Andrea Shaw Resnick - Coach, Inc. Victor Luis - Coach, Inc. Kevin G. Wills - Coach, Inc. Andre Cohen - 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. Omar Saad - Evercore Group LLC Dana Telsey - Telsey Advisory Group Mark R. Altschwager - Robert W. Baird & Co., Inc.

Michael Binetti - UBS Securities LLC Adrienne Yih - Wolfe Research LLC Brian Jay Tunick - RBC Capital Markets LLC.

Good day, and welcome to this Coach Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation.

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 results are Victor Luis, Coach's Chief Executive Officer; and Kevin Wills, Coach's CFO. 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 or fiscal years. Actual results could differ in a material manner.

Additional information about risks and other 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 and constant currency.

You may find the corresponding GAAP measures 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 third fiscal quarter 2017 results and will also discuss our progress on global initiatives across markets. Kevin Wills will continue with details on financial and operational results for the quarter and our outlook for the business for the balance of the year.

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

first, differentiating the Coach experience through leather and craftsmanship; and secondly, developing personalized clienteling and customer events.

I am delighted that our Mystery Shopper Scores, our key metrics that demonstrate how well we deliver our unique modern luxury experience, were up again in the third quarter at over 85% as compared to about 75% in last year's third quarter.

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 such as unique emoji stamps and a customizable bag program being introduced throughout the year.

Across the global fleet, there were 28 Craftsmanship Bars installed at the end of the third quarter and we expect to add about seven more by the end of the fiscal year. And our Made to Order Rogue custom bag service has been a resounding success at our Fifth Avenue Coach House.

Also, after a successful Q2 North American rollout of Coach Journey, our innovative and interactive service training program, we expanded it in Q3 to include all our directly-operated stores in Japan, Hong Kong, Singapore, Taiwan, Malaysia, and South Korea, and are implementing it in China. We remain very excited about our global flagship focus.

We view these stores as important retail and marketing investments for the Coach brand. Early in the quarter, we opened the Kuala Lumpur Pavilion flagship in Malaysia and opened our first flagship in Milan, Italy, during February Fashion Week, which was followed by our flagship in Florence, Italy.

As noted, when we entered the fiscal year, one of our key strategic initiatives is elevating the Coach brand in North America wholesale channel. To this end, we've renovated 60 doors to-date and have continued to see positive results from our Shop Manager program.

Importantly, through 1941, we've added new locations in top-tier specialty stores in North America and globally. At the same time, we have also rationalized our overall North America department store distribution, taking our door countdown by about 25% or by over 250 locations, as well as reducing promotional events in the channel.

As you know, in the fall, we closed the first group of these locations, about 120, while the number of days on sale in department stores were reduced by about 40%.

We closed the net of more than 140 during the third quarter and expect another few to be closed in the fourth quarter, while spring season to-date, February and March, our days on promotion, are down 35%. On the marketing front, for the first time at New York Fashion Week in February, we held a dual-gender runway show to significant critical acclaim.

To this end, we were thrilled when Coach Creative Director, Stuart Vevers, was awarded the distinguished honor of 2017 Designer of the Year by the American Apparel & Footwear Association at the American Image Awards last week, and are equally excited that in his first year of eligibility, Stuart has been nominated for the CFDA Accessory Designer of the Year.

As you know, we recently began working with Selena Gomez, the new face of Coach. The reaction on social media was instantaneous and electric, with her first two posts for Coach getting very high engagement, garnering nearly 5 million and 6 million likes, respectively, on Instagram.

Our first events with Selena were in tandem with Step Up, an organization supported by our Coach Foundation focused on empowering young women from underserved communities and encouraging them to dream big. These events drove 1.7 billion impressions globally.

She has also collaborated with Stuart on a custom handbag, which will be in our retail stores and select department locations globally later this fall. Most importantly, our first global handbag advertising campaign with Selena will hit in July and run through this fall/winter and will be followed by a second campaign in spring/summer 2018.

As a result of these efforts, we are seeing continued progress with consumers.

Importantly, in our North America quarterly brand tracking survey fielded in March, we saw strength with the broad premium market across key emotional and functional attributes, while discount perceptions, an important measure of brand health, declined once again this quarter.

So as our plans unfold and the momentum continues to build, we are delighted with the 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 are 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 of North American category trends. Clearly, the challenges impacting the category in specific and consumer spending in general have persisted in 2017.

