Andrea Shaw Resnick - Global Head of Investor Relations and Corporate Communications Victor Luis - Chief Executive Officer Jane Hamilton Nielsen - Chief Financial Officer Andre Cohen - President, North America.

Bob S. Drbul - Nomura Securities International, Inc. Joan Payson - Barclays Capital, Inc. Janet Lynne Knopf - Oppenheimer & Co., Inc. (Broker) David A. Schick - Stifel, Nicolaus & Co., Inc. Erinn E. Murphy - Piper Jaffray & Co (Broker) Michael Binetti - UBS Securities LLC Matthew Robert Boss - JPMorgan Securities LLC Oliver Chen - Cowen & Co. LLC.

Good day, and welcome to this 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 the Global Head of Investor Relations and Corporate Communications at Coach, Andrea Shaw Resnick..

Good morning and thank you for joining us. With me today to discuss our quarterly and annual 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 a number of important factors, including risks and uncertainties such as expected economic trends, or our ability to anticipate consumer preferences, controlled costs, successfully execute our transformation initiatives and growth strategies, or our ability to achieve intended benefits, cost savings and synergies from the acquisition.

Please refer to our latest annual report on Form 10-K, our quarterly report on Form 10-Q for the quarterly periods ending December 27, 2014, and March 28, 2015, and our other filings with the Securities and Exchange Commission for a complete list of risks and important factors.

Please note that historical trends may not be indicative of future performance. Also, certain financial information and metrics that will be discussed today will be presented on a non-GAAP basis, which you may identify by the terms non-GAAP, as adjusted, constant currency, or excluding transformation-related charges or acquisition costs.

You may find the corresponding GAAP financial information or metric, as well as the related reconciliation, on our website www.coach.com/investors. And then viewing the earnings release posted today. 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 2015 milestones and learnings and will also discuss our progress on global initiatives. Jane Nielsen will follow with details on financial and operational results for the quarter and year, along with our outlook for FY 2016.

After that, we will hold a Q&A session where we will be joined by Andre Cohen, President, North America. This Q&A session will end shortly before 9:30 a.m. Victor will then conclude with some brief summary comments. I'd now like to turn the call over to Victor Luis, Coach's CEO..

first, resetting Essentials, our core assortment. The turnlock tote available in crossgrain leather at a compelling $295 price point incorporates customer feedback around the Taxi Tote of fall 2014 by adding function and distinctive Coach elements, differentiating it from the competitive set.

Stanton, which arrived in July, an everyday chic carryall with effortless style of the downtown New York Street it was named for, and expanding and updating our Edie family with additional sizes, including the Edie 31 and Edie 28 and in a new color palette. We are applying our learnings from last year during the holiday quarter.

Specifically, our goal is to be a bolder destination for gifting with a balanced assortment and broader offering at opening price points, incorporating seasonal fashion elements such as shearling and shine. Second, we shall further develop our fashion families.

Building on the success of Swagger, we are further animating this silhouette with color block and patch-work options and new shapes throughout the year. We are adding Mercer for spring, a new satchel offered in two sizes with a downtown attitude.

And we are bringing in newness with Ace and Nomad, which were features of our Fall 2015 New York Fashion Week presentation. Both silhouettes, offered in glove-tanned leather, speak to our history.

We are also looking forward to celebrating Coach's 75th anniversary in 2016, where we will fuse our brand heritage and legacy of craftsmanship with product innovation to reinforce our positioning as the original American house of leather.

Without giving too much away, through this year-long celebration, you can expect a series of brand and product campaigns and events in support of our re-imaged iconic products, whimsical play concepts, and Coach as a fashion-relevant lifestyle brand.

Activities kick off this September where we will present our collection of calendar 2016 at our first-ever, full runway show during New York Fashion Week. Now, I will turn it over to Jane for details on our financial results and guidance for the years ahead.

Jane?.

maintaining strategic flexibility; strong liquidity; and access to capital markets. In closing, our transformation requires substantial investment and focused execution. We have a clear strategy and a well-articulated implementation plan for FY 2016, building on the early successes we saw in FY 2015.

We expect to realize a positive impact on the top line in constant currency beginning in FY 2016, with FY 2017 being the year we return to growth across the financials, leveraging top-line growth that we expect to be in line with the category, at least a mid-single digit rate and driving operating margin to the 20% area.

We have the resources to fund our plan, while maintaining our dividend during our heavy investment period.

