Earnings Call: Q2 2011

Jan 25, 2011

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. Thank you, Shirley. Good morning and thank you for joining us. With me today to discuss our quarterly results are Lou Frankfurt, Coaches' Chairman and CEO and Mike Devine, Coaches' CFO. Mike Tucci, President of North American Retail is also joining us to discuss our holiday performance and spring initiatives. 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 that is 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 for a complete list of these risk factors. Also, please note that the historical growth trends may not be indicative of future growth. Now let me outline the speakers and topics for this conference call. Lou Frankfort will provide an overall summary of our 2nd fiscal quarter 2011 results and will also discuss strategies going forward. Mike Duetschi will review the holiday season from a U. S. Retail perspective and discuss key initiatives for the spring season ahead. Mike Devine will continue with details on financial and operational results of the quarter. Following that, we will hold a question and answer session that will shortly before 9:30 a. M. Lou will then conclude with some brief summary comments. I'd now like to introduce Lou Frankfurt, Cochran's Chairman and CEO. Thanks, Andrea, and welcome, everyone. As noted in our release this morning, we were very pleased with our holiday results, including strong sales and earnings growth and exceptional comparable store sales in our North American retail businesses. Our performance clearly demonstrates the brands of vibrancy across channels and geographies and bodes well for future growth. Beyond the top line, we were also very pleased with our high levels of profitability and substantial cash generation. In addition, we made continued progress against our global business initiatives, including international expansion, men's and digital media. We experienced strong response to our new collections and our pricing and assortment strategy continued to resonate with consumers worldwide. We're well situated to build upon our leadership position and continue to gain market share. Further, the announcement today of the authorization of a new buyback program reflects our financial strength and our confidence in Coach's future. While I will get into more detail about the outlook for the category and our business shortly, I did want to take the time to review our quarter first. Some key highlights of our 2nd fiscal quarter were: 1st, earnings per share rose 33 percent to $1 compared with $0.75 in the prior year. 2nd, quarterly net sales totaled $1,260,000,000 versus $1,100,000,000 a year ago, an increase of 19%. 3rd, direct to consumer sales rose 17 percent to $1,100,000,000 from $934,000,000 in the prior year on a comparable basis. 4th, North American same store sales for the quarter accelerated, rising 12.6% from prior year, while total North American direct to consumer sales rose 17%. And 5th, sales in Japan were even to prior year in constant currency and rose 8% in dollars. And finally, we continue to generate very strong growth and significant double digit comps in China. During the quarter, we opened 2 North American retail stores both in Canada as well as 1 factory store. Thus at the end of the period, there were 347 full price and 129 factory stores in operation in North America. Moving to Japan, One Coat Shop in Shop was opened in addition to a travel retail location. At quarter end, there were 171 total locations in Japan with 20 full price stores, including 8 Flair Chips, 1 117 shop in shops, 27 factory stores and 7 distributor operated travel retail locations. And in China, we added 3 new locations all in the mainland. At the end of the quarter, there were 52 Coach locations in China, including 10 in Hong Kong, 2 in Macau and 40 locations on the Mainland in 16 cities. As we've discussed previously, we are building a multi channel distribution model in China, including flagships, retail stores, shop in shops and factory stores. Indirect sales increased 28% to $168,000,000 from $131,000,000 in the same period last year. This gain reflected significant growth in shipments into international wholesale and U. S. Department stores given positive POS sales trends notably in the international business. Specifically, sales for the quarter at retail and international wholesale locations were very strong, driven by double digit gains and same store sales and new distribution, while sales at POS and U. S. Department stores rose 3% for the quarter. We estimate that the addressable U. S. Handbag and accessory category rose at a 5% to 10% rate in the holiday quarter, similar to the increase it experienced in the preceding 9 months of the calendar year. At the same time, Coach's bag and accessory sales rose about 14% across all channels in North America during the most recent quarter. In our direct businesses in North America, handbag and accessories sales rose 18%. Importantly, it now appears that the category will increase to $9,000,000,000 in FY 2011, surpassing its previous peak achieved 3 years ago. Separately, it's worth noting that we've seen continued modest improvement in our customers' outlook for the economy with over a third of those surveyed now believing that the U. S. Economy is improving, the best reading in over 3 years. Her intention to purchase Coach over the next year is significantly higher than