Earnings Call: Q4 2010

Aug 3, 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 Shaw 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 Jerry Stritzke, Coach's President and COO and Mike Devine, 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 or fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences. Please refer to our latest annual report on Form 10 K for a complete list of U. S. Factors. Also, please note that historical growth trends may factors. Also, please note that historical growth trends may not be indicative of future growth. Please note that the results for the Q4 fiscal year ending July 3, 2010 included 14 and and 53 weeks, respectively, while the same periods in fiscal 2,009 included 13 52 weeks, respectively. All discussions of comparable store sales are calculated based on an equivalent number of weeks for each period, 14 weeks versus the comparable 14 week period for the Q4 and 53 weeks versus 53 weeks for the fiscal year. Now let me outline the speakers and topics for this conference call. Lou Frankfort will provide an overall summary of our 4th fiscal quarter and annual 2010 results and will also discuss our overarching strategies. Jerry Strutsky will speak to our operations, sourcing and logistics plans as we expand our infrastructure for global growth. Mike Devine will continue the details on financial and operational results of the fiscal year. Following that, we will hold a question and answer session, which will be brief summary comments. I'd now like to turn I'd like to introduce Lou Frankfort, Coache's Chairman and CEO. Thanks, Andrea, and welcome throughout the year as our market share expanded across all geographies. Our results reflect the growing recognition of the Coach brand globally and consumers' strong response to our product offerings and clearly bodes well for the future. While I will get into further detail about current conditions and the outlook for the category and our business shortly, I did want to take the time to review our and quarter first. During FY 'ten, our performance was highlighted by increases of 12% in revenues, 18% in operating income and 22% in earnings per share. It was a year of many milestones including: 1st, a return to double digit top and bottom line growth driven by the successful merchandising, marketing and pricing strategies we put into place last year. 2nd, an increased emphasis on the globalization of our business through both distribution growth outside North America and the opening of our Asian distribution center, which will allow us to operate more nimbly. 3rd, the 1st full year of operation of our stores in China, where our sales and resumed our repurchase program authorizing another $1,000,000,000 buyback this spring off by an excellent 4th quarter. Some key metrics were: 1st, net sales totaled 9 $51,000,000 versus $778,000,000 a year ago, an increase of 22%. Excluding the extra the dollars reported in the prior year. Again, excluding the extra week, EPS rose 23%. 3rd, direct to consumer sales rose 23 percent to $842,000,000 from $683,000,000 in the prior year. 4th, North American same store sales for the quarter rose over 6% on a distribution and the extra week. 5th, sales in Japan rose 13% in dollars and 6 percent on a constant currency basis despite a continued contraction in the category as Coach continued to gain share. And finally, we continued to generate very strong sales and comps in China. During the quarter, we opened 5 North American retail stores, including 2 in new markets for Coach, Chattanooga, Tennessee and Halifax in Nova Scotia. We also closed 6 locations, 2 at lease expiration and the remaining 4 by exercising our termination rights. In addition, we opened 2 factory stores. At the end of FY 'ten, there were 3 42 full price and 121 factory stores in operation in North America, a net increase of 12 full price and 10 factory stores from the prior year, while total square footage grew 8%. Moving to Japan, 2 locations were added, including our 2nd men's shop, one was closed and one was expanded. At year end, there were 167 total locations in Japan with 20 stand alone full price stores including 8 flagships, 116 shop in shops, 25 Japan last year and 3 were expanded, yielding total square footage growth of about 5%. And in China, we added 4 net new locations all in the Mainland, including our first flagship in Shanghai. At the end of the quarter, there were 41 coach locations in China, including 29 locations on the mainland and 13 cities. 