Earnings Call: Q1 2011

Oct 26, 2010

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 Schell Resnick. You may begin. Good morning, and thank you for joining us. With me today to discuss our quarterly results are Lou Frankfurt, Coach's Chairman and CEO and Mike Devine, Coach's CFO. Mike Tucci, President of North American Retail is also joining us for a holiday preview. 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 and fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ These results may differ materially from our current expectations based upon risks and uncertainties, such as expected economic trends or our ability to anticipate consumer preferences. Please refer to our annual report on Form 10 ks for a complete list of these risk factors. Also, please note that historical growth trends may not be indicative of future growth. Let me outline the speakers and topics for this conference call. Lou Frankfort will provide an overall summary of our 1st fiscal quarter 2011 results and will also discuss our progress on global initiatives. Mike Tucci will review our key programs for the holiday season. Mike Devine will conclude with details on financial and operational highlights for the quarter. Following that, we will have a hold a question and answer session that will end shortly before 9 30 am. Lou will then conclude with some brief summary comments. I'd like to now introduce Lou Frankfort, Coach's Chairman and CEO. Thanks, Andrea, and welcome, everyone. As noted in our press release, we posted an excellent quarter as key financial metrics show double digit growth and bottom line results have well exceeded top line sales. All of our business units posted strong performances despite muted consumer spending as the merchandising, marketing and pricing strategies we put into place in FY 'ten continued to drive growth. 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 collections and our pricing in the assortment strategy continued to resonate with consumers worldwide. Beyond the top line, we were also very pleased with our high level of profitability and substantial cash generation in the Q1. Looking forward, we very pleased with the current trends we're experiencing in the business and are well positioned for the upcoming holiday season. While I will get into further detail about current conditions and the outlook for our business shortly, I did want to take the time to review our Q1. Some highlights were: 1st, net sales totaled $912,000,000 versus 7.6 $1,000,000 a year ago, an increase of 20%. 2nd, earnings per share totaled 0 point 6 $3 up 43% from prior year. 3rd, direct to consumer sales rose 19% to 7 $75,000,000 from 654,000,000 in the prior year. 4th, North American same store sales for the quarter rose 17%. 5th, sales in Japan rose 14% in dollars and 3% on constant currency basis despite the difficult environment. And finally, in China, we continue generate very strong sales growth with a continuation of significant double digit comps. During the quarter, we opened 3 North American retail stores, including 1 in the new market for Coach, Corpus Christi, Texas. In addition, we opened 7 factory stores, including our first 5 men's standalone factory stores. The North America. Moving on to China, we opened 8 locations all in the mainland during the the quarter, including our 1st men's standalone factory location. At quarter end, there were 169 total locations in Japan with 20 standalone full price stores including 8 flagships, 116 shop in shops, 27 factory stores and 6 distributor operated locations. Indirect sales, which for context now represents about 12% of Coach's sales on an annualized basis increased POS sales notably in our international businesses and expectations for a stronger holiday for a stronger holiday season for Coach. Specifically, sales at POS in U. S. Department stores rose slightly for the quarter. At the same time, international retail sales rose sharply driven by both distribution growth and comparable store sales. The international traveler represents a meaningful growth opportunity as Coach's global awareness and presence expands. We estimate that the addressable U. S. Handbag and accessory category rose about 5% similar to the increase we experienced in the 1st 6 months of the calendar year. At the same time, coaches bag and accessory sales rose about 16% across all channels in North America over the same period. In our own stores, handbag and accessory sales rose 20%. It's worth noting that our customers' future purchase intent is at the highest level we have seen in the last 2 years. Our total revenues in North America rose 18% for the quarter with our directly operated stores up 17% as distribution growth augmented the positive comp performance. As noted, for both channels. In Full Price stores, both conversion and ticket rose partially offset by rose partially offset by traffic. In factory, conversion and traffic rose partially offset by average transaction size. As noted in Japan, we posted a 14% increase in dollars on a 3% increase in constant currency. Our market share further expanded against a very weak category backdrop. Coach now holds a 16% yen of the strength and relevance of our accessible luxury positioning with the Japanese consumer who has become more value oriented. Once again, I want to call out China, our fastest growing business, which represents the single largest geographic opportunity to During the quarter, our sales rose sharply from prior year fueled by distribution and significant double digit comps. Clearly, the coach proposition is resonating with this consumer who is more detail on our financials and I will discuss our outlook in some detail, I wanted to give you this recap. As you