This volatility was evidenced throughout calendar 2016 impacted by the U.S. election in the fall and the significant strengthening of the dollar over the last several months.

We estimate that the North American premium men's and women's bag and accessory market was again flat to up low-single-digits in the March quarter, which we believe has continued to be impacted by negative trends seen in U.S. department stores as brands, including ours, have pulled back from the channel.

While Kevin 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, total North American Coach brand sales decreased 5% on both a reported and constant currency basis including the negative impact of our deliberate department store pullback. Direct sales declined 2% in the quarter.

As a reminder, this decline was in line with our expectations, given the Easter shift, which hurt us in Q3 and will be a benefit in Q4, as well as the loss of the important post-Christmas week, which fell into our Q2 results this year. Importantly, the third quarter marked the fourth consecutive quarter of positive comps in North America.

Our bricks and mortar comps rose slightly over 3% in the quarter, driven by conversion and ticket, while traffic was down moderately. Overall, our aggregate comp was also up over 3% with e-commerce having a negligible impact on quarterly results.

Finally, our business with international tourists in our North American stores was slightly lower during Q3, negatively impacting comp by under a point, with declines in Chinese tourist traffic once again mostly offset by other nationalities, notably Japanese and Korean visitors.

Now turning to our retail performance and the metrics we traditionally share on product. The penetration of the above $400 price bracket increased to over 55% of handbag sales in North America up from about 40% last year, and generated another positive comp on the sales in unit basis.

The increase was driven from success in both Rogue and Swagger silhouettes. As planned, 1941 handbags represented about 40% of handbag sales in our top-tier retail stores.

We also experienced strength in small bags and accessories driven by crossbodies, clutches, and wristlets, which offer a high level of versatility and functionality at compelling price points.

Turning now to event marketing, our semi-annual sale concluded early in the quarter and we held our closed preferred customer offer in March, which anniversaried the same event last year, but excluded 1941, a significant part of our assortment as mentioned.

In the fourth quarter, we would again expect to hold a short duration sale around Mother's Day and kickoff our semi-annual summer sale.

Looking ahead to the balance of spring and early summer, our goal is to continue to elevate and differentiate the brand by offering innovation and emotion through our product assortment marketing and the in-store experience. We will also continue to work to position our assortment and Coach as a year-around gifting destination.

Specifically, in retail, we will first, offer a compelling Mother's Day story anchored by Souvenir Embroidery, a fun and play-full platform with trend-right embroidered patches supported by a disruptive campaign. We also launched the Bowery Crossbody, a feminine and sharply-priced small bag with a delicate chain strap as the perfect gift for mom.

Second, we launched Coach space, a fun and out of this world capsule that celebrates space exploration's role in the American imagination. We've created instantly iconic product that features bright and graphic space-themed patches on key 1941 silhouettes, including Dinky, Rogue, and the Saddle Bag.

Third, we introduced the new Bandit Hobo, a wearable, soft and streamlined shoulder bag. The Bandit is a chic functional bag that highlights the natural drape of our beautiful leathers. Unique detailing includes a detachable interior pouch that can convert into a second bag, offering a premium two-in-one functionality.

Finally, we will debut the Swagger Shoulder Bag 20, driving innovation below $400. The Swagger Shoulder Bag 20 is a sleek, sophisticated and on-trend addition to the iconic Swagger family that easily transitions from day to night.

And for outlet, as we transition into summer, we are excited to launch a fresh take on our Mother's Day novelty assortment with gifting items across all price points and even offering personalized hang tags for mom on this special holiday.

Starting in spring, we introduced an expanded assortment of hang tags, bag charms, and small leather accessories that drive impulse shopping and allow for fun personalization opportunities for all customers and for all occasions.

Following Mother's Day, we will have a full launch of a Disney and Coach product collection for outlet; our largest ever collaboration in this channel, which will span all of women's and men's leather goods and lifestyle categories.

We've taken inspiration from our best-selling retail styles from our successful collaboration with Disney a year ago, and translated them to a broader assortment for the outlet customer. Rounding out Q4, we will have our first ever Father's Day mailer as we introduce our new men's bond backpack and a range of exciting boxed gift items.

And now, moving on to international results for the Coach brand. As noted in our release, in the third quarter, international Coach brand sales declined about 4% on a reported basis, including about 70 basis points of pressure related to currency translation.