15 of these stores were in Tier 1 cities, in Tier and Tier 3 cities. In addition, there are 10 locations in Hong Kong and 2 in Macau. Overall for Greater China, there was an increase of 13 net new locations for the are building a multi channel distribution model in China, including flagships, retail stores, shop in shops and factory stores. Indirect sales, which for context now represent about 12% of Coach's sales on an annualized basis increased 15% to $109,000,000 from $95,000,000 in the same period last year. This increase was driven by international wholesale shipments, while shipments into U. S. Department stores were essentially consistent with last year's levels. At POS, international sales rose significantly while U. S. Department store sales were even year over year in the quarter. We estimate that the addressable U. S. Handbag and accessory bag and accessory sales rose about 20% across all channels in North America over the same period. In our own stores, handbag and accessory sales rose 24%. For the fiscal year ended June, we estimate that the addressable category rose about 3% to 5% to about 8 point $3,000,000,000 while Coach's North American bag and accessory sales rose 10% across channels and 18% in our own stores over the same period. Our total revenues in North America were up 21% in the quarter with our directly operated stores up 24% as distribution growth augmented the comp performance. Excluding the additional week, North American revenues rose 12% and store revenues increased 14%. As noted, Q4 same store sales rose over 6% on a year, while ticket was stable. In factory, where we continue to leverage the flexibility inherent in our business model to drive sales through pricing, we continue to see increases in conversion and traffic, while ticket declined modestly. We were very pleased to generate positive comps in both channels of our North American retail business. It's also important to reiterate that we manage our North American store business in aggregate. As such, we will continue to fine tune our marketing and promotional levels to maximize the long term returns of both channels while maintaining the integrity of our full price proposition in retail stores. While the fall season is just underway, we are pleased with current trends and consumers' continued strong response to our product positioning. As noted for the quarter, we posted a 6% increase in local currency in Japan and a 13% gain in dollars. Excluding the extra week, local currency sales were even with prior year and sales a imported accessories market. Our growth in share this year in a very tough Japanese market reflects the strength and relevance of our accessible luxury positioning with a Japanese consumer who is becoming more discerning and value oriented. Naturally, I want to call out China, which is our single largest growth opportunity. As many of you know, this was the 1st year that we were directly operating all of our China stores, having completed the acquisition of the Mainland stores in 2,000 and 9. During the Q4, as for all previous quarters this year, we achieved significant double digit comp growth as the Coach brand is taking hold with increasing numbers of consumers. Moving on to products. During the Q4, we maintained a high level of product innovation and distinctive newness. For April, introduced a collection of charm totes along with new floral, graffiti prints and poppy. In May, it was all about Julia, a fresh modern tote and hobo story featuring loose C branding and leather, op art and print concepts along with fresh colors and patterns in Madison, which were the key statements for Mother's Day. In June, we offered updates in Kristen and Brooke. And in July, on its anniversary, we successfully relaunched Poppy in new and updated styles, materials, patterns and prints supported by a comprehensive and integrated marketing campaign. As you know, FY 'ten was a year of strong new collection introductions targeting specific customer segments, including Poppy, which will be part of Coach for years to come. More generally, we adapted our merchandising, marketing and pricing strategies to respond to a changed consumer environment. Our strong product offering and rebalanced assortment strategy were the primary factors driving the conversion improvement in full price stores. Average handbag prices were down about 10% in the 4th quarter, while handbag unit sales rose 25% on a comp store basis. Handbag penetration represented over 55% of sales in our North American retail stores in the 4th quarter, up nearly 10% from the same period last year. It's important to note that we're focused on maintaining our present price positioning in handbags in the $200 to $300 sweet spot, which is clearly resonating with consumers. Moving to factory, our business continues to be strong. Here we are focused on maintaining very high levels of productivity through the introduction of innovative factory exclusive product combined with in store and direct marketing initiatives targeted at our best factory customers. Of particular note in our factory business this quarter was a significantly higher penetration of factory exclusive products at about 90% compared to about 75% last year. This improvement in mix favoring made for factory products as well as improved manufacturing costs further improved profitability in this channel. As we enter FY 2011, our overarching strategies remain largely unchanged, 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. One new global initiative for us that we're particularly excited about is men's, which we now believe will be a significant contributor to top line sales in the seasons and years ahead. For context, the men's global premium bag and small leather goods market is about $4,000,000,000 today or about percent of the total. For example, in Japan, the