know, Mike Tucci has joined us today to discuss our product performance for Q1 and our holiday sales initiatives. Mike? Thanks, Lew. During the Q1, as always, we maintained a high level of product innovation and distinctive newness. To a relaunch of Poppy in July, we brought in Mia, a new soft tailored collection which featured Maggie, our most popular hobo as well as the carry All silhouette. We also delivered new choices in Madison and Kristen. Madison and Poppy continued to be our for the period with both collections performing well. More generally, the merchandising and pricing strategies we initiated 1 year ago to create a drivers in North America. Both handbags and women's accessories achieved positive comps in the quarter with handbag penetration holding at 57% with a slight increase in average unit retails. Earlier this month, we started flowing in our holiday assortment, including a relaunch of the Madison collection featuring the new Sofia satchel in core leather, gathered leather and novelty applications along with a fresh dotted OpArt logo. The initial reception has been excellent. You will continue to see a high level of newness over the next few months with updates to Poppy and new colors in Madison and Kristen. In mid December, we'll be introducing the Alexandra tote to capture peak sales with new product just before the holiday. We're also excited about the trend in small bags, which will be great gift giving items and help to balance our price offer. In addition, our holiday product will be supported by a comprehensive marketing plan building on the successful elements of the campaigns of the last year. We will execute a targeted strategy beginning in mid November to highlight a powerful gifting message for the holiday shopping season. The emphasis of our marketing will be product and item driven across handbags, women's accessories and other gift ideas. Our efforts will span coach.com, digital media and compelling print and in store marketing to drive traffic. I'd also like to take this opportunity to provide an update on our digital media strategy and the benefits that we're deriving from it. As mentioned in previous calls, coach.com is our most important marketing tool. Our primary objective online in North America is to build top of mind brand awareness and expands far beyond our own website. Social media has become an important component of our marketing strategy, including Facebook, where we now have over 1,000,000 fans who enthusiastically engage with our relevant messaging and exclusive offers such as product reviews and free shipping. We've also expanded our digital footprint and advertising highlighted by our recent Poppy project campaign and our rich media takeover ads featuring the Sofia bag. These are just a few of the initiatives that drove double digit year over year increases in sales and traffic to our North American site in Q1. Building on our strong digital platform, visitors to coach.com this holiday will be able to engage with our virtual gift guide featuring a robust selection of compelling gifts. Pick their favorites, add it to a wish list and even share it through social media. We're also excited about enabling customer comments and likes for our Poppy product pages. Inviting our guests to participate in our brand message becomes viral, ultimately driving traffic and sales to our website and stores. Finally, we'll soon introduce our e gift card feature, perfect for last minute shoppers. While this is a snapshot of our North American digital business, our web presence is global. During the quarter, we launched coach.com informational sites in 10 important countries such as Singapore, Taiwan, Korea, France and Spain. This brings our total web presence to 14 countries, 3 of which are e commerce platforms. We will continue to use our digital capability as an enabler and customer touch point as we expand the Coach brand globally. Moving back to our stores. As Lou mentioned, we opened 3 new retail stores in Q1, which are performing well and ahead of plan and 7 new factory factory stores, including our first five men's standalone factory stores. Updating our men's store opening plans for fiscal year 'eleven in full price based on the initial success of our first store on Bleecker Street, we will be opening a few additional men's in strong response reflects the strength of the Coach brand and the strong response reflects the strength of the Coach brand and the consumer's focus on value and function. It underscores our belief that there is a large opportunity for men's domestically in our factory channel as well. During the remainder of FY2011, 'eleven, we'll open at least 5 more men's factory locations. In summary, we're excited with the progress we've made in our Full Price productivity improvement and our men's initiative. We're feeling great about the holiday season given 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 overarching strategies remain largely unchanged. We're focusing 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 and in international markets. As we noted in August, the men's global premium bag and small leather goods market is estimated to be about $4,000,000,000 today or 15% of the total premium accessories the men's sales represent only 3% to 4% of our total sales today. Well positioned to grow in this category. Clearly, we have a significant opportunity for Coach to substantially increase its share in the men's accessories market. In Japan, where the male consumer is more brand and fashion oriented than in introduced a comprehensive men's assortment in key full price locations and have opened 2 stand alone stores. This quarter, we opened our 1st freestanding men's factory store, which