Christina Colone - Coach, Inc. Victor Luis - Coach, Inc. Andre Cohen - Coach, Inc. Andrea Shaw Resnick - Coach, Inc..

Robert Drbul - Guggenheim Securities LLC Ike Boruchow - Wells Fargo Securities LLC David A. Schick - Consumer Edge Research LLC Erinn E. Murphy - Piper Jaffray & Co. Oliver Chen - Cowen & Co. LLC Anna Andreeva - Oppenheimer & Co., Inc. (Broker) Randal J. Konik - Jefferies LLC Michael Binetti - UBS Securities LLC Brian Jay Tunick - RBC Capital Markets LLC.

Good day, once again, and welcome to this Coach conference call. Today's call is being recorded. And at this time, for opening remarks and introductions, I'd like to turn the call over to the Senior Director of Investor Relations at Coach, Ms. Christina Colone..

Good morning. Thank you for joining us. With me today to discuss our quarterly results are Victor Luis, Coach's Chief Executive Officer; and Andrea Shaw Resnick, Coach's Interim CFO. Andre Cohen, President, North America, is also joining us to discuss initiatives for the holiday season.

Before we begin, we must point out that this conference call will involve certain forward-looking statements. This includes projections for our business in the current or future quarters of fiscal years within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ in a material manner.

Additional information about risks and another important factors that could cause results to differ from those in the forward-looking statements can be found in our latest Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission. Also, certain financial information 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.

You may identify these non-GAAP measures by the terms, non-GAAP, constant currency, or excluding the negative impact of currency. You may find the corresponding GAAP measure 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 first fiscal quarter 2017 results and will also discuss our progress on global initiatives. Andre Cohen will speak to our North America business, product performance and review our key programs for the holiday season.

Andrea Resnick will follow with details on financial and operational results for the quarter along with our outlook for FY 2017. After that, we will hold a question-and-answer session which will end shortly before 9:30. Victor will then conclude with some brief summary remarks. I'd now like to introduce Victor Luis, Coach's CEO..

reenergize our brand in the category by continuing to innovate and establish our unique modern luxury proposition; continue the brand's elevation through a fuller expression of Coach 1941 in stores and online while driving our men's business even further across all channels; focus on raising brand awareness and relevance globally through the rollout of flagships and key fashion capitals, while continuing to renovate our existing store base; and differentiate Coach through a combination of fashion and heritage marketing campaigns, distorting investments to key regions and ensuring the message is relevant and increasingly aspirational to the broader market.

This included the relaunch of Coach fragrance with our partner, Interparfums, in September.

And for Stuart Weitzman, we will drive our leadership position in fashion boots during the key winter selling season, augment our leadership in boots by developing iconic styles in pumps, sandals and flats, while also laying the foundation for the relaunch of the brand's handbag assortment, drive global awareness and brand relevance through impactful marketing and the launch of New York and London flagships during the holiday quarter, leverage new leadership both on the management and creative side to bring the Stuart Weitzman brand into its next chapter of growth as a multi-category player.

Now, moving to our results. During the first quarter, we delivered on our plan across businesses and geographies, while continuing to successfully execute our brand transformation across the key consumer touch points of product, stores and marketing.

Most generally, we continued to elevate our retail offering globally with the Coach 1941 assortment resonating in our own stores as well as top-tier specialty and department store accounts. Of course, we continue to transition more of our fleet into the modern luxury concept, driving comp improvement.

Finally, our fall campaign, photographed by Steven Meisel, featured actress Chloë Grace Moretz, against the backdrop of New York, beautifully capturing the spirit and energy of the city. We also ran our first-ever TV commercial for the launch of the new Coach fragrance together with our partner, Interparfums.

At Stuart Weitzman, we're driving global awareness and brand relevance, gaining traction with the important international and millennial consumer. During the quarter, we continued to drive key investments in management and creative talent as well as infrastructure to support the long-term multi-category growth.

Wendy Kahn officially joined as Brand President and CEO in September and we also hired elite footwear designer, Daniele Michetti, who starts this week and will report to Executive Creative Director, Giovanni Morelli, upon his arrival this spring.

While brand sales were essentially even with the prior year this quarter, primarily due to shipment timing and repositioning of our UK business ahead of the opening of our first retail store on Regent Street, we continue to expect a double-digit sales increase in fiscal year 2017.

Indeed, we are extremely pleased by our performance in the early fall-winter season as our strength in boots gains momentum across channels and geographies.

Now, as has been our practice since we implemented our transformation strategy more than two years ago, I'd like to share some of the actions we've taken to drive relevance across the three Coach brand pillars of product, stores and marketing. Starting with product, where Coach has emerged as a house of modern fashion design.