By geography, Greater China sales declined 2% versus prior-year in dollars and increased 2% on a constant-currency basis, driven by strong growth and positive comps in Mainland China, partially offset by continued softness in Hong Kong and Macau.

In Japan, sales rose 2% on a reported basis, while constant-currency sales decreased 1%, impacted by a decline in Chinese tourist spend as we have not yet fully lapped last year's dramatic increase.

In our other directly-operated Asian Markets outside of China and Japan, namely South Korea, Taiwan, Singapore and Malaysia, sales decreased low double-digits in dollars in constant currency.

Our results were primarily impacted by continued softness in South Korea, where macroeconomic and geopolitical headwinds have pressured spending from domestic consumers and tourists.

In Europe, our directly-operated sales grew at a double-digit pace in constant currency during the quarter, while the wholesale business was negatively impacted as planned by a shift in shipment timing related to the change in fashion deliveries. This shift is expected to benefit Q4.

Therefore, total sales in Europe increased slightly in constant currency and declined modestly in dollars. Finally, I would point out that we're continuing to see volatile results in our international wholesale businesses, which while small, are important to growing brand awareness.

For the quarter, as planned, our sales declined double-digits on a net sales basis, impacted by shipment timing, which we expect to reverse in Q4. Sales also declined on a POS basis in Q3.

In closing, we are proud of the progress we've made along our transformation journey and the evolving perception of the Coach brand and Coach, Inc., as we move from a specialty retailer to a house of modern luxury brands. Now I turn it over to our new CFO, Kevin Wills, for details on our financial results and guidance for fiscal 2017.

Kevin?.

Thanks, Victor. It's a pleasure to be with you on my first Coach earnings call. Victor has just taken you through the highlights and strategies. Let me now take you through some of the important financial details of the third 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 a related reconciliation can be found in the earnings release posted on our website today. Our overall financial performance in the third quarter was consistent with our expectations, despite the volatile backdrop.

Our sales were down in the quarter, as projected, impacted by calendar shifts and the deliberate pullback in the department store channel in North America, as well as wholesale shipment timing internationally.

That said, we drove positive comps for the Coach brand in North America and gross margin expansion in each reportable segment, while tightly controlling costs and continuing to invest in our brands. Taken together, we delivered another quarter of solid earnings growth.

Importantly, 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, consolidated net sales totaled $995 million for the third quarter, a decrease of 4% on a reported basis and 3% on a constant-currency basis.

In addition and as expected, the company's strategic decision to elevate Coach brand's positioning in the North American wholesale channel through a reduction in promotional events and door closures negatively impacted sales growth by approximately 150 basis points in the quarter.

As expected, Coach brand sales decreased approximately 4% in aggregate, but increased in North America on a comp store basis. Stuart Weitzman brand sales rose 1%, while being negatively impacted by wholesale shipment timing.

Consolidated gross profit totaled $706 million, a decrease of 1% versus prior year, while gross margin increased approximately 190 basis points to 70.9%. Coach brand gross profit decreased 2%, however, gross margin expanded 180 basis points over the prior year, including approximately 20 basis points of benefit from currency to 71.7%.

Stuart Weitzman brand gross profit rose 8% and gross margin rate increased approximately 390 basis points over the prior year, reflective in part of channel mix, the benefit of currency and lower promotional levels. Total SG&A expenses decreased 3% to $544 million and represented 54.6% of sales as compared to 54.3% in the year-ago period.

Coach brand SG&A expenses decreased 4% to $500 million and represented 54.6% of sales compared to 54.8% in the year ago period.

Stuart Weitzman brand SG&A expenses were $44 million compared to $39 million a year ago, due to an increase in store occupancy costs associated with new openings, as well as the company's strategic investment in team and infrastructure.

Consolidated operating income rose 7% to $162 million, while operating margin was 16.3%, an increase of 160 basis points versus prior year. Coach brand operating income increased 8%, while operating margin increased 200 basis points over the prior year to 17.1%.

Stuart Weitzman brand operating income was $6 million or 6.9% of sales versus $7 million or 9.3% of sales in the prior year, reflecting key investments to support long-term multi-category growth, as discussed. Net interest expense was $4 million in the quarter as compared to $7 million in the year ago period.