where it was a year ago with over 2 thirds of consumers surveyed noting they probably or definitely would purchase a Coach product in the next 12 months. Our total revenues in North America rose 17% with our directly operated business is up similarly driven by 12.6% in same store sales increases and new distribution. Fueling these overall strong comp results with significant gains in conversion from prior year and modest traffic growth, partially offset by a slight decline in average transaction size. We were particularly pleased with the improvement in conversion since it's a driver that we have the most control over through product and service. Mike Tucci will discuss our performance in more detail in just a moment. In Full Price stores, conversion was the primary contributor to our comp growth, while average transaction size was also modestly higher compared to prior year. Traffic trends were slightly lower year over year. In factory, while our business remained remarkably strong, we saw increases in traffic and conversion, while transaction size declined modestly. Our factory store growth continued to be driven by increased spending of factory channel loyal Coach shoppers and by new consumers entering the franchise. As noted, in Japan, we posted an 8% increase in dollars on a flat performance in constant currency. Our market share further expanded against continued contraction in the category. Our growth in share reflects the relevance of our accessible luxury positioning with a Japanese consumer who is becoming more value oriented. Once again, I want to call out China, our fastest growing business. During the quarter, our sales continued to rise sharply from prior year fueled by distribution growth and significant double digit comps. Clearly, the coach proposition is resonating with this consumer who is participating in this category and increasing numbers. While Mike Devine will get into more detail on our financials and I will discuss our outlook in some detail, I wanted to give you this recap. Now, I will turn it over to Mike Tucci to discuss our North American Retail businesses. Mike? Thanks, Lou, and good morning. Today, I'd like to review what was an exceptional holiday season touching on the 3 important productivity drivers within our North American business product performance, digital strategy and coach.com results and progress on our new men's initiative. During the holiday quarter, as always, we maintained a high level of product innovation and distinctive newness, ensuring that we had a steady flow of new product throughout the period. A key to this effort was that we were somewhat less front end loaded than in previous holiday seasons. In October, we relaunched the Madison collection featuring the new Sofia satchel in core leather, gathered leather and novelty applications, along with a fresh dotted Op inclusion on Oprah's Favorite Things for holiday featuring our large patent Sofia and Crimson and Camel on network TV. During the quarter, we also updated Poppy and added new colors in our Madison and Kristen collections. In mid December, we introduced the Alexandra Tote Group to capture peak sales with new product just before holiday. Additionally, we generated excellent sales increases in women's accessories in the quarter, notably in money pieces and small bags. Our holiday product was supported with a comprehensive marketing plan, which highlighted a powerful gifting message for the shopping season. The emphasis of our marketing was item driven across handbags, women's accessories and other gift ideas. Our campaign spanned coach.com, digital media and compelling print and in store marketing to drive traffic into stores and on the Internet. Most generally, the merchandising and pricing strategies we initiated last year to create a more balanced and productive handbag assortment have become proven sustainable growth drivers in North America. Both handbags and women's accessories achieved positive comps in the quarter with handbag penetration holding at over 53% of sales with a high single digit increase in average unit retails. This pricing power was driven by mix as leather and novelty continued to trend very well. Looking forward, we're excited about our spring product initiatives as well. We've been pleased with our performance of our newest collection, Collette, which launched on twelvetwenty four featuring new tote, hobo and carryout silhouettes. And for spring, our major product launch is the new Kristen collection, which will be introduced on February 18. Kristen is a strong assortment of beautiful hobos, totes and satchels offered in a range of leathers and novelty fabrications such as embossed python, linen signature and op art appealing to a broad range of consumers. This relaunch will be supported by a comprehensive broad based marketing campaign, including window vinyls, a special shopping bag and a focused online and print media campaign. On the factory side, our strong results were fueled by a powerful combination of new product introductions with key styles offered at great prices. Our inventory investment strategy enabled us to capture sales upside throughout the season. Our product assortment was also supported by our in store and direct marketing campaigns. Importantly, while we were bold in our pricing strategies, the gains in our factory business drove improved operating margins. As we enter the spring season, we continue