Andrea Shaw Resnick – Senior Vice President of Investor Relations and Corporate Communications Victor Luis – Chief Executive Officer Jane Nielsen – Chief Financial Officer Francine Della Badia - President, North American Retail Lew Frankfort - Executive Chairman.

Ike Boruchow - Sterne Agee Oliver Chen - Citigroup Liz Dunn - Macquarie Bilun Boyner - JPMorgan Bob Drbul - Nomura Kimberly Greenberger - Morgan Stanley Faye Landes - Cowen and Company Laura Champine - Canaccord Randy Konik - Jefferies.

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 Victor Luis, Coach’s CEO, and Jane Nielsen, Coach’s CFO. Francine Della Badia, president of North America retail is also joining us.

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 these risk factors.

Also, please note that historical growth trends may not be indicative of future growth. Now let me outline the speakers and topics for this conference call. Victor Luis will provide an overall summary of our second fiscal quarter 2014 results and will also discuss our progress on global initiatives.

Francine Della Badia will discuss our business in North America in more detail. Jane Nielsen will conclude with details on financial and operational highlights for the quarter. Following that, we will hold a question and answer session where we will be joined by Lew Frankfort, Coach’s executive chairman.

This Q&A session will end shortly before 9:30 a.m. Victor will then conclude with some brief summary remarks. I’d now like to introduce Victor Luis, Coach’s CEO..

product, stores, and marketing. Starting with product, we continue to see strength in men’s and footwear, two categories that have undergone significant evolution in previous years and quarters.

The story of this quarter was the introduction of capsule, notably the success of the Borough bag, a prelude to a comprehensive replatforming of our women’s assortment across bags, accessories, and lifestyle categories.

Stuart has made significant progress leading Coach’s design team to replatform our assortment to both imbue more emotion in the product and elevate the brand. In fact, we’re presenting Coach’s first-ever collection in February during New York Fashion Week.

The presentation will be a series of one-on-one or small group appointments over a five-day period. The goal of presenting in this format is to create the opportunity for Stuart to present the fall collection and personally share his inspiration and vision for the brand with the fashion community in an intimate and informative environment.

Moving on to stores, there are a few areas of progress to note. The highlight of the quarter was the unveiling of a new store concept in two key flagship locations in New York and Southern California. In addition, our holiday store windows, “A Brilliant Season,” reflected our move toward installations rather than simply monthly product backdrops.

And finally on marketing, we launched a new fully integrated marketing campaign, “Coach New York Stories,” showcasing top fashion models wearing Coach, set against recognizable New York backdrops. While our journey has just begun, we have confidence in our vision of what we need to do and have the strategies in place to realize that vision.

As was the case with our former transformations, we recognize that this is a multiyear endeavor which requires single-mindedness, tenacity, nimbleness, and patience before it will be fully reflected in our financial performance.

Turning to the results of the last quarter, some key financials were, first, net sales on a reported basis totaled $1.4 billion versus $1.5 billion a year ago, a decrease of 6%. On a constant currency basis, sales declined 3% for the quarter. Second, earnings per share totaled $1.06 as compared to $1.23 in the prior year’s second quarter.

Third, international sales increased 2% to $425 million, from $418 million last year. On a constant currency basis, international sales rose 11%. Sales in China remain strong, increasing about 25% with the continuation of double digit comps, while sales in our directly operated locations in Asia, ex-Japan and Europe, rose sharply as well.

And fourth, North American sales fell 9% to $983 million from $1.08 billion last year, with direct sales declining 8% on the 13.6% comparable store sales decrease. During the quarter, looking at distribution, the company opened one North American full price location and opened seven factory stores, including one men’s freestanding store.

At the end of the period, there were 351 full price and 205 factory stores in about 155 outlet malls in North America. Moving on to China, during the quarter we opened 10 net new locations, with two locations in Hong Kong and eight on the mainland, bringing the total number to 142 locations, including 122 on the mainland, in 51 cities.

In Japan, as expected, we did not open any new locations during the quarter. There are 196 directly operated locations, which include 149 full price and 47 factory locations in about 30 outlet malls.

Also in Asia, during the second quarter we opened two locations in Malaysia, one in Korea, and one in Taiwan, bringing the total to 98 directly operated locations in the balance of Asia, including 49 in Korea, 28 in Taiwan, 12 in Malaysia, and 9 in Singapore.

