Andrea Shaw Resnick - Senior Vice President, Investor Relations and Corporate Communications Victor Luis - Chief Executive Officer Jane Hamilton Nielsen - Chief Financial Officer Francine Della Badia - President, North America Retail.

Bob Durbil - Nomura Securities Oliver Chen - Citigroup Barbara Wyckoff - CLSA Brian Tunick - JPMC Ike Boruchow - Sterne, Agee Ed Yruma - KeyBanc Capital Markets Dana Telsey - Telsey Advisory Group John Morris - BMO Capital Markets.

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. Thank you for joining us. With me today to discuss our quarterly results are Victor Luis, Coach's Chief Executive Officer; and Jane Nielsen, Coach's CFO.

Before we begin, we must point out that this conference call will involve certain forward-looking statements including projections for our business in the current or future quarters or fiscal years. These statements are based upon a number of continuing assumptions.

Future results may differ materially from our current expectations based upon risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences.

Please refer to our latest Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission for a complete list of risks and important factors. Also, please note that historical trends may not be indicative of future performance. Now, let me outline the speakers and topics for this conference call.

Victor Luis will provide an overall summary of our fourth fiscal quarter and annual 2014 results, and will also discuss our progress on global initiatives. Jane Nielsen will conclude with details on financial and operational results for the quarter and year, along with our outlook for FY '15.

Following that, we will hold a question-and-answer session, where we will be joined by Francine Della Badia, President, North America Retail. This Q&A session will end shortly before 9:30 AM. Victor will then conclude with some brief summary comments. I'd now like to introduce Victor Luis, Coach's CEO..

first, other Asia-Pacific markets; second, Central and South America; and third, the Middle East. We also believe there is a significant opportunity for the Coach brand in global travel retail, which represents the majority of our international wholesale sales.

Before handing the call over to Jane Nielsen, our CFO, I wanted to reinforce the key points from our Analyst Day about the future of Coach. First and foremost, we are an amazing brand and we compete in a growing and very attractive category.

At the same time, understanding that we compete on a playing field that is changing dramatically, we as a management team have clear awareness of this evolving market context and the clarity on how to address our challenges and capture the great opportunity that is ahead of us.

Importantly, we have the right leaders, the history of operational excellence and the resources to execute our plan. While this will be a journey, the opportunities on the other side are compelling for our brands, our team and our shareholders.

And as I have stated, as we continue our journey, we are committed to helping you follow and measure our progress. Now, I'll ask Jane to provide some additional detail on our financials and outlook for the balance of the year.

Jane?.

Thanks, Victor. Victor has just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our fourth quarter and fiscal year results, as well as our outlook for FY '15. Our quarterly revenues declined 7% with North America down 16% and international up 7%.

As noted, on a constant currency basis revenues decreased 6% overall with international sales up 9%. For the fiscal year, sales decreased 5% totaling $4.81 billion with North America down 11% and international up 6%. On a constant currency basis total sales declined 3% for the year with international sales up 12%.

Excluding transformation and other related charges, net income for the quarter totaled $164 million with earnings per diluted share of $0.59. This compared to net income of $254 million and earnings per share of $0.89 in the prior-year's fourth quarter, excluding restructuring and transformation related charges.

For the quarter, operating income totaled $231 million versus $371 million last year on a non-GAAP basis, while operating margin was 20.4% versus 30.3%. During the quarter, gross profit totaled $789 million as compared to $892 million a year ago, while gross margin was 69.4% versus 73%.

SG&A expenses as a percentage of net sales totaled 49% compared to 42.6% in the year-ago quarter, all on a non-GAAP basis. For the full year FY '14, operating income totaled $1.25 billion on a non-GAAP basis compared to $1.58 billion in the year-ago period. Also on a non-GAAP basis, operating margin was 26% versus 31.1% last year.

Non-GAAP gross profit totaled $3.38 billion from $3.7 billion a year ago with gross margin rate of 70.3% versus 73% a year ago. SG&A expenses, as a percentage of net sales, totaled 44.3% compared to 41.9% in fiscal 2013. As I turn to GAAP metrics, let me recap key transformation and other related charges.

For context, and as previously announced at our Analyst Day, and at subsequent filings, we expect to incur pre-tax charges of approximately $250 million to $300 million associated with our transformation plan. A portion of which, we reflected in our fiscal fourth quarter 2014 results and the remainder to be substantially incurred during FY '15.

These charges are related to inventory and fleet-related cost, primarily in North America, including impairment, accelerated depreciation and severance associated with store closures.