Total net income for the quarter increased 5% to $130 million, with earnings per diluted share of $0.46, up 4% versus prior year. Now, moving to global distribution. In total, we closed five net Coach brand locations globally in the third quarter to end the period with 955 directly-operated locations worldwide.

In addition, we ended the quarter with 82 Stuart Weitzman directly-operated locations, no change from the previous quarter. In fiscal year 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 locations. Internationally, we expect a mid to high single-digit increase in square footage. Finally, turning to Stuart Weitzman directly-owned, op distribution.

Year-to-date, we've opened a total of seven net new locations and we expect to close one location in the fourth quarter. Moving on, net cash from operating activities in the third quarter was $202 million compared to $199 million last year. Our CapEx spending was $70 million in Q3 versus $101 million last year.

Free cash flow in the quarter was an inflow of $131 million versus $98 million in the same period last year. Inventory levels at quarter end were $479 million compared to ending inventory of $464 million a year ago, representing an increase of approximately 3% in support of planned sales growth in the fourth quarter.

At the end of Q3, cash and short-term investments were $1.9 billion as compared to $1.3 billion a year ago. Our total borrowings outstanding were $592 million at the end of Q3 compared to $869 million a year ago, reflecting the paydown of our term loan in the first quarter, as previously discussed.

Now, turning to our capital allocation policy, which has not changed. Our first priority is to continue invest in our brands in order to drive sustainable growth and value creation. Our second priority is strategic acquisitions, looking for great brands with opportunities for expansion.

And third, returning capital to shareholders with a focus on dividends. As always, underpinning these priorities are our guardrails for allocating capital effectively, which are maintaining strategic flexibility, strong liquidity, and access to the capital markets.

Now, let me address our outlook for fiscal year 2017 on a non-GAAP 52-week versus 52-week basis. We are maintaining our operational guidance for the year and continue to project revenue to increase at a low single-digit rate, including the impact of currency.

This guidance continues to imply strong top line growth in Q4 on a 13-week versus 13-week basis, benefiting in part from the calendar and shipment timing shifts, which negatively impacted us in Q3.

As a reminder, these impacts include the shift in the Easter and the inclusion of the week leading up to the July 4 holiday, as well as the shift in Coach International wholesale shipment timing due to the change in the delivery calendar in fiscal year 2017.

Importantly, this guidance continues to assume at least a positive low single-digit comp for the Coach brand in North America for the year and in the fourth quarter. We also continue to project double-digit revenue growth for Stuart Weitzman for the year.

We are maintaining our consolidated operating margin forecast 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 Coach brand positioning in the North American wholesale channel.

We now expect the interest expense to be approximately $20 million for the year based on the lower interest expense actualized to-date.

The full year fiscal 2017 tax rate is still projected at about 26%, with a return to a significantly higher tax rate in Q4 versus Q3, consistent with our typical cadence, and we continue to expect our average diluted shares outstanding for the year to be approximately $283 million.

Taken together, we're still projecting double-digit growth in both net income and earnings per diluted share for the year. And we now expect consolidated CapEx to be approximately $300 million in fiscal year 2017.

In closing, we are pleased with our performance in the quarter and the consistency of our execution against the volatile backdrop, building on the successes we have achieved thus far in our transformation. Importantly, we continue to expect fiscal 2017 to be the year when we return to both revenue and earnings growth.

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 for Q&A.

Operator?.

Thank you. Our first question comes from Bob Drbul with Guggenheim..

I was wondering if you could just talk a little bit more about the North American performance. Specifically, was there any variation between the full-price stores and the factory stores in terms of comp and if you could also just address you mentioned traffic, but any big variation on the traffic side on either segment would be helpful..

Good morning, Bob.

Andre?.

Good morning, Bob. So as – we're pleased with the performance in both our channels actually and as you know, it's – we are starting to see the impact of the transformation taking hold. So in retail, brand innovation is really taking hold with the broader distribution, our $400 and above AUR bags are up on a comp basis.

They represent more than 55% of our business. We're seeing in outlets as well innovation increasing with – taking inspiration from our own retail collections with, for example, last quarter, after all explosion that did very well. So, pleased across both channels. No major difference in traffic between channels..

Great. Thank you very much..

Thank you, Bob..

Our next question comes from Ike Boruchow with Wells Fargo..

Hi, good morning, everyone. Thanks for taking my question. Congrats on a nice quarter..

Thank you..