is off to a great start. We believe that over time, our share of the men's market in Japan can equal our total market share of about 16%. Beyond North America percent. Beyond North America and Japan, we believe that men's will be a major growth driver for our international business, especially in China and other Asian markets. We are currently assessing opportunities in these markets and plan to introduce a broad and comprehensive men's assortment and all on to distribution growth. As mentioned in August, we expect that our square footage globally and across all channels will increase about 10% this year compared to 8% in FY 'ten. Starting in North America, we will open about 30 new stores this year, including the 10 locations we opened in Q1. In total, we said many times, outside of North America, China is clearly our largest geographic opportunity as luxury accessories are are expected to double from about 10% of the global market today to about 20% during the next 4 or 5 years, contributing the majority of worldwide category growth. Last year, our sales at retail doubled in China to over $100,000,000 as the market grew rapidly and we increased our share from 4% to 5%. This year, to 5%. This year, we're accelerating new store openings with about 25 new locations planned, up from the net of 13 opened last year, increasing square footage by about 60%. All of these locations will be in Mainland China. 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 have seen some significant early successes. This year, we expect open about 7 net new locations in Japan, including the 2 opened in the Q1. They include 3 men's and 1 poppy location. In total, we estimate that net square footage growth in Japan will increase by about 5% this year, similar to FY 'ten. Earlier this month, we announced the creation of a new international retail organization with 3 major Asian hubs Japan, Mainland China and other Asia markets. We also announced the addition of 3 senior executives who will enable Coach to capitalize on the significant growth opportunities that exist for the brands in the region. Key in this new organization has been the promotion of Victor Luis to the newly created position of President, Coach Retail International with responsibility for all of Coach's directly owned businesses outside North America. Finally, beyond our directly owned owned international businesses in China and Japan, we have significant and growing distributor run businesses in other Asian countries. During this fiscal year, we expect to open about 40 net new international wholesale locations including the 3 opened last quarter, bringing our total number to over 220. As most of you know, in April, we announced a 2 pronged approach to address Europe through the establishment of a joint venture with Hackett for distribution in the UK, Spain, Portugal and Ireland and a wholesale distribution agreement with Printon department stores in France, including a 1700 square foot location on the main floor of Printon's iconic flagship on Boulevard House in last June. We've seen excellent early results where the shop is attracting both local consumers and tourists. We expect to open an additional 5 locations within PrintOn during the balance of the fiscal year. We're also very pleased to announce our initial stores in London, a standalone store in the Westfield White City Mall coming in early spring and a 5,100 Square Foot Flagship on New Bond Street, our first global flagship store in the region coming next summer. Finally, in Spain, we opened our first boutique in El Corte Ingles in Madrid earlier this month and 2 others in Barcelona and Valencia just last week. During the balance of the fiscal year, we plan to open at least 3 more Coach shop in shops within El Corte Ingles and we're exploring additional opportunities as well. Beyond the opportunities in the Coach concept and brand, we just launched The Reed Craycorp brand is targeted at the rapidly evolving luxury market. It has an opportunity to define new American luxury and engage a customer who is looking for exclusivity a store in Madison a store in Madison Avenue and shop in shops in Saks Fifth Avenue 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. What I just reviewed are our strategies to drive our business at a double digit pace given the strength of the Coach business and our increasing global presence. At this time, I will turn it over to Mike Devine, our CFO for further detail on our financials. Mike? Thank you, Lou. Lou is just taking you through the highlights and strategies. Let me now take you through some of the important financial details of our Q1 results. As mentioned, our quarterly revenues increased 20% with direct to consumer up 19% and indirect up 27%. Excluding the currency benefit during the quarter, sales rose 17%. Net income for the quarter totaled $189,000,000 up 34% with earnings per diluted share of $0.63 up 43%. This compared to net income of $141,000,000 and earnings per diluted share of $0.44 in the prior year's Q1. Our operating income totaled $286,000,000 28% above the $223,000,000 reported last year, while operating margin was 31.3 percent versus 29.3% last year. Naturally, we were extremely pleased with this level of growth and our higher level of profitability. During the quarter, gross profit totaled 670 $6,000,000 versus $550,000,000 a year ago, an increase of 23%. Gross margin rate was 74.2 percent versus 72.3 percent a year ago. The year over year change in rate was a function of sourcing cost improvements, notably in the factory channel where mix continued to favor higher margin made for factory product. We were pleased with our expense ratio in Q1 as SG and A expenses as a percentage of net sales