coach, inc., q2 2015 earnings call, jan 29, 2015

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  • ....................................................................................................................................................................WWW.SPCAPITALIQ.COMCOPYRIGHT 2015, S&P CAPITAL IQ, A PART OF MCGRAW HILL FINANCIAL. 1

    CONTENTS

    CALL PARTICIPANTS 3

    PRESENTATION 4

    QUESTION AND ANSWER 12

    Coach, Inc. NYSE:COHFQ2 2015 Earnings Call TranscriptsThursday, January 29, 2015 1:30 PM GMT....................................................................................................................................................................

    S&P Capital IQ Estimates -FQ2 2015- -FQ3 2015- -FY 2015- -FY 2016-

    CONSENSUS ACTUAL SURPRISE CONSENSUS CONSENSUS CONSENSUS

    EPS Normalized 0.66 0.72 9.09 0.36 1.87 2.01

    Revenue (mm) 1227.57 1219.40 (0.67 %) 978.55 4239.13 4309.05

    Currency: USDConsensus as of Jan-29-2015 1:24 PM GMT

    - EPS NORMALIZED -

    CONSENSUS ACTUAL SURPRISE

    FQ2 2014 1.11 1.06 (4.50 %)

    FQ3 2014 0.61 0.68 11.48 %

    FQ4 2014 0.53 0.59 11.32 %

    FQ1 2015 0.45 0.53 17.78 %

  • COACH, INC. FQ2 2015 EARNINGS CALL JAN 29, 2015

  • COACH, INC. FQ2 2015 EARNINGS CALL JAN 29, 2015

    WWW.SPCAPITALIQ.COM 2Copyright 2014, S&P Capital IQ, a part of McGraw Hill Financial.

    Call Participants....................................................................................................................................................................EXECUTIVES

    Andrea Shaw ResnickGlobal Head of Investor Relationsand Corporate Communications

    Jane NielsenChief Financial Officer

    Victor LuisChief Executive Officer andDirector

    ANALYSTS

    Antoine BelgeHSBC, Research Division

    Barbara WyckoffCLSA Limited, Research Division

    Edward J. YrumaKeyBanc Capital Markets Inc.,Research Division

    Erinn E. MurphyPiper Jaffray Companies, ResearchDivision

    Irwin Bernard BoruchowSterne Agee & Leach Inc.,Research Division

    Joan PaysonBarclays Capital, Research Division

    John D. MorrisBMO Capital Markets Canada

    Matthew R. BossJP Morgan Chase & Co, ResearchDivision

    Oliver ChenCowen and Company, LLC,Research Division

    Omar SaadEvercore ISI, Research Division

    Robert Scott DrbulNomura Securities Co. Ltd.,Research Division

  • COACH, INC. FQ2 2015 EARNINGS CALL JAN 29, 2015

    WWW.SPCAPITALIQ.COM 3Copyright 2014, S&P Capital IQ, a part of McGraw Hill Financial.

    Presentation....................................................................................................................................................................

    Operator

    Good day, and welcome to the Coach conference call. Today's call is being recorded. At this time, foropening remarks and introductions, I would like to turn the call over to the Global Head of InvestorRelations and Corporate Communications at Coach, Andrea Shaw Resnick.Andrea Shaw ResnickGlobal Head of Investor Relations and Corporate Communications

    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 Jane Nielsen, Coach's CFO.Before we begin, we must point out that this conference call will involve certain forward-lookingstatements, including projections for our business and the current and future quarters and fiscal year.These statements are based upon a number of continuing assumptions. Future results may differmaterially from our current expectations based upon risks and uncertainties such as expected economictrends or our ability to anticipate consumer preferences. Please refer to our latest annual report on Form10-K and our other filings with the Securities and Exchange Commission for a complete list of risks andimportant factors. Also, please note that historical trends may not be indicative of future performance.Now let me outline the speakers and topics for this conference call. Victor Luis will provide an overallsummary of our second fiscal quarter 2015 results and will also discuss our progress on global initiativesacross markets. Jane Nielsen will continue with details on financial and operational results for the quarterand our outlook. Following that, we will hold a question-and-answer session. This Q&A session will endshortly before 9:30 A.M. We will then conclude with some brief summary comments.I'd now like to introduce Victor Luis, Coach's CEO.Victor LuisChief Executive Officer and Director

    Good morning. Thanks, Andrea, and welcome, everyone. As noted in our press release, our second quarterresults were in line with our expectations and our annual guidance, adjusted for the stronger-than-expected dollar.We continue to see steady progress in our results, with sequential improvement in North America, ourmost challenging business, as we implement our brand transformation initiatives, including greatlyreduced promotional impressions. International growth rates remained fairly stable in local currencyterms, with China and Europe driving segment performance.Our team continued to gain traction on the strategic plan outlined last summer to reinvigorate growthand drive brand relevance. And importantly, we continue to learn as we go along, fine-tuning our actionsacross the key pillars of product, stores and marketing.And as announced, just after the quarter ended, we signed a definitive agreement to buy luxury designerfootwear brand Stuart Weitzman, which we believe has significant domestic and international growthpotential. Stuart Weitzman is a complementary brand with many similar core equities and characteristicsto Coach. It's a brand built on offering innovation, relevance and value to a loyal customer base. It hasan increasing global recognition and a presence in 70 countries and is known for its craftsmanship andquality, fusing fashion and fit in a segment where comfort is a major driver of customer loyalty.While we will develop each brand separately, over the long term, we will learn from each other,driving synergies across our respective businesses. Specifically, we will leverage Coach's internationalinfrastructure and expertise in handbags and accessories to develop Stuart Weitzman's handbag andaccessories business. And in turn, Coach will benefit from the Stuart Weitzman team's expertise infootwear development, where they are proven leaders in style and comfort. We are very excited aboutour first acquisition and look forward to welcoming the Stuart Weitzman brand and organization into theCoach, Inc. family this spring.Also announced in our press release was the streamlining and reinforcement of our North Americanbusiness unit and global marketing and digital teams, with the promotion of 2 seasoned Coach executives,Andre Cohen and David Duplantis. They are both proven leaders and brand builders with experienceacross many aspects of Coach's global business and are ready to address the opportunities ahead with