In Coach Europe, we opened four directly operated doors, including Serrano, our first flagship in Madrid, two shop in shops in Galleries Lafayette in Paris, and a shop in shop in El Corte Ingles. As of the end of the quarter, there were 24 directly operated locations in Europe across the U.K., France, Ireland, Spain, Portugal, and Germany.

We also opened several wholesale doors in the U.K., Germany, France, and Italy. Moving on to sales and productivity, our total revenues in North America declined 9% for the quarter, with our directly operated businesses down 8%. As noted, total Q2 same-store sales declined 13.6%.

While men’s, and our relaunched footwear categories, continue to perform well, we remain disappointed by our overall performance in women’s handbag and accessories. Fran will provide some additional granularity to our retail businesses in a moment.

In department stores, sales trends at POS were slightly below prior year, while shipments into department stores declined as planned. The outperformance vis-à-vis our retail stores was reflective of the overall channel and generally better traffic trends than the malls at large.

Overall, and consistent with the September quarter, we estimate that the North American premium women’s handbag and accessories market again rose at a high single digit rate in the second quarter.

Turning to men’s, as we’ve discussed, we’re also continuing to drive our men’s business globally, through new standalone and dual gender stores, and by dedicating more space for a broader men’s assortment in existing retail stores. In the second quarter, Coach’s sales of men’s bags and accessories increased nearly 20% globally.

Looking ahead, we remain bullish about the prospects for our men’s global business, where we’re continuing to target about $700 million in sales in FY14, up about 20% from last year, and $1 billion in sales in three years.

Turning now to our international segment, which represents about a third of Coach’s business, sales rose 11% on a constant currency basis in the second quarter, but only 2% on a reported basis, primarily due to the weak yen. As expected, China sales rose about 25% from prior year, fueled by double digit same-store sales and distribution growth.

We’re very pleased by the continued development of this market, which bodes well for our global travel retail business, where mainland Chinese tourists play an increasingly important role.

Further, as Coach is a relatively young brand in China, we are already recognized as both dual gender and lifestyle, as men’s products and women’s lifestyle categories, taken together, represent over a third of sales.

Our other Asia direct businesses outside of China and Japan, Korea, Taiwan, Malaysia, and Singapore, also posted strong aggregate growth, increasing at double digit rate for the quarter, with robust comparable store sales.

As a reminder, we anniversaried the purchases of our retail operations in Malaysia and Korea during the first quarter, so our business is now apples to apples, no longer benefitting from a wholesale to retail step up. In Japan, we posted a 2% decrease in constant currency while sales in dollars were down 21%, reflecting the significantly weaker yen.

In Europe, where our brand is small but growing rapidly, we generated significant sales growth at POS and strong comps in the quarter.

We continue to believe that Europe represents a significant long term opportunity for Coach, both with domestic shoppers and the international tourists, notably in key European cities where the accessible luxury segment is outperforming traditional luxury.

While Jane will get into some more details on our financials, and I will discuss our outlook in some detail shortly, I wanted to give you this recap. Francine Della Badia has joined us today to review our holiday season and discuss our business in North America in more detail.

Fran?.

Thanks, Victor, and good morning. As Victor mentioned, we continue to feel pressure in our North America business, in traffic in our retail stores, impacting women’s handbags and accessories. Simply put, we were dissatisfied with our performance in these categories.

As I did last quarter, I’m going to give some underlying texture to the comp performance, both in our successful and strong product initiatives which are resonating with consumers, and where we see the opportunities to strengthen our product [unintelligible] in North America.

As was the case industry wide, in-store traffic decelerated further from Q1 levels as the national retail traffic index posted the steepest holiday season decline in at least six years.

Similarly, in factory malls, which are primarily open air, in traffic, notably in the two weeks leading up to Christmas, we did not experience the build that we expected. On these lower levels of foot traffic throughout our store base, overall conversion rose and transaction size held.

While in previous quarters and years we were able to offset slowing in store traffic on the internet, our online business did not contribute positively to our overall North America comps.

Our year over year comparisons were impacted by our strategic, brand health decisions to both eliminate third-party flash events as well as limit the access and invitations to our factory flash site. Excluding these factors, our internet comp would have experienced moderate growth.

What we have found, as was alluded to earlier, is that when we do offer fashion innovation our customers do respond. As Victor mentioned, the story this quarter was the introduction of capsule. All of our full price stores in North America received the new capsule handbag silhouette, the Borough, in two sizes and three colors.

A tiered offering of more fashion handbags in additional colors and materials were offered in select flagship locations, with the full assortment, including ready to wear, available in 25 global flagships, including 11 in North America.