totaled 42.8% compared to the 42.9 percent reported in the year ago, a 10 basis point improvement despite heavier investment spending. Inventory levels at quarter end were $459,000,000 36% above the $338,000,000 reported at the end of last year's Q1, planned to support the 17 net new North American stores, and 16 net new Coach China stores as well as our new Asia distribution center, all of which are increases from the year ago period. Cash and short term investments stood at 712 $1,000,000 as compared with $995,000,000 a year ago. During the Q1, we repurchased and dollars spending a total of $137,000,000 This brought our trailing 12 month repurchase total to nearly 34,300,000 shares equaling about $1,300,000,000 At the end of the quarter, approximately $420,000,000 remained under the company's present repurchase authorization. Net cash from operating activities in the Q1 was $177,000,000 compared to $241,000,000 last year during Q1. Free cash flow in the Q1 was an inflow of $154,000,000 versus 221 $1,000,000 in the same period last year. Our CapEx spending was $23,000,000 versus $20,000,000 in the same quarter a year ago. As we stated on our August call, based on our current plans for the year, we expect that CapEx will rise to about $150,000,000 driven by the timing shift of Naturally, we were very pleased to report these strong financial results. And as Lou and Mike have said, we feel we're very well positioned the holiday quarter and the remainder of the year. While we do not give specific guidance, I believe it will be helpful for you modelers out there to keep a few things in mind when looking at the year. 1st and most generally, we expect to achieve double digit sales increases in North America and globally with double digit earnings growth. And given the strength in our business, we now believe that we'll achieve mid single digit comparable sales growth in North America for the balance of the fiscal year, up from last quarter when we projected low to mid single digit growth. 2nd, we are encouraged by the rate of profitability improvement in Q1 and excited about our client sales growth. And while our previous comments regarding second half gross margin still enabling Coast to deliver an FY 2011 operating margin at about last year's level. And third, our tax rate is likely to be in the area of 34% for the balance of the year as we further refine our demonstrate the vibrancy of the Coach brand and our ability to manage our business nimbly, while investing prudently for the longer term. We're accelerating our distribution plans to leverage the emerging market opportunities a particular focus on China, while also exploring new geographies, capitalizing on the increasing popularity and recognition of the Coach brand with discerning consumers globally. And with a business model that generates significant cash flow and virtually no debt, we are in a position to take advantage of growth opportunities while continuing to capital to shareholders. Thank you all for joining us on our conference call today. And now Lou, Mike, Andrea and I would be happy to take questions followed by a brief comment from Lou. Thank you. At this time, we're ready to begin the question and answer session. Our first question comes from Bob Drbul. You may ask your question and please state your company name. Barclays Capital. Good morning. Good morning. Hi, Bob. Lou, I guess the first question that I have is, were there any surprises for you this quarter given the surprising strength in the trends of the business overall? I think the only if we want to call it a surprise, the win was at our back and we actually found that the category grew 5% to 10% in North America, and we were able to grow the 3rd quarter in a row where we grew 5% to 10% led by Coach. And that's obviously very encouraging. But more generally and overarchingly, we did have, of course, had an excellent quarter. And what that did for us as a team, it reinforced our confidence that the road map that we've articulated as a growth company can and will be achieved. Got it. And then, I just had a question on inventories and just sort of the outlook for the holiday. On the inventory side, Mike, can you talk about units versus pricing and if you have opportunity for higher average unit retails in the holiday season? And you talked a little bit about feeling great about full price in factory. Was there a sequential improvement or anything we could talk about from throughout the quarter into October so far? Okay. I'll take you got a lot in there, Bob. It's Mike Tee. I'll take a few of those and then I'll hand to Mike Devine. On the business overall, we did see an factory side, again capitalizing on made for factory opportunity. That drove higher penetrations in handbags, productivity opportunity and we do see that as an opportunity going into Q2. More generally, on the full price side, we were pleased with conversion as well as average unit retails and handbags, which were up slightly. That's a nice opportunity for us in Q2. And on the inventory side, I think from a business unit perspective, there are a few important points to make. One is that we're very clean, extremely low levels of clearance in the stores and we're driving very productive sales in our factory stores through better mix. Our 2 year stack on inventory, Bob, is actually up about 14% where we feel last year we were light going into the holiday quarter. And in fact, we did an enormous amount of pull forward of factory products, spring product that we've pulled forward last year to sell in Q2. We've corrected that this year. Additionally, we have more flow in the quarter. So the inventory supports that. Of course, you've heard about some increase in door count