  • COACH, INC. FQ2 2015 EARNINGS CALL JAN 29, 2015

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    their creativity, tenacity and exceptional leadership qualities. Most importantly, they have consistentlydelivered results for our brand and company.Andre will become President, North America. He has extensive experience in managing both developedand evolving businesses. In this expanded role, he will be responsible for all functions that drive Coach'sNorth American retail businesses including retail management, merchandising and planning, marketingand e-commerce. Over his 7 years with Coach, Andre has taken on increasingly senior roles, includingPresident and CEO, Coach China and Coach Asia, and is a highly respected Coach leader and experiencedin driving growth, retail operations and brand development.Francine Della Badia, who had responsibility for North America retail management, merchandising andplanning, will leave Coach next month. David Duplantis, currently Coach's President, Global Digital andCustomer Experience, will expand his role to include global marketing and customer intelligence. Thisadded responsibility will leverage his extensive Coach global brand experience in North American acumen,creating a single, global center of expertise.Over nearly 15 years with the company, David has been successful in many leadership roles withinmerchandising and marketing. His focus during the last 5 years has been around global digital, developingand driving our omni-channel strategy, for which Coach has again been recognized by L2, taking theleadership position in their 2014 Digital IQ Index for Fashion.Stephanie Stahl, who previously led Global Marketing and Strategy, will depart from the company inFebruary. Both Fran and Stephanie have made significant contributions to Coach, most recently in thecreation and initial implementation of our brand transformation agenda. We have great admiration andrespect for their accomplishments and look forward to building upon the strong foundations alreadyestablished.Before we get into the details of the quarter, and as promised, I thought we would share some of theactions we've taken in keeping with our plan as well as our learnings. The most significant takeaway fromholiday was the clear inflection point in the 20 retail stores globally, which offered the modern luxuryexperience, the new product and new store concept and environment supported by our evolved marketingcampaign. While these stores are still few in number, their performance was substantially better thanthe rest of the fleet and provided the most compelling evidence to date that we are moving in the rightdirection.Starting with product. Stuart Vevers' designs represented about 90% of our retail stores' women'sofferings during holiday. We know that the editorial community and fashion press has clearly reactedpositively, and we now see consumers starting to take notice. In our quarterly brand tracking, we sawsome positive indicators emerging, including improved perception of high quality among category driverconsumers, lower perceptions of overall discounting amongst category drivers and positive movement inbrand affinities among millennials.In outlet, our approach of providing value through product elevation has continued, with all of our monthlylaunches benefiting from new materials, branding and hardware. The positive global consumer responseto our elevated outlet strategy gives us confidence in our long-term direction to drive relevance across allchannels.In addition, earlier this month, we presented for the first time ever at London's Fashion Week for men'sto overwhelmingly positive reviews from both the editorial and retail community. We are excited aboutlaunching in key European and U.S. retailers in what is our first foray into men's wholesale distribution.And there were several key learnings about products this holiday season from our store experience as wellas pilots and ongoing consumer research. We continue to reaffirm that our fashion, when supported bymarketing, drives high sell-throughs of the featured product, such as the case with our Rhyder 33.While we continue to be pleased with customer reaction to our new product, we recognized an opportunityto increase the breadth of our offering at opening price points and to become a bolder destination forgifting in our full-price retail channel. In short, we understand the need for continually evolving thefunction and pricing balance in our retail assortment in an increasingly competitive environment.In outlet, we are pleased with our initial product replatforming and have executed well across price points,with our gifting assortment having been exceptionally well received.On to stores. As planned, during the quarter, we opened our first stores in the modern luxury concept,including our new flagship in Shinjuku in Tokyo and our boutique in Shin Kong Place in Beijing. These werefollowed by the reopening of our stores at the Time Warner Center in New York City and our Rodeo Driveflagship in Beverly Hills.

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    Prior to holiday, as expected, we had a total of 20 stores opened globally in the new concept, including 2others here in the U.S., Fashion Valley in San Diego and the Americana in Manhasset, Long Island, withthe balance in Japan, Greater China and Europe. As noted, these stores across channels, such as mall andstreet locations and geographies, significantly outperformed the balance of our fleet. And we remain ontrack to renovate a total of 150 retail locations in FY '15 and open about 50 to 60 new stores globally inthis concept.As of today, we have closed 53 North American retail locations and are on track to close approximately 70for the full year. In addition, we've closed 8 outlet stores, including 6 men's-only outlet locations, whichwe folded into existing stores, leveraging the team and cross-shopping opportunity. We also closed the2 outlet stores identified in key markets as part of our learning agenda. And as expected, we closed 9out of 10 outlet pop-up stores we had used opportunistically to manage deleted inventory, with the lastbecoming permanent and will be considered an opening.In North American department stores, we have already completed nearly 200 projects over the first half,installing open-sell environments and replacing the old case lines and have seen an improvement versusthe balance of doors, while we still expect to convert over 300 total locations from case line presentationsto open-sell this fiscal year.We also expanded the shop manager program in the wholesale channel with now approximately 30managers in key doors, on target with our goal of adding a total of 50 shop managers by the end of fiscal2015. We are taking the key learnings from our successful new stores and are using them to inform thedevelopment of the modern luxury concept for other channels. Our first outlet stores will open in thesecond half, and we are also working on both our wholesale store and travel retail concept. And finally, wehave plans underway for a warm-up of stores that are not getting the full expression of this concept.On the marketing and customer experience front. Continuing with our comprehensive marketing strategy,during holiday, we presented the Dreamers campaign, along with advertising around our licensedcategories of watches and sunwear, again increasing our fashion advertising pages with clear improvementin our positioning. We also saw increases in editorial mentions and rank in all 3 major markets: NorthAmerica, Japan and China.And as we increased our positive brand impressions, we also continued to pull back on our North Americapromotional activity. Consistent with our previously announced strategy, during the year's holidayquarter, we held only one invitation-only customer event around Black Friday and as planned, started oursemiannual sale in mid-December, which ran through January 21, a duration matching our June-July eventand in line with many other lifestyle fashion brands, many of whom went on sale -- open sale right afterthe Thanksgiving holiday.As you know, similar to our competitive peer group, we adopted a semiannual sales model last summerand have found it to be successful in the recruitment of new customers. We also reduced the cadence ofeOS flash sales from 3 a week last year to less than 1 a week this quarter. By the end of FY '15, we expectto be down to about 2 events per month. In addition, there were no Coach day events in North Americandepartment stores during the holiday quarter as compared to 16 days in the second quarter of 2014.While our fashion campaign was well received and effective in repositioning the brand, we continue toevolve our Dreamers campaign to appeal to a broader audience. This spring's campaign features actressChloe Grace Moretz and musician Kid Cudi with core Coach silhouettes. You will see our campaignscontinue to progress in the seasons ahead.So while much of the journey remains in front of us, we are very pleased with what we've accomplishedthese last 2 quarters and will continue to update you on these initiatives as we move forward.Turning to the results of last quarter. Some key financials were: First, net sales on a reported basis totaled$1.22 billion versus $1.42 billion a year ago, a decrease of 14%. On a constant-currency basis, salesdeclined 12% for the quarter. Second, earnings per share totaled $0.72, excluding transformation-relatedcharges, as compared to $1.06 in the prior year's second quarter.Third, international sales increased 5% on a constant-currency basis and decreased 1% in dollars to $421million from $425 million last year. China's sales rose 13% in constant currency and 12% in dollars withpositive comparable store sales, while sales in our directly operated locations in Asia and Europe rose inconstant currency as well. And fourth, North American sales fell 20% to $785 million from $983 millionlast year on a 22% comparable store sales decrease.During the quarter, looking at distribution and consistent with our annual guidance, there were littlechange in our global directly-operated door count, in total adding 2 net locations worldwide, 6 in Greater