to see opportunity to leverage our factory model and increase productivity within this business. The second important growth area in the quarter was digital. As we discussed last quarter, coach.com is a key marketing tool and is becoming a very important revenue opportunity as well. We noted that our primary objective online in North America is to build top of mind brand awareness and drive store traffic, while also maximizing e commerce opportunities. In our Q2, we saw the digital initiatives we put into place for holiday, such as the virtual gift guide and e gift card pay off and the exceptional performance of our online business. In fact, coachscott.com is now our fastest growing full price channel in North America, where both traffic and sales continue to grow at a double digit pace during the holiday quarter. Of course, our web presence is now global with informational sites in 16 countries, 3 of which U. S, Canada and Japan are e commerce platforms. Globally. Moving back to our stores. As Lou mentioned, we opened 2 new retail stores in Q2, Pickering in Ontario and Victoria, British Columbia, taking our first half openings to 5, all of which are performing very well and ahead of plan. We also opened 1 new factory store taking the first half total to 8, including our first 5 men's standalone factory stores, which opened in Q1. These stores also opened strongly and are running above our pro formas. In Full Price, based on the initial success of our first men's standalone store on Bleecker Street and our men's sales growth in core Coach stores, we will be opening 2 additional men's retail stores later this fiscal year, including 1 at Garden State Plaza in New Jersey and 1 in Copley Plaza in Boston. This month, we dedicated more space and introduced a broader men's product assortment to 7 additional stores, bringing our total men's concept store count to 37 in North America, including 8 flagships such as 595 Madison Avenue in New York. On the factory side, our men's stores, which are located next to or nearby our most productive factory locations are performing extremely well. We believe the strong consumer response we experienced reflects the strength of the Coach brand and the factory consumers focus on value and function. It confirms our belief that there is a particularly large opportunity for men's in our factory channel. During the remainder of FY 2011, we're planning to open at least 5 more men's factory locations. In summary, we're excited with the continued progress we've made improving our full price productivity and our men's initiative. We're feeling great about the spring season given the current sales trends in both our full price and factory channels. With that, I'll turn it back to Lou for a discussion of our strategies and opportunities for growth. Lou? Thanks, Mike. Our strategies continue to be focused on expansion opportunities both here in North America and increasingly in international markets. In addition, as always, we're focused on improving performance in existing stores by increasing Coach's share of our consumers' accessories wardrobe, while continuing to attract new customers into the franchise. Mike just discussed our men's initiative, which we're confident will be a significant contributor to global growth in the seasons and years ahead, both in North America and in international markets. Moving on to distribution growth. As mentioned in prior earnings calls, we expect that our square footage globally and across all channels will increase about 10% this year compared to 8% last year. Starting in North America, we will open about 5 stores in the back half of fiscal twenty 11, bringing the total to about 10 new North American retail stores for the year. In addition, we'll open about 12 new factory stores during the balance of the year, primarily to support our men's initiative. In total, we expect North American square footage growth of about 8% this year, similar to last year. In China, as mentioned, our sales are growing rapidly as the market track to generate sales of over $175,000,000 this year. We are also now targeting $500,000,000 in sales during FY 'fourteen, a 10% market share compared with 5% today. Driving this growth, in addition to same store sales, we expect to open about 25 new locations this year, increasing square footage by about 65%. Over the next few years, we're targeting to open about 30 new locations per annum. These locations will be primarily focused on the mainland and mirror our multi channel distribution model in North America and Japan. In Japan, the overall consumer market remains very challenging and the category continues to contract. Our goal continues to be market share gains and we have done this quite well in our core women's business. As elsewhere, we're now also focusing on men's where we've already seen early success. This year, we now expect to open about 10 net new Coach Japan locations, including 5 men's stores. In total, we expect the net square footage growth in Japan will increase by about 6% this year, similar to last year. Beyond our directly owned businesses in China and Japan, we have a significant international wholesale business generating over $400,000,000 in sales at retail. Most of these sales come from other markets in Asia, but the Coach brand resonates well travelers. Given our focus in this area, we're also opening about 25 new distributor operated locations in the Asian