This all store silhouette, priced at $548 and $798, experienced strong sell through, surpassing our internal expectations. Importantly, we experienced no price resistance. More generally, the above $400 price bucket grew in penetration and represented 22% of handbag sales, with the strongest performance at the upper end of our range, $600 and higher.

Emotion clearly trumped price, as our consumer is willing to pay more for compelling, elevated product. I’ve mentioned we continued to see strength in our lifestyle categories in Q2.

Footwear, which relaunched last spring in about 170 full price locations, rose in penetration from about 5% to over 8%, at higher AURs, reflective of the compelling assortment. This category performance highlights our consumer’s desire for more emotional trend right fashion product. We’re seeing strong performance across heels, flats, and booties.

We remain focused on building our market share within the fragmented nearly $25 billion global premium footwear category. For holiday, we introduced more dominant fashion footwear assortments in our international and wholesale locations, and continued to focus on building our key items.

We’re evolving our mix and growing both AURs and overall penetration levels across all of our businesses. At the end of Q2, nearly 150 Coach International retail locations offered the elevated women’s collections, and the response from customers has been excellent.

In factory, after a strong Black Friday weekend, we did not experience the anticipated build in traffic in the weeks leading up to Christmas. However, similar to full price, we are seeing the consumer response to distinctive newness and fashion innovation as well as an overall shift to leather versus logo.

Faux exotics, pearlized, and gathered leathers performed better than we expected at above average price points. The fact that we’re experiencing a strong appetite for more elevated products is exciting for us. We were also pleased with the performance of outerwear, footwear, and the newly introduced watch and jewelry categories.

We’ve also remodeled a majority of our factory stores into our new factory design concept, including enhanced visual merchandising and marketing elements. We are using elements of our New York Stories marketing in the windows, elevating the look and feel of these stores.

In terms of our full price store designs, Victor touched on windows, and most importantly, our new full price concept stores on lower Fifth Avenue and South Coast Plaza. These stores are a physical expression of transformation, as we bring our brand positioning to life.

They’re modern, elevated, elegant, and warm, and offer our customers a more complete dual gender lifestyle experience. They invite customers into a much richer relationship with our brand, giving Coach greater relevance and fashion credibility.

In the weeks since they have reopened, we have seen our customers explore the stores and engage with our product and brand in new and exciting ways. We view these locations as laboratories. We will live in them, learn from them, and ultimately be able to take the elements and roll them out more broadly across the fleet.

This spring and summer, you will see bolder, more feminine visual merchandising initiatives, especially in our most prominent flagship locations, and concepts that will be represented in all stores, continuing to elevate marketing and our brand positioning.

Our fall marketing campaign communicated a more aspirational and consistent brand story, reinforcing the bonds with our existing consumer while driving new customer engagement globally.

During the holiday quarter, we evolved the campaign with new tastemakers such as Misty Copeland, the first African-American lead ballerina to the American Ballet Theater; Michael Chernow, founder of The Meatball Shop; and Gia Coppola, a photographer. They’re all telling their own New York story, featuring their favorite Coach product.

In summary, we’re confident in our roadmap to restore productivity in North America. While we recognize this will take some time, and are clearly disappointed with our recent performance, we are focused on maintaining our operational excellence.

We are making the necessary investments in our digital capabilities as the business becomes increasingly omnichannel, and we’re reviewing our store fleet systematically, culling where necessary and investing where appropriate.

With that, I will turn it back over to Victor for a discussion of our international business, strategies, and further opportunities for growth.

Victor?.

Thanks, Fran. Our strategic focus remains on the four pillars of growth that we have previously shared. First, and most broadly, growing our business in North America and throughout the world by transforming into a global lifestyle brand anchored in accessories.

Second, leveraging the global opportunity by aggressively growing our international businesses. Third, tapping into the large and growing men’s accessory category, which we’ve already touched on. And fourth, harnessing the growing power of the digital world to both drive ecommerce and customer engagement globally.

While focusing on productivity, we will selectively continue to expand our distribution. As our annual plans haven’t changed materially from what we shared in July and in October, I will be brief. We still expect that our square footage globally and across all channels will increase around 9% in FY14, consistent with prior guidance.

In North America, our directly operated square footage will be up about 7%, driven by about 15 new store openings focused on Factory, about 20 expands within the context of our transformation and 15-20 previously announced full price closures.

