Andrea Resnick - Global Head, Investor Relations & Corporate Communications Victor Luis - Chief Executive Officer & Director Jane Nielsen - Chief Financial Officer Andre Cohen - President North America & Global Marketing.

Ike Boruchow - Wells Fargo Securities Erinn Murphy - Piper Jaffray & Co. Anna Andreeva - Oppenheimer & Co. Oliver Chen - Cowen and Company Randal Konik - Jefferies Christian Buss - Credit Suisse Securities Dana Telsey - Telsey Advisory.

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 of 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, control costs, successfully execute our transformation and operational efficiency initiatives and growth strategies or our ability to achieve intended benefits, cost savings and synergies from the Stuart Weitzman acquisition.

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. 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. These non-GAAP measures exclude certain items related to our transformation plan, operational efficiency plan and Stuart Weitzman acquisition-related charges as well as the impact of foreign currency fluctuations, where noted.

The company's sales and earnings per diluted share results have also been presented both including and excluding the impact of the 53rd week in fiscal 2016. You may identify non-GAAP measures by the terms non-GAAP, constant currency, excluding the impact of foreign currency or excluding the additional week.

The company believes that presenting these non-GAAP measures is useful to investors and others in evaluating the company's ongoing operations and financial results against historical performance and in a manner that is consistent with the management's evaluation of the business.

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 full year 2016 results and will also discuss our progress on global initiatives across markets. Jane Nielsen will continue with details on financial and operational results and our outlook for FY 2017.

Following that, we will hold a question-and-answer session, where we will be joined by Andre Cohen, President, North America and Global marketing; and Todd Kahn, President and Chief Administrative Officer. This Q&A session will end shortly before 9:30 a.m. We will then conclude with some brief summary remarks.

I'd now like to introduce Victor Luis, Coach's CEO..

starting with our value product, such as the reversible tote; essentials, such as Phoebe; and fashion, including collaborations and sophisticated handbags such as Blake. Pinnacle product also continues to be very important, as our most elevated offering with the highest amounts of novelty.

In FY 2017, you will see some standalone disruptive outlet collaborations unique to this channel, such as PAC-MAN this fall. Finally, men's is going to be a major focus in outlet, and we expect it to be over 20% of the business by the end of the fiscal year.

On stores, we're continuing to establish our modern luxury concept globally, renovating and opening approximately 165 during the quarter, including 45 renovations and one new modern luxury store in our directly operated North America business.

In total, we renovated and opened about 300 modern luxury locations worldwide in FY 2016, taking us to just over 450 modern luxury locations globally across all channels. This is very much in line with our target to end the year with over 400 doors in the new format.

Consistent with plan, these renovations have been driving significant inflections from previous trends, and comps which exceed the balance of the fleet in the vast majority of stores around the world.

We're especially excited about the ongoing positive comps we're driving in our renovated North America retail stores, including those stores that have now anniversaried their remodels. Of course, transforming our stores is more than just the physical design. It's the experience our store teams provide each and every single day.

I am so proud that our mystery shopper scores, our key metrics that demonstrate how well we deliver our unique modern luxury experience, surpassed 80% this quarter. In addition, it's great to see how customers are responding to our new leather services, such as monogramming and leather conditioning, with new services to be introduced throughout 2017.

In North American department stores, we renovated over 35 shop-in-shop locations to modern luxury in the fourth quarter. Finally, we have about 40 shop managers in place today and have seen a significant impact versus balance of doors.

Separately and as noted in our release, one of our key strategic initiatives in the year ahead will be elevating the Coach brand in the North America wholesale channel. As discussed previously, through 1941, we have already started adding new locations in top-tier specialty in North America and globally.

In FY 2017, we will also be rationalizing our department store distribution, taking our door count down by about 25%, or by over 250 locations, as well as reducing markdown allowances to the channel, given the high level of promotions.

While we understand that consumers may use department stores for trial and shopping across brands, the high level of promotional impressions created negatively impact our long-term brand health, while generating confusion across channels.

As we look towards FY 2017, the last year of our heavy-lifting phase, we will focus on renovating the balance of our targeted store base. By year-end, modern luxury doors will, in aggregate, represent the vast majority of our traffic.

I should also note that we are very excited about our global flagship focus in FY 2017, stores which we view very much as key retail and marketing investments for the Coach brand. These flagships include our Coach House on Fifth Avenue and our Regent Street flagship, both opening in time for holiday.