So Victor, you touched on the North America wholesale channel and the door closures that have taken place this year.

Just kind of curious if you could give us how you're thinking about next fiscal year's potential feature door closures within the wholesale channel and then just tying that together, how could – are there any impacts on the Coach brand margin that we should keep in mind for next year, the trajectory of the Coach brand margin recovery? Thank you so much..

Sure. I'll ask Andre to speak a little bit about obviously the closures that we had talked about in our speakers' notes and thinking go forward..

So by the end of this fiscal year, we would have closed about 250 doors.

We continue to look at our wholesale channel and to pull out of doors that we feel don't make sense from our perspective and perspective of our partners and we want to continue to look at promotions very carefully and to partner with our department store wholesale partners to continue to reduce promotional pressure.

In terms of margin, as you know, the wholesale businesses represent a very small part of Coach's overall business, so we don't see a material impact from that perspective..

Okay. Thanks..

Thank you, Ike..

Our next question comes from David Schick with Consumer Edge Research..

Hi, good morning and thanks for taking my question. I wanted to build off of Bob's question around some of the tickets. So you've talked about the success of 1941, impressive mix, it's been I guess part of the store investments in clienteling, it's all coming together with the work you've been doing.

Is there any more granularity or any other ways you can slice this than the above $400? We see the price points in the editorial that it's generating. Anything that could help us understand what's happening inside that business that's really doing well above $400 would be helpful..

Let me touch on that. Good morning, David. Certainly, look, there's been a tremendous level of innovation across full-price handbags and 1941. We've benefited from that. I think the consumer is perceiving the value at those price points which speaks to both design, quality of the leathers, and obviously make.

And of course, as you mentioned, the total store experience with our sales teams benefiting tremendously from the Coach journey and modern luxury sales training that we've put in place and we've seen that impact our secret shopper scores as we mentioned in our speakers' notes, up from 75% about a year ago now to over 85%, which really speaks to consumers engaging, understanding the transformation.

Certainly, as we go forward there is still opportunity for us to be innovative across the lower price points in the full price category. And I think you'll continue to see us, as we mentioned in the speakers' notes, work very hard to make our full-price business a year-around gifting destination with innovation across all price buckets..

Thank you..

Thank you, David..

Our next question comes from Erinn Murphy with Piper Jaffray..

Great. Thanks. Good morning and welcome, Kevin. I guess my question is for Victor. You've made a number of key talent hires off-late, the Coach brand is tracking well. I would love if you could expand upon some of your comments you made earlier on building a customer-focused multi-branded portfolio.

Could you just talk about kind of what's next and with the success of 1941, does that change or kind of impact your decision of brands that fit well within your portfolio? Thanks..

We've been pretty consistent, Erinn. Obviously, we've talked just about great brands. I wouldn't comment any more specifically than the comments that we've laid out in our speakers' notes and what we've talked about in the past.

Obviously, we're looking to leverage the strengths that we have as an organization whether that be our supply chain or whether that be, of course, our ability to develop and grow brands globally and leverage the teams that we have across the world who are very gifted and proven in growing brand at retail.

At this point, I simply would not comment any further on acquisition activity and won't do so unless and until there's something specific to announce..

Fair enough. Thank you..

Thank you..

Our next question comes from Oliver Chen with Cowen & Company..

Hi. Congratulations. Victor, the people changes in the organization that you've created for the long time. The global business development and strategy role, what are some of the key priorities there, and why did you see the need for that role, it sounds like a nice opportunity.

How do you think about Coach over the next 5 to 10 years? And just sort of a minor question, we were curious about how average unit costs trended and if there is anything we should know in terms how you are balancing the AUC and giving features to the customer in the context of innovation versus managing promotional levels prudently? Thank you..

Thank you, Oliver. It was a bit difficult to hear you. But if I understood correctly, I think your first question was specifically on Ian and his role as President of Global Business Development. And then your second question was on AUCs. I'm going to ask Kevin in a minute to speak on AUCs.

In terms of Ian's role, he'll play a very important role supporting both of our brands. We obviously believe that each brand has a very unique positioning.

But there is an opportunity for us to leverage know how whether that be, of course, in relationships with our landlords globally, as well as working with licensee partners and others as we look to develop both the Stuart Weitzman and the Coach brand, and of course, any future acquisitions that we can make.