In China, as we discussed, we’re on schedule to open about 30 net new dual gender locations, increasing our square footage by about 25%. And as noted in our press release, our sales remain on track to reach $530 million this year, driven by both distribution and double digit comparable location sales.

While we expect to open a few stores in our other direct Asia markets of Korea, Taiwan, Malaysia, and Singapore, our primary focus remains productivity. We have been realizing the benefits of Coach’s direct management in these markets and are pleased with the development of both our teams and our brands.

In Japan, we expect net square footage growth will increase slightly with the opening of about 5 to 10 net new locations, most of them dedicated men’s stores. And in Europe, including the U.K., for FY14 we still expect to open about 10 retail locations focused on key European cities, and now plan to open about 30 total wholesale locations.

As you know, we also have significant and growing distributor run businesses in other countries.

Our primary areas of focus are first, other Asia Pacific markets, including Australia, Indonesia, Thailand, Vietnam, and the Philippines; second, Latin America, including Mexico, Brazil, Colombia, Venezuela, Panama, Peru, Chile, and Argentina; and third, in the Middle East.

I just reviewed our transformation progress, ongoing strategy to reinvigorate growth while taking steps to improve productivity in North America. Importantly, we are confident in our vision and we have the right team and resources to execute our transformation already underway.

At this time, I will turn it over to Jane Nielsen, our CFO, for further details on our financials.

Jane?.

Thanks, Victor. Victor and Fran have just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our second quarter results. Our quarterly revenues decreased 6%, with North America declining 9% and international increasing 2% in dollars.

As noted, on a constant currency basis, revenues were down 3% overall while international sales rose 11%. Net income for the quarter totaled $297 million, with earnings per diluted share of $1.06. This compared to net income of $353 million and earnings per share of $1.23 in the prior year second quarter.

Our operating income totaled $436 million, as compared to the $527 million reported last year, while operating margin was 30.7% versus 35%. During this quarter, gross profit totaled $983 million, versus the $1.09 billion a year ago. Gross margin was 69.2% versus 72.2% for the prior year.

Our expense ratio in Q2 totaled 38.5% compared to 37.2% reported in the year ago quarter. Our SG&A dollars actually declined slightly on a year over year basis as we managed variable cost to the lower sales levels, adjusted our outlook for lower performance-based compensation levels, and benefited from the weaker yen.

We also realized the benefit of our fourth quarter restructuring actions and the sale of RK, which were offset by higher spending on Coach brand marketing as well as the impact of taking Coach Europe in house. Inventories at the end of the quarter were $553 million, 12% above the $494 million reported at the end of last year’s Q2.

As mentioned on our last call, we’ve planned for inventory levels to be up over the balance of this fiscal year, based on several key factors, including distribution growth, the acquisition of Coach Europe, higher average unit cost, and our expansion into lifestyle categories.

In addition, sales growth [unintelligible] the lower expectations, is also driving inventory levels. However, our operating model, with a robust factory channel, allows us to view our inventory as currency, and our balances are high quality and current. Cash and short-term investments stood at $799 million, as compared with $859 million a year ago.

On the balance sheet, we continue to deploy international cash into high quality investments with higher yields and durations over a year. And, in turn, there is a shift between cash and short-term investments into other noncurrent assets.

During the second quarter, we repurchased and retired about 3.3 million shares of common stock at an average cost of $52.99, spending a total of $175 million. At the end of the period, about $1 billion remained under the company’s current repurchase authorization.

Net cash from operating activities in the second quarter was $400 million, compared to $628 million last year during Q2. Free cash flow in the second quarter was an inflow of $340 million versus an inflow of $567 million in the same period last year. Our capex spending was $61 million, even with a year ago.

Consistent with our guidance last quarter, we expect that capex this year will be in the area of $280 million, primarily due to new store openings and expansions across all geographies, elevating our store environment within our existing stores and investments in the technology and infrastructure necessary to enable our global expansion and transformation.

Based on our second quarter results, we’ve modified our outlook for the balance of the year as follows. We now expect to deliver low single digit sales declines in constant currency in the second half. Assuming the yen remains close to 104, this would equate to low to mid single digit rate decrease in sales for the balance of the year in dollars.

For the full year, this would take us down low single digits in constant currency and low to mid single digits in dollars. Also, we are forecasting our North America comp run rate to be in the range of our Q2 levels for the balance of the year, with 3Q the more difficult compare given the Easter shift.