We are also excited to announce our first flagship in Italy, opening in Milan by the end of the calendar year on the prestigious Via Montenapoleone. On the marketing front, in the fourth quarter, Mickey was the big news, with a range of impactful and creative executions globally, generating over 950 million impressions.

The launch created substantial buzz, with both the most fashion-engaged fans and Coach lapsed customers with our messaging of cool fashion and quality glove-tanned leather.

More generally, during the quarter, we remained focused on creating desire for our brand, amplifying our fashion positioning and our 75-year legacy of design innovation, craftsmanship and quality. In FY 2017, we want to enhance brand perception and make the category exciting for her with a singular message that cuts through.

Coach's unique modern luxury proposition focusing on leathercraft and Stuart's vision of Coach New York cool, familiar Americana interpreted with a twist from New York's original house of leather design.

We will leverage the opening of Coach House on Fifth Avenue as a global anchoring moment and will amplify regionally via openings on Regent Street in London, Via Montenapoleone in Milan and China World in Beijing. As a result of these efforts across all customer touch points, we're seeing continued progress with customers.

Importantly, in our North America brand tracking survey fielded in June, we saw strength in our overall brand affinities, while the percentage of customers who viewed Coach as ubiquitous declined versus a year ago.

So as our plans unfold and the momentum builds, we're delighted with our progress and proud of all that our team has accomplished to drive Coach's transformation. The Coach brand is very much on its way to evolving from a specialty retailer and accessories brand to a true house of fashion design, defining modern luxury.

We're excited to see our creative vision and direction gain traction, and we'll continue to update you on these initiatives as we move forward.

Turning now to a discussion on category trends, as we look ahead to FY 2017, there is no doubt that the challenges that existing today affecting the category in specific and consumer spending in general, will persist. The macroeconomic environment is uncertain.

Currency crosswinds are affecting tourist flows, and the recent geopolitical events and tragic terrorist attacks are negatively impacting sentiment. As a result, visibility into category growth is limited, as the landscape continues to rapidly shift.

This volatility was evident throughout FY 2016 and notably in the most recent quarter, as you've seen in some of the varied results already reported by several brands in our space.

Overall, we estimate that the North American premium women's handbag and accessory market grew at a low single-digit in the June quarter, resulting in slight growth for the year.

And while men's growth was somewhat faster, given its relatively small penetration to the total, the premium men's and women's handbag and accessories category also grew at a low single-digit rate for the year. Coach's share of the combined market was 16% in FY 2016.

While Jane will provide additional details on sales and distribution by geography, we wanted to touch on some current trends and strategies by market. Starting with North America, as you read in our release, for the quarter, our total Coach brand sales rose 9% and our direct business 10% on a dollar basis and 11% in constant currency.

Excluding the additional week, total North America sales rose 1%, reflecting the pullback in wholesale shipments, while direct sales rose 2%, driven by the 2% increase in comparable store sales on a 13-week versus 13-week basis.

Comp trends in both retail and outlet stores accelerated, while the Internet contributed approximately one percentage point to aggregate comp this quarter. Overall, our aggregate comp was up 2%, led, as expected, by retail, while outlet comp was essentially flat.

Higher ticket drove overall comp, while very slight changes in traffic and conversion netted to a flat overall number of transactions.

We are especially pleased by the results we are seeing on coach.com, with our fashion launches and unique collaborations, such as Mickey, pointing to increased engagement with the most fashion-engaged online customers.

Most importantly, the fourth quarter marked a return to positive North America comp for the first time since the third quarter of 2013, and the seventh sequential improvement since our transformation began two years ago, representing a 26% comp swing since the first quarter of FY 2015.

Now, turning to our retail performance and the metrics we traditionally share on product, the above $400 price bracket rose in penetration, saw another positive comp on a sales and unit basis and represented about 40% of handbag sales, up from about 30% last year.

As planned, and as discussed back in April, we de-emphasized the entry price gifting assortment since coming out of holiday, and therefore saw a decline in the $300 and below handbag price segment. Turning to event marketing, in FY 2016, we continue to evolve and optimize our events with the goal of further reducing the number of days on promotion.

Exiting this year, we are comfortable with the cadence and type of events we're hosting, and don't expect a significant change in the year ahead. Naturally, there may be some tweaks to the dates, type, or duration, but the overall days should be fairly stable, with our first preferred customer event for September anniversarying the prior year.