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    China, 2 in Hong Kong and 4 on the mainland, 3 in Europe and 1 in Japan, while closing a net of 8locations in North America. As you know, we are primarily focused on replatforming our stores, elevatingbrand perception, optimizing our store fleet and opening new locations selectively in key markets.Moving on to sales by channel and geography and starting with our domestic businesses. Our totalrevenues in North America declined 20% for the quarter, with our directly operated businesses alsodown 20% as expected. As noted, total Q2 same-store sales declined 22%, with the reduction in eOSevents pressuring total comp by about 6 percentage points, as store comps declined 16%, the sequentialimprovement from the 19% decrease posted in Q1.In department stores, our sales trends at POS were similar to the company's directly operated stores,while shipments into this channel declined to a somewhat greater degree as we reduced Coach-specificpromotional events, consistent with our own retail stores. While we've been pleased with the relativeoutperformance of the locations we've converted to open-sell, these were amongst the smallest doors andtherefore, have not provided a significant overall contribution. We expect that the second half could bemore challenging at POS in this channel, given the planned and even sharper decrease in year-over-yearpromotional activity for the spring season.Overall, we estimate that the North American premium women's handbag and accessories market continueto rise at a double -- excuse me, at a high single-digit rate in December quarter, in line with recent trends,as the category continues to benefit from the secular shift into accessories from apparel.Turning to men's, which represents 18% of the global category spend or about $7 billion today. As we'vediscussed, we're also continuing to drive our men's business globally, primarily through new dual-genderstores. As expected, in the second quarter, Coach's global sales of men's bags and accessories wasessentially flat, impacted by the weaker yen and the pullback of promotion and eOS in North America. Andas noted, we were delighted with the response of Stuart's first men's presentation during Fashion Weekat London Collection: Men's earlier this month. Therefore, looking ahead, we remain bullish about theprospects for our global men's business and are continuing to target $1 billion in sales in 2017.Before we discuss international sales, I wanted to provide some more insight into our North Americanbusiness and holiday results. As I'm sure you have heard, the overall market was rather promotional, withincreased competitor activity across all channels from the week leading up to Black Friday. From a channelperspective, traffic trends in retail malls continued their cyclical decline, with the outlet channel faringbetter.This holiday quarter was the first time that we were able to offer consumers the full modern luxuryexperience across product, environments and marketing, albeit in only a few stores. However, it is provingto be a very powerful strategy in terms of changing consumers' perception and the impacting results asthese locations posted positive comps that were greatly above the performance of the fleet. We also sawa relative outperformance in the 12 MSAs in North America where we are most focused and where we aredistorting our attention.In outlet stores, the overall environment continued to be very promotional, especially in our space, withour competitive set incrementally more aggressive than last year's holiday season. We were especiallypleased at customers' response over the important Black Friday weekend and more generally, to thehigher-value new collections we have launched during holiday.As planned, our total store comp was down mid-teens, with ticket up and traffic pressured by overall weaktraffic and lower conversion, greatly impacted by the reduction in promotion days in our outlet -- excuseme, in our retail and wholesale channels. Our total comp was pressured an additional 6 points by eOS,as we pulled back from 3 flash sales events a week in last year's second quarter to less than 1 event perweek this holiday season.Over the year, we expect our store comp trend to improve as new product penetration grows across bothchannels, more stores are replatformed and marketing intensifies. However, our internet comp will worsenas we further curtail events.On a tighter assortments of handbags in retail, with SKUs down about 25% year-over-year, we sawabsolute strength in our elevated product. More generally, the above-$400 price bucket grew inpenetration, saw a positive comp and continued to represent about 30% of handbags sales versus roughly20% last year. More broadly, leather continues to outpace logo across all channels, and we continue todesign into this trend. It's both a shift that favors Coach longer term given our heritage in leather goodsand elevates our impressions in the marketplace.