Gross margin is projected at about 70% for both the back half and the year. The primary impact compared to last year will be increased factory promotion levels, the weaker yen, rising sourcing costs, as well as inventory amortization from the JV acquisition in Coach Europe.

We continue to expect modest mid single digit SG&A dollar growth in the second half, with increased investments in Europe, marketing, and other brand transformation initiatives generally funded by the restructuring actions taken in last year’s Q4, but with some deleverage on the lower sales forecast.

Therefore, for the full year, SG&A will be up low single digits. Taken together, we would expect operating margins to be in the area of 26% to 27% for the year. Finally, our tax rate is expected to be around 32% for the year.

Regarding the balance sheet, cash flow, capital, and capital allocations, we expect to continue to have a strong balance sheet and substantial operating free cash flow. We will prudently invest in the growth of our business while returning cash to shareholders through dividends, coupled with share repurchases.

Our current FY14 outlook continues to reflect about $700 million in share repurchases, approximately equivalent to our prior three-year average. Our long term commitment to growth and shareholder value are unchanged.

We have a business model that generates significant cash flow and we are in a position to invest in our brand while continuing to return capital to shareholders. I’d now like to open it up to Q&A. .

[Operator instructions.] The first question today is from Ike Boruchow with Sterne Agee..

Victor, I wanted to ask about some of the initial steps you’ve taken in this transformation, both from a product perspective. It sounds like the Borough Bag has been a hit, and the lifestyle stores look great.

But both have been done on such a small scale, so I guess the question is why wouldn’t you be a little more aggressive from both a product and stores perspective on some of these changes that do appear to be working.

And then a quick follow up would be, internally, what gives you the confidence that Stuart’s product will work, and that the brand is still healthy?.

Let me start with the second part of your question, which really is about confidence around the brand. I not only have the pleasure of leading the best team in luxury specialty retail, but also without a doubt the leader in the space from a brand perspective. We are the original U.S. luxury brand.

We are the most authentic brand, and certainly any piece of research that we see today, and which I know many of you also do, shows us as the most loved brand in the space. Of course, the environment around this has shifted. Consumer shopping behaviors are changing, there’s a new competitive environment. We realize that.

We’re grasping that opportunity through our transformation, and are very cognizant of the need for us to tell a richer story to our consumers and provide a richer context, which is what we’re doing through our strategies and through transformation. And with Stuart Vevers as our creative director, we’ve undertaken that journey.

He’s been with us for four months, and just yesterday, internally, we showed the first collection. And I can tell you that the energy among the team was palpable. We are extremely excited by the initial steps we’re taking.

Stuart is providing us with a rich context for us, not only in terms of rediscovering what is great about Coach, which is a story on quality, great purity of design, understanding materials and craftsmanship, but also providing a fashion relevance for the brand like we’ve never had. So we’re incredibly excited about that.

In a minute, I’ll ask Lew to give you his opinion as well, because obviously, having been on the journey for 35 years, he can certainly compare with past years. In terms of the Borough and the stores, we want to be of course learning on everything that is happening. The Borough was developed by our team 12 months ago.

And we made the initial buys, we’ve gone back in. You’re going to see increasing presence of that specific silhouette across the fleet in North America and globally. In fact, from this floor set, if you would have visited stores today, relative to holiday, you’ll see an increased presence there.

And in terms of the fleet rollout of the new concept, the lifestyle concept that I know many of you have visited at Lower Fifth and perhaps at South Coast Plaza, as Fran touched on, the feedback from consumers and just our staff and their interaction with them has been very positive.

So we’re learning, we’re tweaking obvious fixture programs and the like, and over the next weeks and months, we’ll be making decisions on how expensively we roll that out based on the feedback.

Lew, perhaps you want to give your comments on what you’ve seen in relation to Stuart’s first development?.

Sure. Good morning everybody. Just for some context, our brand grew organically from our product. Before we had a great brand, we had a great product. And the attributes of the product, as Victor mentioned, authenticity, craftsmanship, quality, and value, were the cornerstones of our products, and eventually became key brand equities.

Today, when we look at the product that we’re going to be launching in our first ever presentation next month, launching in September, it still has been absolutely true to our underlying brand equities. The product is rich, it’s elevated, it’s original.

He has interpreted and brought forward the many codes that consumers have come to know and embrace from Coach. And in closing, the product is imbued with emotion. It resonates with quality, and is quite appealing. .

The next question is from Oliver Chen with Citigroup..