Ultimately, our objective is to drive operating income dollar growth and restore Coach to a place of best-in-class profitability, which, reflecting the changing market dynamics, will now likely be in the mid to high 20%s given the required SG&A investments in marketing, customer experience and stores in a more competitive marketplace.

I'd now like to open it up to Q&A..

Thank you..

Please note also that we will go obviously beyond the 9:30 timeframe in order to give analysts and investors a chance to answer questions. Operator, you may open the call up now..

Thank you. The first question comes from Bob Drbul with Nomura..

Hi. Good morning..

Good morning, Bob..

Morning, Bob..

Good morning. I just had a couple questions, I guess.

The first one is when you consider the moderation in the North American bag and accessory category growth driven by the deceleration you mentioned among major players, do you think this presents a challenge or an opportunity for Coach?.

creating desire through innovative products, differentiated experiences that our customers are looking for and covet. And we strongly believe that at the end of the day, there's no better place in the fashion place to be than the handbag and accessories space.

And with great execution, the terrific team that we have, we remain confident in our ability to drive positive comps by the end of FY 2016..

Great. And then if I could just ask a follow-up.

When you reiterated this morning, I think, the return to positive comps, return to growth in the fourth quarter, and the return to growth in FY 2017, just when you look at all the noise in the marketplace and all the noise in the category, is there one or two main factors that continue to provide your confidence in this return to growth?.

For me, it really comes down to, Bob, as I mentioned, our ability to execute in all of the investment that we're putting behind our transformation and our confidence in our strategy. It really comes down to, first and foremost, as we mentioned the inflection that we're seeing in these 45 doors here in North America.

We have 150 or approximately 15% of our global fleet now in the new concept. By the end of this fiscal year, we will have closer to 40% of the fleet. And we're really excited about the programs that we have ahead of us through products, through marketing as we celebrate our 75th anniversary, kicking off from September..

Great. Thank you very much. Good luck..

Thank you..

Thank you. The next question comes from Joan Payson with Barclays..

Hi. Good morning, everyone..

Good morning..

Hi, good morning..

Victor, I think you mentioned a positive consumer response to the new product that you put into those North American factory stores.

Could you just provide a little more color on what you've been seeing in the outlets recently? Any change in traffic or ticket trends?.

Sure. I'll ask Andre to step in and provide some context on that. As I did mention just to highlight, approximately 50% of the SKUs now in our outlet channel are new designs from Stuart.

Andre?.

Yes. Good morning. We've actually seen an increase in average tickets in factory over the last few quarters, which we're pleased with, lots of it driven by Stuart's new product, which has been outperforming compared to the balance of our assortments.

We've seen storytelling work really well in outlet, so collections such as Badlands which we launched in April-May, did terrifically. It was about 100% above our expectations, above our plan, sold through completely.

So where we've taken bets in terms of more innovative products and more design, more make in the product, it's really resonated with consumers..

Great. Thank you..

Thank you. The next question comes from Anna Andreeva with Oppenheimer..

Hi. Good morning. It's Janet Lynne on for Anna. Congrats on seeing sequential improvement in the business..

Thank you..

So I guess just we were hoping with the category being more choppy in June, if you had been seeing more consistent performance in July, and what kind of category growth you have embedded for 2016 guidance?.

Overall, we have – as we stated in our notes, we're looking at category growth into the medium term of mid-single digits. We remain confident in that 5% to 6% range. And in terms of July, we're very consistent with the guidance that we've just given. So no real change..

Okay. And then one quick follow-up to Jane on the FX impact.

Could we expect this to be more translational or transactional? And looking to 2017, should we expect the headwind to continue in the out-year if rates stay at current levels?.

Well, certainly the impact on revenue is translational. There is some impact that we called out in gross margin that relates to our hedging activities and impacts largely related to inventory..

Great. Thank you so much..

Thank you. The next question comes from David Schick with Stifel..

Hi. Good morning..

Morning..

Just to – thank you. To put it together, you talked about the category incrementally worsening of late, but your business having a little more traction of June.

How should we put those two together? What are the things – obviously, there's been a little bit more time with the retouched stores, but if you could just put together what you think is impacting your relative delta for June? And then second, as a second question, how should we think about net advertising expense around the 75th anniversary, I guess, for the year?.

Sure. First, in terms of the first part of your question, David, there isn't really one thing.

I mean, we've been very consistent in sharing the fact that we believe that's really all of the multitude of actions that we're taking around product, around our stores and around our marketing, whether it be traditional print or recent activities around social media and across channels, not just specific to any one channel.