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    Outside of handbags, we continued to see relative strength in our lifestyle categories in Q2. Women'sfootwear significantly increased its penetration from last year's level of about 8%, growing to 12% ofNorth American retail sales in those stores carrying a full offering. Performance was driven by boots,where we were better positioned in terms of inventory versus last year. We were also seeing a positiveresponse to our expanded men's and women's footwear assortment in outlet stores. In total, we saw asignificant increase in footwear sales across all our directly operated channels in North America.As I've already talked to the global learnings around product, store and marketing in my opening, I willmove to our spring initiatives. We're very excited about the recent arrival of Stuart's first spring collectionwith Swagger, our key silhouette, offered in all stores. And we are now bringing in further designs intooutlet, including Mickey [ph] and Ruby, building on the success of Colette, Margot and Phoebe in Q2.As discussed during Analyst Day, our approach to customer events, formerly known as PCE, will be farfewer events annually, about 3, focusing specifically on the best customers during key holiday periods,such as our Black Friday events, the only one held in the second quarter. We expect to hold one in Marchand one in the fourth quarter around Mother's Day. We are being more tailored in our segmentation,selectively extending invitations. Separately, with 2 semiannual sales now under our belts, we will continuethis practice moving forward, with our next event scheduled for the May-June period. This approach willsupport sustained sales growth and build our brand, reinforcing our multichannel positioning.Overall, we are pleased with the initial steps we've taken to reposition Coach, notably in the NorthAmerican women's business, adding more emotion and excitement to the product offering and around ourbrand.Turning now to our international segment, which represents about 1/3 of Coach's business. Sales rose5% on a constant currency basis in the second quarter but declined 1% on a reported basis, primarilyimpacted by the stronger dollar. As mentioned, China sales rose 13% from prior year in constant currencyand 12% in dollars, with positive comparable store sales and slower distribution growth, in line with ourforecast.We remain very optimistic on the prospects for this market over time as the long-term drivers that we'veconsistently mentioned remain intact, including a rapidly growing middle class, an overall shift frompure status to value as well as the recent anticorruption and anti-extravagance campaigns, favoring theaffordable luxury segment, and the evolving retail landscape with the development of new luxury shoppingmalls.However, we understand that there will likely be continued volatility in the near term due both to macroissues and geopolitical events, which are impacting trends in China and some key tourist markets, notablyHong Kong and Southeast Asia. At this juncture, we are still targeting sales of about $600 million for FY'15 in China, primarily driven by distribution growth, but would note, as many others have called out,that the current conditions are limiting our ability to predict PRC consumer travel and shopping patterns,especially in Hong Kong and Macau. Therefore, we continue to expect ongoing performance volatilityduring the back half of the year.To this point, our other Asia direct businesses outside of China and Japan, South Korea, Taiwan, Malaysiaand Singapore posted positive aggregate growth in local currency, though the region continued toexperience a slowdown in traffic, impacted by shifting trends in PRC tourist travel as well as weak inboundtravel into Malaysia, given the sustained impact from the airline disasters.As expected in Japan, we posted a 7% decrease in constant currency, due in large part to the continuedoverhang of the April consumption tax increase. Dollar sales declined 18%, reflecting the weaker yen. InEurope, where our brand is small but growing rapidly, we generated significant double-digit sales growth inthe quarter, driven both by distribution and comp.And we continue to believe that Europe represents a significant long-term opportunity for Coach, both withthe domestic shopper and the international tourist, notably in key European cities, where the affordableluxury segment is outperforming traditional luxury. Given the recent and significant strength of the dollarversus the euro, we are adjusting our sales forecast for FY '15 to about $90 million versus our priorguidance of $100 million.Turning now to our global distribution plans. As they haven't changed materially from what we outlinedon the last 2 earnings calls, I'll be brief. We continue to expect our square footage globally and across allchannels will increase slightly in FY '15, reflecting our North American fleet optimization. Our overarchingfocus will be on renovations and remodels to drive productivity.

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    To this point and as guided previously in North America, our directly operated square footage will be downaround 5%, given the 70 retail and 15 outlet closures, offset by a number of expansions within the contextof our transformation and a number of outlet store openings.And in wholesale, as we've noted, we're moving to more open, accessible displays in rolling out a shoppermanager program. We expect our footprint in department stores to increase modestly in FY '15. We planto add about 40 locations and about 3% to 4% square footage, while converting more than 300 locationsfrom case line presentations to open-sell.Turning to China. We are still planning to open about 20 stores and could have about 10 closures, resultingin around 10 net openings. While we expect to open a few stores in other direct Asia markets outside ofChina and Japan in FY '15, our portfolio approach is focused on renovating key impact stores with ourmodern luxury concept in order to drive our brand transformation and maximize the productivity gainswith only modest growth in our footprint.Turning to Japan. In FY '15, we continue to expect the total number of locations to remain the same, withslight square footage growth from the new flagship and expansions of a few highly productive locations.Led by retail, our brand transformation plans in Japan focus on the renovation of key doors in Tokyo,representing over 70% of the traffic by the end of FY '16, [ph] including the new flagship store in Shinjukuwhich opened in October. We will also renovate key locations in important cities throughout the countryand our flagship stores in Tokyo this spring.As a reminder, the next 2 quarters in Japan will be very unbalanced due to the pull-forward of demandin last year's third quarter as the consumption tax increase was affected on April 1, 2014. Therefore, wewould expect a double-digit decline in local currency sales in the third quarter with a rebound in the fourthquarter. Of course, reported sales will be substantially lower given the yen weakness.Moving to Europe. As noted in FY '15, we are now projecting reported sales of around $90 million giventhe strength of the dollar against the euro and adding about 10 directly operated locations and morethan 100 wholesale locations. Our goal is to achieve over $0.5 billion in sales at retail, representing amid-single-digit share of the premium men's and women's bag and accessories market over our planninghorizon.Finally, as we've expressed in the past, we also believe there is significant opportunity for the Coachbrand in global travel retail, which represents the majority of our international wholesale sales. At quarterend, we had a total of 214 international wholesale locations in 28 countries, which included 110 travellocations, and expect to add about 30 additional net locations by year-end.Now I'll ask Jane to provide some additional detail on our financials and outlook for the balance of theyear. Jane?Jane NielsenChief Financial Officer

    Thanks, Victor. Victor has just taken you through the highlights and strategies. Let me now take youthrough some of the important financial details of our second fiscal quarter results as well as our outlookfor FY '15.Our quarterly revenues declined 14%, with North America down 20% and international down 1%. Asnoted, on a constant currency basis, revenues decreased 12% overall, with international sales up 5%.Excluding transformation and other related charges, net income for the quarter totaled $200 million, withearnings per diluted share of $0.72. This compared to net income of $297 million and earnings per dilutedshare of $1.06 in the prior year's second quarter.For the quarter, operating income totaled $299 million on a non-GAAP basis versus $436 million last year,while operating margin was 24.5% versus 30.7%. During the quarter, gross profit totaled $841 millionas compared to $983 million a year ago, while gross margin was 69% versus 69.2%. As expected, grossmargin benefited from the reduction in North America promotional activity but was negatively impacted bythe yen.SG&A expenses as a percent of net sales totaled 44.4% on a non-GAAP basis compared to 38.5% in theyear ago quarter. Absolute SG&A expenses declined slightly, reflecting a stronger dollar than expected.In addition, we repurposed last year's promotional costs primarily associated with events into increasedbrand-focused marketing spend this holiday. We've also captured savings related to our restructuringssooner than originally anticipated.As I turn to GAAP metrics, let me recap key transformation and other related charges. As previouslyannounced, we expect to incur pretax charges of approximately $250 million to $300 million associated