Regarding the factory channel and the promotional nature of what’s happening there, could you highlight a potential catalyst for abatement there, and what you’re seeing competitive within the marketplace? And just as a follow up, to help us set expectations for your business going forward, how do we think about timing for a better comp store sales? And what should we prioritize as the key drivers for that happening?.

I’ll start with your factory question. In terms of factory stores, as we mentioned, we had a strong Black Friday weekend, and then were disappointed by the deceleration of traffic post that, in the weeks leading up to Christmas.

We have been promoting more heavily, specifically on the clearance end of the business in factory, to move through some inventory and manage our inventory as efficiently as possible.

So the good news is that Maria’s new product, and the new design that we have in the stores, is really checking with consumers, and we are selling that product extremely well, at above-average factory price points. And so when we have the traffic, we are able to very effectively convert and actually move ticket.

So as we are into the spring season, we anticipate holding traffic, that we should be able to continue down the path of being really proud of the product that we put into factory stores and continue to convert the customers that are walking in. .

And my second question was just more about setting appropriate expectations for the timing of the turnaround of the comp and which drivers would you prioritize for us as the most importance aspect?.

Certainly we’re committed to driving productivity, as we have discussed, and long term value for our shareholders. We have of course also guided that we will not forecast the change in the trend until we see it. There is of course the knowledge that traffic is a likely indicator. We’re going to see conversions being the main driver.

We’re excited about the fact that we have a tremendous amount of internal excitement already and what we’re seeing in new product coming out for September. We know that while shopping behaviors are changing, all of our traffic is being impacted globally, this is truly about great brands.

And we’re focused on driving relevance for the Coach brand, getting back to the core, creating exciting shopping experiences for consumers, engaging with them online and in the stores in new and exciting ways, which is necessary in this changing environment, and doing so of course through all of our marketing mediums, whether it be through traditional advertising, social media, and the like.

And we’re on a journey, and we will take you along with us on that journey, and we’re very focused, of course, on the fall, as a very important key next chapter for us as we continue with the marketing campaign that we already have, but also the presentation of Stuart’s first full collection in our full price channel, where we will have the largest single introduction of new SKUs that we’ve already had, in one launch.

.

The next question is from Liz Dunn with Macquarie..

My question is relative to your place in the marketplace. I guess you talked about the overall North American handbag market still being fairly robust, but obviously your business was tough. Traffic was tough.

Do you think it has to do with a shift to business online? I’m just sort of struggling with how the overall market remains as robust as you see it being, but your problem is primarily traffic.

If you could just help add context? Is it just that you’re not checking online to the same extent that your competitors are? What channel do you see losing the most share in?.

I think most retailers today are seeing that the shopping mall channel is seeing the most pressure in terms of traffic overall. Our online business is more mature than perhaps some of the other competitors that we have. We’ve been in the space longer than most of our competitors.

But saying that, as we discussed in our notes, we did take a very important strategic decision this past quarter to limit access, especially on our flash site, as we look at driving brand equity and moving forward. We know this is a long term journey.

Specifically, we did not have third-party events via our flash web sales, as we had this time last year. And we’ve been also very vigilant in ensuring that we try and keep resellers off of our flash web sales model because of the impact that it has, of course, through the parallel channels both domestically and international.

Our number one opportunity of course is in recruitment of consumers into the franchise here in North America, where we are still the leaders.

We know that that’s going to happen in an omnichannel way, both through the wholesale channel, through our current partners, where there’s a definite opportunity for us to drive further relevance and a further strong presence for our brand, of course, through our own stores. And we realize that the full price channel has to lead.

This is something that we shared with you, and we’re very focused on driving relevance through that as our most important priority, because of the halo that that plays across the entire brand.

And for those of you that have visited our Lower Fifth Avenue store and you compare that experience with the rest of the Coach fleet, and you can imagine that across an entire fleet, as we tweak it, develop it, and perfect it, I think you see a Coach of the future.

And of course as well through the digital channel, which is not only an important channel for communication, but increasingly for ecommerce. So it’s really about the brand across all channels. .

The next question is from Bilun Boyner with JPMorgan. .

It’s very encouraging that you mentioned you did not see price [unintelligible] and higher price points perform better.

So when we get Stuart’s first [unintelligible] in September, where should we expect AURs for that line compared to the collection that’s lower priced? And you mentioned that you limited access through the [unintelligible] sale websites. I’m just trying to get a sense of how material that was.

Was it a significant portion of the [unintelligible] business you cut out?.

