TPR
#Good morning
And welcome everyone
As noted in our press release, we are pleased with and proud of our performance this holiday season, particularly in light of the challenging and volatile global retail environment
Our team delivered top line growth in each of our segments, highlighted by positive comparable store sales in North America with solid demand across channels and overall gross margin expansion
We continued to grow our business internationally with notable strength in Europe and mainland China which represents significant opportunities for our brands
Importantly we opened our first Coach House global flagship locations on Fifth Avenue in New York City and Regent Street in London which represent the fullest expression of our modern luxury vision to date and celebrate our heritage and seventy-five year history of craftsmanship
And despite our deliberate pullback in the North America wholesale channel and unanticipated currency fluctuations, we delivered double digit earnings growth in the quarter
We were also thrilled with Stuart Weitzman’s results this quarter as we continued to implement our strategic priorities for the brand
We advanced our leadership position in fashion boots and booties during the winter selling season while driving global awareness and brand relevance through impactful marketing and the launch of key global flagships
This quarter strength which reflected strong growth in directly operated channels as well as the anticipated shift in wholesale shipments from the first quarter took brand sales growth to double digit for the first half and we continue to expect Stuart Weitzman sales to increase at a double digit pace this fiscal year
More generally, we continued to execute the Coach brand transformation across the consumer touch points of product, stores and marketing
Our gifting assortment resonated with our customers globally across all price points and in all channels
We continue to transition more of the fleet into our modern luxury concept while enhancing our customer experience
Finally, our holiday marketing was bold, innovative and fun, driving a dramatic increase in impressions globally
Also, during the holiday period we continued to elevate our brand through global celebrations of our seventy-fifth anniversary, including our first dual-gender runway show in early December here in New York City
We also announced Coach’s partnership with the actress and singer Selena Gomez
Her work with Coach will be wide ranging and begin with her appearing in Coach’s fall 2017 fashion campaign
It will also include a special product collaboration for launch in the fall across our global network and with major wholesale partners
Organizationally, we've announced two new leaders
First, Kevin Wills will join our team as chief financial officer in the coming weeks
Kevin is a proven leader who brings nearly thirty years of broad based and relevant retail and finance experience to Coach
His expertise and strong operational track record make him a valuable addition to the leadership team
We're also delighted about the recruitment of Carlos Becil, coming in a newly created role of chief marketing officer for the Coach brand
Carlos is joining us from Equinox where he held the role of chief marketing officer for the last four years
In his new role, Carlos will partner with Stuart Vevers and our global marketing teams to continue to innovate and bring our brand messages to broader audiences around the globe
I would like to take a moment to recognize and thank <UNK>a who has held the position of interim CFO over the last several months
She and our proven finance team ensured we continue to execute our strategies flawlessly
And I know you are all pleased to learn that <UNK>a will continue in her leadership role as global head of investor relations and corporate communications
Now, as has been our practice since we implemented our transformation strategy more than two years ago, I'd like to share some of the actions we've taken to drive performance across the three Coach brand pillars of product, stores and marketing
Starting with product, where Coach has emerged as a house of modern fashion design
In retail in the holiday quarter we successfully launched Heritage Gifts, a powerful year round dual gender gifting strategy grounded in glove tanned leather featuring pops of color and a balance of emotionally novel giftables
Retail also continued to focus on elevation and fashion in Q2 with the expansion of Coach 1941 handbags and the launch of our first ever all-door pre- spring collection
Building upon product innovation, 1941 continues to be Coach's vehicle to deliver playful iconic Americana inspired themes
In outlet, as we touched on during our last call, we kicked off the quarter with a very successful outlet only Pac-Man collaboration
Metallics, florals and patents and dressy silhouettes were also well received
In addition, the exclusive playful holiday prints anchored by our animated Coach bears collection drove consumer engagement via strong messaging to our outlet customers, including Windows, mailers, emails and in-store experience
Men’s continued to be a major focus for outlet and is on plan to be over 20% of the channel by the end of the fiscal year