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    with our transformation plan, of which about $130 million was reflected in our fiscal fourth quarter 2014results, with another $57 million included in our first half 2015 results.These changes are related to inventory and fleet-related costs, primarily in North America, includingimpairment, accelerated depreciation and severance cost associated with store closures. In total, we nowexpect to capture over $70 million in savings related to our transformational initiatives in fiscal 2015 andapproximately $150 million in ongoing annual savings in fiscal year 2016.During the second quarter of FY '15, the company recorded charges of $20 million under the company'smulti-year transformation plan. These charges consisted primarily of accelerated depreciation forrenovations, lease termination costs related to store closures and organizational efficiency costs. Theseactions increased the company's SG&A expenses by $19 million and cost of sales by $1 million, negativelyimpacting net income by $14 million after tax or $0.05 per diluted share in the second quarter. In addition,the company recorded cost of $4 million associated with the pending acquisition of Stuart Weitzman,which impacted net income by $2 million after tax or $0.01 per diluted share.Therefore, during the first 6 months of 2015 -- fiscal 2015, the company recorded total transformation-related charges of $57 million and acquisition-related costs of $4 million, increasing SG&A expenses by$56 million in total, cost of sales by $5 million and reducing net income by $43 million after tax or $0.16per diluted share for the current 6-month period.Moving on to the balance sheet. Inventory levels at quarter end were $447 million, down 19% from Q2FY '14. Cash and short-term investments stood at $1.06 billion as compared to $799 million a year ago,substantially held outside of the U.S. As expected, we ended the second quarter with only $20 millionoutstanding on our credit facility, but would expect our debt level to rise in order to cover our workingcapital needs in light of investments in our business, the acquisition of Stuart Weitzman and the newcorporate headquarters.Net cash from operating activities in the second quarter was $445 million compared to $400 million lastyear during Q2. Free cash flow in the second quarter was an inflow of $406 million versus $340 million inthe same period last year. Our CapEx spending was $39 million versus $61 million in the same quarter ayear ago. We now expect CapEx for FY '15 to be in the area of $300 million to $350 million, excluding thecosts associated with the new headquarters, which are expected to be approximately $90 million in FY '15.And we anticipate maintaining our dividend at the annual rate of $1.35 for FY '15.Before I discuss our financial outlook, I want to touch on the pending Stuart Weitzman acquisition.Although the Federal Trade Commission just granted us early termination of the Hart-Scott-Rodino waitingperiod, I can't provide too many details around the financials and the synergies beyond what Victoralready noted. And we do not expect to close the acquisition until May.As disclosed, we expect the Stuart Weitzman business to be accretive from year 1, exclusive oftransaction-related charges, including anticipated purchase accounting adjustments and contingentpayments related to the transaction. We expect to use our cash to fund a significant portion of thepurchase price.In short, Stuart Weitzman meets the criteria we established for ourselves in an acquisition. It's a solidgrowth company with over $300 million in annual sales in one of our targeted lifestyle categories. Thebusiness has significant domestic and international development potential, particularly in Asia.Importantly, the size, scope and vibrancy of the Stuart Weitzman brand, along with the continuity ofits management team, including Stuart Weitzman himself, allows for a seamless transition to Coachownership. We believe it will be an enhancement to our transformation rather than a distraction, and it willcontinue to run as a largely stand-alone business.Turning now to our financial outlook for FY '15. Most broadly, our annual guidance has not changed for FY'15, although the stronger dollar and international tourist trend will impact reported dollar sales and SG&Agrowth.First, on sales. We still expect to deliver a low double-digit decline in constant currency for fiscal 2015,though down slightly more on a reported basis due to the increasing strength of the dollar. Also keepingin mind the compares in Japan, given the consumption tax increase in April 2014, we would expect theirthird quarter sales to be weaker than fourth quarter.Overall for FY '15, we expect continued pressure on sales due to our reduced promotions and secondhalf store closure activity. We are now projecting a mid-teens comp decline in our North America storesgiven what we actualized in the first half and our second half forecast of improvement with eOS pressuring

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    the aggregate North America comp by an additional 10 points. This equates to a mid-20s decline inaggregated comps.Over the course of the fiscal year, we would expect continued modest store comp improvement as theproduct and store initiatives roll out, offset by the continued curtailment of eOS events. Gross margin isstill projected to be in the 69% to 70% range for the year, with higher sourcing costs largely offset byfavorable channel mix and lower promotional activity.SG&A expenses are now expected to grow at a low single-digit rate, reflective of our increased marketingspend and transformational initiatives, but helped by currency and the faster realization of savingsthan anticipated. We do still expect that our second half compares will have modest increases given theprior-year dollar declines and the timing of our marketing spend. Taken together, we continue to expectoperating margin to be in the high teens.Finally, our tax rate is expected to be in the area of 32% for the year, though there will be some variabilitybetween quarters. We have a strong and flexible balance sheet, with about $1 billion in cash andinvestments and low leverage. As noted during our Analyst Day and previous calls, we plan to access thecapital markets as needed to fund our headquarters investment and a portion of the cost of our recentlyannounced acquisition of Stuart Weitzman, which will result in some interest expense in the second half ofthis fiscal year.In closing, I'd like to reiterate Victor's earlier remarks. We laid out a very clear plan last summer, andits execution is well underway. You heard this morning about our brand transformation progress aroundproduct and marketing as well as our key learnings and takeaways, and I will add that we are on trackfrom an investment and restructuring perspective.We've now taken well over half our total expected transformation-related charges over the last 3 quarters,including rightsizing our inventory levels. We're investing in replatforming our stores and wholesale doorsand are on track to spend about $570 million over the next 3 years. We've begun to realize our costsavings, running a leaner, more efficient organization sooner than expected.Therefore, looking further ahead, we would expect to realize an overall annual financial improvementbeginning in FY '16, with FY '17 being the year when we return to growth in line with the category. Wehave the resources to fund our plan while maintaining our dividend during our heavy investment period.Ultimately, our objective is to restore Coach to a place of best-in-class profitability and sustainable growth.I'd now like to open it up to Q&A.