It'll set us well to provide some leverage on the front end of the business as Ian partners with both the CEO of Stuart Weitzman, Wendy Kahn, as well, of course, as the CEO of the Coach brand, Josh Schulman, who joins us in June.

A specific example of that, for example, could be in the case of Stuart Weitzman supporting that organization, the take-back of certain markets, which is a skill that obviously we have very strong experience in from past work that we've done at Coach and specifically which Ian has led in his career.

Kevin?.

Sure. Good morning, Oliver. On the – if I understood your question around average unit costs and related to the margin versus the increased cost, obviously, there's a balancing act there as we are elevating part of the 1941 product. There's more cost that go into that, but we're balancing that.

You think about the components of our bags whether it's the leather, the tanning, the hardware, each have their own individual kind of inflationary, deflationary factors. So it's a – again, it's a balance and we're looking that across the chain. And I think you're seeing that balance work itself out in our gross margin rate performance..

Thank you. Best regards..

Thank you, Oliver..

Thank you..

Our next question comes from Anna Andreeva with Oppenheimer..

Great. Thanks so much. Good morning, guys, and let me add my congrats as well..

Thanks, Anna..

Thank you. Good morning..

Good morning. I'll follow up on Oliver's previous questions. Really strong results on the gross margin line.

Maybe talk about expectations for the fourth quarter and just puts and takes on this line item as we think about 2018? And quickly also, what was the Easter shift headwind to the third quarter? Just trying to gauge the benefit to expect for 4Q? Thanks..

Sure. I'll let Kevin jump in on that one..

Well, good morning, Anna. I think, we outlined basically our expectations for the balance of – for the full year and given the Q3 year-to-date results, you can see it affecting what we're expecting for the fourth quarter. We're continuing to expect improved performance in the fourth quarter.

On the Easter shift, there's a number of, kind of, puts and takes on the sales line in the quarter. But that was probably about a, let's call it, around a point impact in the third quarter versus the fourth quarter, as -imprecise size, but we'd estimate around a point in the gross margin. Probably we're not seeing improvement in the fourth quarter..

Terrific. Thanks so much..

Our next question comes from Omar Saad with Evercore ISI..

Hi. Thanks. Good morning. I wanted to ask a follow-up question on the M&A strategy. More broadly speaking, a couple of quarters ago, I believe, you mentioned that one of the categories or criteria was you're trying to avoid turnaround situations.

And I wanted to push you a little bit on this, especially given the transformation that you guys have executed for the Coach brand over the last few years, kind of, shrinking to grow, reducing proportionality, elevating the brand, bringing into more fashion and innovation globally.

Is that a skill-set you think you can apply, especially, as you look across the landscape to other brands where that – where there might be a strong underlying brand asset, but there is a lot of struggle and challenges going through the evolution of all the changes that are happening at retail and wholesale channels and things like that.

I wonder if it's something you think about a core competency having gone through what the company has gone through so successfully that you could apply in other similar branded situations in the global soft lines and accessory space? Thanks..

Good morning, Omar, and thanks for the question. Look, certainly, we have a very gifted and talented team. And obviously, with the work that we've done with Coach, this isn't our first transformation.

There are folks in this company who have been here 20 years, 25 years, who have gone through this in the past with our first what one could consider our first transformation just prior to our IPO, and obviously also speaks to the fact that we have a great brand in Coach.

Specific to your question around whether we're interested in turnarounds, first and foremost, Omar, we're looking for great brands, brands that have the potential for growth. Brand health and consumer perception for us is absolutely critical.

We're not looking for brands that have, in essence, lost their way or need to be completely repaired or repositioned in the minds of consumers.

Healthy brands that have a unique positioning and that certainly allow us to use the skill sets that you referred to, to diversify whether that be our consumer target or a specific consumer attitude or segments of the markets or perhaps the geography channel or category are what interests most and what we're most focused on.

I think that Stuart Weitzman, of course, is an acquisition that we're extremely pleased with and is a good example of that..

Thank you, Victor. Good luck..

Thank you, Omar..

Our next question comes from Dana Telsey with Telsey Advisory Group..

Good morning and congratulations, everyone, and welcome, Kevin. As you think about the penetration to the over $400 price point now being 55% or so, where do you see that, and how do you see the portfolio price points emerging? And on marketing spend, it certainly is a big benefit.