The key retail strategies we are implementing include, the continued elevation of the assortment with the further rebalancing between Coach New York and 1941, and a move from 12 to eight deliveries in our retail channel, first to better align with the fashion calendar, notably with the higher end specialty retail and also to drive improved productivity as we align deliveries with seasonal marketing.

During the quarter, our women's retail performance was driven by leather goods and growth in 1941 silhouettes, the Rogue, Saddle Bag and Dinky as well as the novelty Tea Rose and varsity patch platforms. Also during the quarter, we introduced the Drifter family and a smaller version of Mercer.

Mickey, which had successfully launched late in FY 2016, built into early Q1 before selling through in most silhouettes. In outlet, men's continue to be a major focus for the business and is on plan to be over 20% of the channel by the end of the fiscal year.

New style launches in outlet during the first quarter included the Tyler Tote, the Charlie backpack and the Mini Charlie. Signature and leather exotic mixed platforms in dressy silhouettes were well received, and we had a strong customer response to seasonal neutrals.

On stores, we're continuing to establish our modern luxury concept globally, renovating and opening 40 locations during the quarter, including three renovations in our directly operated North America business, taking us to nearly 500 modern luxury locations globally across all channels.

This is very much in line with our target to end the year with over 700 doors in the new format, representing the vast majority of our traffic. Consistent with plan, these renovations have been driving significant inflections from previous trends and comps, which exceed the balance of the fleet in the vast majority of stores around the world.

Of course, transforming our stores is more than just the physical design. It's the customer experience our store teams provide each and every single day.

I'm delighted that our Mystery Shopper Scores, our key metric that demonstrates how we will deliver our unique modern luxury experience, was up again in Q1 at over 80% this quarter as compared to 70% when we started tracking them a year ago.

In addition, it's great to see how clients are responding to our new leather services, such as monogramming and leather conditioning, with new services to be introduced throughout 2017. Across the global fleet, there were 17 Craftsmanship Bars installed as of the end of the quarter.

We also just launched Coach Journey, an online multi-language learning platform which is globally scalable. It is designed to engage and develop our store associates into knowledgeable modern luxury brand ambassadors through a robust development program and monthly product, service and styling skill training.

In our 75th year, we are very excited about our global flagship focus. We view these stores very much as key retail and marketing investments for the Coach brand. These flagships include our Coach Houses on Fifth Avenue in New York City and Regent Street in London, both opening this month, in time for the important holiday season.

We will also open our first flagship in Milan, Italy, by the end of the fiscal year on the prestigious, Via Monte Napoleone. In North American department stores, where we're repositioning the brand, we did not do any renovations this quarter.

We did continue to implement our shop manager program and see a significant impact versus balance of doors in key accounts. As noted on our August call, one of our strategic initiatives this year is 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 retail stores in North America and globally.

We are now also in the process of rationalizing our North American department store distribution, taking our door count down by about 25% or by over 250 locations over the fiscal year, as well as reducing promotional events in the channel.

In the first quarter, we closed the first group of these locations, about 120, and expect to close the remainder in our third quarter this upcoming spring season. On the marketing front, the quarter kicked off with the successful launch of our Mickey collaboration.

We were also thrilled about the reaction to our third-ever 1941 Runway Show this past September, which garnered positive editorial feedback while generating close to 1 billion impressions globally.

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.

This year, we want to enhance brand perception and make the category exciting for consumers with a singular message that cuts through; Coach's unique modern luxury proposition, focusing on leather craft and Stuart's vision for Coach New York cool, familiar American culture interpreted with a twist from New York's original house of leather design.

As a result of these efforts across customer touch points, we're seeing continued progress with consumers. Importantly, in our North America brand tracking survey fielded in September, Coach's perception of positive brand momentum increased among category drivers versus a quarter ago, while our brand affinities were strong with consumers overall.

In addition, category drivers' view of the Coach brand as original increased versus a quarter ago, reflective of our product and marketing strategies. We are delighted with our progress and proud of all that our team has accomplished to drive Coach's transformation.

The Coach brand is very much on its way to evolving from a specialty leather and accessories brand to a true house of fashion design, defining modern luxury. We are excited to see our creative vision and direction gain traction and will continue to update you on these initiatives as we move forward.

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

Currency crosswinds continue to affect tourist flows, and geopolitical events are negatively impacting sentiment. As a result, visibility into the category growth remains limited as the landscape continues to rapidly shift. This volatility was evidenced throughout FY 2016 and in the most recent quarter.

Overall, we estimate that the North American premium men's and women's bag and accessories market was flat to up low single digits in the September quarter, which we believe has been impacted by negative trends seen in the U.S. department store space.

While Andrea will provide additional details on sales and distribution by geography, we wanted to touch on some current trends and strategies by market. So, I'll turn it over to Andre for a discussion of North America.

Andre?.