On stores, we're continuing to establish our modern luxury concept globally, renovating and opening 46 locations during the quarter, including four in our directly operated North America business, taking us to about 540 modern luxury locations globally across all channels
This is very much in line with our target to end the year with over 700 doors in the new format, representing the vast majority of our traffic
Consistent with the plan, these renovations have been driving significant inflections from previous trends and comps which exceed the balance of the fleet in the vast majority of stores around the world
Of course, as we've said before, the in-store customer experience is a key component of our brand elevation strategy, which is based upon, first, differentiating the Coach experience through leather and craftsmanship; and secondly, developing personalized clientele and customer events
I am delighted that our mystery shopper scores, our key metric that demonstrates how well we deliver our unique modern luxury experience, were up again in the second quarter at over 85% as compared to about 75% in last year's holiday quarter
In addition, it's great to see how clients are responding to our new leather services such as monogramming and leather conditioning, with new services such as unique MOG stamps being introduced throughout the year
Across the global fleet, there were 26 craftsmanship bars installed as of the end of the second quarter and we expect to add twelve more in the second half of the fiscal year
We remain very excited about our global flagship focus
We view these stores as important retail and marketing investments for the Coach brand
These flagships include our Coach Houses on Fifth Avenue in New York City and Regent Street in London, both successfully opened during the second quarter in time for the important holiday season
Earlier this month we opened the Kuala Lumpur Pavilion flagship in Malaysia and will soon open our first flagship in Milan, Italy during February Fashion Week
In North American department stores where we're repositioning the brand, we did four renovations last quarter and continued to see positive results from our shop manager program without performance versus the balance of doors in major accounts
As noted, when we entered the fiscal year, one of our key strategic initiatives is elevating the Coach brand into North America wholesale channel
Through 1941, we've added some new locations in top tier specialty stores in North America and globally
We are now also in the process of rationalizing our North American department store distribution, taking our door count down by about 25% or by over 250 locations over the fiscal year, as well as reducing promotional events in the channel
In fall, we closed the first group of these locations, about 120, while the number of days on sale in department stores were reduced by about 40%
And we remain on track to close the balance of targeted doors this spring season
On the marketing front, we held events across the globe celebrating the culmination of our anniversary year
Our global influencer driven campaign was our most significant one yet with over 2.6 billion global impressions, up 160% from last year's holiday season
Color was important in creating visual impact, highlighted by our Heritage Gifting program
Large scale experiential marketing, including events in Europe and in Japan, such as our Covent Garden pop-up installation also drove engagement
Similarly, multiple brand moments around celebrity births, Coach House opening events and #Coach75 extended the life of our anniversary campaign
And to cap our anniversary year, as mentioned, we held our first dual-gender runway show in December in New York City generating excitement and brand buzz globally
More generally, during the quarter we remained focus on creating desire for our brand highlighting our fashion positioning and our 75 year legacy of design innovation, craftsmanship and quality
Our goal is to enhance brand perception and make the category exciting for consumers with a singular message that cuts through: Coach’s unique modern luxury proposition focusing on leather craft and Stuart’s vision of Coach New York cool, familiar American culture interpreted [ph] with a twist from New York's original house of leather design
Of course, signing Selena Gomez as the new face of Coach will amplify the coach message given her very substantial global following, especially on social media
As a result of these efforts across customer touch points, we are seeing continued progress in consumer perception
Importantly in our U.S
brand tracking survey fielded in December, Coach’s repurchase intent with category drivers increased versus a year ago, while our brand affinities were strong with consumers overall
In addition, fewer consumers viewed the brand as promotional versus a year ago which we believe reflects our deliberate pullback in events over the last two years
We are delighted with our progress and proud of all that our team has accomplished to drive Coach’s transformation
The Coach brand is very much on its way to evolving from a specialty leather and accessories brand to a true House of fashion design
We are excited to see our creative vision and direction gain traction and as has been our custom, we'll continue to update you on these initiatives as we move forward