We've been very consistent about that in trying to be as focused as possible in these 12 major North American markets so that we can drive towards an inflection point for the total brand.

Obviously, look, the clearest sign that we have of our strategy is, as we mentioned during our notes and have been very consistent with, we couldn't be happier with the doors that we've renovated. We're doing everything possible to move ahead at a further and quicker pace with those.

What we've done in the last six months with 150 locations, new and renovated, is pretty unprecedented in our space globally for luxury brands. So pleased with that, and by the end of this fiscal year, we'll have another 40% – about 40%.

In terms of the investment in marketing, we are going to increase our marketing spend by another $25 million, has been the plan this fiscal year, and we're very focused on that.

And it'll be across a multitude of different areas from of course investments in our fashion show to the follow-up work across social media and as well, of course, everything related to what we're doing in partnerships and events, especially with Coach Backstage and music and the like to drive relevance across different consumer groups..

Yeah, David, just to add, just in aggregate, over the last two years, we're very much in line with the guidance we put out, which is a $50 million increase by the end of FY 2016 in total advertising. You'll see it in our release this year, and then we expect to continue next year..

And to be clear, in total marketing, which will be a mixture of advertising, social media events and the like..

Thank you..

Thank you..

Thank you. The next question comes from Erinn Murphy with Piper Jaffray..

Great. Thank you. Good morning. I'm sorry if I missed this, but could you just help us bridge the gap between how you've kind of guided fiscal 2016 with the fiscal 2017 operating margin guidance I think you gave at the Analyst Day. I think you said 20% to 25%.

I'm assuming it gets a little bit lower than that just given the broader – kind of broader category issues of late. But just any context around just that bridge would be very helpful..

That's right. So right now, we're guiding for FY 2017 in the range of 20%. It's a little bit of tightening based on the category dynamics..

Okay. Great. Thank you.

And then just a quick follow-up on just the June overall category growth, recognizing it was low particularly in the June month, but was the overall category, was it kind of flat to low single, low to mid-single? Just any context around what that category grew just given it sounds like some of your competitors have had a little bit more of a tough time of late.

That would be helpful. Thank you..

We don't provide it for the month. I mean we're really looking at obviously results where we're taking it from public sources as well as our internal panel. And in general, as we said, we've had a slowdown from the previous quarter mid-single to low-single digits for the quarter..

Okay. Thank you, guys....

We also know, Erinn, as reported by the ShopperTrak, the market intelligent (sic) [intelligence] (1:10:57) comps actually showed weakening in mall traffic in the month of June too. That was one of our inputs when we looked at the overall category..

Okay. Thanks, Andrea. That's helpful..

Thank you. The next question comes from Michael Binetti with UBS..

Hey. Good morning, guys. Congrats on some of the improvements in the quarter. Victor, could you clarify for us some comments on the renovated stores? Is your conversion in the renovated stores outpacing expectations at this point? I know you highlighted the traffic inflected, but I didn't quite understand the comment on conversion being better..

Morning, Michael. So, conversion improved sequentially across the entire chain and particularly so in the renovated stores. Overall, it's been a mixed bag of metrics improvement in the renovated stores. Traffic has been the most consistent one, but we've seen improvement in virtually every renovated store.

Next is average ticket, that's improved also disproportionately. Conversion has been mixed. In some cases, it's been up, in other cases not. But overall, all metrics have moved positively in these 45 renovated stores..

Okay. And then, would you mind commenting on the June trend? I'm trying to sort out whether there was a shift in sales in June from moving the semi-annual sale..

We had the semi-annual sale, Michael, as you'll remember, in both June, and we were not speaking only about us, we were talking about the overall category, as I referenced, as well as weaker traffic into malls in the month of June.

Obviously, there are a lot of reports of other companies yet to come for us to provide a better analysis of what specifically happened in June. But, again, we did call out what we believe is a deceleration. And I know a number of the other analysts in the calls have also put it out in their research and their handpacks or their results..

Okay. And is there any way you can help us think about – I know you gave us some of the cadence with the inflection in the second quarter in the comp.

Is there any way you can help us think about the trend in the first quarter and put some dimensions around that inflection in the second quarter and through the year?.

Yeah, I think, Michael, what I'll say is, as we come out – we expect the most significant inflections to be in the second quarter. We'll have a significant – we'll have an increase in our modern luxury door renovations. You'll see our new product flows as well as 75th anniversary marketing initiatives.

So as you're thinking about comps, the most significant inflection comes through in Q2. But really, we're thinking about it as a sequential progression through the year, getting to positive in that fourth quarter in North America..

