Earnings Call: Q3 2010

Apr 20, 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. Thank you. Good morning, everyone, and thank you for joining us. With me today to discuss our quarterly results are Lou Brantford, Coach's Chairman and CEO and Mike Devine, Coach's CFO. Ian Bickley, President of Coach International is also joining us. Before we begin, I must note that this call will include certain forward looking statements, including projections for our business in the current or future periods. Future results may differ materially from our current expectations and historical growth trends may not be indicative of future growth based upon a variety of risks and uncertainties. Please refer to our latest Form 10 ks for a complete list of these risk factors. Now, let me outline the speakers and topics for this conference call. Lou Frank first will provide an overall summary of our 3rd fiscal quarter 2010 results and will also discuss our strategy. Ian Bickley will then discuss the increasing globalization that will end shortly before 9:30 a. M. Lou will then conclude with some brief summary comments. I'd now like to introduce Lou Frankfort, Coach's Chairman and CEO. Thanks, Andrea, and welcome, everyone. As noted in our release this morning, we were very pleased with 3rd quarter results, including excellent sales and earnings and earnings growth and a further strengthening of our full price business across all geographies. Our performance reflects the continued traction of the product and pricing strategies we put into place this fiscal year and bodes well for the future. Beyond our recent performance, we're also very pleased to announce the doubling of our dividend at the 1 year anniversary of its initiation, signaling our confidence in our outlook. We've also authorized a new $1,000,000,000 stock repurchase program. Finally, we're encouraged with the progress we're making in transforming Coach into a global brand. As Andrea just mentioned, we've asked Ian Ripley to join today's call to talk about our initiatives, notably in Asia and our development strategy for Europe initially focusing on the UK, France and Spain. While I will get into further detail about current conditions and the outlook for the categories and our business shortly, I did want to take the time to review our quarter first. Some key highlights of our 3rd fiscal quarter were: 1st, earnings per share rose 40% to $0.50 compared with $0.36 in the prior year. 2nd, globally net sales totaled $831,000,000 versus $740,000,000 a year ago, an increase of 12%. 3rd, direct to consumer sales rose 15% to $726,000,000 from 634,000,000 sales rose 16%. 5th, sales in Japan declined 1% in constant currency and rose 2% in dollars. And finally, we continue to generate very strong sales growth and significant double digit comps in China. During the quarter, we opened 2 North American retail stores, both in new markets for Coach, Burlington, Ontario and Brownsville, Texas and closed 2 others. We also opened 1 factory store thus at the end of the period, there were 343 full price and 119 factory stores in operation in North America. Moving to Japan, we opened our 1st Men's location as well as the factory store and the wholesale location. At quarter end, there were 166 total locations in Japan with 20 full price stores, including 8 collections, 100 and 16 shopping shops, 24 factory stores and 6 wholesale duty free locations. In direct sales decreased 1% to $105,000,000 from $106,000,000 in the same period of last year. This decline was due to slightly reduced shipments into U. S. Department stores. We continue to manage inventories into the by distribution. We estimate that the addressable U. S. And A and accessory of calendar 2009. Coaches bed and accessories sales rose about 15% across all channels in North America over the most recent quarter. In our own stores, handbag and accessory sales rose 18%. Our total revenues in North America rose at a similar pace as our overall top line of 13 percent with our directly operated stores up 16% driven by both distribution growth and positive comp performance. As noted, Q3 same store sales rose 5%, reflecting a further strengthening of our full price business. Fueling this total retail comp gain was significant gains in conversion from prior year, while in aggregate traffic was equal to last year's level. We were particularly pleased with the conversion improvement as it is the driver that we have the most control over through product and service. In full price stores, average transaction size was slightly lower compared to prior year as increased handbag penetration offset most of the impact of lower handbags and accessory prices. Traffic trends improved from 2 quarters from the Q2 and were only slightly down from the prior year. And factory, where we continue to leverage the flexibility of Terence and our business model to drive sales through pricing, we saw increases in both traffic and conversion, while ticket declined