification, just want to make sure I heard correctly. Comps at full price stores in the 4th quarter increased around 6.7 percent, right? What we said was that they remain consistent with their level last year. We do not just last quarter, we do not disaggregate comps and our overall were 6.7% in the Q3. And what we went on to say was that the entire decline was due to a decline in performance within our factory channel during the 4th quarter. Okay, great. And then my question is for Mike Tucci. Just wondering what your thoughts are on the North American wholesale business now that you're in charge of that business as well. Do you think that there are any changes to the strategy maybe that you could make there? Thanks. I do. Quick learnings there for me. 1, we have a strong team here with very committed to Coach. We're working extremely hard to create the same excitement around legacy in department stores that we have in our retail stores. And so the investments that we're making around presentation, product assortment, training and development and marketing really carries over into the wholesale channel. That launch was timed exactly to the day with when we launched in our retail stores. I think the first major flagship in a department store that's going to be run by the Coach Direct team in Herald Square as part of find some opportunity for longer term in terms of the operating model. So we're working very hard on that channel to protect our position there as a market share leader and to deliver value to that consumer. Great. Thanks and best of luck. Thank you. Thank you. Our next question comes our final question comes from Christian Boos. You may ask your question. Please state your company name. Okay. Credit Suisse. I was wondering if you could talk a bit about the marketing investments and the cadence you expect there over the course of fiscal 2013 and how that's going to impact the P and L? Yes. Talked about, we are distorting our marketing early in the year to support legacy. So, you will see it especially in the Q1 and as we move through the year. We will be investing through the year. In aggregate, our incremental marketing investments, we're expecting to be about $0.04 to EPS, a little more than $0.04 to EPS. Okay. That's very helpful. Wondering if you could also talk about the concession shop with Macy's and what the thinking is there and whether that might become a model on a go forward basis for North America? Let me begin by saying that outside the U. S. All of our shopping shops are leased shops. These are they are all concession shops where we pay based on performance and in some cases a guaranteed minimum threshold. So this is really the prevailing model outside the United States and we've enjoyed great success with that model. In the U. S, the situation is quite different as department stores have maintained their direct operation of virtually all of their shops. We don't expect that to change materially. We see Macy's as an exceptional situation where we're partnering with Macy's to really create a global flagship for Coach that will attract tourists both from the United States and abroad to Macy's to see our spectacular shop. Thank you. That's going to conclude our conference call today. We went a little longer than usual to make up for some of our early technical difficulties. But now I'd like to turn it back over to Lou for a few closing words. Lou? Let me begin by saying that we know there's a lot of interest in what we announced today. Obviously, some of the metrics were lower than what Wall Street expected. The reality is that we manage our business for the long term and we have real clarity about what we're doing and where we're traveling and are very confident in our long term growth prospects and our ability to drive our business at a double digit pace. We have an exceptionally strong franchise. We have a seasoned and nimble management team and operating team and we're driven to win. And I believe that you will find that in the seasons and years to come, we will prevail as we have over the years decades. Thank you, everybody. Thank you. This does conclude the Coach earnings conference. We thank you for your participation.