Thanks, Victor. As you read in our release, for the quarter, total North American Coach brand sales decreased 3% on both a reported and constant currency basis, reflecting our deliberate department store pullback, while direct sales were flat. Importantly, the September quarter marked a continuation of positive comps in North America.

Our bricks and mortar comps rose approximately 4% in the quarter, driven by ticket and conversion, while traffic was down modestly. Overall, our aggregate comp was up approximately 2%, with e-commerce, notably lower eOS flash sales, impacting results. Generally, our coach.com retail site demand is similar to our retail stores.

For most of the category, the dotcom channel is overwhelmingly a promotional one, with most of our competitors having perpetual sale shops available. As you're aware, we have a clear strategic direction to limit our promotional stance online, given the negative impact on long-term brand health.

Finally, our business through international tourists in our stores rose during Q1, with declines in Chinese tourist traffic more than offset by other nationalities, notably Japanese and Korean visitors.

Now, turning to our retail performance and the metrics we traditionally share on product, we continue to drive brand elevation with the above-$400 price brackets rising in penetration to over 50% of handbag sales, up from about 30% last year and generating another positive comp on a sales and unit basis. This drove handbag AURs to over $300.

Turning to event marketing, as noted on the last call, we came out of FY 2016 comfortable with the cadence and type of events we'd hosted. We held a preferred customer event for September, anniversarying the prior year though slightly shorter in duration and which excluded 1941 products.

And we'll hold a Black Friday event followed by our semiannual winter sale in December. Looking ahead, our goal is to be the destination for gifting with a compelling assortment and broad offering across price points.

We'll incorporate fashion elements such as studs and hologram platforms with a strong nod to our archives, featuring glovetanned leather across all categories for both men's and women's, creating an emotional and compelling offering for the season.

Specifically in retail, we will, one, continue elevation strategy with further animations of Rogue; two, establish Coach as a year-round gifting destination; three, continue to leverage our unique leather craft which is exemplified by appliqués and quilting in our Coach New York offering and through the use of distinctive materials and techniques such as embroidery and beading in our 1941 collection; and finally, launch several major new platforms, including our iconic 1941 duffle reinvented with increased functionality and Brooklyn, a reimagined carryall with increased functionality addressing the business bag opportunity.

As we move into holiday in North America outlets, we'll accelerate our strategy to drive more innovation and emotion in the channel through limited editions, collaborations and the launch of new silhouettes and platforms.

We're also focused on continuing to grow the men's category and we'll celebrate our first holiday season with men's available in all of our outlet centers. In October, we kicked off the second quarter with a dual-gender limited-edition Pac-Man collection in all our North American outlet doors.

This was our first collaboration strictly for the channel and we've been extremely pleased with the results. Building on the success of the introduction of Tyler, we're continuing to launch new silhouettes like the Central Satchel and City Zip Tote.

For holiday, outlet launches a bold expression of five key prints and a wide array of metallics across multiple categories. Gift sets and novelty items continue to be big drivers for the season. And for Black Friday, we launch another dual-gender limited-edition leather bear collection in all our doors.

We've seen great success with these disruptive playful moments in our stores both in bags and in novelty categories. We'll be supporting these holiday initiatives and expressing the playfulness of the season in our advertising. The holiday campaign is all about our Coach dinosaur, Rexy.

Buzz has been building around her for months beginning with London Collections Men in January, by celebrity dressing and a collaboration with Colette. Building on this excitement, this week we're launching a global Rexy campaign with a video where she comes to life in the workshop linking this pop character to our heritage of leather craft.

The campaign continues with our celebrity friends amplifying Rexy and our emotional heritage gifting assortment across multiple platforms, including digital and social media. In summary, we're encouraged by our performance and excited for holiday.

We believe that our initiatives across the brand pillars will continue to drive positive traction in North America. And now turning it back to Victor for international..

Thanks, Andre. Moving on to Coach brand's international performance. As noted in our release, in the first quarter, international Coach brand sales rose 7% on a reported basis and 3% on a constant currency basis. By geography, Greater China sales were essentially even with prior year in dollars in the quarter.

On a constant currency basis, sales rose 5%, driven by double-digit growth and positive comparable store sales on the Mainland, offset in part by continued weakness in Hong Kong and Macau.

In Japan, sales rose 11% on a reported basis benefiting from the stronger dollar while constant currency sales decreased 7% impacted by a decline in Chinese tourist spend as we lapped last year's dramatic increase.

In Europe, our sales grew at a double-digit pace in the quarter, driven by new distribution and positive double-digit comps, excluding Paris, where our business continues to be impacted by weak tourist traffic.