slightly. While most of the quarter remained ahead of us, we're tracking well and are excited about Mother's Day and the rest of the spring season. It's also important to note 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. As you know, we have resale price maintenance 360 5 days a year, a full price proposition. As noted in Japan, we posted a 2% increase in dollars on a one percent decline in constant currency. Our market share further expanded against a continued very weak category backdrop and reflects the relevance of our accessible luxury positioning with a Japanese consumer who is becoming much more value oriented. We're also very pleased with our performance in China, where our proposition of New York fashion and accessible luxury is clearly resonating with both domestic consumers and with tourists in our Hong Kong and Macau stores. Clearly, our double digit comp store sales growth further demonstrates Coach's great potential with this emerging consumer group. Finally, as mentioned in our press release, our sales are trending about a year ahead of our original plan unveiled 2 years ago when we announced our intention to take control of this business. Moving on to product. Moving on to product. During the Q3, we maintained a high level of product innovation and distinctive to spring with the introduction of the patent collection offered across multiple fabrications and silhouettes anchored by both our carry on and shoulder bag styles. This was followed by the relaunch of Puffy in February and the new Kristen collection in March. With its new and distinctive hardware and soft feminine style, Kristen represents another significant design evolution for Coach and was supported by our spring ad campaign. Just this month, we introduced a collection of charm totes along with new floral, graffiti prints and poppies. And yesterday, we launched the Julia, a modern tote and hobo story featuring new branding in leather, art and print concepts along with fresh colors and patterns and in Madison, which are the key statements from Mother's Day. In addition, this July, on its anniversary, we will relaunch Poppy, a new and updated styles, new materials, patents and prints with a comprehensive and integrated marketing campaign. Our strong product offering and rebalanced assortment strategy continues to resonate with consumers. Average handbag prices were down about 12 percent this quarter, similar to the first half of the year. These factors were the primary drivers of our conversion improvement in full price as handbags unit sales rose 22% on a comp store basis. Handbags represented 50 9% of sales in other North American retail stores in the 3rd quarter, up about 10% or 5 points from the 54% handbags represented in the same period last year. Moving to factory, our business remains strong. Here, we are focused on maintaining very high levels of productivity through the introduction of innovative factory exclusive products combined with in store and direct marketing initiatives targeted at our best factory customers. Of particular note, in our factory business was a significantly higher penetration of factory exclusive product at 80% compared to last year's 60% levels. This improvement in mix favoring made for factory products as well as improved manufacturing costs resulted in significantly higher profitability in this channel. More broadly, our 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 Coaches' share of our consumers' accessories wardrobe, while continuing to attract new customers into the franchise. Starting in North America, we plan to open an additional 5 stores this quarter, bringing the total to 20 new American retail stores for the year. In addition, we will open 2 Coach International, to talk about our abundant opportunities outside of North America. As many of you know, Ian has been with Coach since 1993 and has been a key architect of our international growth strategies. Ian? Thanks, Lou, and good morning. I'm very pleased to be able to talk about the globalization of the Coach brand. We now expect the global luxury handbag and accessories markets to reach about 29,000,000,000 during 20 50% of global category sales and 90% of Coach sales are generated in North America and Japan, pointing to a very large opportunity outside of our core markets. The most rapid growth is coming from the emerging markets, notably in Asia, China clearly our largest opportunity, as it is expected to double from about 10% of the global market today to nearly 20% by 2013, contributing the lion's share of category growth. The The the extremely high repurchase intent among existing customers. Coach's potential in S. And 63% in Japan among target consumers. As mentioned, our business is trending about a year ahead of the plan we originally articulated back in the spring of 2,008. We're now targeting to achieve about 250,000,000 dollars in sales during FY 2012. And as a result of this growth, we are now profitable in China, also ahead of