with the men's strategy and some of the global initiatives that we have on new stores. And that specifically is driving some of the inventory increase as well. So we're in very good shape. We feel good about what we're seeing in the business today in October. We did see a strong finish in the quarter with the launch of Madison at the end of September and that of increase in inventory is overwhelmingly skewed towards an increase in unit. We have a low single digit average unit cost per item. So of the year over year inventory dollar growth, the vast majority of it is in fact units which Mike spoke to. I'll also add on to that, of course, since a year ago, we've opened the Asia distribution center, which has required a inventory investment, but now allows us to operate far more nimbly and take advantage of growth opportunities in region and Asia. Great. Thank you very much. Thank you. Our next question comes from David Schick. You may ask your question. Please state your company name. Hi, good morning, Stifel and Nikolas. Good morning. A very sort of structural China question for you. You've just talked about your share going from 4% to 5% and the business is growing the market itself is growing. Just structurally as you look at who plays in that market, I know you've talked about 16% share in Japan and your shares higher here. 5 or 10 years out, what's the right share to think about for where you guys should be in the China market rally? I mean, the higher the better, of course. But I think that it's realistic for us to assume that if we continue on our trajectory and have and enjoy the same level of success that we've enjoyed in other new markets that we've penetrated that we could achieve our 15% market share. Okay. And there's been it's just been a quarter, but there's no change to the pace of market growth there it sounds like? No, the market is moving quickly. Coach is growing much faster than the market, but the market is, as we said earlier, is going to over the Coach Japan business in 'one, we had about a 2% market share. And as we just reported, we're excited about the opportunity this kind of represents. That's great. Thank you very much. Thank you. Our next question comes from Lorraine Hutchinson. You may ask your question. Please state your company name. Thank you. BofA Merrill. Good morning, everybody. Good morning. I was just hoping for an update on the sourcing environment. I know you mentioned margins would be down in the back half, but if you could just talk about the specific drivers here? And then also in the context of the higher handbag AUR in the full line stores, is this your strategy for offsetting some of the cost increases and will we see continued higher prices going forward? Okay. Thanks, Lorraine for the question. I'll tell you what, I will take the sourcing cost question and then I'll allow Mike Tucci to answer the AUR question. But obviously coming out of the quarter, we're absolutely thrilled with the levels of profitability of the business, gross margin and SG and A, we're delivering 200 basis points of operating margin improvement. But as we've been talking about for 3 quarters now, we do anticipate seeing inflationary cost pressures that will impact our gross margin rate. We spent a lot of time on the last call going through a number of the initiatives we have in place to look to offset those longer term things like counter sourcing moving to production to Vietnam, the India, etcetera. So all of those activities continue ahead at full speed and we just are enormously encouraged by the quarter that we just put in books and feel that we can keep the top line growth going. We can deliver SG and A leverage that will help to offset some of these gross margin pressures and deliver very, very strong operating margin to the bottom line similar to last year's level in spite of the pressures. Sure. On the AUR side, particularly within handbags, what we're experiencing is very balanced growth in handbags. We had a nice comp performance in handbags in Q1 and we're positioned in Q2. There is some opportunity to raise or to get higher handbag AURs and we're very, very much focused on very strong response to leather, to gathered leather, to novelty leather applications. Those by nature carry higher retails and the customer is voting yes on those. So while we're very committed to protecting our opening price point positioning, we're also seeing some upside in some of the elevated product. And we do believe that there's opportunity for us to nuance that going forward and we'll take full advantage of it. Great. Thank you very much. Thank you. Our next question comes from Christine Chen. You may ask your question. Please state your company name. Good morning. This is Paula Torch calling for Christine from Needham and Company. I wanted to ask a question about Europe. What is the long term potential there? And do you intend to have your own stores eventually besides flagships or just through partnerships? And also if I may on Europe, wondered if you could give us a little bit more color on the customer. I know you said that she's a local and a tourist, but wondering more so what her purchases are like, how often does she shop, any sort of price point differences and anything that stands out in terms of collections that she's resonating towards versus the U. S. Customer? Thank you. There's a lot of parts to that. Let me begin by saying that Europe does represent a very Over on most generally, we will enter Europe with a multichannel strategy as we have in other countries. So you will see us having flagship stores, freestanding stores, shop in shops and outlet locations in addition to an Internet presence. The way in which we're looking to