How do you see marketing spend contribution going forward and will there be other variances in marketing spend? Selena Gomez has been terrific and how do you see the events with her moving forward? Thank you..

Good morning, Dana. First, on Selena, we're really pleased, obviously, with our partnership so far. It's in its very, very early stages.

And in fact, had a big day with Selena yesterday as she wore Coach for the Met Gala, and the play that we're seeing in both digital and traditional media, television to newspapers, magazines, and of course, all of their online channels, has been absolutely terrific, if not electric, in the last 24 hours.

We expect Selena to really kick off, however, fully with the very first handbag campaign that will hit in July. That will then lead to through all the fall winter, and then later this year, we will be shooting the campaign for next spring-summer.

And so we have a full year ahead really of activities and advertising that will hit, featuring Selena and, of course, leveraging her very, very extensive online following, where I believe today she's north of 116 million to 117 million followers on Instagram alone.

As it refers to the above – and just to close on your marketing question, I would not expect total marketing dollars to change beyond what we are investing this year on a go-forward basis. In terms of the penetration on the above $400, Dana, I would not expect a significant additional growth in handbag AUR.

Certainly, there's a potential for ticket growth as we launch other categories whether that be ready-to-wear, of course, our soft accessories and footwear becomes an increasingly important category for us as well..

Thank you..

Our next question comes from Mark Altschwager with Robert W. Baird..

Good morning. Thanks for taking the question. I also wanted to follow-up on gross margin, really nice performance this quarter.

Can you give us a sense of the outlet pricing environment and whether you think the tide is beginning to turn there? If so, what's driving it? And then bigger picture, Coach brand gross margin seems to be trending towards the higher end of that 69% to 70% range you've consistently discussed.

So just wondering if you see potential for some upside there as we look into fiscal 2018 and any puts and takes we should be thinking about? Thank you..

First, on outlet, I'll let Andre jump in and then Kevin will answer your question on total gross margin..

So we haven't seen the outlet pricing environment improve. If anything, it's become more competitive, more promotional over the last couple of quarters at least. And we've tried to manage that basically through an increased pipeline of innovation..

And Mark, this is Kevin. On the gross margin, obviously, we're not providing any outlook or guidance as it relates to 2018 at this point in time. So, no specific comments on that. However, as we've clearly articulated, we do see there's an opportunity to increase the operating margin of this business over time.

And all the actions we're taking, we hope we'll be able to improve the bottom line. But no specific comments at this time relative to 2018..

Thank you..

Our next question comes from Michael Binetti with UBS..

Hey, guys. Good morning. Congrats on a nice quarter.

Can I just ask you a quick modeling question and then a follow-up? Could you just help us bottom line where you think reported revenues land in the fourth quarter? I think with all the shifts going on between the third quarter and the fourth quarter and the extra week, there's a bit of confusion on – I'd hate to get off the call without having a clear idea of where we're headed.

I think the 53rd week is maybe a two-point headwind to the year in the fourth quarter.

But maybe beyond that, can you just help us clarify on where you think the fourth quarter trend revenue – reported revenue would land?.

Sure, Michael. This is Kevin. Obviously, as you noted there's some puts and takes with some of the timing. At a top line level, I would say somewhere around plus mid-single digits versus the 13-week reported basis in 2016, which was at $1.070 billion.

I wasn't here, but I know in the press release last year in the fourth quarter, we did call out the impact of the 53rd week on the revenue, and it was around $84 million, and I believe about $0.07 a share. So between those two, I believe, you would be able to back end an approximate number..

Okay. And if I could ask one quick follow-up. Victor, I know at the Analyst Day, it was a long time ago, and the category was much different than it is today, but you guys highlighted where you saw the Coach brand margins could go at that time into best-in-class in the category I think was high 20s% with an year-mark.

I know we beat this up with – several analysts asking about this quarter and past quarters. It is leaving us a little bit off balanced, not having some kind of a north star to think about for that brand. And obviously, the category is very volatile.

But can you just help us with how you see the profitability of the brand evolving over the next few years? Where you think best-in-class should land in the categories you guys are in with the brand and the position where you're at today and the price points where you're at today?.

Sure. First and most importantly, we expect to drive operating leverage in the Coach brand and our sales growth beyond 2017. As you suggested at our Analyst Day, we guided that Coach brand will get back to best-in-class by 2019.