schedule as strong unit economics have allowed us to leverage the considerable infrastructure investments. In China, we expect to open 5 new locations during the remaining few months of the year. This will bring our net FY 'ten openings to 13, resulting in approximately 50% growth in square footage. As mentioned, this week we're officially opening our first flagship location on the mainland in Shanghai, just ahead of the World Expo, which is expected to attract 70,000,000 visitors the city over 6 months. This 7,000 square foot store reflects Coach's latest flagship design. We believe this important store will further elevate the brand's image and is consistent with our strategy of raising awareness and aggressively growing market share with the Chinese luxury consumer. Next year, we will accelerate new store openings with at least 20 new locations planned. To support our growth in China and the region, we have just started up an Asia distribution center in Shanghai, allowing us to better manage right locations, but rather our emphasis on excellent customer service, which requires recruiting and training the right retail teams to run our stores, a much greater challenge than finding store sites. In Japan, the overall consumer market is very challenging and the category continues to see declines. Our focus remains on growing market share and we have done this quite well in our core women's business. We're now exploiting new categories such as men's where we've already seen early successes. For context, the men's imported leather goods market is nearly $1,000,000,000 in size and has been less impacted by the macroeconomic environment than women's. With only a 3% share of the men's market today, Coach is very underpenetrated. And over the next few years, we believe it has an opportunity to match our an net square footage growth in Japan will increase about 5% this year compared to about 8% in FY 'nine. Finally, beyond our directly owned international businesses in China and Japan, we do have significant and growing distributor run businesses in other Asian countries. For example, in Korea, Singapore, Taiwan and Malaysia, there are about 90 total Coach locations generating nearly $200,000,000 of sales at retail. Coach is already among the top 5 imported brands in these markets with significant potential for further strong growth. During this quarter, we plan to open about 6 net new international wholesale locations. This would take us to about 25 net new international distributor operated locations this year. At fiscal year end, there will be about 180 Coach international wholesale locations in over 20 countries around the world, generating sales at retail of nearly 350,000,000 dollars We're also pleased to announce our expansion plans into Western Europe. As you know, Europe is a large market for women's and men's luxury accessories, representing about 25% of the global category sales. Our experience with European Tourists in combination with recent consumer research has given us confidence that our current design direction resonates with Europeans and that our price points will offer a compelling value proposition. Further, Coach's heritage linked to New York fashion is appealing for most Europeans and creates a differentiated positioning compared to the traditional luxury brands. As discussed in our press release, we are starting with a 2 pronged approach with strong local partners. Initially, we will focus on France through a distribution agreement with the prestigious The first will be a 1700 square foot shop, which will open in June in their flagship Boulevard Hausmann location in Paris, followed by 5 additional locations by the end of the calendar year. We have also agreed in principle to establish a joint venture with Hackett Limited, the iconic British retailer to open in the UK, Spain, Portugal and Ireland, creating a multi channel distribution model in these markets. We expect the first locations in the UK, Spain and Portugal to open during the next 12 months. With that, I will turn it over to Mike Devine. Thank you, Ian. Lou and Ian have just taken you through highlights and strategies. Let me now take you through some of the important financial direct to consumer, which represents over 3 quarters of our business, up 15% and indirect down 1% due to slightly lower shipments to U. S. Department stores. Earnings per share for the quarter increased 40% to $0.50 as compared to $0.36 a year ago, while net income rose 37% to $158,000,000 from $115,000,000 Excluding the one time charge from last year's Q3, Operating income totaled $249,000,000 up 34% from the 185,000,000 dollars reported in the comparable year ago period, while operating margin was 30% versus 25.1% reported for the prior year. Excluding the one time charge last year, operating income rose 25% from prior year or double the rate of sales growth as the year ago operating margin was 26.9% on the same basis. In the Q3, gross profit rose 17 percent to $616,000,000 from $525,000,000 a year and gross margin rate increased to 74.1 percent versus 71% flat in the prior year. The primary driver of our substantial gross margin expansion 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 SG and A expenses as a percentage of net sales at 44.1% compared to 45.9% in the year ago quarter. Excluding the one time charge in the year ago comparison, the expense ratio was equal year over year at 44.1%. 