Coach, Inc. (COH)
Q2 2009 Earnings Call Transcript
January 21, 2009 8:30 a.m. ET

Executives

Andrea Shaw Resnick - Senior Vice President, Investor Relations
Lew Frankfort - Chairman and Chief Executive Officer
Michael Tucci - President of North American Retail
Michael F. Devine - Chief Financial Officer and Executive Vice President

Analysts

Robert Drbul - Barclays Capital
Dana Telsey - Telsey Advisory Group
Michelle Clark - Morgan Stanley
Christine Chen - Needham & Company
Kimberly Greenberger - Citigroup
Todd Slater - Lazard Capital Markets
Paul Lejuez - Credit Suisse
Neely Tamminga - Piper Jaffray
Adrianne Shapira - Goldman Sachs
David Glick - Buckingham Research Group
Lorraine Maikis - Banc of America, Merrill Lynch

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, Andrea Shaw Resnick. You may begin.

Andrea Shaw Resnick – Senior VP Investor relations

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 Mike Devine, Coach''s CFO. Mike Tucci, President of North American Retail, is also joining us. Before we begin, we must point out that this conference call will involve certain forward-looking statements, including projections for our business in the current or future quarters or fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences or control costs. 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 2009 results and will also discuss our strategies going forward. Mike Tucci will then review the holiday season from a U.S. retail perspective and discuss key initiatives for the spring season ahead. Mike Devine will continue with details on financial and operational results for the quarter. Following that, we will hold a question-and-answer session that will end shortly before 9:30 a.m. Lew will then conclude with some brief summary comments.

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

Lew Frankfort – Chairman & Chief Executive Officer

Thanks, Andrea, and good morning, everyone. As noted in our release this morning, we were able to report second quarter sales and earnings per share that were only slightly lower than prior year despite the most challenging holiday season our company has experienced during my 30-year tenure. The heavily promotional atmosphere against a deteriorating economic backdrop impacted both traffic and conversion rates in our retail stores and department store locations and ultimately led to weaker than expected sales. Importantly, we achieved our goal of providing consumers with truly innovative wow product offering compelling value. We made the deliberate decision not to discount in our retail stores, protecting our brand equity, while our business model provided the flexibility to leverage our factory business. Before we discuss the details of our second quarter results, I believe it''s important to touch on a few key points.

First, Coach is operating from a position of strength. We have made and will continue to make good sound business decisions to position us for profitable growth in the years ahead. We are continuing to build a foundation for growth by investing prudently. Our store fleet is strong, and we will be appropriately cautious about our square footage growth given the current backdrop. Our multi channel distribution model is diversified and includes substantial international and factory businesses, which reduces our reliance upon our full-price U.S. business. We will continue to protect our brand. The strength of our balance sheet and business model gives us the flexibility to adapt our pricing strategies to make the right decisions for the long-term. Our toughest comparisons are to our own historic metrics.

Second, all of our research and our experience points to the fact that the handbag and small leather goods category will hold up better than apparel and other wardrobing choices as a secular shift, which took us to this point, continues. Third, we are working to rebalance our assortment for a much more price-sensitive consumer by effectively reducing prices 10% to 15% in FY ''10 by rebalancing our handbag and small leather goods assortment. Mike Tucci will discuss this initiative in more detail shortly. Fourth, while we remain focused on innovation to support productivity, we will continue to exercise disciplined expense control, investing where prudent and cutting costs as appropriate. And lastly, when we do emerge from this downturn we will be well situated to build upon our leadership position and continue to gain market share.

While I will get into further detail about current conditions and the outlook for the category and our business shortly, I did want to take the time to review our quarter first. Some key metrics of our second fiscal quarter were, first, earnings per share declined 3% to $0.67 compared with $0.69 in the prior year. Second, net sales totaled $960 million versus $978 million a year ago, a decline of 2%. Third, direct-to-consumer sales rose 2% to $818 million from $803 million in the prior year on a comparable basis. Fourth, North American same-store sales for the quarter declined 13%. And fifth, sales in Japan declined 1% in constant currency and rose 15% in dollars.

During the quarter we opened six North American retail stores, including two in new markets for Coach, Sioux Fall, South Dakota and Modesto, California, as well as three factory stores. In addition, two retail stores and one factory store were expanded. Thus at the end of the period, there were 324 full-price and 106 factory stores in operation in North America. Moving to Japan, two locations were added. At quarter end there were 160 total locations in Japan, with 20 full-price stores, including 8 flagships, 114 shop-in-shops, 21 factory stores, and 5 distributor operated locations. Indirect sales decreased 19% to $143 million from $176 million in the same period last year on a comparable basis. This decline was primarily due to reduced shipments into U.S. department stores. We continue to tightly manage inventories into the channel given weakening sales at POS, which declined 22% for the quarter as discounting in the channel reached unprecedented levels and Coach was generally excluded from these sales. International POS sales rose slightly in the period, driven by distribution while shipments declined.

We estimate that the premium U.S. handbag and accessory category declined about 10% during the fourth quarter of calendar 2008. At the same time, Coach''s bag sales declined 6% across all channels in North America. Our total revenues in North America were down 6%, with our directly operated stores off 1% as distribution growth offset nearly all of the negative comp performance. We should note that in full-price stores our weak traffic patterns from the previous few quarters worsened considerably while conversion declined modestly and average transaction size fell slightly. Beyond the deteriorating retail environment, we would attribute this relative weakness in traffic and conversion to our deliberate decision not to engage in discounting when virtually the entire mall was on sale. In factory, where we leveraged the flexibility inherent in our business model to drive sales through pricing, we continued to see increases, although at more moderate levels across all three metrics of traffic, ticket and conversion.

While Mike Devine will get into more detail on our financials, and of course I will discuss our outlook in some detail, I wanted to give you this recap. Now I''ll turn it over to Mike Tucci to discuss our product performance for the second quarter, highlights of the second half as well as real estate and pricing strategies for FY ''10. Mike?

Michael Tucci -- President of North American Retail