And now, moving on to international, in the fourth quarter, international Coach brand sales rose 15% on a reported basis and 13% on a constant currency basis. For the year, Coach brand's international sales increased 5% in dollars and 9% in constant currency.

As noted in our release, the additional week of sales in FY 2016 added approximately $32 million to overall International segment sales. Therefore, excluding the additional week, fourth quarter sales rose 6% in dollars and 5% in constant currency, while full year sales increased 3% in dollars and 7% in constant currency.

Turning to details by geography - and please note the comments I'll make will be on a 13-week and 52-week basis. Greater China sales increased 5% in dollars in the quarter, with double-digit growth and positive comparable store sales on the Mainland offset, in part, by continued weakness in Hong Kong and Macau.

On a constant currency basis, sales increased 10%. For the year, sales increased 2% in dollars and 5% in constant currency to approximately $605 million, slightly ahead of our most recent guidance of approximately $600 million, despite a further devaluation in the renminbi since our last earnings call.

Notably, our constant currency sales growth for the year was consistent with our original expectations provided last August, despite the evolving macroeconomic environment and tourist spending flows, as well as sustained softness in Hong Kong and Macau.

Importantly, and despite near-term volatility, we remain optimistic on the prospects for this market over the long term, as the drivers we've consistently mentioned are more relevant than ever and as our China team continues to do an excellent job of building our brand equity in that market.

It's important to note that we still see the Chinese consumer as an increasing part of our total business. During the fourth quarter, our global business with the Chinese continued to grow. In addition to strong domestic spending, we experienced growth in other key destinations, including Southeast Asia.

This growth was partially offset by declines in travel flows into North America and Europe, notably France, along with continued softness in Hong Kong and Macau.

In addition, and as expected, we also saw a decline in Chinese tourist flows into Japan, impacted by currency fluctuations and the anniversary of the dramatic increase in Chinese tourists last spring. To that end, in the fourth quarter, Japan sales were down 5% on a constant currency basis but rose 7% on a dollar basis, reflecting the stronger yen.

For the year, sales rose 2% in constant currency and were essentially even with the prior year in dollars, benefiting overall from an increase in PRC tourist flows on an annual basis and a positive response to our new modern luxury positioning from Japanese consumers and tourists alike.

In Europe, our brand continues to grow rapidly through new directly operated stores, wholesale locations and comps. Our overarching focus is to build brand awareness with both domestic consumers as well as tourists. In the fourth quarter, our business grew at a double-digit pace, driven by both distribution and comparable store sales.

We experienced relative softness in France in the quarter, impacted by weak tourist traffic, as mentioned. Overall, and despite these headwinds, our sales rose 50% to $135 million in fiscal 2016 and exceeded our guidance of $125 million.

Over our planning horizon, our goal is to achieve over $0.5 billion in sales at retail, representing a mid-single-digit share of the premium women's and men's bag and accessories market.

In our other directly operated Asian markets outside of China and Japan, namely South Korea, Taiwan, Singapore and Malaysia, sales growth in the fourth quarter was solid across the entire region in local currency and rose at a low single-digit rate in dollars.

For the year, sales increased high single digits in constant currency, but declined slightly in dollars. Here, too, we remain focused on driving productivity through our transformation initiatives.

Finally, I would point out that we're seeing disparate results in our international wholesale businesses, which, while small, are important to growing brand awareness.

For the quarter, our overall sales at POS increased modestly, driven by strong growth in those distributor-operated locations focused on the domestic consumer, while travel retail was relatively weak due to the volatility of tourist spending flows globally. On a net sales basis, revenue was down in the quarter due to shipment timing.

For the year, both POS and net sales declined slightly, as softness in travel retail offset growth in distributor-run locations targeting domestic customers. In closing, we are encouraged with the momentum of our business and proud of the progress we've made along our transformation journey, elevating the perception of the Coach brand and Coach, Inc.

as we've earned increasing acceptance as a house of modern luxury brands. Before handing over to Jane for details of our financial results and guidance for fiscal 2017, I would like to touch on our CFO transition.

First, as you know, we announced Jane Nielsen's departure in June, which will become effective later this month following the filing of our 10-K. This will be Jane's last earnings call with Coach. Jane has played an important role as a terrific partner to me and the Coach executive team as we have executed our brand transformation.

I speak for the entire team in thanking her and in wishing her every success in her future. At the same time, I could not be prouder of the bench that we have across Finance and especially the leadership role that Andrea Shaw Resnick will play as our Interim CFO until we appoint a permanent successor. You all know Andrea well.