In total, we expect to capture $70 million in savings related to our transformation initiative in fiscal 2015, and approximately $150 million in ongoing annual savings beginning in fiscal 2016. During the fourth quarter of FY '14, we recorded charges of approximately $130 million for transformation and other related actions.

These charges consisted primarily of the realignment of inventory, impairment charges and a portion of the cost related to store closures. In aggregate, these actions increased our cost by $82 million and SG&A expenses by $49 million in the period, negatively impacting net income by $88 million after-tax or $0.31 per diluted share.

In July, following our fiscal yearend, we announced the elimination of over 150 jobs related to our organizational effectiveness initiatives, representing a 6% decrease in global corporate staffing levels.

This plan will drive efficiencies across our business by streamlining our organization and leveraging our global capability, resulting in savings that will in part fund key investments related to our transformation. In the fourth quarter of FY '13, the company recorded charges of $53 million for restructuring and transformation.

In aggregate, these actions increase the company's SG&A expenses by $48 million and cost of sales by $5 million in the period, negatively impacting net income by $33 million after-tax or $0.11 per diluted share.

Therefore, including these charges reported net income for the fourth quarter of fiscal 2014 totaled $75 million, with earnings per diluted share of $0.27, bringing total year net income to $781 million and earnings per share of $2.79.

This compares to FY '13 fourth quarter net income of $221 million, with earnings per diluted share of $0.78, bringing the total year FY '13 net income to $1.03 billion and earnings per share of $3.61 on a GAAP basis. Moving to the balance sheet.

Inventory levels including our inventory realignment actions last quarter end were $526 million, about even with FY '13 yearend. Cash and short-term investments stood at $869 million as compared to $1.1 billion a year ago, substantially held outside the U.S.

As noted earlier this year, 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 non-current assets.

As expected, we ended the fourth quarter with $140 million outstanding on our credit facility in order to cover our working capital needs in light of investments in our business and new corporate headquarters.

During fiscal 2014, we repurchased and retired over 10 million shares of common stock at an average cost of $51.27, spending about $525 million. At the end of the year, approximately $835 million remained under the company's current repurchase authorization.

As noted in our press release, the Board declared a quarterly cash dividend of $0.3375 per common share payable in late September, maintaining our annual rate of $1.35. We remained strongly committed to our dividend. And as our transformation takes hold, we expect to resume increasing our dividend at least in line with net income growth.

Net cash from operating activities in the fourth quarter was $360 million compared to $375 million last year during Q4. Free cash flow in the fourth quarter was an inflow of $254 million versus $293 million in the same period last year. Our CapEx spending was $62 million versus $81 million in the same quarter a year ago.

For the full fiscal year 2014, net cash from operating activities was $985 million compared to $1.4 billion a year ago. Free cash flow in fiscal year '14 was an inflow of $766 million versus $1.2 billion in fiscal year '13. CapEx spending totaled $220 million for the year compared to $241 million in the prior year.

The decline from previous guidance of about $250 million to $260 million related to a further shift in the timing of retail store and wholesale remodel and conversions into FY '15.

We expect CapEx for FY '15 to be in the area of $350 million, excluding the cost associated with the new headquarters, which are now expected to be approximately a $100 million in FY '15 given construction timing estimates.

Turning now to our financial outlook for FY '15, as our annual plans have not changed from those shared during our June Analyst Day meeting, I'll be brief. First on sales. We expect to deliver a low-double digit decline both in constant currency and on a reported basis in fiscal 2015, largely due to our reduced promotion and store closure activity.

We are projecting a high-teens comp decline in North America store with our e-outlet pressuring the aggregate North America comp by an additional 10 points. This equates to a mid-to-high 20% decline in aggregate comps.

Gross margin is projected to be 69% to 70% for the year with higher sourcing cost largely offset by favorable channel mix and lower promotional activity. SG&A expenses are expected to grow at a low-to-mid single-digit rate reflective of our increased marketing spend and transformation initiatives.

When modeling the year, bear in mind that our second and third quarter compare will show the most significant increases given the prior-year dollar decline and the timing of our marketing spend in FY '15. Taken together, we would expect operating margin to be in the high-teens.

And finally, our tax rate is expected to be in the area of 32% for the year, as we do not expect to anniversary some of the one-time tax benefits we generated in the second half of FY '14. As we aggressively invest in our business, it's important to keep in mind that we are embarking on this journey from the position of financial strength.