And at this juncture, given the lack of visibility in the current environment, putting a specific number out there for what best-in-class will be two years down the road would simply be an exercise in fall's precision. Look, of course, both Coach brand and Coach, Inc.

today continue to evolve in terms of our channel mix, geographic mix, our category mix as we bring footwear and other categories in-house to become a more important part of our business. And it's very likely that we will be a very different company by 2019.

Our focus has been and will continue to be overall profitable growth and operating margin dollars..

Very helpful. Thanks..

Thank you..

Our next question comes from Adrienne Yih with Wolfe Research..

Good morning. Let me add my congratulations and congratulations to Stuart for the recognition..

Thank you..

You're welcome. My question is on inventory at the end of the June, at the end of the fourth quarter. How should we think about that given there's layering in a little bit more higher AUC product for 1941. And then, if you could quickly comment on outlet.

It sounds like there was a little bit better quality of sales, so the overall competitive and promotional environment at outlet relative to the holiday coming out of that one was very challenging? Thank you very much..

Sure. I'll let Andre speak to outlets, and then Kevin will speak to total inventory..

We were pleased with our performance in outlets in Q3, again, driven mostly by product innovation. Frankly, we haven't seen an improvement in the competitive environment at all compared to Q2. It's remained as promotional, if not more so, than in Q2..

On the inventory level, we feel very good about where we ended the quarter. Obviously, we've commented on sales expectations for the fourth quarter. So, we believe inventory is in line with our sales expectation and certainly from a currency and content perspective, we feel good about the inventory..

Great. Thank you very much. Great job on the product. Thank you..

Ladies and gentlemen, we have time for one final question this morning. Our final question comes from Brian Tunick with Royal Bank of Canada..

Great, thanks. I'll add my congrats as well..

Thank you, Brian..

I guess curious between -thanks – the 1941 collection and then Selena Gomez.

Are those two very distinct customers you're trying to get into the door? Are you seeing, on the 1941 side, customer reactivation from older – Coach customers, are they new customers? And on the Selena side, is to bring back the millennials? Just trying to think about how you're going to balance those two barbell thoughts.

And then on the category, what do you think it's going to take to resume a mid-single digit category growth kind of number.

Is it we need to get past these wholesale pullbacks? Is it AURs? What it is going to take you think for the category to resume mid-single digits?.

Sure. First on your question on 1941 and Selena, they're not, definitely not looking at different strategies if you will, both intended to drive brand relevance and engagements across a broad consumer.

In the case of 1941, our initial strategy was very much focused on engaging the upper end of the wholesale channel, both here in North America and in Europe. But we're really pleased with the engagement that we're seeing in our entire full price fleet with all of Coach consumers, both lapsed and new consumers coming into the brand.

The Selena strategy is very much about bringing the transformation message, leveraging, of course, a very strong digitally engaged celebrity across her channels as well as our own channels, not only here in North America but globally and bringing more awareness of what we're doing to that broader consumer.

Her collaboration with Stuart on the handbag, which launches this fall and a couple of other small items that we're very excited about should help us as well. It is priced at a sharper price points. And then the traditional 1941 collection in handbags, which has been above $500 and the Selena handbag will be below $500.

On the category in mid-single digits, I think the – look, the most certainly pullback in department stores is one key factor. There's no doubt about that. And once we see some of the cross-channel tensions, if you will, settle, one would expect the category to grow more robustly. I think at the end of the day, it's going to come down to innovation.

It's going to come down to consumers engaging with great brands and everything that we're doing is very, very much focused on that. What I would share as I've shared with all of you very consistently.

I just don't feel that there is a better category in the fashion space to be in as handbags and accessories continues to be the category that consumers use most as an investment item to express their individuality and everything that we're doing is focused on playing a leadership role in this space..

Thank you. That will conclude our Q&A. Victor, over to you for some closing remarks..

Thank you, Andrea. As has become our custom, I just want to close by congratulating our global teams, both within the Coach and the Stuart Weitzman brands for all of their hard work and dedication to our brands and to our consumers.

I could not be prouder of them and their commitment for continuing to drive innovation, strong engagement with our consumers across the globe and excellence in execution of our strategy.

And it's truly thanks to them that I remain incredibly confidence in our future as a house of consumer-led brands that is focused on innovation and long-term sustainable growth. Thank you..

This does conclude the Coach earnings conference call. We thank you for your participation. You may now disconnect, and have a wonderful day..