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 consolidated P and L as well. Inventory levels at quarter end were 3 $7,000,000 down about 14% from prior year on a comparable basis. On a unit basis, inventory was up 3%, reflecting our lower average unit costs. Cash and short term investments stood at $908,000,000 as compared with $551,000,000 a year ago, During the Q3, we continued our repurchase activity buying nearly 11,300,000 shares of common stock at an average cost of 35.5 $2 As of the end of the period, approximately $10,000,000 remained under the company's previous repurchase authorization. As noted in the press release and by little earlier on this call, the Board has authorized a new $1,000,000,000 repurchase program. As you know, we've also announced the doubling of our dividend rate from flow at about $180,000,000 a year, leaving us more than ample cash to fund our growth and continue our buyback program. Net cash from operating activities in the Q3 was $205,000,000 compared to $207,000,000 last year during Q3. Free cash flow in the Q3 was an inflow of $190,000,000 versus $180,000,000 in the same period last year due to lower CapEx and higher net income. Our CapEx spending was $15,000,000 versus $27,000,000 in the same quarter a year ago. Naturally, we are very pleased to report 3rd quarter earnings that demonstrated our ability to achieve strong top line and accelerated income and earnings growth. Looking ahead, I think it would be helpful for you modelers out there to keep a few things in mind when we're checking our 4th quarter. First, we would reiterate that our gross margin is expected to expand significantly in Q4 versus last year, although it will likely be somewhat lower than our Q3 rate due to channel mix as factory will be distorted in the 14 week quarter. 2nd, as a result of our sales productivity gains and our on ongoing operating efficiencies, we continue to expect that our SG and A dollar growth will be quite close to top line growth for the Q4. We are targeting these levels in spite of more difficult compares from last year's Q4 due to our higher investment spending and increased incentive compensation accruals. 3rd, we do expect to see some inventory growth as we plan to build inventories for the fall season and we begin to anniversary our average unit cost improvements. Separately, based on some changes in project timing, we now expect that this year's CapEx will be in the area of $90,000,000 to $100,000,000 down from our previous guidance of 110,000,000 dollars In summary, our double digit growth demonstrates our ability to manage our business nimbly, while investing prudently in longer term opportunities for the brand. We're accelerating our distribution plans to leverage the emerging market opportunity with a significant cash flow and with virtually no debt, we are in a position to take advantage of profitable growth opportunities I guess, Luke, the one question that I have for you is when you look at the results this morning, very encouraging, do you view this quarter as an inflection point for Coach and why do you think? We do see it as another inflection point for Coach. I think in the year from now or 2 years from now, we will look back upon this quarter. The initiatives that we announced in Europe, the acceleration of our business in China and the rejuvenation of our full price businesses and conclude that it indeed was an inflection point. We're extremely encouraged by the results across all channels and geographies last quarter. Great. And are you finished with your question, sir? Yes. Thank you very much, Louis. Thank you, Bob. Thank you. The next question comes from Kimberly Greenberger. You may ask your question. Please state your company name. Great. Thanks. It's Citigroup. Good morning. Good morning. The comp acceleration this quarter was nice. I'm wondering if you could give us any color on the if the factory versus the full price comp, if that differential has been closing further? And do you think that the go forward comp can be sustained here in the mid single digit range or are you looking for a low single digit going forward? Well, in terms of our false precision, when we say low single digits, mid single digits to us, that's a very subtle change. What we said publicly quite recently is that we do believe we can achieve during our LRP period double digit top line growth with the bottom line growing at a faster rate. And what we also said is that we're anticipating low to mid single digit comps worldwide. If we get some wind at our