Turning now to a discussion of category trends
As we look ahead to the balance of FY’17, we believe the challenges that exist today affecting the category in specific and consumer spending in general will persist
This volatility was evidenced throughout FY’16 and the first half of FY’17 impacted by the U.S
election this fall and the significant strengthening of the dollar over the last few months
Overall, with limited data points given the delayed year end reporting for several brands, we estimate that the North American premium men's and women's bag and accessories market was flat to up low single digits in the December quarter which we believe has continued to be impacted by negative trends seen in the U.S
department store space
While <UNK>a will provide additional details on sales and distribution by geography, we wanted to touch on some current trends and strategies by market
So I'll turn it over to <UNK> for a discussion of North America
Thanks, <UNK>
Moving on to Coach brand’s International performance
As noted in our release, in the second quarter International Coach brand sales rose 3% on a reported basis and 1% on a constant currency basis
By geography, Greater China sales were essentially even with prior year in dollars in the quarter
On a constant currency basis, sales rose 6% with positive comparable store sales overall
We continued to drive strong results on the mainland while Hong Kong and Macau experienced significant improvement in the quarter
In Japan, sales rose 9% on a reported basis while constant currency sales decreased 2%, impacted by a decline in Chinese tourist spend as we lapped last year's dramatic increase
In Europe, our sales grew at a double digit pace in the quarter driven by new distribution and positive double digit comps
We've continued to experience very strong results in the UK benefiting from the currency weakness and increased traction with the local consumer
We were particularly pleased to open our Coach House location on Regent Street in London during the quarter where results to date have been strong and above expectations
In Paris, our business for the quarter continued to be impacted by weak tourist traffic, though we did see relative improvement in December as we anniversaried the negative impact resulting from last year's tragic terrorist attacks
In our other directly operated Asian markets outside of China and Japan, namely South Korea, Taiwan, Singapore and Malaysia, sales decreased low single digits in dollars and in constant currency
Our results were impacted by softness in Korea where macro-economic headwinds have pressured spending from domestic consumers
Excluding Korea, our business in our other directly operated Asian markets in aggregate rose mid-single digits in dollars and in constant currency
Finally, I would point out that we're continuing to see disparate results in our international wholesale businesses which while small are important to growing brand awareness
For the quarter, our overall sales at POS increased slightly, driven by strong domestic performance offset in part by relatively weaker tourist location results
On a net sales basis, revenue also increased over prior year
Now I'll turn it over to <UNK>a for details on our financial results and guidance for the balance of the year
Sure, I'll take the North America comp question and then <UNK>a will jump in with the guidance question
<UNK>, we're obviously very pleased with our performance in the second quarter in North America where we saw demand grow across all of our direct channels with an expansion in our gross margin
As you know in the first quarter we have a total comp of 2%
We saw that grow to 3% with our bricks and mortars comp being 4% for the holiday quarter, really benefiting from all of the actions that we have been taking over the last couple of years to drive our transformation across both channels
In retail, we're seeing our elevation take hold with the broader distribution of Coach 1941 and the continued rollout of our modern luxury concept
And I couldn't be prouder of the engagements of our teams with our consumers across both channels as well
And in outlets, we are seeing a level of innovation from our design teams at a level that we haven't seen in the past and that's really beginning to resonate
Of course that includes as we suggested during our prepared remarks some of those wonderful collaborations that we have seen
Yeah, well, obviously we're really great in our core category and that will remain a core competency going forward, <UNK>
We don't see ourselves becoming an apparel play, if you will
Obviously we've also talked about layering on other categories and we've made a very important acquisition in Stuart Weitzman, that has made us a very significant player both here in the U.S
and increasingly internationally in footwear
We're going to be leveraging that know-how of course for the Coach brand as well, especially as we take back our license later this calendar year and begin both the development design and production of shoes in house to have footwear become an increasingly important part of the Coach brand go forward
As well, we do see outerwear as an area of growth for us