region during this fiscal year. Moving to Europe, it is a new region of expansion for Coach. To date, we've opened 6 boutiques in Printem department stores in France and expect to open one additional location within Prenton during the balance of the fiscal year. And through our joint venture with Hackett, we've launched the brand with 4 shop in shops in Spain and 1 in Lisbon with 1 more to go before year end, all within El Corte in place. Last quarter, we also announced plans for our initial stores in London, a standalone store in the Westfield White City Mall, which is on plan to open in late February and a 5,100 Square Foot Flagship on New Bond Street, our first global flagship store in the region coming this summer. We've been pleased with our initial results in Europe as our brand gains recognition with a domestic consumer and benefits from our popularity among tourists, notably those who are Asian based. Beyond the opportunities in the Coach concept and brand, as you know, we launched Reed Craykoff in September in a few boutiques in the U. S. And Japan as well as through prestigious international specialty retailers such as Lane Crawford in Hong Kong and Colette in Paris. While it's still very early days, we are pleased that the product is appealing to the targeted Pinnacle luxury consumer. In summary, we are excited about the global opportunity for Coach, especially the emerging market potential, given the rapid growth of the category and the foundation which we have begun to build in the important Asian region. At this time, I will turn it over to Mike Devine, our CFO for further detail on our financials. Mike? Thank you, Lou. Lou and Mike have just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our 2nd quarter results. As mentioned, our quarterly revenues rose 19% with direct to consumer, which represents over 3 quarters of our business, up 17% and indirect up 28% due to higher shipments into international wholesale accounts and the U. S. Department stores. Earnings per share for the quarter increased 33 percent to $1 even as compared to $0.75 in the year ago period as net income rose to $303,000,000 from $241,000,000 Our operating income totaled $453,000,000 in the 2nd quarter, up 19% from 3 $81,000,000 in the same period last year. Operating margin in the quarter was 35.9% compared to 35.8% in the year ago period. In the 2nd quarter, gross profit rose 19% to $915,000,000 from $771,000,000 a year ago and gross margin rate remained strong at 72.4 percent even with the prior year. Gross margin reflected the impact of channel mix and continued high levels of promotional activity in our factory channels offset by sourcing cost improvements. Moving to expenses, we were pleased that we were able to gain modest leverage in the holiday quarter, which is our toughest quarter to do so. Specifically, SG and A expenses as a percentage of sales improved from prior year levels in the second quarter and represented 36.5 percent of sales versus 36.6% last year. Once again, our 2 primary direct businesses here in North America and in Japan both provided leverage not only to their own P and Ls, but to the corporate P and L as well, more than offsetting the impact of our investment spending. We believe we're striking the right balance between driving future growth opportunities and operating efficiently. Inventories at quarter end were $367,000,000 up 36% from the end of last year's Q2, but down 4% on a 2 year basis. Clearly, these inventory levels were key to delivering the exceptional holiday quarter. Our current inventories support the strong underlying business trends and will allow us to maximize sales this spring. Generally, it's worth noting that we've been rightsizing our inventories this year, bringing them up to more appropriate levels to support our growing businesses, including new growth initiatives such as men's, global expansion and our new distribution center in Asia. Cash and short term investments stood at $940,000,000 as compared with $1,100,000,000 a year ago, despite repurchases of nearly $1,400,000,000 worth of Coach common stock in the interim 12 months. During the Q2, we repurchased and retired nearly 7,000,000 shares of our common stock at an average cost of $55.72 spending a total of $388,000,000 Net cash from operating activities in the 2nd quarter was $408,000,000 compared to $364,000,000 last year during Q2. Free cash flow in the second quarter was an inflow of $382,000,000 versus $347,000,000 in the same period last year due to higher net income offset by working capital items. Our CapEx spending was $26,000,000 versus $17,000,000 in the same quarter a year ago. As we stated on our last two earnings calls, based on our plans for the year, we expect the CapEx will be about $150,000,000 in FY 2011, primarily for the opening of new stores across all geographies. Naturally, we were very pleased to report these strong financial results. And as Lou and Mike have said, we're well positioned for the back half of our fiscal year. While we do not give specific guidance, as you know, I always think it's helpful you modelers out there to keep a few things in mind when looking at the year. 1st and most generally, we continue to target double digit sales increases globally with double digit earnings growth. And given the ongoing strength in our business, we now believe that we'll achieve high single digit same store sales growth in North America for the