back, it will be higher. If we don't, it will be somewhat lower. With regard to the earlier part of your question, yes, there's been a convergence between full price and factory. It's increasing the convergence. Fantastic. Thanks, Lou. You're welcome. Thank you. Our next question comes from David Schick. You may ask your question. Please state your company name. Stifel Nicolaus, good morning. Good morning. Kind of a question going back on the broad thinking over a year. One of the reasons I think Coach didn't face comparisons that were dropped off the table was that you guys guys recognized the change, called it the new reality, had some strategic changes around that a year ago. So as you lap that and I know you mentioned that the handbag unit comp was 22%, but down 12%, I think you said in price on the call. Is there any reason to revisit the new reality or would any improvement off of the new reality be taken care of in the RK line? How should we think about your thinking on that strategic shift? Sure. David, I think I'm going to ask Mike Tucci, who's sitting in with us on the call to take that question. Mike? Sure, Lou. Good morning, David. On specifically on handbags, rebalancing and repricing strategy and a stabilization of traffic, the key for us in getting productivity back is selling more units and handbags. We had a a assortments through Q4 of this year and into the first half of next year, we actually do see some subtle opportunity to opportunity to blend the product differently going forward. And the key for us is really in the middle. It sits between in the Coach handbag hierarchy between Poppy, which is our introductory price offer, Madison, which represents a higher price offer. The best representation of that today in the stores is Kristen and Julia, which launched yesterday, really targeting that yesterday, really targeting that core leather and Signature sweet spot between $298,000,000 $3.58 As we built that in Q3, we saw the strengthening of our handbag business in particular in our overall business. We will build on that significantly in FY11 beyond. And I think that positioning hierarchy. To me, 3 very distinct Thank you. Thank you. Our next question comes from Christine Chen. You may ask your question please state your company name. Thank you, Needham and Company, and congratulations on a great quarter. Thank you, Christine. I wanted to ask about the international customer. I mean, as you go global, going into Western Europe and then also focusing on China, what differences do you see between the customer across the country? I mean, is the Chinese customer similar to the Japanese customer? Does the European customer shop differently than the U. S. Customer versus the Asia customer and how do you think about that as you grow? I believe that overall, the differences between our customers are very subtle. And we've learned through our consumer research that consistently our heritage is consumer is something that resonates globally. And then with respect to Europe, I guess, what are you doing differently this time other than partnering with key retailers than when you tried to grow in Europe in the past? Yes. Let me take that one because this is our 2nd try in Europe. As you know, I failed the first time and a few things. The first, it was the old world of Coach. It was online without the bags, Christine. I'm not sure you're old enough to remember them, but I remember I'm old enough. Yes, Christine? I said, I remember I'm old enough. Okay. Well, we actually developed a great business in North America, but it did not resonate that well with the Europeans who wanted products that were more stylish and are more sophisticated. 2nd, we did not have local partners and we did it remote without putting the level of investment into these markets that we're doing today. Today, as we announced, we have 2 great partners that we're starting with and we're very enthusiastic about what we can do together. Okay, great. That's helpful. Thank you. You're welcome. Thank you. Our next question comes from Brian Tunick. You may ask your question. Please state your company name. Hey, guys. Good morning. It's actually Ike calling in for Brian, JPMorgan. Mike, you had talked about the gross margin expansion you guys saw in the quarter. I think you pointed out the lower product cost channel mix and made for factory product at factory as the primary drivers. Is it possible to quantify those in terms of basis point impact? Yes, I would probably stay away from going with too much more precision, but rest assured that of the 310 of margin expansion far and away the biggest resulting in a growing expansion between our average outdoor pricing and the average unit cost for the items sold. The other traditional big movers of our gross margin rate were relatively quiet this quarter versus last year. Our levels of promotions in the factory channel were very similar, TYLY. And also we're starting to see some and we discussed in our prepared