She's been an important partner to me and our business in crafting and the communication of our strategies and we'll ensure we don't miss a beat in their execution. I would now like to pass on to Jane.

Jane?.

Thank you, Victor, for those kind words and for the privilege of working at this outstanding company. Victor has just taken you through the highlights and strategies. Let me now take you through some of the important financial details. Please note, the comments I'm about to make are based on non-GAAP results.

Corresponding GAAP results, as well as the related reconciliation, can be found in the earnings release posted on our website today. We are extremely pleased with our performance in the fourth quarter, as we drove increases across the key metrics of sales, operating profit and earnings.

We achieved positive comps in North America while continuing to grow our business internationally, and we leveraged this growth with significant improvement in our operating margin for the quarter. The strong fourth quarter capped a year of important financial milestones.

In fiscal 2016, we generated overall top line growth for Coach, Inc., while tightly controlling our inventory. We drove a sequential improvement in our North America comps throughout the year, while achieving our revenue targets for Europe and Greater China against a volatile macro backdrop.

We continued to invest in our brands, while delivering our margin target for FY 2016, ending the year with an operating margin of over 17%, in line with guidance of high-teens, including a Coach brand gross margin slightly above prior year, excluding the impact of currency.

In addition, we successfully integrated the Stuart Weitzman business, which outperformed our original revenue and earnings per share projections for the year.

Turning now to the details, before I begin, please note that the results for the fourth quarter and fiscal year 2016 included 14 and 53 weeks, respectively, while the same periods in fiscal 2015 included 13 and 52 weeks, respectively.

The 53rd week contributed $84 million to 2016 fourth quarter and fiscal year sales, including $77 million in Coach brand revenue and $7 million associated with Stuart Weitzman. The additional week added $0.07 to earnings per diluted share. The following discussion of performance for the fourth quarter and fiscal year 2016 includes the 53rd week.

Focusing on Coach, Inc., net sales totaled $1.15 billion for the fourth fiscal quarter, an increase of 15% on both a reported and constant currency basis. For the year, net sales totaled $4.49 billion, an increase of 7% on a reported basis and 9% on a constant currency basis from fiscal 2015.

Gross profit in the fourth quarter totaled $783 million, an increase of 13%, while gross margin for the quarter was 67.8% compared to 69.0% last year. Gross profit for the year totaled $3.05 billion, an increase of 5%, while gross margin was 68.0% compared to 69.6% in FY 2015.

SG&A expenses totaled $608 million in Q4, an increase of 7%, or 52.7% of sales as compared to $566 million or 56.4% in the year-ago period. For the year, SG&A expenses were $2.28 billion, an increase of 7%, and represented 50.7% of sales as compared with 50.8% a year ago.

Operating income for the quarter was $175 million, an increase of 39%, while operating margin was 15.1% versus 12.6%. Operating income totaled $777 million in FY 2016, a decrease of 2%, while operating margin was 17.3% versus 18.8% a year ago. Net interest expense was $7 million in the quarter as compared to $6 million in the year-ago period.

Net interest expense was $27 million in FY 2016 as compared to $6 million in FY 2015. Net income for the quarter totaled $126 million compared to $85 million a year ago, with earnings per diluted share of $0.45, up 47% versus prior year.

Net income for the full year totaled $552 million, an increase of 4%, with earnings per diluted share of $1.98, including a $0.12 contribution from Stuart Weitzman's. Now moving to global distribution, in total, we closed 11 net Coach brand locations globally in the fourth quarter to end the year with 954 directly operated locations worldwide.

In addition, we finished FY 2016 with 75 directly operated Stuart Weitzman stores, including 14 locations associated with the acquisition of the Canadian distributor which closed in the fourth quarter.

Overall and consistent with our plan, our global Coach brand directly operated square footage rose low single digits for the year, with North America square footage essentially even with prior year and International up mid-single digits. In FY 2017, we expect our Coach brand directly operated square footage to be up low single digits globally.

This guidance assumes that Coach brand directly operated square footage in North America will decline slightly with continued net store closures.

Internationally, we expect distribution growth to again be led by Europe, where we are planning another year of significant square footage growth, driven by new stores including our flagship on Regent Street.

In Greater China, we are projecting a mid-single-digit increase in square footage, driven by net new store openings on the Mainland, partially offset by a modest decline in units in Hong Kong and Macau.

