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

Thank you. 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 will be 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. 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. We presently expect to update our estimates each quarter only, however the failure to update this information should not be taken as Coach's acceptance of these estimates on a continuing basis. Coach may also choose to discontinue presenting future estimates at any time. Now let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our second fiscal quarter 2008 results, and will also discuss our strategies going forward. Mike Tucci will review the holiday season from a U.S. retail perspective and discuss key initiatives for the spring season ahead. Mike Devine will conclude with details, financial and operational highlights for the quarter, as well as our outlook for the second half and full fiscal year 2008. Following that, we will hold a question-and-answer session that will end by 9:30 a.m. I'd now like to introduce Lew Frankfort, Coach's Chairman and CEO.

Thanks, Andrea, and good morning, everyone. As you know, we've announced strong top line and bottom line growth of 21% respectively for the quarter just completed, a bit ahead of our expectations. We were pleased with our performance, especially in light of the weakening retail climate in the U.S. We were also encouraged with the continued strength of new stores, which are coming online well ahead of expectations. Some highlights of our second fiscal quarter were: First, earnings per share rose 21 - I'm sorry, excuse me. Excuse me. Overall, Coach's holiday performance reflected the strength of the Coach franchise, our position as a gift authority, and the continued strength of the U.S. handbag and accessory category. However, this quarter demonstrated for the first time in our public history that we are not immune to a slowing consumer environment. At the same time, it's important to underscore our continuing positive outlook, including the delivery of at least a 17% revenue gain for the balance of the fiscal year, driven, as always, by both distribution growth and productivity gains. We're well positioned for the spring season and expect that our diversified model will continue to mitigate the impact of the consumer malaise in the U.S. Given the vitality of the Coach brand, category strength and our diversified business model, we're confident that the earnings per share guidance for the year originally provided in July and reiterated in October can still be achieved. In addition, our ability to act quickly and nimbly secure spending during a period of uncertain sales trends as demonstrated in our holiday quarter will ensure continued expense leverage. While I will get into further detail about current conditions and the outlook for the category in our business shortly, I did want to take the time to review our…

Thanks, Lew, and good morning. Lew has just given you a recap of the quarter, which was challenging in many respects. While we essentially met our guidance of our high single-digit combined full-price and factory store comp, we were surprised by the slight comp decline in our retail stores, where our traffic challenges continued through the quarter. The good news was that against the lower traffic, we actually converted at a much higher rate, although at a lower average transaction size or ticket than we saw last year as some consumers were definitely trading down to lower-priced items. As mentioned in our release, our holiday offerings were generally well received across categories in collections. Our key item strategy was successful this season, which featured groups and item concepts generating about 50% of our holiday sales. Bleecker, our newest lifestyle platform which was inspired by our classic Heritage, was the most important initiative during the quarter. It was well received by consumers, notably at higher price points. In fact, the $400 and up handbag offering represented about 22% of handbag sales this year versus 13% last year. At the other end of the spectrum, new items such as our $98 capacity wristlet were top sellers, while new categories such as jewellery and fragrance were great giftables at sharp prices. The strong performance of these categories speaks to the vibrancy of the brand as we gave consumers new ways to participate in Coach this holiday season. Overall on a comp basis, we did see handbag penetration in our retail stores decline slightly in favor of these lower price point items. This suggests an opportunity in smaller bags at sharper prices which will be reflected in our assortments going forward. Before moving on to spring, I'd like to touch on some of the…

Thanks, Mike. I think it's important to note that this challenging climate has only served to reinforce our longstanding practice of evolution and continuous improvement. We are embarking on a comprehensive review of all ways in which the brand touches the consumer. These initiatives will be evident as we move into full year 2009, most notably in our product and in our store environments. We plan to leverage for the early successes we have seen with our Pinnacle offering, creating a broader assortment of more sophisticated and elevated product which will create a halo for the entire brand, heightening Coach's aspirational appeal. We will also at the same time maintain the balance that is key to our franchise, capitalizing on our leadership position with our loyal core consumer and with the aspirational consumer who is often trading up to Coach. It is for these reasons that we're now realigning our product development structure to create separate cross-functional design and sourcing teams dedicated to meeting the varying consumer requirements across attitudes and price points. We will also be enhancing our in-store experience notably through the environment, creating a more residential and intimate feel, with more proprietary elements capturing the attitude we have achieved in our legacy concept store here in Manhattan. We continue to believe that our opportunities, both in our home market and internationally are abundant. For perspective, we estimate the addressable handbag and accessory market in North America reached over $8 billion in calendar 2007 and is continuing to demonstrate growth despite the weaker economy. Thus, with the Coach brand so strong and the market expanding, the potential for Coach remains significant. As most of you know, we have two primary sales drivers; each plan to achieve about 10 points of growth. First is distribution as we expand our…