remarks is taking a little bit of pressure off the channel mix and also the rapid growth while it's still small for the total company of Coach China with its very healthy gross margin rates also helped move the needle on channel mix a little bit this quarter. So the big story really is about price versus cost, which is very exciting for us. Right. And with the increased penetration of the made for factory product and if you guys are able to continue to diverge the full price in the factory channel comps. Is it reasonable to assume that you guys could possibly get back to a 75 ish percent gross margin? Well, again, we're not giving specific forward guidance, But what I would say is that we're feeling good about our gross margin rates heading into Q4. And for the coming quarters, we do expect to be able to deliver year over year gross margin expansion out over the next couple of quarters. We've locked in many of our material costs at historically low levels. That being said, we are beginning to see some inflationary pressures. So that will be a challenge for us going forward. However, we do have many opportunities to look to offset this pressure whether it's through alternate materials, counter sourcing, channel mix as China grows, as I mentioned earlier, and our divergence between full our convergence between full price and factory. So we're feeling like there are opportunities, but are headwinds on the inflationary pressure side. I'd like to also just add, Mike, if I could, is that we actually internally nicknamed Mike divine, my gross margin divine. And we are so unsuccessful with all of you guys migrating you to operating margins because we do think that's really the way you need to evaluate us. And that's a more comprehensive measurement, not with down the P and L. All right, thanks. Great job guys. Thank you. Thank you. Thank you. Our next question comes from Lorraine Hutchinson. You may ask your question. Please state your company name. Good morning. It's Rick Patel in for Lorraine, Bank of America Merrill Lynch. Can you talk about your thought process in choosing your new European partners? Where exactly do you see the synergies with Hackett and Printemps? Sure. Well, first of all, we really see the new partnership with Printemps as the cornerstone for going into Western Europe. France obviously is a very important market. It's a leading fashion market and we believe if we're successful there, we really will build a halo effect for the rest of Europe. Printemps for us is a perfect partner. We know that they get the vision for Coach brand. They will help us to establish image enhancing locations and they will give us broad geographic coverage throughout France and enable us both to leverage consumer as well as international tourists, which especially in their flagship Printer location in Paris represent a very significant share of the business. In terms of Hackett with whom we are jointly developing other key Western European markets. We do believe again they are a group that high touch customer high touch customer service model that is very consistent with the way we drive our business. And can you are Ian, I'll take this one. The question is, can we talk about who we're trying to target? We actually have a very broad reach as a democratized luxury brand where available to consumers who are aspirational trading up into Coach as well as consumers who are find that we're able to develop a broad and diversified consumer base in each of the markets we're in and that's one of the elements that's very compelling to our proposition. Great. Thank you very much. Thank you. Our next question comes from Dana Telsey. You may ask your question. Please state your company name. Hi, it's Tag and congratulations. Can you talk a little bit about as you see the department store business or indirect business, any updates there in terms of what's happening? And then just to clarify on the positive high single digit comp that you mentioned for Full Price, is that just in handbags, is that overall? Thank you. The positive comp was in handbag units, am I correct? 22% more units, yes. With regard to department stores, we had an excellent quarter at POS. Our sales were up 11%, driven by full price sales and that compares actually to down 22% just in the last quarter. And I think that's both a reflection of Coach's strength and the strength in department stores. They have really backed away from the promotional proposition and are giving consumers a stronger everyday value. We're benefiting from that of course and we're encouraged. We believe that we will stay in positive territory at POS in U. S. Department stores. It bodes well for not only Coach, but other brands and their entire franchise. Thank you. You're welcome. Thank you. Our next question comes from Laura Champine. You may ask Please state your company name. Good morning. We're with Cowen. Given the CapEx guidance for the full year that's changed a little bit, but the step up