balance of the fiscal year, even in the face of more difficult spring compares. This is up from last quarter when we projected mid single digit growth. Additionally, we expect a continuation of our positive POS trends in our indirect businesses. However, our second half comparisons will be impacted by the timing of shipments in those indirect businesses and the extra week in the prior year's Q4. As you may recall, this extra week contributed $70,000,000 of sales and $0.08 of EPS. 2nd, we were excited that our top line sales growth drove higher levels of profitability in the first half. And while our previous comments regarding second half gross margin still stand, our sales growth coupled with controlled spending will help offset both product cost and channel mix pressures. Therefore, we are reiterating our previous guidance of a full year FY 'eleven operating margin at about last year's level of about 31.5% on a 52 week basis. 3rd, our tax rate is likely to stay in the area achieved in the 1st 6 months for the balance of the year as we continue to refine our international tax strategies. 4th, I wanted to briefly touch on share count. We would expect second half share count to be similar to where we ended the 2nd quarter. Before we open it up for Q and A, I wanted to echo Lou's earlier words. This was an exceptional quarter for Coach. Clearly, our holiday results bode well for the future and we're confident that we'll continue to deliver very strong sales and earnings gains over the balance of the fiscal year and beyond. Thank you all for joining us on our call today. And now Lou, Mike, Andrea and I would be happy to take questions, which will be followed by brief closing remarks from Lou. Thank you. At this time, we're ready to begin the question and answer session. And our first question comes from Bob Drbul with Barclays Capital. You may ask your question. Thanks. Good morning. Good morning. Lou, I guess the first question that I have is, can you talk about what contributed to the upside in the comp versus the mid single digit guidance and sort of what impact it had through the P and L as you look at it? And the second question I have is for Mike is, so I wonder if you could put any buckets on the inventory increases with the various initiatives in terms of quantifying any of the specific buckets on each category? Sure, Bob. I'll actually ask Mike Tucci to answer this your first question regarding comps. Sure. Good morning, Bob. We had strong performance across the board from a comp standpoint. When I look at the business by channel, the full price channel performed very well, balanced throughout the quarter, a really strong online quarter, which was very nice for us. We continue to see that channel grow from an interaction standpoint as well as being able to drive revenue there. So that was very pleasing to us and that did provide some upside. On the factory side, the quarter was extremely strong and we felt like from a positioning standpoint, while we were able to drive value in terms of our proposition, we did see some upside there based on ownership of product, a very strong handbag assortment, which drove sales as we went right into peak through Christmas and the week after. So I would say across the board, we had strength. We are pleased with the pricing power in handbags, which drove comp in both full price and factory. And we had a very strong accessories quarter. And it feels like the cycle from an accessory standpoint was a driver of comp within the quarter as well. Bob, let me jump in on inventory levels. We've never answered inventory levels with that degree of growth opportunities. And I think so that would span a number of our initiatives. I would firstly say that our investment in factory inventories allowed us to capture the outperform during the holiday quarter that Mike just spoke to that we weren't able wouldn't have been able to get to this time last year. So that investment was well placed. Also investment in our men's initiative is a part of the inventory driver. And then lastly, feeding inventory into the Asia region through the ADC is also a subset of where the inventory growth came from. But the thought I want to leave with in addition to enabling the growth is that our inventories are exceptionally clean and current and really position us well now to maximize sales as we move into the spring quarter I'm sorry, the spring half of the year. Great. Thank you very much. Thank you. Our next question comes from Kimberly Greenberger with Morgan Stanley. You may ask your question. Great. Thank you. Good morning. Good morning, Kimberly. I was hoping you could talk to us about your gross margin outlook. And in particular, in light of sourcing cost inflation, are you considering any very slight increases in pricing? Or are you simply redesigning into the, I guess, higher cost of goods? How are you thinking about gross margin progress throughout the calendar year of 2011? And with sourcing cost inflation coming, how does that impact your thinking? Hey, Mike, Steve? So I'll take the cost part of the gross margin equation and then I'll ask Mike to speak to the pricing power. But Kimberly, we really are where we've been for about a year now in terms of talking about our gross margin rates. We did have called out inflationary pressures would have a dampening impact on our gross margin rates in the back half of our FY 'eleven. And so that's still