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    Question and Answer....................................................................................................................................................................

    Operator

    [Operator Instructions] The first question is from Bob Drbul with Nomura.Robert Scott DrbulNomura Securities Co. Ltd., Research Division

    Victor, I just had 2 quick questions. I think the first one, in the press release, Victor, you talked aboutencouraged by the green shoots you're seeing. Can you provide any numbers around the relativeoutperformance of some of the new modern luxury doors? And then the second question that I have isjust with the new product going into the outlets, can you just talk a little bit more about the strategy, theprice points and sort of how you're executing that piece of it and sort of the early response that you'reseeing there?Victor LuisChief Executive Officer and Director

    Sure. In terms of the modern luxury doors, Bob, which really represent, as you said, one of the mostpromising of the green shoots that we're seeing in our retail stores, we have approximately 20 that wehave replatformed prior to holiday, and that's across a variety of different channels, so street locationsuch as here in New York and Rodeo Drive, mall locations as well as in certain international locations.And we're very, very pleased with the performance, which have, in fact, exceeded our own internalexpectations, positive comping and doing tremendously better than the rest of the fleet. And it's certainlyvery consistent with the strategies that we have consistently shared with all of you, which is that webelieve that it is when the product, stores and marketing all come together that we will see the changein perception required to drive the business forward. And that's exactly what we're seeing in theselocations. And as we expressed in our speakers' notes, we are continuing with the 150 replatforming ofcurrent locations and then 50 to 60 new locations for the second half of the year. In terms of the outletsdiscussion, Bob, I think that you were specifically talking about our product strategies there. Very excitedabout what we're seeing there and very consistent with what we have shared with you in the past. First,Stuart's design team have been touching all of the current products that had existed upon his arrival.And we, in essence, replatformed the product with new leathers, new materials, new hardware, newbranding, adding a lot of value to that channel at increased cost. But the consumer is reacting well. We'reseeing her more than willing to pay for it, and that has driven an improved performance in our outletstores year-on-year during the holiday period at increased gross margins year-on-year as well in whatwas an increasingly competitive environment. So we're really pleased. And it really started with our terrificbalance of price points across a mixture of categories, handbags, accessories, footwear and a great giftingcollection from Black Friday. So very much great learnings for us that we'll leverage across channels as wemove forward.Operator

    The next question is from Matthew Boss with JPMorgan.Matthew R. BossJP Morgan Chase & Co, Research Division

    So can you just talk about some of the expense savings in the quarter particularly and then also visibilityto the full $150 million opportunity? You made some management changes and talked about streamliningin the release today. So any other potential buckets of opportunity? And finally, just any changes aroundthe SG&A that you announced today for the full year, just if you could outline that.Jane NielsenChief Financial Officer

    Sure. What we saw is -- starting those [ph] in the near end, what we saw in the quarter was really 2benefits, as I called out. One was the stronger dollar, which had a benefit to our expense line. So thatwas a key driver. And then we realized stronger savings from our restructuring than we anticipated. Werealized those savings sooner, largely related to organizational efficiency. We also were able to repurposemarketing spend from promotional events, largely related to eOS, into more brand-focused events and

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    realized savings there. So those were the 3 drivers of savings. We'd expect the benefit of the weaker yenprimarily to continue as we move through the year, but we do expect that marketing spend related tobrand focused -- brand equity building will be heavier in the second half. As we look forward to the $150million of savings, those savings will primarily be related to efficiencies related to our store closure. They'llbe related to organizational streamlining and efficiency. Those will be the key drivers of savings as wemove forward.Matthew R. BossJP Morgan Chase & Co, Research Division

    Great. And then just one follow-up. Can you just walk us through some of the puts and takes on the grossmargin this quarter globally and more importantly, confidence longer term with that 69% to 70% targetrange?Jane NielsenChief Financial Officer

    Absolutely. As I look at our gross margin, in this quarter, we really executed our strategy. We maintainedour high gross margin at very stable rates that you've seen in prior year. And really, we executed thestrategy. We invested in our product and elevated our product, as Victor talked about, and we reduced ourpromotional activity in North America and really struck that balance. We had a little bit of pressure fromthe yen on gross margins, but really, that's our strategy, and you saw it come through on the gross marginline.Andrea Shaw ResnickGlobal Head of Investor Relations and Corporate Communications

    [Operator Instructions] And given the lateness of the hour, we will extend our Q&A to 9:45 to answermore questions. Please go ahead, operator.Operator

    The next question is from Barbara Wyckoff with CLSA.Barbara WyckoffCLSA Limited, Research Division

    Can you hear me?Operator

    Yes, ma'am, we can.Victor LuisChief Executive Officer and Director

    Barbara.Barbara WyckoffCLSA Limited, Research Division

    Could you talk about the leadership in Asia? How is this evolving with all the changes? And can you justalso comment on sales in top-tier doors versus the lower-tier doors and sort of the future of expansionthere, where it's going to be concentrated?Victor LuisChief Executive Officer and Director

    Specifically, Barbara, top-tier doors versus lower-tier doors, are you talking about the tiers in terms ofcities within Mainland China?Barbara WyckoffCLSA Limited, Research Division

    Yes, yes.Victor LuisChief Executive Officer and Director

    Okay, thank you. In terms of the leadership in Asia, there is no change impacted by the changes we'vejust announced. Andre Cohen, who is taking over as our leader for North America, has been playing the

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    role of Chief of Staff for the recent past, having returned from a family leave after a year. And the currentleadership in Asia continues as is. In terms of our distribution strategies in China, as we've mentioned inthe past, Barbara, and talked -- we've been, this year, very focused on ensuring that. We're prepared forthe consolidation that is taking place amongst certain malls, especially in the Tier 1 and Tier 2 cities. Butlonger term, we still very much believe in the opportunity in the Tier 3 and Tier 4 cities, not only in whatit promises for the domestic market because it is where we're seeing the greatest growth overall in Chinafrom a GDP perspective, but also what it means for outbound tourists. As we know, there's approximately100 million outbound tourists from China today. That number is expected to grow by the end of 2019 toapproximately 200 million. The vast majority of that growth will come from those Tier 3 and Tier 4 cities.And so we're very focused on developing our awareness, developing our brand in those cities, not only tobenefit domestically, but also in the international tourist markets.Operator

