Coach, Inc. (COH)

Q2 2013 Earnings Conference Call

January 23, 2013 8:30 am ET

Executives

Andrea Shaw Resnick – Senior Vice President of Investor Relations and Corporate Communications

Lew Frankfort – Chairman and Chief Executive Officer

Michael Tucci – President, North American Group

Jane Nielsen – Executive Vice President and Chief Financial Officer

Victor Luis, President, International Group

Analysts

Bob Scott Drbul – Barclays Capital, Inc.

Kimberly Greenberger – Morgan Stanley

Brian Tunick – JPMorgan

Erika Maschmeyer – Robert W. Baird

Alvin Cooperman – Wells Fargo & Company

Chloe Wayne – ISI Group

Dana Telsey – Telsey Advisory Group

Antoine Belge – HSBC

Laura Champine – Canaccord Genuity

Jennifer Davis – Lazard Capital Markets

Oliver Chen – Citigroup

Presentation

Operator

Good day, and welcome to the Coach Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Senior Vice President of Investor Relations and Corporate Communications at Coach, Ms. Andrea Shaw Resnick. You may begin.

Andrea Shaw Resnick

Thank you, Wendy. Good morning and thank you for joining us. With me today to discuss our quarterly results are Lew Frankfort, Coach's Chairman and CEO; and Jane Nielsen, Coach's CFO. Mike Tucci, North American Group President is also joining us for a holiday review.

Before we begin, we must point out that this conference call will involve certain forward-looking statements, including projections for our business in the current or future quarters or fiscal year. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon risks and uncertainties such as expected economic trends, or our ability to anticipate consumer preferences. Please refer to our latest Annual Report on Form 10-K for a complete list of these risk factors. Also, please note that historical growth trends may not be indicative of future growth.

Now, let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our second fiscal quarter 2013 results and will also discuss our progress on global initiatives. Mike Tucci will review our key programs for the holiday season. Jane Nielsen will conclude with details on financial and operational highlights for the quarter. Following that, we will hold a Q&A session, where we will be joined by Victor Luis, International Group President; and Jerry Stritzke, our President and Chief Operating Officer. The Q&A session will end shortly before 9.30 am. Lew will then conclude with some brief summary comments.

I'd now like to introduce Lew Frankfort, Coach's Chairman and CEO.

Lew Frankfort

Good morning. Thanks, Andrea, and welcome everyone. As noted in our press release, we were pleased with the overall progress we made against our strategic initiatives, aggressively growing our international business, becoming a market leader in the Men's accessories category globally and harnessing the power of the digital world. And in aggregate, we posted modest though highly profitable growth.

However, we were clearly disappointed in our North American performance notably in women’s where results were below expectations. The two overarching issues which impacted results, first was the muted consumer environment in the U.S. with a fiscal cliff uncertainty weighing on shoppers and a slow recovery from Hurricane Sandy in the Tri-State area. Second was intensified competition and heightened promotional activity in the women’s bag and accessory category, especially in the weeks leading up to Christmas. Importantly, we maintained our pricing strategies, protecting our brand proposition.

While we will get into further detail at our current conditions and the outlook for our business shortly, along with specific strategies underway to address the North American market, I did want to take the time to review our quarter first.

Some key financials were, first, net sales totaled $1.50 billion versus $1.45 billion a year ago, an increase of 4%. Currency negatively impacted total sales by about 1%. Second, earnings per share totaled $1.23, up 5% from prior year. Third, North American sales increased 1% to $1.08 billion from $1.07 billion last year with direct sales up 2% on a 2% comparable store sales decline. And fourth, international sales increased 12% to $411 million from $368 million last year, driven in part by a 40% gain in sales in China with a continuation of double-digit comps.

Looking first at global distribution, during the quarter, we opened two retail locations, including the first company operated concession in North America at Macy’s Herald Square, as well as 15 factory stores including four Men’s factory stores. This brought the total to 356 retail stores and a 189 factory stores in North America at the end of the period.

Moving on to China, during the quarter, we opened 13 new locations on the mainland, bringing the total number to 117 locations including 99 on the mainland in 40 cities and we just celebrated our 100th store opening last week.

In the wake of our Asian distributor acquisitions over the last 18 months, we now directly operate 92 locations in Asia comprised of seven in Singapore, 10 in Malaysia, 27 in Taiwan, and 48 in Korea. We do not have any openings in these markets during the last quarter. And in Japan, five dept stores were opened. At quarter-end, there were 193 total locations in Japan with 24 standalone full priced stores including eight flagships, 122 shop-in-shop, 40 factory stores, and seven distributor operated wholesale locations.

Moving on to sales and productivity and starting in North America, our total revenues in North America rose 1% for the quarter with our directly operated businesses up 2% on the 2% comparable store sales decline. Overall trends in both retail and outlet malls in the U.S. shorten over the period impacted by macro concerns and Hurricane Sandy. For Coach, traffic trends in-store also weakened, while conversion and average transaction size was similar to prior year.

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