We plan to fund investment activities from current cash flows, while maintaining our dividend. We have a strong and flexible balance sheet, with about a $1 billion in cash and investments and low leverage. We can continue to access the capital market at attractive rate as needed to fund our headquarter investment.

Over the next few years, our first priority is to invest in our business, as we have a compelling opportunity to drive sustainable growth and value-creation. And we're putting our capital against this opportunity. Our second priority, strategic acquisitions is also about growth.

While, we have nothing planned eminently, we want to have the flexibility to act, if and when it's in the best interest of Coach and our shareholder. And third, capital returns. As I've stated before, as our transformation takes hold, we expect to resume growing our dividend at least in line with net income growth.

Underpinning all three of these priorities are our guardrails for allocating capital effectively, maintaining strategic flexibility, strong liquidity and access to the capital markets. In closing, our transformation required substantial investment and focused execution. We have a clear strategy and a well-articulated implementation plan for FY '15.

We expect to realize a positive impact on the annual financials beginning in FY '16 with FY '17 being the year when we return to growth in line with the category. We have the resources to fund our plan, while maintaining our dividend during our heavy investment period.

Ultimately, our objective is to restore Coach to a place of best-in-class profitability and sustainable growth. I'd now like to open it up to Q&A..

(Operator Instructions) The first question today is from Bob Durbil with Nomura Securities..

I had two questions, quick questions, related questions on the dividend and the repurchase plans. There has been just a lot of discussion about the sustainability of the dividend at the current levels, given your low level of U.S. cash, your domestic cash flow generation, and the expenditure on your New York headquarters.

Can you just reaffirm whether or not you see the dividend being at risk, and sort of what could lead to a change in dividend policy? And the second question that I have is just more housekeeping, but it does sound like the share repurchase program is on hiatus for now, like what share count should we be modeling in the FY '15 numbers?.

Sure. Thanks Bob. We have taken a careful look at, as we laid out in Analyst Day, at our cash flows and our investments needs across our business. And our cash flows and strong balance sheet really allow us to fund our transformation investment and maintain our dividends at our current level.

So the $1.35, the annual dividend that we talked about today with our dividend announcement was an attractive yield now at 4%. As we have indicated, we'll fund our headquarter building, a long-term asset with long-term debt. And at the current attractive interest rates we expect that that's a strong capital plan.

We have spent about $210 million on our headquarters and have another $540 million to fund over the next few years. And we factored that into our planning. So we feel strongly about our ability to continue to support our dividend. We're committed to our dividend.

And as we said, as our transformation takes hold, we'd expect to grow our dividend with our net income growth, and that's our long-term outlook. As you think about next year, Bob, we closed the year with 277 million shares outstanding. And I would expect with options that modeling about 278 million shares will put in a great stead for FY '15..

The next question is from Oliver Chen with Citigroup..

Regarding the road to becoming a modern luxury company, the evolution there, your comments on the outlet opportunity in the second half, could you just share with us some details on how you see the product portfolio evolving there? And what are the biggest opportunities? And also just as a follow-up, as you engage in the opportunity for lower promotional pressure, what's the timing on that happening?.

Oliver, its Fran. I'll take this question. Stuart's product that he's been working on in designing is set to really launch during the second half in outlet.

And as we have talked about, what you'll see very consistently is us lessening our dependence on logo product, putting more emphasis on leather and really incorporating all of the design codes from our brand DNA that will be reflected in more updated and relevant product for the outlet channel.

At the same time, that newness will allow us to create more value for customers and put that product into the market at slightly higher average unit retails than where we are today. The biggest opportunity in terms of lessening promotional strategy is really EOS. That's the most significant strategic initiative that we have.

And we know, we've been putting out a lot of promotional impressions in the marketplace by pulling that back. We'll really reduce the amount of promotional impression that are out in the market..

And Jane, on the comp guidance for FY '15, is average unit retail, how do you see average unit retail evolving? Is it higher due to the lower use of EOS?.

The biggest impact in terms of AUR that we're modeling, we are going to see some movement as you've seen in our above $400 handbag, we'll see some movement in price point. And then lower promotional activity, both in-store and EOS will be a factor in terms of lower discount rates in terms of realizing a higher AUR..

The product in Paris in the department stores looks great, so best of luck..

The next question is from Barbara Wyckoff with CLSA..

Can you talk about the sales in China versus the United States, strength by classification, men's versus women's, regular price versus outlet? And is there a significant difference between what's working in Hong Kong versus Greater China?.