men's premium market is nearly $1,000,000,000 and over 20% of total sales. And in contrast to the contracting women's market, men's is actually stable in Japan. In Greater China, today men's represents about $900,000,000 in sales, which is about 1 third of the nearly $2,500,000,000 market and is growing rapidly. At the same time, for Coach, men's represents only about 3% to 4% of global sales today depending on the geography. During FY 'ten, we began to pilot a more comprehensive men's accessories assortment. In the U. S, we introduced our first men's standalone store on Bleecker Street in New York City in May, next door to our women's store. We've seen very strong initial results and we use key learnings from this store to inform our men's product and merchandising in the 30 North American locations in North America later this year. In addition, as most male consumers in the U. S. Are essentially S. Are essentially focused on value and function, we believe that there is also a large opportunity to commence domestically in our factory channel. Thus during FY 'eleven, we will be opening about 10 standalone stores in the best outlet malls, most in Japan, where In Japan, where the male consumers more brand and fashion oriented, we've introduced a been excellent. For example, our 1st men shop in shop in Umeda, Han Kyu, which opened in March is running at an annual rate of over $1,000,000 2.10 Square Feet. And our second store just opened in June is also performing very strongly. We also recently reformatted our Maranlucci flagship location, which is in the business district of Tokyo making the whole 1st floor men's and experienced an immediate and dramatic increase in sales driven by all key metrics traffic, ticket and conversion. We've also have placed an expanded men's assortment into over 60 locations in Japan during the last fiscal year and saw an immediate and significant positive impact to results. We believe that over time that our share of the men's market in Japan can approximate our total market share of about 16%. Beyond North America and Japan, we believe that men's can play a more prominent role in our international locations, especially in China, where as noted the category is growing rapidly with men's playing a significant role as well as in other Asian markets and in Europe. We are continually and currently assessing opportunities in these markets with an expectation of rolling out a more comprehensive men's assortment globally and expect to to we will capitalize on the brand awareness Coach already enjoys in these markets to grow our penetration of men's. Moving on to distribution growth, we expect that our square footage globally and across all channels will increase about 10% in FY2011 compared to 8% in FY 2010. Starting in North America, we will again open about 30 new stores in FY 2011, but the composition will be somewhat different with 10 full price locations, 10 American square footage growth of about 8% this year, similar to last year. Outside of North America, China is clearly our largest geographic opportunity as it is expected to double from about 10% of the global market share today to nearly 20% in just a few years, as evidenced by the significant double digit comps we're consistently generating and the extremely high repurchase intent among existing consumers. As mentioned, our sales at retail doubled in China this year to over $100,000,000 as the market grew rapidly and we increased our share as well from about 4% 5%. And as a result of this growth, strong unit economics allowed us to leverage 'ten. This year, we will accelerate new store openings with about 30 new locations planned, up from the net of 13 opened in FY 'ten, increasing square footage by about 60%. All of these locations will be in Mainland China. In Japan, as I mentioned, the overall consumer market remains very challenging and the category continues to to As During FY 2011, we expect to open about 8 new locations in Japan, including 2 men's and 2 Poppy locations. In total, we expect that net square footage growth in Japan will increase by about 6 Finally, beyond our directly owned international businesses in China and Japan, we do have significant and growing distributor run businesses in other Asian countries. During FY 2011, we expect to open about 25 net new international wholesale locations, bringing our total number to nearly 210. And consistent with our strategy of directly operating select Asian markets, we're pleased to announce that we reached an agreement to take control of our domestic retail businesses in in over the next 2 years beginning in July 2011. While the impact of the transition will be small, it is an important step towards controlling our future in Asia. As you know, last quarter, we announced our first expansion plans into Western Europe, which represents about 25% of the global category sales. Initially, we focused on France through a distribution agreement with the prestigious PrintOn department store group. Through PrintOn, we expect to open a total of at least 14 shop in shops in their stores over the next 3 years. We opened our first location in June, a 1700 Square Foot Shop in