In terms of average price points, the over $400 bucket, as we talked about strength in that in the prepared remarks, we actually had a 7% increase in AUR over last year. So as we anticipate Stuart’s collection and look forward to his fall, the newness in his products, we do anticipate that AURs will increase.

And balance in the assortment is important, but seeing that we are performing well in the categories where we had very emotional product, the consumer is willing to pay for it, and we will price the goods accordingly.

In terms of the internet, and the limitation of the flash sale site, we did eliminate third-party, as we said, and paid search as well, and the reseller impact. Those things taken together did have an impact on the overall performance of our internet business, and if we took those out, we would have seen a moderate increase in internet sales..

The next question is from Bob Drbul with Nomura. .

I just had one question.

What led to the decision to have an analyst day, and what do you plan to share with us on that meeting?.

We want to share details of the vision that we have. Obviously, seeing is believing. You will all be able to see the product in all of its glory, meet the teams that care, which is, as I’ve shared, and we believe strongly, without a doubt, the best team in the space, and share with you our vision for the future. .

The next question is from Kimberly Greenberger of Morgan Stanley..

Victor, you mentioned the endeavor to restore brand equity, and I’m just wondering, how do you think about that effort over time with the ongoing increase in square footage in factory? It would seem in some ways that those two things worked against one another, given that typically expansion in factory is not really brand enhancing.

It certainly increases distribution opportunity, but having more discount product out in the marketplace would not really seem to be congruent with the effort to restore brand equity. So I’m just wondering if you can help us with how you think about those two opposing forces..

It’s obviously a question we get often, and what I would share is that we believe the brand, first and foremost, must be led through the full price channel.

And what you see, again, in Lower Fifth, what you see in South Coast Plaza, in terms of a direction for the future of our fleet and the equity that we want to drive through that fuller lifestyle experience, where consumers are engaging with the brand differently, without a doubt will be both a business driver but just as important, if not more so, the halo for the entire multichannel strategy that we have.

Outlets, in terms of their importance globally, are unquestionably the fastest growing certainly bricks and mortar channel in the luxury space. That is not only true for U.S. based multichannel brands.

It is increasingly true for European and traditional luxury brands who are driving further relevance for the channel globally, whether it be here in the U.S., where it’s quite a mature channel, but of course increasingly in Europe, and now, more than ever, increasing in China and the rest of Asia as well.

And so as that channel grows, we want to make sure that we participate in it, and take our fair share there. Saying that, we’re very cognizant of the need, as a result of increasing competitor pressures in that channel as well, to remain relevant there.

And many of you have visited our [unintelligible] Park rollouts, which is now our global rollout already, which we believe in that channel elevates the brand, provides a terrific experience, and I think just as you’re seeing and will see increased value, not just through price, but through great product, emotional product, in our full price channel.

We will continue to see that moving forward in our factory channel. And that is the key. The key is not just to see it as a promotional channel, but to see it as a channel which is of relevance to a certain consumer, who does not shop in other channels, and where we have the leadership position and see continued growth moving forward. .

The next question is from Faye Landes of Cowen and Company..

On the outlet thing, can you just give us some dimension? You implied that you’re going to be selling the excess full price product in the outlets channel, just to get rid of the inventory you have right now.

How quickly do you think you can clear that, because as you’ve often indicated before, that’s not the core of your outlet strategy?.

Our outlook is that we’ll be able to move through a great deal of our inventory over the next several quarters. And given the size, the productivity of our factory channel and the volume that we move through there, we have a lot of confidence that we’ll be able to clear through our inventory profitability over the next several quarters..

I would just add that this is not new for us. Many of you who have been with us on our journey know that even during the 2008/2009 crisis, it didn’t take us more than two to three quarters. This inventory is currency for us. It’s no more than 5% of our total sales, and we’ve always sold full price [unintelligible] in our factory channel.

It adds to the relevancy of that channel. There are many consumers who are obviously looking for the hunt of what was in full price in previous months. And so we look to it as an opportunity and not necessarily a negative..

There are several drivers of inventory, one of which is our sales outlook that was lower than expectations. But some core drivers, like our distribution expansion, our higher average unit cost, and the acquisition of Coach Europe and our expansion into lifestyle categories have elevated inventory levels, some just based on the nature of the business.

But in terms of that which is excess because of our sales outlook, we’ll move through that very quickly..

The next question is from Laura Champine with Canaccord..