In our directly operated businesses in Southeast Asia, we expect little change in both units and square footage, while in Japan, we are planning for additional store closures resulting in a mid-single-digit decline in square footage. Closing with Stuart Weitzman distribution, we expect five to 10 net new directly operated locations in FY 2017.

Moving on, inventory levels at the quarter end were $459 million compared to ending inventory of $485 million a year ago, a decrease of 5%. Net cash from operating activities in the fourth quarter was $249 million compared to $186 million last year.

Free cash flow in the quarter was an inflow of $129 million versus $111 million in the same period last year. Our CapEx spending was $120 million versus $75 million. For the full fiscal year 2016, net cash from operating activities was $759 million compared to $937 million a year ago.

Free cash flow in the fiscal year 2016 was an inflow of $362 million versus $738 million in the fiscal year 2015. CapEx spending totaled $396 million for the year, including approximately $145 million of CapEx associated with the new headquarters compared to total CapEx of $199 million in FY 2015.

At the end of the fiscal year, cash and short-term investments stood at $1.3 billion as compared to $1.5 billion a year ago, and our total borrowings outstanding were approximately $900 million at the end of the fiscal quarter.

Turning to Hudson Yards and a discussion of our capital allocation policy, last week, we completed the sale of our interest in 10 Hudson Yards in New York City, resulting in a gain of approximately $30 million. At the same time, we entered into a 20-year lease for the headquarter space at approximately $65 a square foot for the first five years.

This transaction is leverage neutral and increases the flexibility of our balance sheet, while, at the same time, securing a long-term lease for our company with minimal net impact to our P&L. As planned following the sale, we paid down approximately $300 million of our term loan, with no prepayment penalty.

In addition, we will receive net proceeds of approximately $125 million later this fiscal year related to the sale of our previous headquarters' buildings on 34th Street. We should receive the proceeds within 45 days of vacating the buildings and, therefore, expect receipt during or by the end of the second fiscal quarter.

Overall, we are very pleased to monetize our investment in Hudson Yards, where our commitment was key to kicking off the project. Our new headquarters brings both our brands, Coach and Stuart Weitzman, together under one roof in a modern workspace very much reflective of Coach values and sensibility.

The transaction was long planned for and there is no resulting change in our capital allocation policy. Our first priority is to continue 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 imminently, we want to have the flexibility to act, if and when it's in the best interest of Coach, Inc. and our shareholders.

And third, capital returns, as I've stated before, we are committed to our dividend and expect our dividend to grow at least in-line with the prior year's operational net income growth, as our transformation gains momentum.

To this end, as noted in our press release, the board declared a quarterly cash dividend of $0.3375 per common share payable in early October, maintaining our annual rate of $1.35.

Underpinning all of these priorities are our guardrails for allocating capital effectively; maintaining strategic flexibility, strong liquidity and access to the capital markets. Now, turning to our outlook for fiscal 2017, on a non-GAAP 52-week versus 52-week basis, we expect total revenues for Coach, Inc.

in fiscal 2017 to increase by low to mid-single digits, including the expected benefit from foreign currency of approximately 100 to 150 basis points, based on current foreign exchange rates. This continues to assume a positive low single-digit comp for the Coach brand in North America for the year.

In addition, we are initiating an operating margin forecast for Coach, Inc. of between 18.5% and 19% for fiscal 2017.

This guidance incorporates the negative impact of both Stuart Weitzman and the strategic decision to elevate the Coach brand's positioning in the North America wholesale channel, including the closure of about 25% of doors and a reduction in markdown allowances.

Excluding this impact, Coach brand operating margin would be in the area of 20% for fiscal 2017, consistent with prior guidance. Interest expense is expected to be in the area of $25 million for the year, which incorporates the benefit associated with the pay-down of the term loan, as announced.

The full year fiscal 2017 tax rate is projected to be about 28%. We expect our weighted average diluted shares outstanding for the year to be in the area of 283 million. Taken together, we are projecting double-digit growth in both net income and earnings per diluted share for the year, and we expect CapEx for Coach, Inc.

to be in the area of $325 million in FY 2017. In closing, we are very pleased with our progress to-date. We have a clear strategy and a well-articulated implementation plan for FY 2017, building on the successes we have achieved in our first two years of transformation.

Importantly, we expect FY 2017 to be the year when we return to growth across all financials, leveraging top-line growth and supported by our operational efficiency initiatives, which have allowed us to become a more nimble organization.