    [Operator Instructions] The next question is from Ike Boruchow from Sterne Agee.Irwin Bernard BoruchowSterne Agee & Leach Inc., Research Division

    Victor, I guess, could you elaborate a little bit more on the remodels? I think you said there's about 20now, and you said you were pleased with the performance. Should we read in that the comps in thosestores are actually in the positive range? And then, I just want to double check. Did you say that weshould have about 150 of those remodels converted by year-end, with another 50 to 60 of additionalstores? Just wanted to clear that up.Victor LuisChief Executive Officer and Director

    That's correct. And you've just confirmed everything I said. They were positive and 150 for the second halfin terms of remodels, with an additional 60 new locations [indiscernible].Operator

    The next question is from Oliver Chen with Cowen and Company.Oliver ChenCowen and Company, LLC, Research Division

    Regarding your statements on the product assortment and the SKU breadth, is there more to go in termsof reducing the SKUs? And did you have comments on the positioning regarding core versus downtownand uptown and if you're happy with the composition of how the assortment looks with respect to thatmerchandising strategy?Victor LuisChief Executive Officer and Director

    Thank you, Oliver. Yes, in terms of reduction of SKUs, not at all. In fact, if anything, from this holidayquarter, we've learned that the big opportunity for us was perhaps to have been a little bit fuller in termsof our gifting assortment, especially in retail. With Stuart's initial launch, we were very focused on thefashion messaging, which has, of course, been very well received. As we move forward, what I thinkyou'll see, Oliver, in our assortment is a continued reinforcement of our core or what we're calling Coachessentials, not only in terms of what they represent at those core price points, the $300, $400 pricebucket, but also in terms of how we elevate those styles with other fabrications, other more premiumleathers and the like to continue to bring texture and elevation into the stores. So if anything, I think you'llsee in the quarters ahead, as we head into FY '16, a slight increase in our SKU counts from the reductionthat we've announced of 25% this past quarter.Operator

    The next question is from Antoine Belge with HSBC.Antoine BelgeHSBC, Research Division

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    It's Antoine Belge at HSBC. Regarding inventories, we've seen quite a substantial decline. How do youexpect inventories to trend towards the end of the fiscal year? And what's the view on the quality of thoseinventories?Jane NielsenChief Financial Officer

    Yes, Antoine. As you saw in last fiscal Q4, we took the opportunity to evaluate our inventory with respectto our transformation. As we've moved forward, you've seen inventory track very closely or in a rangeof sales. That's our long-term goal, to have inventory be in line with sales, with some puts and takesfor building for certain holiday quarters and store openings. But that's the trend you should expect tocontinue. I feel very good about the quality of the inventory that we sit on right now.Victor LuisChief Executive Officer and Director

    And Antoine, I would only add one thing, which -- as I mentioned in my notes, we had 8 pop-up factorydoors that we used to cleanse those inventories, which we have since closed and are no longer operating.Operator

    The next question is from Erinn Murphy with Piper Jaffray.Erinn E. MurphyPiper Jaffray Companies, Research Division

    Great. You talked about pricing in your prepared remarks and needing to have a broader array of openingprice points. Could you maybe elaborate on what you're learning there? It does seem like a slightdeviation given your overall kind of build to kind of elevate the brand.Victor LuisChief Executive Officer and Director

    Sorry. Could you just repeat the second half of that question again? You kind of fell out a bit.Erinn E. MurphyPiper Jaffray Companies, Research Division

    Absolutely. So as you've talked about kind of broadening the opening price points, I would love to hearkind of what you're learning there's as you think about that. It just seemed a little bit of a slight deviationgiven your overall context to elevate the brand, so would love to kind of hear what you're learning as youkind of delve into that.Victor LuisChief Executive Officer and Director

    Sure. Yes, I mean, elevation has never been -- we've said this over and over, elevation has never beenabout simply increasing price points. It's been about improving the perception or elevating the perceptionof the brand, if you will, qualitatively in the mind of the consumer. And the most important step that we'vetaken there has been the pull back in promotions. And the $300 million reduction, if you will, in eOS thatwe've discussed and shared with you guys openly as well as the vastly reduced number of events that weare holding in our retail channel, which is impacting our comps in that channel, especially as well as thereduced Coach days in the wholesale channel as well. In terms of the assortments, balance has alwaysbeen important for us. We are very focused on continuing to refine what we call core, which Oliver askedabout earlier. And there are certain silhouettes which we're continuing to refine into -- one example is theTaxi Tote, which is getting new shapes, getting new sizes, getting new functionality based on the additionallearnings that we've had as well as other key core silhouettes and specifically a carryall, specifically theEdie shoulder bag which will get different sizes and different materials. So what we're doing is enrichingthe assortment, broadening it for that core customer to ensure a broader range of fabrications and pricepoints.Operator

    Our next question is from Omar Saad with Evercore ISI.Omar SaadEvercore ISI, Research Division

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    Wanted to ask about Stuart Weitzman a little bit. Maybe have you elaborated -- I think you made someopening comments around the rationale behind the acquisition and your excitement behind both theopportunity for that brand and maybe cross-pollination or pollinization of certain capabilities. But it wasinteresting to me to hear you qualify it as your first -- the Coach's first acquisition. And is there somethingspecific about this asset that really kind of compelled you? Or could this be part of an -- the early stagesof an evolution towards more of a portfolio approach to the North America global luxury market?Victor LuisChief Executive Officer and Director