their flagship Boulevard Houseman location in Paris. We've seen excellent early K, Spain, Portugal and Ireland and we'll be creating a multi channel distribution model in these markets. The the opportunities in the core Coach concept and brand, I'm excited about our upcoming Reed Craycorp launch. We believe that this concept has an opportunity to define new American luxury and engage a customer who is looking for exclusivity and limited distribution. The Reed Kraykoff brand is targeted at the rapidly evolving luxury market. It is a standalone brand separate and apart from Coach, though leveraging Coach's infrastructure. Also has a unique point of view and aesthetic reflecting Reed's personal design philosophy. Reed Cray Craycaw will be launched with a few boutiques in the U. S. And Japan as well as in prestigious international specialty retailers such as Lane Crawford in Hong Kong and Colette in Paris. In the coming weeks, we will be opening a store in Madison Avenue in New York, 1 in Tokyo, the first shop in shops in Saks and the brand's e commerce site reekrachecost.com. What I've 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 expansion. In order to achieve these goals, naturally, we need to create the the to turn it over to Coach's President and COO, Jerry Stritzke. Jerry? Thanks, Lou. To begin, I want to touch on our Asia distribution center in Shanghai. As you may know, the DC just opened in May. We successfully scaled up to handle 100 percent of the volume related to our Greater China domestic business. Similarly, by fiscal year end, we expect to be fully supporting our Asian Coach International Wholesale business as well. Finally, as we move into next year, we will be in a position to start providing services to Coast Japan from this distribution center. The Asia DC is already allowing us to better manage logistics in the region while reducing costs. We will obtain significant advantage in speed to market and enables us to provide value added services in regions such as PigPack for China and other Asian countries. Of course, we'd be much more nimble using one common inventory for Asia held in region taking advantage of the duty free status to hold products until our demand forecasts are finely tuned by market. Simply put, the AGDC provides the ability to flow inventory as needed to optimize sales in the region. Developing AGDC in the duty free zone and in close proximity to our manufacturing base has allowed us optimize our tax and corporate structure as well. In addition to developing distribution and logistics capabilities in Reason, we have used the last 12 months to establish a systems platform in China for planning, financials, data warehousing and CRM. This systems platform together with the Asia Distribution Center will create the nucleus of what will be our shared service center in Shanghai providing support to Asian markets in region. This year, we will add procurement functionality as well as HR and finance capabilities. In addition to supporting China and Japan, it will allow us to seamlessly integrate new direct markets as they come online such as Singapore and Malaysia. While we're on the subject of global China, we are now facing rising raw material prices and increasing labor costs. As always, we continue to design and engineered product with the goal of improving costs without compromising quality or value. Specifically, we are strengthening our raw materials leather, fabric and hardware. We have consistently sought both alternative sources for raw materials such as lower cost tanneries and fabric mills, while also developing alternative fabrications. Today, we're enhancing our capabilities to source the raw materials close to manufacturing by investing in strong on the ground presence. We're also accelerating the diversification of our manufacturing outside of China. We've already made excellent progress in developing a manufacturing base in Vietnam, which will account for 7% of our finished goods production in FY2011. In India, we are intensifying our efforts to bring more this diversification, we have created a dedicated team which is solely responsible bringing new sourcing facilities in countries online. In summary, we have made significant strides in becoming a more sophisticated global operator. The Asia Distribution Center, systems platform and emerging services capabilities will enable the growth that we have planned in Asia while improving our costs associated with delivering the support. At this time, I'll turn it over to Mike Devine, our CFO for further detail on our financials. Mike? Thanks, Jerry. Lou and Jerry have just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our 4th quarter results. As mentioned, our quarterly revenues percent and our indirect segment up 15%. Net income for the quarter rose 30 4% and totaled $196,000,000 with earnings per diluted share of $0.64 up 40%. This compared to net income of $146,000,000 and earnings per diluted share of $0.45 in the prior year's Q4. For the fiscal year, earnings per share were $2.33 up 22 percent compared to $1.91 while net income totaled $735,000,000 up 18% versus net income of $623,000,000 reported in