Thank you, Lew. Lew and Mike have just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our second quarter results. As mentioned, our quarterly revenues increased 21%, with direct-to-consumer up 18% and indirect up 37%. Earnings per share for the quarter increased 21% to $0.69 a share as compared to $0.57 in the year ago period as net income rose to $252 million from $214 million. Our operating income rose 18% to $403 million in the second quarter versus $341 million in the same period last year. Operating margin in the quarter was 41.2% compared to 42.3% in the year ago quarter. In the second quarter, gross profit rose 19% to $737 million, up from $621 million a year ago. Gross margin rate was 75.4% versus 77.1% last year, impacted by the promotional environment in North America as well as currency fluctuations. SG&A expenses as a percentage of net sales were below prior year levels in the quarter and represented 34.2% of sales versus 34.8% last year. We achieved leverage on our retail P&L despite its lower level of comp, while we also saw leverage on what we refer to as our semi-fixed corporate functions. Moving to the balance sheet, inventory levels at quarter end were $301 million, about 20% above prior year levels and slightly below our sales increase, leaving us well positioned with clean inventories as we enter the spring season. This inventory increase allows us to support 54 net new U.S. stores, 15 net new locations in Japan, and substantially increase sales levels. Accounts receivable balances rose only 14%. Cash and short-term investments stood at $891 million as compared with $820 million a year ago, despite the repurchase of $839 million worth of our stock…

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Robert Drbul with Lehman Brothers. You may ask your question.

Good morning.

Good morning, Bob.

Morning, Bob.

Lew, I guess the question that I have this morning for you is given the uncertainty out there in the environment, I mean, how can you be confident in the guidance that you're giving us for the second half of 2006 of the year?

Bob, as you know, we have a diversified business model. We're not overly dependent on any single channel. We do have two levers for growth. The first is distribution, which will represent slightly more than half of our planned growth in the second half of 2006 and that we have great visibility to. We also look to improve worldwide productivity, and we have excellent visibility in that arena as well. So we have built a range of assumptions that lead us to confidently project growth of at least 17%.

Okay. And then just another question real quickly would be: When you talk about the consumer trading down specifically within your stores, have you seen higher levels of cross-shopping between, you know, full-price stores, shopping in the outlets or, you know, any other trends you guys usually analyze.

No. The short answer is no. What we have found both in our factory stores and in our full-price stores is substantially higher conversion levels. So once the consumer is in our full-price store or our factory store, she's converting at higher levels. But we don't see consumers trading down from full price to factory.

Great. Thank you very much.

You're welcome.

Your next question comes from Michelle Clark with Morgan Stanley. You may ask your question.

Great, thanks. And good morning, everyone.

Good morning.

First in terms of traffic trends, can you give us any more color, any notable cause in terms of one geography, and then if you're seeing any notable differences in terms of your on-mall locations versus your standalone locations?

Sure. We actually saw traffic patterns through the quarter that were very consistent from the start of the quarter right through and frankly, very consistent across geographies, so no major differences to call out around traffic. Obviously, we're fighting that headwind and trying to convert the people who are coming into our stores, which we're doing at a much higher rate.

All right. Thanks. And Mike, any notable differences in your on-mall locations versus your off-mall locations in terms of traffic?

A very slight difference in terms of malls suffering a little bit more and our street locations and what you might call lifestyle centers or hybrids a little bit more healthy. Of course, that's a much smaller piece of our portfolio.

Right. And then, second question, Lew, your thoughts on announcing a new share buyback plan in the second half of '08?

We actually have an existing stock authorization program, and as Mike Devine indicated, I believe there's over $660 million still available.

Right. But anything in addition to that if you can get through it in the third quarter?

Well, we can deal with that at that time.

Okay, great. Thanks and best of luck.

Thank you. Our next question comes from Kimberly Greenberger with Citi. You may ask your question.

Great, thank you. Good morning.

Good morning, Kimberly.