Post the Brexit vote, we've actually seen very strong results in the UK, benefiting from the currency weakness and increased traction with the local consumer. In our other directly-operated Asian markets outside of China and Japan, mainly South Korea, Taiwan, Singapore and Malaysia, sales rose low-single-digit in dollars and in constant currency.

Finally, I would point out that we're continuing to see disparate results in our international wholesale businesses, which while small, are important to growing brand awareness. For the quarter, our overall sales at POS increased modestly, driven by strong domestic performance, offset in part by relatively weaker tourist location results.

On a net sales basis, revenue also increased over the prior year. Now, I will turn it over to Andrea for details on our financial results and guidance for the year ahead.

Andrea?.

Thanks, Victor. Victor and Andre have just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our first fiscal quarter results as well as our outlook for fiscal year 2017. 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're pleased with our financial performance in the first quarter, which marks continued progress against our transformation plan and momentum in our business.

Our sales increased over the prior year, driven by positive comps in North America and continued growth internationally and despite the strategically positioning of the Coach brand in the promotional North American wholesale channel.

Operating margin expanded significantly over prior year once again this quarter, fueled by higher gross margin while we continue to invest in our brands. Taken together, we generated double-digit growth in net income and earnings per share.

And our balance sheet remains extremely healthy with a clean inventory position and sufficient cash to support our strategic initiatives, while returning capital to shareholders through our dividend. Now, turning to the details.

Coach, Inc.'s net sales totaled $1.04 billion for the first fiscal quarter, an increase of 1% on a reported basis and a decrease of 1% on a constant currency basis, including approximately 150 bps of pressure related to the company's strategic decision to elevate the Coach brand positioning in the North American wholesale channel.

Coach brand sales increased 1%, including positive North America comp store sales and continued international growth, as Victor and Andre have discussed. Stuart Weitzman brand sales were essentially even with prior year in Q1, impacted by wholesale shipment timing.

To this end and as expected, second quarter-to-date Stuart Weitzman brand sales are up double-digits. Total gross profit totaled $715 million, an increase of 3% versus prior year, while gross margin increased 120 basis points to 68.9%.

Coach brand gross profit increased 3% while gross margin increased 120 basis points over prior year to 69.8%, which included about 40 basis points of pressure from currency.

By segment, total North America gross margin increased over prior year, including our directly-operated business, where both gross profit dollars and gross profit rate grew over prior year. International segment gross margin increased over prior year, excluding the negative impact of currency.

Stuart Weitzman gross profit rose 2%, while gross margin increased approximately 100 basis points over prior year. Total SG&A expenses increased 1%, approximately in line with sales, to $538 million, and represented 51.9% of sales as compared to 51.7% in the year ago period.

Coach brand SG&A expenses decreased 1% and represented 51.9% of sales compared to 52.7% in the year ago period, an improvement of 80 basis points.

Stuart Weitzman brand SG&A expenses were $45 million, compared to $36 million a year ago due to store occupancy costs and the timing of marketing expenses, as well as the company's strategic investments in team and infrastructure. Coach, Inc.

operating income rose 7% to $177 million, while operating margin increased 100 basis points over prior year to 17% even. Coach brand operating income increased 13%, while operating margin increased 200 basis points over prior year to 17.9%.

Stuart Weitzman brand operating income of $7 million was down versus prior year based on the timing of net shipments as well as key investments to support long-term multi-category growth, as discussed. Net interest expense was $6 million in the quarter as compared to $7 million in the year ago period.

Total net income for the quarter was $126 million compared to $113 million a year ago, with earnings per diluted share of $0.45, up 10% versus prior year. Now moving to global distribution. In total, we closed a net of two Coach brand locations globally in the first quarter to end the period with 952 directly-operated locations worldwide.

In addition, we opened two net Stuart Weitzman directly-operated stores to end the quarter with 77 locations. In FY 2017, we continue to expect our Coach brand directly-operated square footage to grow low-single-digits globally.

This guidance assumes that Coach brand directly-operated square footage in North America will decline slightly with net store closures in both our retail and outlet channels.

Internationally, we expect a mid-single-digit increase in square footage led by significant growth in Europe and a mid-single-digit increase in Mainland China, partially offset by a high-single-digit square footage decline in Japan as well as a modest unit decrease in Hong Kong and Macau.

In our other directly-operated business in Asia, we expect a little change in both units and square footage. Closing with Stuart Weitzman distribution, we expect to open five to 10 net new directly-operated locations in fiscal year 2017.

Moving on, inventory levels at quarter-end were $547 million compared to ending inventory of $575 million a year ago, a decrease of 5%. Net cash from operating activities in the first quarter was an outflow of $38 million compared to an inflow of $8 million last year. Our CapEx spending was $68 million in Q1 versus $69 million last year.

Free cash flow in the quarter was an outflow of $106 million versus an outflow of $61 million in the same period last year. During the quarter, we received approximately $675 million in net proceeds associated with the sale-leaseback of the Hudson Yards building.