    Thank you, Omar. We're really excited about Stuart Weitzman. Of course, the deal doesn't close untilMay. So we're very limited in what we can say. But first, it's a wonderful, clean brand. Leadership inits category, not unlike ourselves at that size and larger in our earlier days especially. A brand that hashistory and heritage, over 30 years of legacy, and has extremely clean distribution and pricing, top-tierdepartment stores, one outlet door here in the U.S. and only one in Europe, proven technical know-how,a great senior management team in place and a truly differentiated supply chain, with the relationshipsand ownership that they have, a part of their production. Saying that, there's also, in addition to theattractiveness of the brand itself, of course, the operational, technical and know-how synergies that wefeel extremely good about for ourselves. In my notes, I talked about our own footwear business and itsgrowth this past quarter. I think some folks forget that we have a $200 million footwear business already.And so combined with Stuart Weitzman, we are, today, or will be, when the deal closes, the #2 U.S.market share player in the premium shoe market, following Uggs, I believe, as the #1. And so there's anopportunity, of course, for Stuart Weitzman to share with us their know-how and especially everythingthat they know so well around fashion and fit and comfort. They have an incredibly loyal customer basethat swears by the fit. And that's an opportunity for us at Coach as we look at our current shoe business,which is growing and has a lot more opportunity. And of course, they have an opportunity themselves togrow their multi-category strategy as they have a very nascent handbag and accessories business today,no more than 4% to 5% of their total business. And we have an opportunity to help them develop that tobe something more important. And I'm especially excited about what is happening today with the StuartWeitzman brand, not only here in the United States, but in Asia, and especially the green shoots thatwe're seeing for them in China, which is the market that we know well and that we know we can helpthem grow and support.Jane NielsenChief Financial Officer

    Yes. And Omar, I would just jump in and say, this is entirely consistent with the capital allocation prioritieswe've laid out for Coach, Inc., which is to invest in our business, which you saw us do this quarter, both inmarketing and in capital, to be highly selective about pursuing value-creating acquisitions that we believehave growth and profitability for the long term, being Goldilocks, if you will, has to be just right, and wefeel Stuart Weitzman is. And then finally, commitment to returning capital to shareholders, which you sawus reiterate, again, a commitment to maintaining our dividend.Operator

    The next question is from John Morris with BMO Capital Markets.John D. MorrisBMO Capital Markets Canada

    Two quick questions. One, the semiannual sale that you guys did -- just completed, did that start on timeas planned? Or did you shift the timing at all? And what is the timing for the next semiannual sale? Andthen just my other quick question was, I think there were a couple of markets where you had closedoutlets just to test how the closings impact the full-line stores. And just wanted to get an update on any ofthe impact there on those MSAs and what you're learnings were.Victor LuisChief Executive Officer and Director

    Sure. In terms of the semiannual sale, it was as planned. It started in mid-December and through January21. And that was the exact same length of time as our previous semiannual sale. So absolutely no surpriseor change there. In terms of the 2 outlets that we have closed, they have just closed a few weeks ago.

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    It's still very early. We're putting together a learning agenda around those outlets, not only in terms of, ofcourse, cross-channel shopping, but other consumer perception changes in those 2 markets, one in Miami,the other in L.A. And we will share those with you in the quarters ahead.Operator

    The next question is from Joan Payson with Barclays.Joan PaysonBarclays Capital, Research Division

    Just back on the store reformats that were comping positively, were those traffic or conversion-driven?And then also, how did the business trend during the semiannual sale compared to the rest of the quarter?Victor LuisChief Executive Officer and Director

    The metrics in terms of the modern luxury stores were really mixed by location because of the type offormat, if you will, the street locations versus mall. Overall traffic was a driver as consumers were comingin, of course, to experience the new. But also, conversion was the other key driver. And I would say that'sin the street location. So our flagships, especially here in New York as well as L.A., which was consistentwith the total retail fleet, ADT was a driver because of the decreased promotion year-on-year. So theyreally benefited across all metrics relative to the other locations. And as things stabilize, of course, overtime, I would imagine that we will continue to see a normalization where conversion and ADT will be themajor drivers.Jane NielsenChief Financial Officer

    Joan, I'd just add that, just as a recall, as we close out this quarter -- only about a little less than half ofthe semiannual sale period was included in this quarter.Operator

    Our final question today is from Ed Yruma with KeyBanc Capital Markets.Edward J. YrumaKeyBanc Capital Markets Inc., Research Division

    I guess, turning quickly to department stores. I think you said that POS could be weaker in the secondhalf. I know that you had some small tests on the open-sell. But I guess, how should we think aboutthe department store channel longer term? Are you changing the amount of footage you get? And whenshould we expect some of the larger doors to move to the open-sell format?Victor LuisChief Executive Officer and Director

    Sure. Longer term, of course, we're excited about the channel. We believe it's an absolutely vital onewhere obviously, the consumer has choice and where we need to compete and win effectively. The 300doors that we have been moving to open-sell, which truly represent the smallest doors that we haveand the ones that are still in case line, about 20% of the total fleet, but less than 15%, in fact, of totalrevenues, their financial impact is quite small but very important to allow consumers to access product,given that we're really the only brand in our space still in those cases. Longer term, as I mentioned,we are today taking all of the learnings from our retail modern luxury concept. So the one we openedin Rodeo, here at Time Warner and of course, our mall locations, especially as well as some duty-free locations globally, we're taking those learnings and we'll be leveraging them across format. So inthe spring, you will see us leverage that in our first outlet stores, as I mentioned, and we will also bedeveloping that format into both wholesale as well as global duty-free locations, which we're very excitedabout.Andrea Shaw ResnickGlobal Head of Investor Relations and Corporate Communications

    Thank you, everyone. That concludes our Q&A. I will now turn it over to Victor Luis for some concludingremarks. Victor?Victor LuisChief Executive Officer and Director

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    Thank you, Andrea. Thank you, everybody, for being with us and for continuing to follow us on ourtransformation journey. As a team, we're encouraged by the positive signs that we're seeing and theexecution of our strategies around products, stores, marketing, as we continue to drive fashion relevancefor the Coach brand into -- differentiated from the accessible luxury competition that has grown over thelast 5 to 10 years, especially.I want to recognize the entire Coach team for their commitment and for continuing to have both thecourage and the discipline to stay the course with our strategies, which are very much in the long-terminterest of our brand health and our business. And I know that they also very much look forward towelcoming the Stuart Weitzman team to the Coach, Inc. family. Thank you.Jane NielsenChief Financial Officer

    Thank you.OperatorThank you. This does conclude the Coach earnings conference. We thank you for your participation.

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