In terms of what's working between Hong Kong and Greater China is vastly driven by the very large percentage of Mainland Chinese stores, so I would say there was a dramatic difference. The local Hong Kong consumer market is quite small.

And of course, we do have one or two locations, which do specifically cater to that consumer where we do tweak the assortment. The consumer there tends to be a little bit more, I would say, fashion-engaged with current trend.

And certainly, the team on the ground there is catering to them through assortment, not only, of course in our women's, but also in our men's collections as well.

As I touched on in my prepared notes, Barbara, in terms of the categories in China, both, and I would call it Greater China, Mainland, Hong Kong and Macau, which we refer to as Greater China at Coach, the penetration of men's and lifestyle categories together is at about a-third, which compares to approximately 20% here in the U.S.

That is driven not only by men's itself, but also with by very good penetrations, which are increasing in our outerwear businesses as well as in our very nascent, but developing footwear business as well. And we started with those strategies very early on. We're still a very small, and I would say, developing brand in China in many ways.

From an awareness perspective, our netted awareness in China is only 18%, which compares with, say 58% in Japan, 76% in the U.S. So the opportunity for us is truly boundless in that market..

The next question is from Brian Tunick with JPMC..

I guess two questions. Was wondering from a marketing and product perspective, could you just maybe remind us sort of, it doesn't sound like this quarter obviously is going to be a big inflection, but you talked about the second quarter, third quarter.

Can you talk about sort of when we're going to see or the customer is going to see a bulk of the marketing Stuart's product hitting the stores? Just maybe walk us through that thought process? And then, secondarily, on the 70 retail store closings, can you maybe remind us sort of, what's the productivity of those stores that are closing versus the chain average? Are you assuming transfer? Just give us some idea of how you think the 70 retail closings are going to play out?.

So we start with the retail closures..

Yes, Fran will start with the retail closures..

Sure. Brian, as we said on the Analyst Day, we got to the number of 70 store closures, because they're the least productive stores in the fleet. So their impact on the overall topline from a profitability perspective will be very minimal. We expect to see a little bit of transfer to other stores, but it will have a small impact on comp improvement..

In terms of the rollouts of our transformation initiatives across products, marketing, as well as our store renovations, Brian, it really does start in the second quarter. Product will commence hitting in early September on certain locations, and be across the world by mid-September. Marketing will also hit at approximately the same time.

And then store renovation start later in the second quarter, with first locations opening here in North America as well or in Shinjuku, Japan that I mentioned earlier in the October-November time period.

I would suspect that right now our planning is showing approximately 15 to 16 locations, should there not be any shift in the new concept by holiday.

And then across the world, we will have in FY '15 16 new open doors in the new concept and approximately 150 doors that will be moved into the new concept, if you will, renovate it in the new concept by the end of FY '15..

I'm just going to add one thing, Brian, there. If you remember, we actually had SG&A dollar decline in both our second quarter of FY '14 and our third quarter of FY '14.

And so when we referenced that those were going to be higher SG&A dollar growth quarters, we were looking at that versus the FY '14 decline, so they'll look higher in the SG&A dollar growth in Q2 and Q3 of FY '15..

The next question is from Ike Boruchow with Sterne, Agee..

Victor, you've talked about the strategy to move away from the online factory sales this year. I was just wondering if you could give us a little more color as to help us kind of understand the impact. Maybe could you tell us what percent of U.S.

sales accounted for EOS last year and where you're trying to lower that penetration too? And then also, when does that initiative really accelerate? Because you said it was a 3 point hit this quarter, but you're expecting a 10 point negative hit for next year.

So just kind of curious when we build out our quarterly models, when would the impact start to become greater?.

As mentioned, decrease in the cadence of events is really being phased in throughout the year. And it has started this quarter, where we're right now at approximately four events per week. That then decreases further in the second quarter. And by the second half of the year, we will be at approximately one event per month.

EOS or e-outlet business was over 15% of North American sales at about $0.5 billion..

And if you're thinking about comps, we expect that our in-store comps will improve moderately, as we move through the year, but the impact of EOS will be greater as we move through the year. So the aggregate comps will be relatively stable over the course of the year..

The number I gave you, the $0.50 billion, is representative of total e-commerce sales including EOS..

The next question is from Ed Yruma with KeyBanc Capital Markets..

I was wondering if you could delineate more specifically the inventory component of the impairment and then more specifically I guess how do you think about when you impair inventory versus just flowing it through the P&L as a normal markdown..

So, Ed, the way we look at inventory was consistent with our transformation.