And, as announced, we used a portion of these proceeds to pay down our term loan of approximately $300 million with no prepayment penalty. As such, our total borrowings outstanding were approximately $600 million at the end of the first fiscal quarter compared to approximately $900 million a year ago.

At the end of the fiscal quarter, cash and short-term investments stood at $1.5 billion as compared to $1.3 billion a year ago. As a reminder, we expect to receive net proceeds of approximately $125 million during this fiscal quarter related to the sale of our previous headquarters building on 34th Street.

Turning to our capital allocation policy, which has not changed, our first priority is to continue to invest in our brands, 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. We're committed to our dividend and expect our dividends to grow at least in line with prior year's operational net income growth as our transformation gains momentum.

As always, 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 year 2017 on a non-GAAP 52-week versus 52-week basis, which has not changed, so I'll be brief.

We still expect total revenues for Coach, Inc. in fiscal 2017 to increase by low single digits to mid-single digits, including an expected benefit from foreign currency of approximately 100 basis points to 150 basis points based on current exchange rates.

This continues to assume a positive low single-digit comp for the Coach brand in North America for the year and in each quarter. As a reminder, we would expect Stuart Weitzman top line variability quarter-to-quarter, given the nature of the business and its high penetration of wholesale.

In addition, we are maintaining our 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 American wholesale channel.

As an aside, for you modelers out there, we should note that our 2Q will likely include SG&A dollar growth ahead of sales due to the timing of our 75th anniversary celebrations, notably marketing activities surrounding the opening of Fifth Avenue and Regent Street. We continue to expect interest expense to be in the area of $25 million for the year.

The full year fiscal 2017 tax rate is still projected at about 28%. And we expect our average weighted 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 continue to expect CapEx for Coach, Inc.

to be in the area of $325 million in FY 2017. In closing, we're very pleased with our performance in the quarter and the consistency of our execution against a volatile backdrop building on the successes we've achieved in our first two years of transformation.

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

Overall, we remain confident 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. And apologies for any technical difficulties that you experienced early in the call. Operator, go ahead and queue up the first question..

All right. And our first question comes from Mr. Bob Drbul from Guggenheim. Sir, you line is now open..

Hi. Good morning..

Morning, Bob..

I don't think you talked about comp by store channel in North America.

I was wondering if you could provide some additional color there and specifically on the Internet business in North America?.

Sure. As you know, Bob, we saw our comp of nearly 4% this quarter across channels in bricks and mortar, which is not the strongest comp that we've seen in over three years and I couldn't be happier with our performance across both channels, and as Andrea mentioned with the expansion in gross margin that we saw in our direct business.

In retail, the impact is from broader distribution of Coach 1941 that we've been working on over the last couple of quarters especially of course the continued rollout of our store concept as well as the great work being done by our sales associates with the enhanced service experience.

In outlets, as we look to engage with the broader consumer, really proud of the level of innovation and the team as the team has been leveraging a lot of inspiration both from our retail stores and as we mentioned even a few very specific outlet specific innovation such as Pac-Man, which has gotten us off to a very good start earlier this quarter and couldn't be more excited by the level of innovation that we have actually, especially in the back half of this year.

In terms of your question online, Bob, as you know most of the category uses dotcom as a promotional channel with perpetual sale on their sites. We have a very clear strategy to limit our promotional stance online. We have no 24/7 sale on coach.com. Generally, I can share with you that coach.com retail site demand was similar to our retail stores..

Great. Thank you very much..

Thank you..

And our next question comes from Ike Boruchow from Wells Fargo. Your line is now open..

Hi. Good morning, everyone, and congrats on a very solid quarter..

Thank you, Ike..

So pretty impressive Coach brand gross margin performance in the quarter, so congrats there again. Just hoping to dig through that a little more.

Maybe, Andrea, specifically could you talk about the North American margin in the quarter, maybe how much of a benefit was there to gross margin from the wholesale repositioning? And then does your outlook for the remainder of the year incorporate any kind of improvement in the outlet margin performance that you've been seeing in the past quarter or so?.

Sure. So when you look at gross margin in the quarter, for overall, the Coach brand, there were a couple of areas of benefit and a couple of areas of hit. So starting off on channel mix, channel mix was a positive in the quarter to us.

Product mix and cost were actually a very large positive, which we in turn returned to consumers in terms of pricing and value. Not a complete offset but a partial offset there. And then in terms of the currency impact, currency was a negative impact in the quarter we talked to about 40 basis points.

Interestingly, there was an impact of the yen and that's really about OCI and the yen hedge loss position in the quarter as well as a negative impact in other Asian currencies and on the R&D in terms of the China currency impact. For North America specifically, North America gross margin improved in the quarter for the same reasons that I discussed.