in Chinese growth and also the European plan. Can you give us kind of an initial look at 2011 CapEx? Well, we haven't completed yet our complete CapEx planning for our new fiscal year 11 out through next June. I can tell you that the reduction this year from the $110,000,000 to the $90,000,000 to $100,000,000 is just project timing. So I would anticipate that from that $110,000,000 level, if you look at that as a go forward number and then have the movement of $10,000,000 to $20,000,000 I think we probably will end up coming forward with a CapEx plan that would be in the $130,000,000 to $150,000,000 range for next year, but it's very early in our detailed planning processes. The relationships that we're forming with our new partners and their growth in China will increase our CapEx spend, but we've done tremendous work around store construction costs and sourcing. And so we feel like our CapEx spend will continue to be very well controlled. Our next question comes from Erika Maschmeyer. You may ask your question please state your company name. Thanks. Erica Nashmeyer, Robert W. Baird. I noticed that your unaided awareness in the U. S. Looks like it had a nice jump. Could you talk about the factors there? Okay. Our unaided awareness is extremely high. I'm not quite sure what source you're referencing, but our unaided awareness is I believe north of 70% in the U. S. So 7 out of 10 consumers who we target mentioned Coach as a top of mind brand. Perhaps it's a bit higher than it was, but we haven't seen the results for that effect. I thought you had said 80% unaided awareness there, I think the low 70%, sorry, I misheard that. I think what we referenced was 8% unaided awareness in Japan, 8% China compared to in the 60s in Japan and 70s in the U. S. And the reason Ian made that point was to suggest that the opportunity for us to continue to grow rapidly as awareness builds is boundless in China. Great. Well, excellent quarter. Thank you. Thank you. Thank you. Our next question comes from Marie Diskall. You may ask your question and please state your company name. Thank you. Standard and Poor's Equity Research. I have a question about how you're going to be flowing your goods in Europe and Asia. You be flowing them as constantly as frequently as you do here in the U. S? The short answer is yes, we do that today. I answer is yes, we do that today with the same pace. We have a global calendar. And when we update our windows in the United States, we do the same in China, Korea and every other market. So the cadence is exactly the same. What we did announce and Ian touched on it, I believe today is an Asia distribution center, which is just opening now. And for the first time, we will be shipping goods for Asian markets directly into a distribution center that will enable us to in Asia, the goods go all the way to Florida and believe it or not, and then go back to Asia. We're going to be cutting 4 to 6 weeks of transit out. We're going to be able to have a pooled inventory so that we can respond to country variations in demand in a much more spontaneous way. So we're trying real hard to strengthen our capabilities there. And can I just ask, do you also have an e commerce platform in Europe? It's not a question. We do not today have an e commerce platform in Europe. We're actually launching later this week, I believe, if we're still on track, a Japanese e commerce site. What we have in China and several other markets and we'll have in Europe once we launch is an informational site that will provide updated information on product, Luke's worthy stories as well as directions on where they can go within the respective countries and purchase coach. Thank you. You're welcome. Anton Belge. You may ask your question. Please state your company name. Yes. Hi. It's Anton Belge at HSBC. Regarding your expansion in France, will be your pricing much different from your pricing in the U. S? And also in terms of profitability, do you expect some initial earnings dilution from going into Europe? On to you? In terms of the pricing in France, we expect to, as Lou talked about earlier, position our brand has an acceptable luxury brand between the international brands and the domestic brands targeting about 120% premium. 