establish the brand initially is through flagship locations in such markets as London and in Paris, whether the flagship is within a prestigious department store such as PrintOn or freestanding location. We are working with our local partners who have considerable know how in the market, and we will continue to do that. I'm very pleased with the way things are going. I actually was in Spain and France just the other week and it was exciting for me to visit our first shop, which opened in Madrid and have a chance to see our little jewel and speak to consumers. And the consumers surprisingly actually had a very high awareness of Coach and they did because of international travel. They appreciated the quality, the styling, the pricing certainly and the overall in store experience. In addition, we're also benefiting from our growing awareness globally in the form of international travelers. So when we were in Trenton just a day or 2 later, we saw a very broad mix of consumers, including, of course, substantial French consumers, but also international travelers, particularly from China and Japan, and we believe that will help us form a very profitable business from the inception. Poor, is that it? Yes. Okay. Yes. And just in terms of the collection so far, I mean, I realize that it's early, maybe any price point preferences? Is she looking at sweet spot or? In general, she likes leather and she likes stylish products. And we Mike said earlier, we've had a very strong success in North America and Madison, particularly with our gathered leather, the Sofia style, that is our we're actually we're actually chasing inventory for it. So we're finding that she is more sophisticated, more stylish and is looking for product that meets her current needs. Thank you. Our next question comes from Brian Essex. You may have your question please. Your company name. Yes, thanks. Good morning. Congrats. Good morning. Good morning. Just two quick ones for I guess Mike Devine. First one, on the flat EBIT margin guidance, does that include or exclude the 53rd week from last year? And when does the SG and A leverage point really start to come down here? When is the max spending quarter for the year? Thanks very much. Sure. That's a good question, Brian. We really think about a 52 week compare in the main, of course, that will only influence Q4, which during FY 'ten was a 14 week quarter for us versus our usual 13 weeks. So as I thought as I speak to that, I really think it's appropriate to look at it on a comparable basis. So good clarifying question. In terms of peak SG and A, actually, we're going to continue to open stores and invest in the business and so we'll continue to see SG and A dollar growth year over year. What I will say is that our Q2, our December quarter is obviously our most mature and evolved quarter. We've been a gift giving resource for many, many years. So it will be this year as it has been in years past, the most difficult quarter to achieve SG and A leverage because we have so much leverage to begin with because of the high sales volumes. And where we'll really see that SG and A leverage kick in year over year as the top line continues to grow will be in the second half Q3 and Q4. Thank you. Jefferies. Just quick questions. Lou, is the consumer becoming less price sensitive out there? What's your thoughts there? And then I guess Mike Tucci, it sounds like we're getting a little bit closer to an inflection point on traffic in the full price business. Can we just get an update on where we are with that full price traffic trend when we think it can reach that inflection point? Thanks. Randy, the consumer is cautious and she is price sensitive. And as we've said before, what we have found is that she's looking for a combination of innovation, relevance and value. And the modified merchandising, pricing and marketing strategies we put into place over a year ago, where the where effectively through the rebalancing of our assortment, we lowered our average price by about 10% is resonating extremely well and that positioning is our long term strategy to give consumers great product that's stylish, well made out of excellent materials at a very compelling price point. Mike? Sure. Randy, Q1 was encouraging to us from a traffic standpoint. We see some improvement coming out of from a sequential standpoint coming out of Q4. And I believe that these trends are cyclical. We are starting to lap our repositioning strategy. And I think that that's an important opportunity for us to continue to build traction. This is a long term game. And as we've established much more balance in our assortments, and I believe our product from an innovation standpoint continues to improve, it feels like traffic is moving in the right direction. It's very difficult to put a stake in the ground and predict exactly when the inflection point will occur. But we're feeling very good from a full price out there, pilots and marketing initiatives as well as seeing the long term benefit from our repositioning. Very helpful. Just a little back on the pricing. It just seems that you're getting more response to some of these higher price point products. You talked a lot about the Madison Collection, etcetera, It's been strong. Is it just a function of the fashion, the assortment has gotten a lot better from your standpoint, happens to be a little bit more priced, you get the leather in there. Is that what's really happening here? I think the answer is yes. I mean, Randy, when you look at our the closet of our customer and while on average, you might have 10 to 12 bags in active use and even a Coach loyal consumer would have, let's say, a few brands from other brands. In many households where the consumer