FY 'nine. The 53rd week in FY 'ten contributed about $70,000,000 to sales and $0.08 to earnings. Excluding that extra week, sales would have risen 13% for the quarter, while sales for the year would have been up 10%. Similarly, EPS would have increased 23% for the quarter 18% for the fiscal year. For the 4th quarter, our operating income totaled 290 $7,000,000 45 percent above the $205,000,000 reported last year, while operating margin was 31.2 percent versus 26.3 percent. For the full fiscal year, operating income was $1,150,000,000 an increase of 18% from $972,000,000 generated a year ago. Operating margin for the year was 31.9 percent as compared to 30.1 percent a year ago. During the ago. Gross margin rate, which exceeded our expectations, was 73.3% versus 70.4 percent a year ago. SG and A expenses as a percentage of net sales totaled 42.1% compared to the 44.1 reported in the year ago quarter. For the full year, gross profit rose 13% to $2,630,000,000 from $2,320,000,000 a year ago. Gross margin rate was 73 percent even in FY 'ten versus 71.9 percent posted in FY 'nine. SG and A expenses as a percentage of net sales totaled 41.1% compared to the 41.8% reported in fiscal 2,009. The primary driver of our substantial gross margin expansion in both the quarter and the fiscal year was lower was lower manufacturing costs. Product mix, notably the increased sell through of handbags in our full price stores and the increase of higher margin made for factory products in factory stores was also a contributor to the year over year improvement. As we noted in our press release, we reported a number of unusual items which impacted both 4th quarter and full year results in FY 'nine. Excluding these unusual items in the prior year's Q4, FY 'ten operating income rose 35% from the $220,000,000 reported in FY 'nine, while FY 'ten operating margin expanded to 31.2% from 28.2% in the prior year. SG and A expenses as a percentage of net sales totaled 42.1 percent in both periods on the same basis. Net income in the 4th quarter rose 43 in FY 'nineteen results, operating income rose 15% in FY 'ten from the $1,000,000,000 flat reported in the prior year, while operating margin expanded 90 basis points to 31.9%. SG and A expenses as a a Net income in FY 'ten rose 18% from $622,000,000 reported in the prior year, while earnings per the quarter came in below 35%, bringing the full year to just over 36% versus the 36.7 5% we've been accruing for the 1st 3 quarters of 2010. There were 2 primary factors which improved the FY10 tax rate. Firstly, higher profitability in lower tax rate jurisdictions and second, a lower effective state tax rate. Inventory levels at quarter end were $363,000,000 up about 11% from FY 'nine year end consistent with our expectations. This inventory level allows us This inventory level allows us to support 22 net new North American stores, 6 net new locations at Coach Japan from the year ago period as well as our 41 Coach China stores. Cash and short term investments stood at 6.90 $6,000,000 as compared with $800,000,000 a year ago. During the Q4, we repurchased and retired nearly 10,900,000 shares of common stock at an average cost of $41.43 spending a total of $450,000,000 For the full fiscal year, we repurchased and retired nearly 30.7 1,000,000 shares of common stock at an average cost of $37.48 spending a total of 1 $150,000,000 At the end of the year, approximately $560,000,000 remained under the company's present repurchase authorization. Net cash from operating activities in the 4th quarter was 182,000,000 dollars compared to $270,000,000 last year during Q4. Free cash flow in the 4th quarter was an inflow of 100 $52,000,000 versus $245,000,000 in the same period last year. The primary factor impacting cash flow was a $90,000,000 swing in cash for inventory as we build inventories to support our growing business this year versus reducing inventories in last year's Q4. Our CapEx spending was 29,000,000 dollars versus $26,000,000 in the same quarter a year ago. For the full fiscal year Free cash flow in fiscal year 'ten was an inflow of $910,000,000 versus 569,000,000 in fiscal year 'nine. For the year, CapEx spending totaled $81,000,000 This compares to CapEx of $240,000,000 in the prior year, which included the purchase of our company headquarters here in New York City. It's important to note that based on our current plans for FY 2011, we expect CapEx for next year will be up substantially in the area of $150,000,000 driven by the timing shift of certain projects, primarily for the opening of new stores across all geographies. While we're not giving specific guidance for FY11, I believe it will be helpful for you modelers out there to keep a few things in mind when looking at the year ahead. I would add that all of my comments are on a comparable 52 week to 52 week basis, given that we have provided the sales and earnings of the 53rd week in FY 'ten. 1st and most generally, we do expect to achieve double digit sales and earnings growth as mentioned in our press release and in Lou's remarks earlier. Our top line will be driven in part by low to will be more difficult as we'll face headwinds on the