And it's probably worth noting obviously our 1Q comp guidance, our overall guidance for the trend over the year does incorporate what we're seeing in the markets, most recently in the June numbers. Can I also ask – I won't wait for the operator to do this, but you limit yourself to one question. Thank you..

Thank you. The next question comes from Matthew Boss with JPMorgan Chase..

Hey, good morning, guys.

So, thinking longer term with the slowing in the category growth rate here currently, I mean, is there any way to think about any signs of stabilization? And then are you seeing any changes in the promotional cadence across the landscape as a result of some of the slower growth?.

I think there's been a lot of comments, Matthew, in the market about just the promotional environment in general, whether it be in department stores, the full-price malls or the outlet channel having picked up across the various categories, not just handbags and accessories, but fashion in general.

And certainly what we're seeing go forward in terms of how to think about a stabilization in the category, as I'd mentioned, I think there's two or three things here.

There's, first and foremost, the macro trends that we're seeing and especially in the luxury sector, handbags and accessories we know are very much driven as well by tourist in major markets. So I think that's one key impact that we'll see. And then secondly, it's going to be innovation.

It's going to be brands coming forward and driving relevance and creating desire within obviously the various consumer segments. We're very focused on that with what we're doing and really looking forward to obviously driving forward with both our product and marketing and store initiatives in the months and quarters ahead..

Great. And then just quick clarification.

Is the 28% tax rate this year, is that sustainable beyond this year or how should we think about it?.

We see it as our go-forward tax rate for the period of our planning horizon..

Okay. Great. Best of luck, guys..

Thank you..

Thank you. And our final question comes from Oliver Chen with Cowen & Company..

Hi. Thanks. Congrats on the solid innovation we're seeing. And our checks, we are noticing that you're couponing less in outlets, and you've also done a great job kind of value-engineering and high-quality product at compelling prices.

Should we expect to continue to see no couponing in the outlet channel? And on the modern luxury renovation, as you have been experiencing these nice lifts in traffic, is that because of the store displays? I'm just curious about linking that to the positive, the window displays..

We've been trying to focus more on outlet channel as a brand building channel, as we believe it is. It's got a distinct consumer who doesn't really shop across channels, and that's resulted in some more experimenting with different promotional strategies.

Overall, our discount rates have reduced in outlets over the past few months, and it's a mix of, what we call, variable pricing, so no couponing and focusing on different price points and discount rates within the store and the occasional couponing to drive – to surprise consumers and drive incremental sales. So that's one part of it.

The other piece is, going back to my earlier comments, we are trying to market in a more deliberate way to that consumer, so we've been focusing on specific windows in outlet and really trying to deliver more value through improved product, more storytelling, delivering a higher customer experience within our stores as well. So....

And, Oliver, I would say just as you look at that, that really reflects sort of what we're continuing to call for in terms of our gross margin outlook, which is really investing in the product, investing in higher quality, balanced by pullback in promotion with that FX being sort of a toggle over time, but continued benefit to gross margin of our international growth..

And, Oliver, to your question, I think, specifically on the traffic in the modern luxury doors, which is across channels, not just the outlet, part of the answer would be, as you suggest, of course the window program, which we're really pleased with. It helps to differentiate us.

But also in general, what we hear from our sales associates is just word of mouth as consumers come in and experience the location, sharing it with others and driving increased interest in the location and in the brand..

Thank you, all. That concludes our Q&A. I will now turn it over to Victor Luis for some concluding remarks.

Victor?.

Thanks, Andrea. I just want to close by thanking you all again for joining us. With the first year of our transformation fully behind us, I certainly could not be prouder of our team, the continued commitment and courage they are demonstrating and executing our plans.

We have a unique opportunity, a brand with a unique heritage as America's original house of leather. And we fully plan to leverage that as we celebrate our 75 years as a brand by taking a very bold step forward, defining a modern Coach with our first full runway presentation this September.

In addition, with the acquisition of the Stuart Weitzman brand, I believe that as a company, we're much better positioned to capitalize on the growth outside of handbags and accessories. In short, we're committed to our strategies.

We're going to be steadfast in our investments that we've outlined behind our products, stores and marketing as we drive growth and relevance for both our brands over the long term. We have a firm belief that we will return to best-in-class, and we look forward in the months and quarters ahead to sharing our 75th anniversary with you. Thank you, all..

This does conclude the Coach Earnings Conference. We thank you for your participation..