The SG&A rates or the SG&A growth rate was very nice this quarter and actually lower than we were expecting. Is this a sustainable level of SG&A growth rate, and if you could just talk about some of the levers that you're pulling in a little more detail, that would be helpful.

Sure, Kimberly, I'll take that. We were pleased with where SG&A landed for the quarter. As you pointed out, it was - we got about 60 BPS of leverage from SG&A. We actually saw leverage on Mike Tucci's P&L at about a 7 comp. We were able to pull that off in Q2 when volumes were high, and I think it does speak to the levers and the manoeuvrability we have within spending and how nimble we are. You know, I've called them out before but I'm happy to talk about them again, particularly in our direct businesses. A lot of our spending is variable. We are in percentage rent in the majority of our stores. That is true in Coach Japan as well, where their occupancy is largely variable. Also, Mike talked about some of the technology enhancements that we've put into the store environment to make our associates more productive, most notably those around time and attendance and smart scheduling allows us to ideally match staffing levels with anticipated traffic and control store wages that way. We've also put on hold certain longer payback spending initiatives. Also I will tell you that, as we've shared with the Street community over the years, our internal goals are always stretch versus those expectations we set with the Street, so we also have a variable component of our SG&A in terms of management bonuses. So all of those things taken together give us a lot of confidence that on a mid-teen type of top-line growth, we can continue to deliver SG&A leverage.

Great. That's very helpful. And just one last question on your gross margin guidance for the fiscal '08 year, I think you said down 100 basis points for the year, which would imply, you know, obviously some slight pressure on Q3 and Q4, but not to the extent that we saw in Q2. Please talk about how it is that you're getting there, and what gives you the confidence that the promotional environment that we saw here in the holiday period doesn't continue into Q3 and Q4?

Yeah, actually, Kimberly, you're right in calling out that it is down year-over-year in the second half; that continues. And our own anticipations are that we're going to need to continue the promotional activities that we employed in our direct businesses, particularly in North America, in the second half. These intensified promotional activities are really going to be required for Coach to adapt to the difficult consumer environment, and so that is assumed in the gross margin guidance that we've laid out there for the balance of the fiscal year.

Great. Thanks, and good luck here in the second half.

Thank you.

Thank you. (Operator instructions) Our next question comes from Jeff Edelman with UBS. You may ask your question.

Thank you. Good morning.

Good morning, Jeff.

On the promotional side, this is the first time you've had to step it up to create incremental purchases. As you analyze your customer base, are we seeing any shift in less positive response to new line offerings or are would you attribute it to overall slower store traffic or price points?

Overall, the significant majority of our sales in Q2 were made at full price, so we continue to be primarily a full-price proposition. So what we're talking about, Jeff, is on the margins, we intensified our preferred customer events in order to offset some of the reductions that we were experiencing in traffic and to be responsive to the challenging retail environment. Our brand is as resilient as it has been. Based on the research we did as recently as last month and into the first part of this month, Coach consumers intend to continue to spend on bags as much or more in the future than they did in the past, even though their overall purchasing spend is expected to be less. So we don't see this as germane to anything related to our franchise.

Okay. Lew, in the past you've always maintained a very strong full-price proposition and the consumers have responded to that. As you increase your friends and family coupon or whatever, what's the fear that you have that you would create the let's wait and see what the next promotion is before I come into the store?

It's a very good question, Jeffrey. What I should have mentioned earlier perhaps is that the intensification primarily came from a new program that we just introduced to our exclusive factory store consumers where we offered our best factory store consumers the opportunity to buy at a discount in full price for a limited period of time. That initiative was extremely successful. So this is a situation where we're looking to migrate factory consumers who are unique factory consumers or what we call exclusive factory store consumers to full price. It's been very successful. So that's been the vast majority of the intensification. And again, the vast majority of our sales continue to be at full price. The other thing that was interesting to us, notwithstanding the very strong response we got from our best customers who we invited - best factory customers who we invited to our full-price events, there was no fall off in our factory business during or subsequent to that event.

Okay. And the same question as far as the full-price stores are concerned?

The only thing that happened was our business increased during the period in full price.

Jeff, what Lew was explaining is that the exclusive factory store customer invites were the invites for those consumers that shop in the full-price stores.

And that was the incrementality year-over-year.

Okay.

That new set.