raw materials and labor cost side and tougher second half compares, which will be offset in part by channel and product mix as well as FX. 3rd, on SG and A, we would expect the expense ratio for the full year FY 2011 to be about flat to FY 2010. Even as we ramp investment spend to include REIT Cracow, Europe and building the infrastructure for global growth, while continuing to deliver leverage across balance of the business. Taken together, the investments will impact FY 2011 earnings per share by about a nickel more than investment spend did in FY 'ten. 4th, our tax rate is likely to be in the area of 35% for the year as we further refine our international tax strategies. Separately, I do want to note that we expect further increases in inventory at the end of next quarter as we build inventory against current trends to maximize sales this holiday season. In summary, our 4th quarter and FY 'ten results demonstrate our ability to manage our business nimbly while investing prudently in longer term opportunities. We're accelerating our distribution plans to leverage the emerging market opportunity with a particular focus on China, 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 with virtually no debt, we are in a position to take advantage of profitable growth opportunities globally while continuing to return capital to shareholders. At this time, I'd be happy to open the call to question and answer. Thank you. At this time, we're ready to begin the question Barclays Capital. Good morning. Good morning. Hi, Bob. Just had a question on for this quarter's comp store sales results. Luke, can you talk maybe about the monthly progression throughout the quarter including into July? And can you talk overall on whether or not there was a sequential improvement in the North American full price retail stores versus the prior quarter? Well, first, our Q4 overall comps were better than Q3. And our performance was consistent throughout the quarter, driven as we said earlier by a sharp increase in conversion and that trend continues through today. Bob, I think getting to the second part of your question, while we don't disaggregate our comps, I think this was the first call in recent quarters where we did say both channels were positive during the quarter. Great. Thank you very much. Thank you. Our next question comes from Nili Tamanga. You may ask your question. Please state your company name. Great. Thank you so much and congratulations. Thank you. Just a question for Jerry since we have him on the call. It would be great to have him talk a little bit more about the sourcing headwinds and pressures and just get his perspective as to the potential pressures from raw materials versus labor versus transportation It's been a pretty dynamic environment in the last 6 months. The labor increases have already really taken place in China. I think we along with many others have already kind of planned those and incorporated them into our future costs have stabilized. If you follow that, there's been quite a bit of press coverage. And we've taken a much more cautious approach and feeling pretty good about what we can anticipate there. Raw materials is the piece that's still bouncing around. We've been a little more successful offsetting some of that by being judicious about what we're using, where we're using it. The euro will bounce it around. We've been opportunistic extent that we can source product in places that offset raw material costs, we're looking for opportunities to do that. So it's a bit of a mixed bag. An environment where we have to be very deliberate and more nimble and even more thoughtful than ever to make sure that we're really looking at our key programs and we're making big investments and that we're kind of wisely building our cost, so we don't see a significant impact to our business. Great. Thank you. 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. Good morning. Just wanted to ask about pricing. I know you said you wanted to stay within that $200 to $300 sweet spot, but are there any levers you could pull here on the price points to offset some of these raw material pressures? And then a little bit of clarification on your back half gross margin guidance. Are you expecting margins to be down at this stage? Or do you think you can do enough to offset these pressures? Let me answer the first part of your question. The $200 to $300 sweet spot is very powerful. And as I mentioned earlier, handbag unit penetration increased 25% this past quarter, a remarkable level. And we're very pleased with that. And for us, as we revitalize full price business, we look at operating margins, not gross margins. And we would rather trade off some basis points in gross margin because we know the consumer will return it to us in multiple ways by buying more units if we keep the prices sharp. And so that's been the focus. In addition to all of the sourcing initiatives that Jerry has mentioned. Mike, you want to take the second part? Sure. So we will be up against some very challenging gross margin rate compares in the second half. We recorded 74% in Q3 north of 73% in this quarter we've just completed. So honestly, I