If you look at what we're doing with all of our runway shows and anything that you see within our stores you will see that outerwear plays a very important part of our apparel play, if you will, of what we're doing in terms of giving context to the Coach woman and the Coach man much more so than I would say a standard tops and bottoms T shirt and jeans type of business
We're not interested in getting into a basics business
So those three categories combined represent an $80 billion global opportunity and today at $4.5 billion, we obviously have a very small stake in that and so within both the Stuart Weitzman brand where you will see us add with our new creative director, handbag business and then within the Coach brand as we add footwear and outerwear you will see us take an increasingly large share of those three pieces of the pie
<UNK>a will answer the gross margin question in a minute
In terms of how we think of Coach and go forward, I believe that before the Stuart Weitzman acquisition we've been clear that we see Coach Inc
being larger than just the Coach brand
Obviously we've made our very first and significant acquisition with Stuart Weitzman, we're really pleased with the results there
The team has done an amazing job, we’re continuing to drive that business and obviously we have continued to invest both in managements and into design talents and I'm very excited about the opportunity for Stuart Weitzman and I would say before thinking about the larger vision beyond those two brands that our team is very focused on executing in our core business and organic business and doing a terrific job and driving both the transformation of the Coach brand as well as in driving the Stuart Weitzman brand which we see moving beyond footwear into handbags and accessories player as well in the years ahead
So as we think about acquisitions beyond Stuart Weitzman, <UNK>, we've been very very consistent for years now in terms of our capital allocation strategy
Obviously we've been very excited about thinking of the three categories as I touched upon earlier that we believe are the closest to us and the most branded in the fashion space, handbags and accessories, footwear and outerwear especially and that would be obviously part of our consideration set, we're not interested in turnaround plays, we're very interested in brands that are great brands and that growth potential where we can leverage both our skill set, our structure, our systems, our infrastructure, supply chain and know how that we have in helping great brands develop global
In terms of the flash sales ---+ our EOS impact as we call it internally are e-outlet store which is as you call the flash sales model, the impact in the second quarter was really a slight bump versus previous performance of around Black Friday, gifting in general
Overall as we have stated in the past we are not actively recruiting new consumers into the database, we’re only mailing those who shop within our outlet channel
And so I would again expect the database to continue to shrink and its performance to consume shrink as well
Yes, there may be some confusion because you mentioned return to growth, we've been growing very strongly in China since we took that business back in 2008, I believe it was, and have grown it from what was approximately a $30 million business to over $600 million today
Team has done an amazing job in driving our distribution there
Today we're at approximately across Greater China which would include Hong Kong, Macau and mainland China, 191 doors, we have 172 doors in China, still very much opportunity for growth in second and third tier cities
As you may know, China has approximately 200 or more cities with a population of a million or more and given more accessible price points we believe we're going to be seeing continued opportunity for us to develop distribution beyond what the traditional luxury brands have and have tremendous opportunity of course to continue to grow within same stores there as the middle class continues to evolve in that markets and as we continue to see of course the population urbanizing
So the long term story within mainland China is very very exciting indeed
In terms of Hong Kong and Macau we've seen a much better performance over the last quarter
And that is very a significant for us, it's a very important market of course especially for PRC tourists and it's been 18 to 24 months since we saw the first protests from Occupy Central and I think all of us in retail and luxury retail especially are very happy to see that market’s stabilized and hopefully in the future become a source of growth
Thank you, <UNK>
As is our custom I just want to close by, first and foremost congratulating all of our teams across the world both in the Coach and the Stuart Weitzman brands for all of their hard work and dedication
Against what is a continuing volatile and unpredictable global market, I couldn't be prouder of all of them, their commitment to driving innovation, the strong engagement that they have with consumers across the globe
And it's truly their hard work that is reflected in our results
And I thank their commitments and their can-do spirits and thanks to them that we remain very optimistic about the long term opportunities for our brands