going to hold the way we want to ask everyone to think about it, however, is that also the guidance that we've given previously of gross margin rates coming in for the year in the 70 2% to 73% range are still valid. That guidance that we gave a couple of quarters ago, we still feel very good about. And of course, we could go on and list in addition to the inflationary pressures, all the positive things that we're doing to move gross margin and help to offset those pressures, things like counter sourcing materials, looking to migrate a substantial amount of our production into lower cost countries out of China and the countries like Vietnam and India as an example. And ultimately with the top line growth in the Asian region, most notably China, we'll start to get some help from channel mix as well. So there are a number of positives going on in the gross margin line that will help mitigate the inflationary pressures. On the retail side and full price, there's absolutely a focus on finding pricing opportunity within handbags in particular using Q2 as a foundation where we took handbag average unit retails to $2.95 again we're targeting that $300 sweet spot that was about a 9% improvement. We will continue to focus on that area in the back half and there are a couple of things going our way. One is, a shift towards leather, which helps us from a pricing standpoint on the retail side. So we do see an opportunity to impact average unit retails in the do have pricing power. We were aggressive in the quarter. However, we were able to protect margins from a gross margin standpoint in factory and we drove tremendous operating margins. That effort positions us very well in the back half to continue to focus on unit retail gains in the factory channel, productivity gains in the factory channel and drive operating margin. Great. Thank you. Thank you. Our next question comes from Brian Tunick with JPMorgan. Please ask your question. Thanks and good morning everyone. Good morning Brian. I guess one clarification first on this channel mix that impacted the gross margin here. Was it deeper promos at factory or was it selling less made for factory products? It was actually neither one. It was not deeper promos. Our discount rate in factory was virtually the same. Our margin rate in factory was actually a touch higher. It's purely a function of volume. When we put that volume increase into the quarter, it moves a bigger percentage of our overall pie into the factory channel, which has an impact on gross margin, also has a very positive impact on operating income. Hence, you see the EPS impact that we're able to deliver. So that's the story on channel mix there. Okay. And then on China, you guys talked about this $500,000,000 goal by FY 2014. Can you maybe give us a sense about how you think about profitability expectations in this channel? Clearly, I guess, higher gross margins, but how would you expect China by 14 to rank in terms of profitability versus your other channels? Mike, D? Yes, Brian, I'll jump in on that one. We're very excited about it. Already are achieving 4 wall store operating margins in China that begin with a 4. And so as we gain same store sales, those 4 walls will only drive higher. And as we grow the top line, open additional stores, realize same store sales year over year will more than cover the infrastructure investment that we have on the ground there today. And so, we will have a positive as we've talked about it towards one of our highest gross margin channels. It will also help gross margin from a channel mix gross margin from a channel mix perspective, but ultimately be a strong driver of operating income as we grow the top line and leverage the infrastructure there with these exceptionally strong four wall operating margins from the China stores. Thank you. Our next question comes from Omar Saad with Credit Suisse. You may ask your question. Thanks. Good morning. Good morning, Omar. I wanted to ask about the SG and A flow through in the quarter. I know you've got a lot of investments going on. Can you help us understand how you think about managing SG and A, the duration of some of these investments. I know you've got a lot of growth as you just talked about in China and other markets. How should we be thinking about modeling SG and A on those lines? Thanks. So, Omar, I'll take that one as well. I was really pleased with that flow through during Q2 and we really leveraged the line growth. If you go back actually as I did in preparation for this call and look at the Q1 transcript, I actually called out that I didn't see us having SG and A leverage in the December quarter. And the reason there is if you look at across the 4 quarters of the year, you'll see that Q2 last year was in the mid-30s, whereas the balance of the quarters of the year are in the 43%, 44% range in terms of SG and A as a percentage of sales. Point being that we already have so much leverage in this holiday quarter because of the top line growth. So, the fact that we outperformed in our North American business that Japan did as well as it did with the tough market backdrop really allowed those mature businesses to pour leverage to the P and L that helped us offset our investment spending in Europe, in other parts of Asia, in the new RK brand, etcetera. So I was very pleased that the flow through was as strong as it was in Q2 and that really bodes well for the flow through coming our