think it's unlikely that we'll be able to hold to those levels in the back half, but we have all confidence that we'll be able to continue to deliver gross margin rates in the 72% to say a say a chance depending on how things fall out. Jerry said it's very dynamic that year over year total year gross margin rate should approximate FY 'ten rate in FY11 with favorability first half and less favorable compares back half. Your next question comes from Christine Chan. You may ask your question and please state your company name. Needham and Company, thank you. Congratulations on a good I wanted to ask about China. Can you talk a little bit in more detail about the customer? I mean, how often is she in the stores? Is the age range similar to here? Do you get an older customer, younger customer? And what is she buying? Is she also buying in that sweet spot? I know the prices there are higher, but I'm just thinking on a like for like bag. She's primarily in her 20s early 30s. She is a young professional. She values shopping. It's one of her favorite pastimes. And she does look at value and innovation and brands. And she really has embraced coach. When we look at what she's purchasing, she's purchasing in the main what consumers are purchasing in other parts of the world. And for its equivalent, the actually has on the mainland in Shanghai, actually has on the mainland in Shanghai and Beijing, she actually has a household income of about $35,000 which is exciting. And she's grown and the middle class as you know is growing at last year 40%. We don't have the more recent numbers, but it fit very well continuing at a 40% level. What we're also particularly pleased about as we go into the 2nd tier and third tier cities being the 1st imported luxury accessories brand, the first imported accessories brand, we're doing extremely well, a lot better than our performance and it bodes well for very substantial distribution in China. And just for context, there are over 300 cities in China with more than 1,000,000 people, quite remarkable. And how many bags a year does she purchase high end bags versus U. S. Customer in Japan? She purchases 1 to 1.5 bags a year high end compared to more than 2 in the U. S. Our next question comes from Brian Cunick. You may ask your question. Please state your company name. Yes, thanks and congrats as well. I was hoping to get your perspective on the opportunities to drive continued productivity gains at the very impressive factory channel. It seems that's the biggest concern that we hear from investors. So maybe if you could talk about either marketing or store promotions, discounting, anything you could share on that front would help us get some perspective. And then on the indirect channel side, I think there were some media reports last quarter about a possible deal to do a private label program with JCPenney. And just wondering if this was a growth area, your expertise that you would explore? Thanks very much. I'll answer the second part first. I saw the mention in women's wear. Actually got lots of e mails and there's absolutely no truth to that. You can't believe everything you read. And in fact, it's not something that we're contemplating private label. We have abundant opportunities organically to grow the Coach brand and that's what we're focused on in addition to the launch of the RK brand. I'm going to ask Mike Tucci to take the first part of your question, Brian. Sure, Brian. It's not surprising that as our full price business strengthens that people begin to worry about the sustainability of our factory model. We really believe that our merchandising strategy, our positioning in factory and the customer behavior in the factory channel continues to show opportunity. Examples of that are the continued focus on shifting of mix to make the factory product, which offers a much more dynamic price leverage opportunity for us, innovation and newness in factory products, which offers an opportunity for repeat purchase, multiple purchase and also drives traffic and conversion. And then longer term looking at the men's opportunity in factory as a growth and productivity driver, not only for the new opportunity to grow the men's category on a standalone basis, but also as an opportunity to further improve the productivity in our existing factory base, which has stretched the capacity based on current traffic and throughput. So we feel very good out there and the model is very clean. We don't discount in our full price channel if the customer wants wants Coach at a promotional price point. She knows she can get it in a very vibrant factory environment with high service levels and very high product flow. And that seems to be really, really working for us. So we feel good about where we are there. Thank you, Mike. Thank you. The next question comes from Dana Telsey. You may ask Please state your company name. Chad, good morning everyone and congratulations. Thank you, Dana. As you think about product extensions and enhancing the productivity in the full price business, how is the shoe business, watches, sunglasses and other product extensions we should be thinking about and how the fragrance