Overall, the strength of our brands, the clarity of our vision and the dedication and proven execution capabilities of our team gives us continued confidence in our ability to drive sustainable and profitable growth for Coach, Inc. over the long term. I'd now like to open it up to Q&A..

Thank you. We will now begin the question-and-answer session. And our first question comes from Ike Boruchow. Your line is now open..

Hi, everyone. Thanks for taking my question, and congrats on the return to positive comps..

Thanks, Ike..

Thanks, Ike..

So I guess on North America, I think you said the North America outlet comp was essentially flat in the quarter, which I don't think a lot of people expected, given what some other brands have said about tourism and traffic the past quarters or so.

I just wanted to ask, what are you assuming is the run rate of that channel for you guys in North America going forward? And then, just a quick one on top of that, given the timing of initiatives and multi-year compares and the choppy environment, should we assume much, if any, North America comp variability or volatility by quarter or by half this year? Thank you very much.

Thanks, Ike. I'll let Andre answer that for you..

Morning. So first, we're really pleased with the sequential improvement we've seen in the outlet channel over the last several quarters. It remains a very productive, important channel for Coach, as you know. For FY 2017, going forward, we're really looking at comps in outlet being sort of either side of flat.

And over time, as conditions in the market improve, we're hoping to be able to reduce our promotional stance in that channel. Now, as to your second question, we're expecting comps to basically be positive across all quarters for FY 2017. So....

Okay, thank you..

France being negatively impacted, of course, by terrorist attacks; continued softness in Hong Kong and Macau; and now Japan anniversarying, of course, the massive increase last year of PRC tourists. Southeast Asia continues to see tremendous benefits from the PRC tourists..

Got it. Thanks. Congrats again..

Thank you..

And our next question comes from Erinn Murphy. Your line is now open..

Great. Thanks. Good morning. I was hoping maybe you could dig in a little bit more about the decision to exit 25% of your North American wholesale doors.

How should we be thinking about effectively the sales and the margin impact from the strategic pull-back as we look at your fiscal 2017 guidance?.

Morning, Erinn.

Jane?.

Yeah, so, Erinn, as you think about 2017, essentially our guidance for the Coach brand is essentially unchanged, except for the impact of North America wholesale. When you think about that, we expect that impact to be about a point to sales growth, most notably in Q1.

Obviously, it's a high operating margin channel and will flow through to our operating margin. But the most significant impact will be in Q1..

Okay. And then, Jane, I guess, for you, how should we think about gross margin for Coach, Inc.

for the full year, given that change as well?.

Yeah, so you'll see Coach brand gross margin maintain that 69% to 70% range that we guided to two years ago..

Okay. And if I could just sneak in one more for Victor, just on pricing architecture, you guys have obviously seen a very nice response to 1941 collection.

Could you share with us what type of consumer you're seeing in terms of the trade-up? Is it the last consumer? Is it a new consumer? And then, on a full year basis, just how should we think about the product mix in terms of those buckets that you break out, under $300, $300 to $400 and $400-plus? Thank you..

Sure. We're seeing both current Coach fans engaging well with 1941, lapsed consumers and especially pleased with what we're seeing online, Erinn, as we're getting a younger consumer that maybe has not engaged with Coach and is much fashion-engaged through coach.com engaging with newness as well.

And that's especially true at the beginning of the fashion seasons or during special launches, such as we've just experienced with Mickey. And that is the case, of course, in most of our mature markets.

Quite different, of course, in developing markets like Europe where we're starting with 1941 as the true first impression that these consumers have of Coach in an increasing way.

In terms of how we see the balance, and we discussed in our prepared remarks the balancing of the assortment between, if you will, the essentials, fashion and 1941, we are increasing the presence of 1941 to the whole network, as I discussed.

I think that during gifting periods, as has been the case in the past, you will see us, of course, increase that assortment with lower price points taking a larger share of the mix, which would be our plan for this holiday as well.

But overall, I think you're going to see us continue to see how high is high as consumers engage incredibly well with the message that we're putting out there and understand both the quality of what 1941 represents, but also the fashion messaging..

Thank you, and congratulations..

Thank you..

[Operator Instructions] Thank you. And our next question comes from Anna Andreeva. Your line is now open..

Great. Thanks so much. Good morning, and congrats to the team..

Thank you, Anna..

Good morning..