We look at all of our product inventory and looked at certain products that we thought were not consistent with the brand image that we were trying to move into, as we moved into Stuart's design aesthetic and looked at whole product, whole SKU lines that we eliminated from inventory and took those as a write-off rather than flowing them through the outlet channel and moving them into the market.

So we really looked at where we're headed, where is the inventory not consistent with that direction, and we took the opportunity to write-off that inventory into the fourth quarter. We will destroy that inventory consistent with the write-off charge.

And just as a reminder, the inventory charge were shadowed both at Analyst Day and previewed in our 8-K filings prior to today..

The next question is from Dana Telsey with Telsey Advisory Group..

Can you give us an update on the first-ever sale that you had in the full line stores in June.

How did that do? What were the learnings? How would it be different when you look to the January sale? And any update on the outlook performance versus the prior quarter?.

The semiannual sale met our expectations. So as you know, our strategy is to be more surgical and strategic, with how we're promoting in our retail stores, and in the past we've done special preferred customer events. We really curtailed those events in the fourth quarter to set us up for the semiannual sale.

So it's a different strategy that really aligns us with kind of the fasten industry and other luxury brands. So it met our expectations in terms of performance and the goal of this semiannual sale really is to liquidate at end of season; fashion, colors, things that were very specific to the season.

We're not looking at it as an overall liquidation strategy. And one of the most important things that we learned this season in our first-ever, is that it really bought new customers into the store.

So we did have a high percentage of our sales that came from new customers into the brand, and we did market to it in our windows, in-stores and in print advertising. So we are very pleased with the results..

And then on the outlooks, any update there?.

More specifically, Dana, in terms of?.

How are promotions tracking versus how they had been in the prior quarter? How you're thinking of pricing in outlets versus the past?.

So we continue to promote heavily in clearance in outlet during this past quarter, which has been consistent with the quarters before. That put a little bit of pressure on our margins. So we were promotional during the quarter. What we've been doing now is really tapering off that heavy level of promoting.

And as we talked about also, obviously, taking into consideration our online business, the U.S. business pulling that back. What we're doing is emphasizing units in outlet, positioning ourselves at higher average unit retail prices, going out with new product launches, and we're finding that strategy to be very, very successful.

So it is allowing us to lessen our dependence on clearance. We also have a number of pilots and testing in the market right now with different construct to again reduce the level of promotional activity, while maintaining good levels of conversion..

Our final question today is from John Morris with BMO Capital Markets..

Following up on I guess the outlets a little bit. I think back on the Analyst Day you talked about experimenting or maybe kind of piloting a program, where you might close a couple of outlets, and then see what happens in full price stores in similar proximity.

Can you give us just to remind us the numbers that you're looking at, if there is any change there or was it just a couple, when the timing of that might be? And any changes to your thoughts on that? And then just a quick comment about the launch of the men's footwear line, when that might be happening and is that across all stores?.

We are still planning on closing two outlets consistent with what we've said on Analyst Day. Those two outlet stores will be closing in the second half. And we really picked the two that we chose they are part of the 12 MSAs, our metropolitan statistical areas that we're focusing on in terms of our transformation strategy.

And there are retail and outlet stores within a 30-mile radius. So these closures will allow us to measure the channel shift, and in these stores there is also a competitive presence.

And what we're going to be able to measure is, will the consumer shift to another Coach channel, can we influence her or guide her to shift though targeted and strategic communication strategy. So that will happen in the second half, and we're still on target for that. In terms of men's footwear, we're launching men's footwear in the fall.

And it will be a small launch, but we plan to bring footwear to our men's locations and in retail, specifically, in about 50 locations for the fall half..

Thank you. That concludes our Q&A. I'll now turn it back to Victor, for some concluding remarks..

Thank you, Andrea. And let me start by thanking all of you, who did attend our Analyst Day and as well, of course, for being with us today. I would just like to close by expressing my confidence in our plan, our brand, and most importantly in our people.

As a company, this team has an amazing track record of transformation, business success and driving shareholder value. And our management team has clearly understood and embraced the need for change, the need to innovate and to evolve in what is a rapidly changing market.

Our plan is bold and I certainly could not be proud of the steps we have already taken in bringing Coach the creative talent, to innovate, and to bring excitement and resonance to our brand, across all of the consumer touch points that we have been sharing with you.

As we look to FY '15, it's a year of change and we all look forward to keeping you informed of our progress. Thank you..

Thanks everyone..

Thank you. This does conclude the Coach earnings conference. We thank you for your participation..