way in the back half of the year. Great. Thanks. Thank you. Our next question comes from Christine Chen with Needham. You may ask your question. Thank you and congrats on a great quarter. Thank you, Christine. I wanted to ask, so your opportunities to increase AUR at the full price stores, wondering if you could share with us on the really high end bags, bags over $400 What was that penetration in the holiday quarter versus last year? And then on another note as far as factory, what was the percentage of factory exclusive product in the holiday quarter versus last year? I think last quarter you had mentioned that it had ticked up pretty substantially from the year before. Sure. There is absolute opportunity by price bucket in full price. We had a very good quarter average with handbags over 400 and that's just a benchmark. Penetrations were double digit, north of 10%, which is very good. We will focus on that as an opportunity, particularly given the fashion cycle that we're in around manipulated leathers, gathered leathers, treated leathers, some of the burnishing that we're doing on bags. So that offers us a pricing opportunity on the full price side as we move forward, as we develop our assortments into spring and next fall. On the factory side, our product mix in factory was very much driven by made for factory product. Again, I think we were north of 80% in made for factory. In fact, it was 89% for the quarter, probably an all time high, very little clearance, very little full price delete activity in the quarter in the factory channel and that trend will continue. One of the things that we did this quarter, which helped us on the factory side is that we corrected a flow imbalance that we had last year where we were chasing inventory in factory and doing a lot of pull forward on spring goods to sell in the holiday quarter. That also positions us very well as we entered into January. And what were the penetrations last year? About 85. In fact, made for factory. And then the 400 bags in full price last year? About the same. About the same. Okay. Thank you and good luck. Thank you. Thank you. Our next comes from Lorraine Hutchinson with Bank of America. You may ask your question. Thank you. Good morning. Good morning. I wanted to follow-up on the men's business both in Full Price and Factory. Can you just give us a little bit more details about your plans for size of stores, expected productivity versus women's? And then what your expectations are for margins over the long term for men's? I'm sorry. The question focuses on men's mic. What type of size of store are we contemplating? What kind of productivity are we achieving and anticipating relative to our women's stores? Sure, okay. The men's stores actually are being targeted smaller, probably less than a 1,000 square feet of selling space, about 1500 square feet overall. You can assume that productivity on those stores will be extremely high given our sales thresholds. So it's a very intimate environment. On the factory side, store size will be about 2,500 Square Feet. We're still working the model. We're also trying something or we're exploring something on the full price side where we'll have a dual gender store side by side with a separate men's environment and women's environment and that may give us some productivity opportunity. So we actually see that from a margin standpoint, in terms of store contribution as well as gross margins, these stores are very attractive. Thank you. Thank you. Our next question comes from Nealey Tamenga with Piper Jaffray. You may ask your question. Great. Let me add my congratulations. It's a fabulous quarter. Thank you. Hey, Lou, can you talk a little bit more about the Chinese consumer as you're learning more and more about those customer in terms of their preferences or is there any price resistance to some of the price points that you have out there? Just a little bit more on the qualitative side about this consumer would be helpful. Thanks. Sure. What we're finding is that she wants to participate in the accessory category as she does in other modern fashion areas. And she's looking for authenticity, quality, value. She's discerning. She's thoughtful. We see her as embracing Coach. The purchase re intent is approaching 90%, which is remarkable, a level we have not seen in any other market at any other state at any early stage of our business. And we have the emerging Chinese middle class consumer growing at a 30% rate, and she sees Coach as an expression of authentic New York fashion. She likes the spirit. She likes our heritage and she sees us as offering exceptional value and she's willing to pay 2 to 3 weeks of her annual income to purchase a Coach bag. Thank you very much and good luck. You're very welcome. Thank you. Our next question comes from Jennifer Black, Jennifer Black and Associates. You may ask your question. Let me add my congratulations as well. Thank you. Thank you. You've expanded your price points as well as the appeal in your Poppy collection with your most recent floor set. And I wondered if you plan to do the same with your other collections. I also wondered if you've already seen an impact on your blended AURs on Poppy. Thank you. I think as we get more time with each major collection, we're constantly moving and refining it. What's happening within Poppy specifically is that we're trying to capture the opportunity around trend in novelty