I guess two questions; first, with all the volatility out there, what kind of category results in North America are you guys embedding, either here in the first quarter or for the year? And secondly, a question on e-commerce, now that eOS impact has been lapped and e-commerce is contributing again, remind us about the size of this business.

Is profitably higher versus corporate average? And how big do you think this business could ultimately get? Thanks..

Okay, I'll let Andre discuss e-commerce in a bit. In terms of the category, per our remarks, just given the uncertainty in what's happening in both the macro and geopolitical environment, the trends on tourists, we see that it is difficult to plan an acceleration in the overall category, of course, in the short term.

And, in fact, there are, just as we had two years ago, very specific actions in the pull-back of our eOS, which led to some impact on total category growth. I know that many of you are aware that some of our competitors are discussing similar actions at the moment, which will also impact category growth, especially here in North America.

I would just add that in terms of our own guidance, we built it bottoms up. It's based on our views on our own distribution growth, our own comp expectations by market and by region, driven by as well our own innovation across product, stores and marketing and what we expect for the Coach brand.

Andre, on web?.

Yes. So web performed really well. It generated about a point of our two points of overall comp growth, both web channels, full price and eOS, performed well.

We're seeing, I think as we mentioned earlier, a really much more fashion-engaged consumer engage with the web, particularly when we've got more elevated product, novelty and some of these collaborations like we saw with Mickey. We see that business continuing to grow in line with the balance of Coach going forward, at least in line, I'd say..

Yeah, and its profitability gross margin is about in line with the rest of the business, but the operating expenses are obviously advantaged to give it a higher operating income level..

Terrific. Thanks, and best of luck..

Thank you..

Thank you..

[Operator Instructions] Thank you. And our next question comes from Oliver Chen. Your line is now open..

Hi. Congrats on solid results, and, Jane, also best regards. We'll miss you..

Thanks, Oliver..

Thank you, Oliver..

Victor, on your comments about going from eight to 12 (sic) [12 to eight] (59:05), could you brief us on how that will manifest in terms of which collections do you think will benefit from this increased flow? And how do you just ensure that the store continues to look integrated and tell the right story in terms of the customer reception to that flow? And on the decision on department stores, it would be great if you could just brief us on the strategic rationale and how you'll evaluate making sure that the ones that you're exiting are the right ones for the brand at large? Because it is a category where certain customers still have a lot of loyalty to that channel, so I just want to make sure I understand why that was the right time.

Thank you..

Thank you, Oliver. First on the product flow, you mentioned eight to 12. We mentioned in our notes going from 12 to eight, and we think, of course, that's what you meant, the 12 to eight flow, which is for....

Yes..

It's important to note for full price only. In our outlet channel we continue to drive monthly newness with monthly flows. In our full price channel, we're moving from 12 to eight, and the reasons there are two.

As I mentioned in my prepared remarks, we're really wanting to align much more closely with the fashion calendar, as we engage increasingly with top-tier specialty and tier 1 department stores across the world, and wanting to have our launches be much more impactful as we put much more marketing muscle behind them.

And the perfect example of that could be a collection such as Mickey, which in the case of Japan is today, still very much being rolled out through special events with key department stores in that market.

So it's really about having the newness, such as Rogue and other 1941 bits of the assortment play a more important role for a slightly longer period of time and, therefore, drive more efficiency.

And then on wholesale, Andre?.

one, lower volume doors, so doors that are below a certain threshold of volume and where we're no longer seeing a Coach consumer shopping; and second, it's a channel that's become very promotional over the last few quarters, as you know, and we have decided that we'd no longer support knock-down allowances to the level we did in the past.

So that's going to naturally exclude us from a number of events in that channel, and it will help to return the brand to health along all of its touch points, not just our direct operated distribution, so..

Yeah, Oliver, I would hate for anyone to believe that we don't have belief, if you will, in the wholesale channel. We have terrific relationships with all of our partners. This is very much a surgical move that is meant to drive the long-term sustainable health of our brand.

And we also want to avoid, as I said in my prepared remarks and as Andre has reiterated, that confusion between channels, so a very important move for us..

Thanks. The elevation looks great. Best regards..

Thank you..

Thank you, Oliver..

And our next question comes from Randy Konik. Your line is now open..

Great. Thanks.

Just want to follow up on the comments around 1941 expansion into all stores, can you kind of give us more specific, I guess, color on what you mean by presence? What kind of SKU count should we expect in the stores? And how do you think about the presentation aspects of it and the marketing aspects around the product? Just kind of get some color on how we should expect things to kind of progress there.