is done? And then lastly, Lou, you talk a lot about the men's opportunity. How should we think of that eventually becoming a part what percentage of sales U. S. And globally and the margin opportunities there? Thank you. First off, with regard to shoes as shoes, fragrance, watches, somewhere and the alike, all of the categories are doing very well, both at own own distribution, we're actually going to be expanding footwear into Asia with an Asian fit, which we know will be enormously helpful. In terms of Dana, in terms of men's, believe that men's is going to be another major growth area for us and it's early days, but we would be disappointed if our men's global sales did not reach and exceed 10% of our overall sales over the next few years, up from the 3% to 4% this past year. So if you do the math, it's going to it can add $300,000,000 to our business as we approach 500,000,000 dollars So it will be significant. Thank you. As far as margins are concerned, just lastly, margins, we use the same rigor and the same approach and the margins are consistent with the women's side. Thank you. Thank you. Our next question comes from Erika Moschmeyer. You may ask your question, please state your company name. Thanks. Company is Robert W. Baird. Good morning, good quarter. Thank you. Could you talk a little bit about how your full price traffic compared to last quarter? And then also did the differential between factory and full price comps continue to narrow? I think what we've said all through the quarter and with the release is that we had positive comps in both Full Price and Factory that the channels performed very well and more consistently as that performance converges. It's obviously a positive for us in overall productivity. And as we see traffic as we saw traffic in Q4, very consistent with where we were for Q3. And while it's very early in the quarter, our trends in July have remained very consistent. We feel very good about where we are. Great. Thanks Our next question comes from Randy Konik. You may ask your question and please state your company name. Just Lou, just curious to get your sense on we had this call 3 months ago, what's your view on the consumers today versus 3 months ago and what's your kind of outlook on the consumer especially for the full price mall business heading into the back half of the calendar year here? Thanks. We feel on well, first for context, we just interviewed the 5,100 Active Coach users as part of a semi annual survey in June and consumers are feeling better than they have in over 2 years. And what's in it's quite encouraging that 30% of consumers as an example feel that the economy is getting better and if you just roll back 1 year it was only 8%. So for the first time in 2 years, a majority of consumers believe the market as the economy is either going to stabilize or improve. That's compared to a low point last year of under 20%. So consumers are feeling a lot better. I also feel that we will continue recovery. And even if we do slip into a slight GDP decline, we don't think it's going to materially affect the discretionary spending on Coach because what consumers are telling us also in this survey that their intention to purchase Coach over the next 12 months has dramatically increased from 6 months ago, which bodes well. Lastly, of course, we are increasingly really the formative stages and you will hear us talking about men's as another major platform in the months ahead. So is it fair to characterize you feel that the U. S. Consumer is better positioned for the back half of the year and then the accessories business is better even better than that or how should you think about the accessories? Absolutely. I mean there's a variety of ways to look at it. Compared to last year, she's far more optimistic and I think that will be reflected in spending, not necessarily across all brands and concepts, but those who innovate and offer good value. I also think sequentially from the first half to the second half, we see also improvement. Thank you. Thanks so much. I'll now turn the call back over to Andrea Resnick. Thank you everybody for joining us this Thank you, everybody, for joining us this morning. I'm going to turn it back over to both Mike Devine and then Lunely for the closing comments. Yes. Thank you, Andrea. This is Mike. I just wanted to make clarification from some of the prepared remarks that I gave earlier, particularly around expectations for our North American comp, I wanted to make sure that it was clear that our expectation is to deliver low to mid single digit comps for North America and that they will fluctuate quarter to quarter as a result of calendar timing. So thank you. And Lou, I'll turn it over to you. I think our results speak for themselves. Our outlook is robust. We feel coming out of this year extremely strong as a team, whether wherever we travel and speak to consumers, we feel we've never been better positioned for the future than we are today. So as I said last quarter, stay tuned. And thank you and have a good day. Thank you, everybody. Thank you. This does conclude the Coach earnings conference. We thank you for your participation.