I'm sure one of the things you're interested in specifically, our outlet, North America store gross margin was actually up in the quarter, so glad that we were able to take the benefit of lower costs and, as I said, returned some but not all of that to the consumer.

We did have a small hit in North America from currency and our guidance for the year does bake in these continued benefits from both AUC, or average unit cost, as well as an overall impact of returning that to the North America retail and outlet consumer in terms of pricing. So a nice balance there, as we move through the year..

Thanks so much. Appreciate all the color. Congrats..

Sure..

And our third question on queue comes from David Schick from Consumer Edge Research. Sir, your line is now open..

Good morning. Thank you for taking the question. You talked about macro volatility. Obviously, we hear that a lot. We see it a lot.

But could you talk about how the macro volatility you mentioned in your release plays out in the different businesses that you see? How should we think about if macro volatility were to increase going forward, how to expect that to impact the businesses? And then secondarily, the pre-follow-up would be that the category, essentially, categories in which you play have evolved, and so how do you see the different interplay of the categories to define a sort of aggregate category growth? That would be of interest as well, as you've done more in different sort of subcomponents of the categories.

Thank you..

Okay. Thank you. In terms of your question on macro, David, obviously, it's very, very hard to predict. As we know, the geopolitical impacts most recently, whether it be terrorist attacks and where those happened and the impacts that can have, are almost impossible to predict.

They do lead, most lead to of course shifts in tourist flows, especially as well as in some markets, even short-term to medium-term impacts on domestic demand. The biggest impacts that we have seen outside of those short-term geopolitical have been mostly currency swings.

There has been a lot of talk, of course, about the Chinese tourists, where they're increasing and where they're decreasing. We've seen, with the appreciation of the Japanese yen, decreases in tourist spending in Japan.

We've seen pickups in Korea, and, of course, we have seen a pretty strong drop-off in Mainland Europe, but especially in Paris, which is a very important destination. In terms of the categories, we have just, obviously, with the acquisition of Stuart Weitzman, made a bigger bet on footwear.

We're excited about the long-term opportunity in that category for us, a $28 billion opportunity. But generally, into the medium-term and long-term, we continue to believe there is no better space to be in fashion than the handbag and accessories space.

We're excited about that as an opportunity, of course, not only in developed markets here in our home market, the U.S., Europe, which is really a greenfield opportunity for us. I could not be more excited about the team that we have on the ground there and the great work they're seeing.

We're beginning to see decent traction now, especially with the UK domestic consumer and as well in developing markets, of course, where there's still so much of untapped opportunity with growing middle classes globally. So, that's, I hope, answer to your question..

Very helpful. Thank you..

And our next question on queue comes from Erinn Murphy from Piper Jaffray. Your line is now open..

Great. Thank you. Good morning. I think you guys said in your prepared remarks that the $400 price point with that 50% penetration.

Just to clarify, is that full price only, or is that overall Coach, Inc., and then – or Coach brand? And then as you head into the second quarter where gifting is the key focus, how should we think about the penetration rate between that over-$400, the under-$300 price points? And then last, how many stores in North America have the 1941 1941 (53:39)? Thanks..

Thank you, Erinn. We'll let Andre answer that..

Morning. So starting with the $400 price bracket, that has grown, as you know, as we mentioned, significantly this quarter. Going into the holiday quarter, we see a continuation of the growth of that $400 price point bracket, but we've also significantly expanded our assortment below $400 with a gifting focus. And we're particularly excited about that.

The heritage gifting collection it's called, that's hitting the stores in the days ahead. And we'll give some good balance to the assortment to take advantage of the gifting opportunity. In terms of the distribution of 1941, it's now in our full retail distribution.

It's been in full distribution since August, and it's been performing I have to say very well at every level of every tier of store, not only our sort of more top-tier stores..

Yes, so, Erinn, to your first question, it is just in the retail channel, not across both channels, of course. And as Andre mentioned, really excited year-on-year about the heritage gifting, which should probably lead to a decrease in that $500 slightly during the quarter..

Got it. Thank you, guys, and best of luck..

Thank you..

And our next question on queue comes from Oliver Chen from Cowen & Company. Your line is now open..

Thanks a lot. Victor, you've made a lot of progress with the evolution towards the house of fashion design and also the Stuart Weitzman acquisition.

As you think about the long-term in terms of what you're creating, what do you think about an American multi-brand house and how you'll think about allocating capital and synergy opportunities as you may or may not create a multi-brand kind of company? And then just curious. There was a lot of great commentary on bringing service back to stores.

What are your high level thoughts about what the industry is facing with traffic and how you can continue to motivate the Generation Z and the new generations to come just to come into physical stores at large?.