20% of the U. S. Prices and Antoine, we do not see any dilution of earnings from this initiative in France. Okay. Thank you very much. Thank you. Our next question comes from Marni Shapiro. You may ask your question. Please state your company name. Hey guys, the retail tracker, congratulations. Thanks. I saw Julia yesterday and I think it's one of the best lines you guys have put forth in a while. So I have just a couple questions about France and Western Europe and even a little bit about China. Could you talk about as you roll the brands into these how are you approaching this from marketing, but also product wise? Are you rolling in with brands with sub brands like Madison and Julia or is Signature there too? Is Poppy there? And do you have a full assortment as far as fragrance, jewelry, small leather goods, just a little behind that? And I know the stores and the department stores, the shop and shops will be smaller. So if you could just talk specifically about that versus the store, say in China? Yes. Sure. Well, first of all, let me talk about products and marketing. We expect the assortments for Europe to be very consistent with our assortments globally. Of course, there will be preferences that consumers have there, specific we'll be approaching each market that we're entering with a specific launch strategy. We are partnering as part of our agreement with Plantin on a shared integrated marketing and communications campaign to launch the brand in France that will focus a great deal on the houseman store, leveraging databases, windows, but also some degree of national advertising as well as editorials. We'll also be tapping into opportunities to leverage the international tourists in that market as well. And we'll take a consistent approach when we go into the U. And Spain and those markets in advance of opening the first locations. With regard to the store sizes, as I mentioned earlier, our location in the Prainton flagship location on Boulevard, Houseman is going to be 1700 Square Feet in a very prime location. Actually, when you go into the store, it will have a 3 room concept and will look very much like an elevated coach freestanding In terms of the broader distribution, we'll probably be looking at shop in shop sizes that will range between 50 and 80 square meters in size. And then could you just follow-up on China and I'm assuming just based on those store sizes that the assortment in France at least will be a little bit more limited and focused on handbags. Is that correct? No, it's the same broad lifestyle collection that we offer, there's no difference in China. No, no, no, I'm sorry, in France. China is getting now the full is the full assortment, but in France with these smaller shop in shops, the assortment be focused primarily on handbags? In France? What Yvesu was saying is that the smaller shops will have a comprehensive assortment. What we do in a small size flagship and we have many of them around the world is have a more edited assortment of the comprehensive offering, but it will be a true flagship assortment, which is a lifestyle expression of the Coach's law. Excellent. Thanks, guys. Sorry about that confusion and good luck with Mother's Day. Thank you. Thank you. Thank you. Our next question comes from Michael Binetti. You may ask your question please state your company name. Hi, it's Michael Binetti with UBS. Congrats on a nice quarter guys. I was wondering if you could comment a little bit closer on whether the promotional cadence at the factory stores was higher year over year. I think last quarter when we talked to you guys, you expected it to be about flat for the rest of the fiscal year. Don't know if you kind of gave us directionally for the quarters, but I'd be curious on the insights you have there and then maybe your outlook for Q4? Sure. Really importantly on the factory side, what's driving factory and the significant margin improvement in factory is mix, where we are back to historical levels of 80% penetrations in made for factory goods. Remember at this time last year, we were peaking in the level of delete activity in our stores as we're clearing through excess inventory that situation no longer exists. The promotional cadence in factory is absolutely flat and drives purchase. That's where we play and we will continue to do so. So the value proposition within the factory channel, we have stated and will be committed to a very, very strong and value oriented experience for our consumer there and we see that carrying through Q4 and the tactics we will lever those tactics as we need to. And to build off Lou's earlier point, we want to bridge you down operating income here and the expansion of the gross margin coupled with the increased productivity is driving operating margin expansion that's driving earnings factory division itself actually 4 wall contribution is up 100 of basis points year over year. If I could just follow-up really quickly, could you try to quantify any kind of calendar shift in the Q3 as well as whether we should expect one for our models into the Q4, Sure. There is no there really was no calendar shift in the Q3. The way we report the Easter shift had no bearing between Q3 and Q4. So we feel very good about April and how the Q4 shapes up. Thank you. Thank you for all your questions today. As we draw towards the open of the market, I'm going to turn this back over to Lou for a few closing remarks. Lou? Outlook that we do feel enthusiasm regarding our outlook that we do feel that we have reached another inflection point for Coach. So I would just say stay tuned. Have a good day everybody. Thank you. This does conclude the Coach earnings conference. We thank you for your participation.