is not price sensitive, she's also carrying European luxury brands. And what we're finding by rebalancing our assortment, as Mike T. Indicated and giving consumer a wide range of choices, we're able to let the consumer vote in the store at what rate she wants to purchase. The key for us was to rebalance our assortment. The strength that we're experiencing in the higher price points comes from incredibly appealing product in leather that represents great value. Very helpful. Thank you. Your next question comes from Laura Champine. You may ask your question. Please state your company name. It's Cowen. It seems that obviously the in the wholesale channel that your some of your customers are excited about holiday, seems like you're stocking up as well in advance of holiday. What is it about your holiday that makes you more positive going into the season? There's a variety of factors. 1st and most importantly, it's product. And the product that we introducing for holiday, we have done substantial pilots and early reads show that it's selling extremely well. So the sell through that we're experiencing in Madison in particular and the it's product that gives us that confidence. Great. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. And it's product that gives us that confidence. Great. Thank you. Yes, let me just add something and I'd encourage you guys to keep an eye on it in your channel checks. We have also built a slightly different flow strategy in for Q2 and you'll see us with updating our product assortments more boldly throughout the quarter. So as we typically this season, we also have strong newness hitting over the course of the next 8 weeks, 8 to 10 weeks. And that's really important, particularly in December where we're flowing in Alexandria, which offers us a real opportunity to capture sales on newness going into our peak 10 to 14 day period. That's great. Thanks. And then just quick housekeeping for Mike Devine. Is that 34% tax rate what we ought to model long term as well? Yes, we feel like the strategies we've put in place largely around our international tax strategies should hold for the foreseeable future. Great. Thank you. Thank you. Our next question comes from Dana Telsey. You may ask your question please for your company name. Good morning. Congratulations everyone. Thank you, Dana. As you expand your channels and geographies, how do you see it changing the operating margin parameters over the long term? Does the the business get back to its former operating margin levels? And also as you think about next spring and just next year with innovation being so important, what do you see for spring 2011 in terms of envisioning the assortment maybe by category or by price? How is it changing? Thank you. Mike? I'll take the first half of the question, Dana. And I think we're very optimistic about the trajectory and shape of the curve long term around our operating margin. And what we'll see is as full price business reinvigorates and as our international businesses begin to take a bigger share of the total sales pie, those two positive things will begin in the main move gross margins forward or higher. In terms of delivering SG and A leverage, again, if we continue to see the top line growth that we enjoyed in Q1, it's clear that we'll be able to deliver additional leverage. During the quarter, Mike Tucci's P and L and our P and L in Coach Japan delivered a tremendous amount of SG and A leverage allowing us to show the 10 points of leverage across the whole company as we continue to investment spend. As an example, the Coach China P and L showed 15 points of SG and A leverage against itself from a year ago. We're still growing our spending there faster than the top line. So it was modest a modest delever for the company as a whole. But just as an example, as Coach China begins to or continues to grow top line and their spending year over year slows, they will continue to deliver operating years out into our long range plan, but definitely the direction that we will head over time. Hey, Dana. On the product side, we're pretty focused on Q2, but just to foreshadow the back half, we believe Poppy and Madison as anchor collections have continued strength through the back half. We're also very excited about Colette and Kristen as platforms that we can build on and they really target a very important sort of classic tailored consumer. There's obvious opportunity for us to continue to build on the men's innovation piece in our existing stores and our men's concept stores and our freestanding stores. And directionally, I want to really emphasize that we do believe there is pricing opportunity for us, not in an enormous way, but we are projecting AUR improvement in handbags in the back half. We also are extremely pleased with the strength of our women's accessories business, which is trending really, really well. And we've put a ton of innovation and function into that category, particularly in wallets and small bags, and that's checking very, very well. That will continue. Thank you. At this time, we're going to conclude our Q and A session so that we have time to have Lou make a couple of concluding remarks before the market opens today. Thank you, Angie, and thank you everybody for participating in the call. I think the quarter speaks for itself. And as I said at the very beginning of the question period, the confidence that we have coming out of this quarter after several quarters of continued double digit growth really reinforces our confidence as a team that's a matter that we've articulated as a growth company looking to achieve double digit top line, top line growth over the next several years is well within our sights and within our