This is, I’m afraid, just an extension of what Liz has already asked, which is can you talk about what is driving the strength in the category and how you diagnose, in the most important quarter of the year, an acceleration in market share loss, and what is being done specifically to address that other than obviously new product coming with Stuart’s arrival?.

Well, the strength in the category really speaks to the message that we’ve been putting out there for many quarters now, which is obviously that consumers increasingly look to accessories as the most important part of their wardrobe.

It’s what they are doing and leveraging in that sense, to identify themselves as they spend less on apparel and more on accessories. This is a cyclical shift that has been going on for over a decade now. Obviously, as a result of our own success, as a result of this growth in the category, there’s increased competition.

That competition creates excitement in the category, which continues to drive it.

The opportunity for us, of course, is to leverage our solid equities in our brands, the amazing team and know how that we have, and with new creative direction, to drive relevance in our brands and take our fair share of the market as we have in the past, and that’s what we intend to do.

So our strategies for dealing with that are everything that we have been sharing with you in terms of transformation.

We’re excited about having you all together with us on June 4, when we will share not only with you the details of our vision, but of course the strength of this team in terms of what we’re doing and how we’re going to execute moving forward..

And just as a follow on, is there a concerted effort to elevate the brand? And how might that change the market size that you can address in North America, if I am hearing that right, that there is an effort to elevate the brand to higher price points?.

It’s a terrific question. You will see some increased SKU counts at the higher price points, but our strategy is not to change the range of our price points. Many of you will remember, during the financial crisis, when consumers were more price sensitive, we talked about a rebalancing in our assortments.

What we’re seeing with obviously consumer confidence at levels that are much better, and the increased competition and excitement around the category, is an opportunity for us to leverage our core strength, our authenticity, quality, heritage, and the respect that consumers have for Coach as the leader in this space to continue to elevate and rebalance our assortment now to more SKUs in the above $400 space.

But this is not about us becoming a European luxury brand tomorrow. This is about us driving desirability and driving, if you will, confidence in the brand in the mind of the consumer through increased value through quality. .

The next question is from Randy Konik with Jefferies. .

Can I just follow up on that, with pricing architecture, because you said on the call that about 22% is done at the greater than $400 price point, which is doing well. But 80% of your business is below that, and when you look on the website, you’re hit with price points right away that are $598, $698, $1,000, etc.

And when you look at your key competitors, their opening pages on their websites are $298, $328, to $458.

So I guess I’m just curious about how you’re thinking about pricing architecture and how to message that to the consumer, because again, when I look at the website, it just looks like the prices are just not accessible as they have been in the past.

And just want to follow up with the point that you’re not going to alienate that lower price point offering. Just your thoughts there would be helpful. .

It’s a great question, because I think what you’re looking at, as you open up our website, of course we always start with newest [unintelligible], with newness, and what you’re seeing on the top of the page there is the Borough. And thankfully, the Borough is resonating incredibly well.

As you go into the bottom of that first page, or onto page two or three, you’ll see that we have not given up the $200 price bucket, $300/$400 price bucket, and that we continue to be very active in that space. As well, I think what you’ll see is that we will play across channels a little bit in a bit more targeted way.

You’re going to see us develop more specific products that will be in more price sensitive channels such as that with our wholesale [unintelligible], versus what you might find in the flagship store, versus what you might find in a secondary market, either here in the U.S. or internationally.

These are strategies that we’ve been leveraging globally quite successfully. There is, without a doubt, a very substantial opportunity above the $400 price point bucket. We know that that is becoming increasingly attractive not just here in the U.S., so I would ask us to think about that opportunity globally.

As we see the logo business challenged, what is increasingly happening globally is brands headed further into the leather space. As many of you know, our European competitors have a very hard time achieving price points below $1,500, below $2,000, when it comes to leather handbags.

And so the opportunity for us is not just to play with lower prices, but to play with increased value and perception through quality, and that’s where we’re going to look to change the value proposition in the months ahead, but doing so by rebalancing the assortment, not by shifting completely. .

Thank you all for attending our Coach conference call this morning. As is our custom, it is now 9:30, and I will turn it over to Victor for some concluding remarks..

Thank you, Andrea, and thank you all for listening and for being on this journey with us. As we stated, while we’re disappointed in our Q2 results, and as Lou has stated in the past, we know that we are at a very specific moment in time.

We have tremendous confidence in the strength of our brand, in our vision, and in our team, and we are very excited about partnering together as this team executes the transformation already underway, and to get us back on the road to a healthy track and long term growth. Thank you very much..