Okay. But the fact that you've stepped up the friends and family or coupon to the existing full-price store customers, if you fall back on that -

Year-on-year, it's heavily the same on full price.

Okay. Okay, thank you.

There was one event this quarter, there was one event last quarter; the numbers are relatively similar. The difference is that we did a very substantial event inviting, again, unique factory store consumers to shop at full price. We obviously will be measuring the long-term impact to see whether all of the spend is incremental, whether we're also able to convert some of them to buy in full price at full price.

Okay. Okay, great. Thank you.

You're welcome.

Thank you. Our next question is from David Schick with Stifel Nicolaus. You may ask your question. David Schick - Stifel Nicolaus & Company: Hi. Good morning.

Good morning, David. David Schick - Stifel Nicolaus & Company: The question is really if you could talk about your online business and your communication with your customers through email, what they're looking at, what they're opening in terms of spring. Is there anything that leads you to any conclusions on attitudes or appetite from that line of communication? Thanks.

Sure. In terms of our online activity, we had a very strong quarter online. We introduced a number of features online, like the - what we're calling web store pick up. Interestingly, our traffic patterns online have remained very healthy. We have not significantly increased our email activity. We're very disciplined around email activity, and our thought process there is that we're going to send emails to those people who are most interested in receiving them and have the highest propensity to open them. Our email and promotional activity online is really focused on newness, so what we're using online as a vehicle for is an introduction to the brand. Our business online equals on an annual basis all of our visits in store. It's an enormous number of people. We are going to be introducing new product into the stores on Friday of this week, which will be a lifestyle platform called Heritage Stripe. We'll use online as a way to introduce that in terms of a product refresh online as well as email. Sequentially, on the 15th of February we will introduce a major platform of Signature Stripe. We'll also refresh our web site in conjunction with our store refresh, use email to communicate that. And that's essentially how we do it. We see the online experience as a direct link to our store experience, and very recent data that we've looked at suggests that more and more, the store experience is being pre-shopped by our consumer online. They're going online to basically interact with the brand, scout for newness, scout for information, and then they're visiting the stores off of that experience. So we feel very good about what we're doing with our online consumer. David Schick - Stifel Nicolaus & Company: And is there anything, you know, in the last month or two months in terms of what people are looking at price point wise or anything that you can track there that would lead you to other conclusions about price point going forward other than what you've already shared?

It's very funny. It's such a mirror image, what the consumer buys online and how she behaves online. We merchandise our web site as a flagship, so it's a very broad offering. I would take the opportunity to maybe bridge to the subject of assortment and what we believe very strongly in is continuing to focus on this elevated product assortment and going after the white space. I will say that there is an opportunity offsetting that to make sure we have proper balance across price spans at lower prices in the handbag spectrum, and as I said earlier in my prepared remarks, that's something that we're addressing. I think with the next two deliveries, in fact - Heritage Stripe and Signature Stripe you're going to see a very broad offering from a price standpoint, including some very sharp price points in smaller bags, and that'll round out the assortment. And you'll see that online and in store. David Schick - Stifel Nicolaus & Company: Great. Thanks.

Thank you. Our next question comes from Liz Dunn with Thomas Weisel Partners. You may ask your question.

Hi. Good morning.

Good morning.

Hi.

Can you discuss the price adjustments that occurred during the quarter? How was that accounted for? My understanding is that it was accounted for as a price adjustment, not a markdown. And over time, what's your ability to sort of hit those lower price points while maintaining your exceptional growth margins? Also related to gross margin, what's the cost environment like? We're hearing a lot of talk about cost pressure coming out of China. What are you experiencing?

Okay. Well first, with regard to the repricing, the catalyst for the repricing was to provide price comparability with department stores whose inventories were larger than they would have liked going into the week before Christmas. And their interest was to cleanse their inventories, and we followed up to provide consumers with comparability. What you need to appreciate is that it was less than 5% of our sales. It wasn't undertaken to lower price points. It was really undertaken to give consumers an equal value. It was an exceptional event. We did it because wanted our department store inventories to be clean for the spring, which they are, and we think we're better off for it. It was de minimus to our overall results. With regard to the cost environment, you're correct. Costs are going up in China. At the same time, we are beginning to migrate some of our production to lower-cost neighbouring countries such Vietnam and India, which of course is not that close. But we are looking at other geographies. We're also, within China, moving to lower-cost areas in the northern part of China. So we have a very flexible constellation of independent factories that work in partnership with us in order to preserve high quality and at the same time enable us to maintain or reduce costs. Mike, you want to -