And then, just back on the greater than $400 penetration question, I think, was asked earlier, is there any kind of specific kind of threshold where you would see, you know, we should get towards a goal of maybe 50% of the mix is greater than $400 and that would be it, or how should we be thinking about what is the optimal mix from a price point perspective in the assortment? Thanks..

In terms of 1941, what we're taking to full store distribution in North America is handbags, so we'll have about 20 SKUs of handbags. Actually, it's already happened in the last week that have hit all the doors.

Basically, these are bags that go from Dinky at $300 to Rogue at $800 and above, so we're not taking our ready-to-wear to full distribution at this point. It's a key piece of our brand building. 1941's resonated very strongly with all levels of distributions being put in.

And we felt it needed to have a consistent expression of the more elevated brand across the entire fleet in the U.S. and Canada..

And in terms of a specific target, I would say that we really don't have one. The consumer is going to help us decide that. And it's going to have a very different face seasonally, as I mentioned earlier. During holiday, we'll have, obviously, gifting play a more important role in the assortment. And, therefore, we would expect AURs to be lower.

And during seasonal launches, especially at the beginning of each fashion season as we enter increasingly with 1941 into a fashion cycle, you'll see that during periods like March/April, September/October/November, you will have higher AURs play a more important role as the fashion launches play a more important part of our mix..

And our next question comes from Michael Binetti. Your line is now open..

Morning, Michael..

Michael? Operator, would you move onto the next, please?.

Yes. Our next question comes from Christian Buss. Your line is now open..

Morning, Christian..

Yes. Hello. Good morning. I was wondering if you could talk a little bit about the cost disciplines that you're implementing.

Where's the progress there, and have you found any incremental areas as you look towards fiscal 2017 and 2018?.

We continue to execute against the operational efficiency plan that we outlined in the last quarter, where we focus on becoming a more nimble, agile, less-layered organization. We've made progress against that goal. You saw it show up in our fourth quarter operating margin, as we leveraged top line sales to expand our operating margin.

And that is incorporated into our FY 2017 guidance..

And our last question comes from Dana Telsey. Your line is now open..

Good morning, everyone, and nice to see the return to positive comps. Congratulations..

Thank you, Dana..

Thanks, Dana..

As you think about Stuart Weitzman and its contribution this past year, how do you look at Stuart Weitzman in fiscal 2017 and it contribution? And just lastly, the 1941 collection gaining more prominence, what percent of the SKUs should it account for? And is it a higher margin than the core? Thank you..

how it's resonating; the strength of its supply chain; the strength of its international and growing consumer profile; and most importantly, by the wonderful new talent that we're also bringing in that will help this brand over the medium to long term evolve into a broader luxury brand, with a strength, for sure, to come in handbags and accessories as well.

In terms of the question on 1941, I'll let Andre just touch on that for you..

So it varies by tier of distribution. Obviously, in our top-tier, it's probably about a third of the assortment and down to about a quarter in our more entry-level stores. And that's an evolution. We'll get there over the next couple of quarters..

Yeah, Dana, as you think about Stuart Weitzman, especially in the coming year, we do expect a low double-digit growth rate. There is a fair amount of volatility in both sales and profit as you move through the year, given the high mix of its penetration into wholesale..

Thank you..

Thank you. That will conclude the Q&A portion of our call. I'll now turn it back over to Victor Luis for some concluding remarks.

Victor?.

Let me first thank you, Andrea, and thank you, Jane, for all of your contributions.

I want to close by just congratulating all of our global teams, both in the Coach and Stuart Weitzman brands, for their hard work and dedication in driving not only the development of our brands, but, of course, our business during what has been a very volatile year in the broader environment.

I also want to thank all of you on the phone who've been following us, especially over the last 24 months, and have seen the continued unfolding and realization of our creative and business vision.

While there's a tremendous amount of uncertainty in the global environment and the category in the short term, I remain incredibly optimistic about the long-term opportunities in our categories, not only handbags but increasingly footwear and outerwear in both developed and developing markets, and the prospects that exists for the world's middle classes.

Most of all, I have tremendous faith in our teams and our brands, as we define a new vision for luxury that is based on quality, craftsmanship and a modern fashion sensibility that is both approachable, optimistic and inclusive and represents the best of our New York and American values that resonate so well across the world. Thank you, all..

This does conclude the Coach earnings conference. We thank you for your participation. You may now disconnect..