Thanks, Oliver. In terms of the progress that we've made, of course, not only with the Coach brand, but now, of course, as a dual-brand company, I couldn't be more excited about our ability to leverage the knowhow that we have in Coach to support, of course, Stuart Weitzman.

Incredibly excited about the new talent that we've recruited to that brand, both the CEO, Wendy Kahn; the Creative Director, Giovanni Morelli, who joins us in the spring; and as we announced today, Daniele Michetti, who joins us as the lead shoe designer reporting into Giovanni.

More broadly, in terms of our capital allocation strategy and what could come next, we've been very consistent. We have a tremendous amount of work and opportunity within the Coach brand and the Stuart Weitzman brand. That is our first priority. Our second priority, as you've suggested, is to look at value-additive acquisitions.

Of course, we're going to be very selective in acquisitions that allow us to build platforms for long-term growth, that allow us to leverage our global infrastructure and on organizational capabilities and our skill sets, which is obviously building brands and retail management and a terrific supply chain in our core space.

Most importantly, we look for great brands. We're not as committed to any specific nationality, so I would keep that in mind..

Thank you..

.

He has a second question, I'm sorry, I've just been reminded, in terms of the physical stores and service. I couldn't be, as I mentioned in my response to Bob's question, happier with what the teams are doing across both retail channels. As you've seen, we've driven a positive 4% comp nearly in our bricks and mortar stores.

I believe that it's not one specific channel or one specific action, Oliver, that leads to the positive results. It's about a total brand experience. We're committed to being very active digitally and engaging with the millennial and indeed with the broader consumer that's increasingly engaging online.

And we want to provide her with a great experience whether she decides to shop in our stores or online. What we're being very careful about is managing those promotional impressions, especially in the online channel, which we know is global, transparent and can create a tremendous amount of confusion.

And, therefore, a lot of the steps that we've taken both in the online channel and as well, I would say, as we have shared repeatedly in the wholesale channel where we're looking to manage our brand more effectively for long-term growth..

Thanks a lot for those comments. Appreciate it..

Operator, we will take additional questions beyond 9:30 given the technical issues that we had at the beginning of the call..

And our next question on queue comes from Anna Andreeva from Oppenheimer. Your line is now open..

Great. Thanks. Good morning and congratulations on navigating the environment really well..

Thanks, Anna..

Thank you..

I guess one clarification and one question.

First on the flash sales headwind that you experienced during the quarter, has that now been lapped or should we continue seeing some of that going forward? And then secondly on Stuart Weitzman, were operating margins up during the quarter excluding the marketing shift and how do we think about the profitability of this brand for the year? Thanks..

Okay. I'll let Andrea discuss the Stuart Weitzman in a bit. In terms of the eOS, no further comments other than what I've said earlier. And I think the main driver there as we've mentioned is that we're not in a very active recruiting mode. It's a closed database to those that shop in our bricks and mortar stores and that have been in our database.

And so therefore we will continue to probably see some shrinkage in eOS go forward..

In terms of the Stuart Weitzman operating margin, Anna, as you know, gross margin was up during the period on a year-over-year basis and so was the SG&A expense line which actually rose significantly during the period. We've called out part due to marketing expenses but there were also additional items.

For example, as you may remember, we bought in the Canadian distributor there. So we had those directly-operated expenses of the Canadian stores that we did not have in the year ago period. We also had higher retail occupancy costs. Just like Coach, but of course it's more magnified for Stuart Weitzman.

We have the occupancy of both the Fifth Avenue and Regent Street stores hitting the P&L there in terms of occupancy expense where we have no sales yet. So we had those as well. There were a couple of other items that impacted it but it was not only marketing timing just to keep that in mind..

Best of luck, guys..

For the year, I would say that our operating margin for Stuart Weitzman should be in the realm of where it ended last year. And that is what we had expected when we entered this year..

Terrific. Best of luck, guys..

Thank you..

Go ahead, operator..

Thank you. And our next question on queue comes from Randy Konik from Jefferies & Company. Sir, your line is now open..

Yes. Thanks a lot.

So I want to just talk to the cyclicality of the margin structure, gross margin, that is, across the channels, because it was very positive to hear what the – it sounded like the gross margin was up in the outlet channel and the strategy has been more about – I think less about just driving units for units or revenues for revenues but driving a healthier, better margin business and being smarter with the promotional cadences and so forth.

So can we just get some perspective on where the – just at a high level, where we are in the cyclicality peak trough between the channels? Because it seems to me there'd be a lot more gross margin opportunities still left in the outlet channel. Just wanted to explore that a little further. Thanks..

Yes. Randy, I think, it's a good question. As you may remember, last year, I believe it was in our January call regarding our second – December quarter. We talked about outlet promotional activity ratcheting up. We saw that in the competitive environment hours ratcheted up as well. So we don't lap that until let's say partway through this second quarter.