applications in leathers and mixed materials. And that actually will have a positive impact on pricing within Poppy, which really flows through the balance of our collections as well. Thank you. Your next question comes from Laura Champine with Cowen and Company. You may ask your question. Good morning and congratulations on that great growth in the U. S. In Japan, even though you mentioned that you're still gaining share, sales weren't quite as strong as what we were looking for. Maybe you could comment on the pace of share gain or more importantly, what your long term views are of the health of that market and how that will color your investments there? Well, first, our business was even with last year, which is running about 10% ahead of the category during the corresponding period. We were very pleased with our results. We were able to maintain very strong profitability in that business, ramp up men's, which offers a future opportunity. And I believe our share today is in the neighborhood of about 17% or 18%. We believe there's opportunities for us to gain additional share in the years ahead because the Japanese consumer is extremely value oriented. In terms of the future of the category, unfortunately, the category has been on a 10 year decline. And while we expect it to slow in the rate of decline, we're not optimistic considering the aging of the Japanese population and the absolute decline in population that the category will resume growth. So our focus is to be efficient, develop our men's business, leverage our team in Japan to assist us in the growing Southeast Asian region and we're doing all of those things. Thank you. Thank you. Our next question comes from Erika Moschmeyer with Robert W. Baird. You may ask your question. Thanks. Congratulations. Thank you. I remember when you first started talking about lowering your handbag AUR, you had talked to more of a $200 to $300 sweet spot. And today, I think you mentioned $300 Is that a subtle change in your philosophy? No, our $300 target and again, it's just it's a benchmark is really where we built the assortment strategy going back almost 2 years now. What's happening as we anniversary that strategy and we continue to fine tune the assortment and the cycle evolves, we will constantly look at ways to impact that from a growth and productivity standpoint, price being one of them. Great. Thank you. Your next question comes from Dana Telsey with Telsey Advisory Group. You may ask your question. Hi, good morning, everyone. Hi, Dana. Congratulations. As you talked about new sourcing opportunities and shifting production department store and wholesale business has done well. Are they are you gaining department store and wholesale business has done well. Are they are you gaining further selling space and what's changing there? Thank you. I'll take the second part first, Dana. We do have a healthy department store business. We're pleased with its performance and our accounts are as well. We do have a very strong presence today. And situationally, we do gain real estate in some locations. But in general, we're very comfortable with the nature of our distribution and the size of the space we have. And we are looking forward to a good and strong spring season. Mike, with regard to production? Sure, Dana. In terms of moving production out of China, we have a lot of Jeri's leadership and act a 4 year plan to measure progress and look to drive that growth by measuring and revisiting out of out of China and into these new markets. And we're also going to target small leather goods, which as you can imagine are more labor intense than bigger bags. But we've had a lot of success there in India already and we'll continue to build on that success. And we believe we can get to somewhere in the neighborhood of 40% to 50% of unit production sourced out outside of China by the end of our 4 year plan. So it's an important meaningful initiative that we're putting a lot of energy against. In terms of gross margin impact, obviously, labor costs are increasing in a variety of markets, And so there's a whole set of our profit a set of assumptions that we've made that we believe this migration in 4 years will benefit us by at least 150 basis points from what it would have been had we remained in China. Thank you. Thank you for joining us today for our Q2 conference call. I will now turn it back over to Lou for some closing remarks. Lou? We've had a lot of attention on individual metrics, and I think that's appropriate. And it's probably also appropriate for me to bring us back to our overall performance. Not only were we pleased with the exceptional top line growth, but we were also equally pleased with the exceptional bottom line growth. And importantly, I think you need to appreciate that our And we are leaving this recession with all guns blazing and feeling very confident that we will continue to be able to drive top line, double digit sales growth and double digit earnings growth, and we're operating income and return to shareholders EPS. And we will manage our balance sheet tightly. I just want to also comment very briefly on inventory. About 2 thirds of the inventory growth that we have year over year is to actually support new locations in terms of model stocks as well as a new Asia distribution center. So it's only about our inventory like for like is up about we estimate about 15%. So thank you and have a good day everybody.