So we would continue to see that. Now we are experiencing lower average unit cost, higher initial markup, which is allowing us to fund, if you will, and pass that on to the consumer. But we start to lap that, to your point, through the second quarter.

I am fresh out of crystal balls right now, and I'm not sure that we're going to see a significant lessening in the environment in the second half of the year. But, presumably over time, we'll be able to actually keep some of those lower average unit costs on the outlet side.

One thing I will mention is we are having and will have for the full year a small benefit associated with the reduction of sales in our wholesale channel. So that will help. And, obviously, we're experiencing lower average unit costs on the retail side as well. And we're seeing nice growth in those AURs and ADTs, as Andre talked about.

So I think that probably sort of explains what's going on, on the outlet side and what we're looking at for the balance of the year. As you know that we've reiterated our guidance for the year of 69% to 70%..

Very helpful. Thank you..

My pleasure..

And our next question on queue comes from Michael Binetti from UBS. Sir, your line is now open..

Hey, guys. Good morning. Congrats on a nice quarter. Just really quickly, I wanted to touch on the comment that tourism was I guess better or less bad. Could you clarify for me, was that related to the U.S.? I know you made some global comments. But is your sense that tourism's getting better in the U.S.

and how meaningful of a change there or so? And then can you help us think about whether the tourism, the outlets – I'm sorry the tourist outlets are getting better? Or maybe if there's any kind of signs of improvement or trend change in the outlets that are largely shopped by domestic customers?.

Okay. I'll let Andre chime in on that..

So without going into the details by channel, we did see a slight growth in tourism in the first quarter, a slight decrease in Mainland Chinese tourists to North America, but actually more than offset by other Asian nationalities, particularly Koreans and Japanese..

Great. And then I think you mentioned that the category for premium accessories for men and women was flat, slightly positive. I think in the past you've spoken just on women's.

Is there any way you could help us clarify between the two and if you saw a change in women's that would be worth calling out as well?.

No. No major shift across channels. I mean it's what we've talked about which is basically the fact that the department store impact has been, obviously, a slight drag. And what we have seen, of course, is that all of the major luxury channels, of course, report with men's and women's together.

And we've seen a little bit of an uptick with a few specific luxury players that are impacting both, and therefore, consolidate across all brands..

Okay. Thanks a lot, guys. Congrats again..

Thank you..

And our last question on queue comes from Mr. Brian Tunick from the Royal Bank of Canada. Sir, your line is now open..

Hi. Thanks. Good morning. Congrats as well. I guess you guys usually share with us what innings you think maybe we're in.

So I was wondering if Victor or Andre could talk really about the factory channel and maybe talk about what inning you guys think we're in from a store remodel perspective, a product development perspective, including the men's growth.

And then if you still believe the retail being the halo for factory will take a few more quarters to really set in from a brand perception perspective. Thanks very much..

Well I'm rooting for Cleveland tonight. There is one or two Chicago fans here in the rooms, but of course, Game 6 we're looking for an end this evening. A big Tito fan, given my affiliation with the Red Sox. I will just add that in before I answer your question..

Oh, my God..

Thanks..

So, to your baseball metaphor I think, obviously, look, if we're looking at the outlet channel, we're still in the very early stages in terms of the rollout of the autumn luxury concept itself. Andre and the team leveraging a lot of the consumer insights work at tweaking that concept for it to be more effective.

The major impact that we're seeing in that channel is really from the great level of innovation that Stuart and the team are putting into product, and the overall halo impact of the brand as we continue to speak to the broader consumer more directly.

And I think you'll see that pick up in the quarters ahead, specifically for holiday, and even more so as we look at the third and fourth quarters.

I would say that from a store perspective, we're maybe in the second innings specifically to your question, from a product perspective maybe we're in the middle innings and of course we don't market to that consumer outside of what happens either in the mall itself or in direct email communication with her so I would say that there we are pretty advanced..

I think we've gone into extra innings here.

So, Christina, you want to sum it up?.

Sure. That concludes our Q&A. I will turn it over to Victor Luis for some closing remarks..

Thank you. Let me just apologize again to all of you for taking a little bit of your time and apologize on behalf of our service provider.

Just want to thank you all for joining us this morning, want to again thank and congratulate both the Coach and the Stuart Weitzman teams for their hard work and to the performance that they are driving on behalf of our shareholders in this rather volatile environment. Very excited about the quarters ahead.

We have terrific bolt product marketing and wonderful retail experience as planned ahead as we open this quarter in a few weeks both Coach House here in New York as well as in London to cap our 75th anniversary. So, thank you, all, and look forward to chatting live with many of you..

This does conclude the Coach earnings conference, and we thank you for your participation..