Yeah, just to drill down and a little nearer term in around the cost pressures, they have existed and continue to exist. We've seen some easing of leather prices, but there are also offsets. The sourcing organization has done a marvellous job. In the second quarter alone, while we talked about gross margin being impacted by some promotional pressures in our direct business, we actually saw gross margins expand in our indirect business. And so again, the sourcing organization, merchandising and our wholesale sales divisions really did a terrific job in actually delivering year-over-year margin growth in the indirect business. So we have been able to offset those cost increases in what I'll call our organic gross margin rate product price versus cost ratios.

And do you think your gross margins are sustainable in sort of a mid-70s range over the long term?

Yeah, we feel very strongly that way.

Great. Thanks.

You're welcome.

Thank you. Our next question comes from Christine Chen with Needham & Company. You may ask your question. Christine Chen - Needham & Company, LLC: Thank you. I was just wondering, for the gross margin decline in the quarter, can you help us quantify what part of it might have been due to the channel shift, you know, given the outperformance of factory and how much of it was due to the promotional environment? And then can you also talk a little bit about your relationship with department stores, like for the bags that did get marked down in the department stores, is that markdown money that they have to bear or is that on your end? Thank you.

I'll take that one. I'll answer the last part of the question first. In terms of relationship with the wholesale partners, the markdown money is something that's been accounted for both in our actual margins through Q2 that we published today and in our guidance and thinking going forward, so it's in there, if you will. And I'm sorry, the second part of the question?

Breakdown gross margin.

Oh, the breakdown of gross margin, I'm sorry. We had roughly an offset. I just spoke about the hard work of the sourcing organization. We actually had the sourcing relationship improvements roughly offset our channel mix. Both were at about $40 BPS in either direction offsetting those. And so the year-over-year change of about 170 basis points came from about 100 basis points due to increased promotional activities in our direct businesses and about 50% - I'm sorry, 50 basis points - also from a negative impact from currency fluctuations, most notably the yen in Japan. And so from guidance, where we had guided down about 50 basis points for Q2, the mix was about 120. That same 50 in currency accounts for part of that 120. We didn't anticipate the strengthening of the yen going into the quarter. And then our promotional activity was about 70 basis points more in our direct channels than we had anticipated when we gave our October guidance. Christine Chen - Needham & Company, LLC: Got it. And then I guess just to further clarify the relationship with the department stores, some vendors, you know, negotiate a discount upfront and then at the end of the quarter they don't need to argue about markdown dollars. Is that how you do your business, or do you discuss it at the end of every quarter?

We have a longstanding partnership with department stores. They look, as we do, at our business with them on an annual basis, and any markdowns and discounts are a very small part of the total picture, not worth even discussing. Christine Chen - Needham & Company, LLC: Got it. And then can you talk a little bit about jewellery, how that did during the quarter?

Sure. We were very, very pleased with jewellery. It is a flanker category. It is a category that we believe has strong relevance in the mix in terms of our brand. We introduced it to all stores in September. We refreshed jewellery in terms of new product going into the quarter. It performed better than we had planned at slightly better penetration levels in the 3% range overall; higher in our more dominant flagship locations which had a broader assortment of jewellery, including sterling. And one of the learnings that we got is that we got a very strong reaction to the sterling portion of the jewellery mix, and we are rolling that to several more stores as early as this quarter where we can provide fixturing and add that in terms of an assortment mix. So we feel very good about the assortment. You'll see a lot of newness in jewellery in the next 60 days in our stores.

Christine? Christine Chen - Needham & Company, LLC: Yes.

Yeah, just one last thing on department stores. I know you know this, but I'll just say it anyway. For context, department stores are only about 11% to 12% of our global sales, so it's actually a very small part, unlike the situation with most American brands. Christine Chen - Needham & Company, LLC: Right. Well, thank you and good luck.

Thank you.

Thank you. Our next question comes from Erwan Rambourg with HSBC. You may ask your question.

Hi. Good morning, everyone.

Good morning.

Good morning.

I think you've been very clear on the promotional environment in the States. I was just wondering if this was an isolite - an isolated, sorry - phenomenon or if you're also seeing promotional activity going on in Japan? And if that's the case, does that explain the fact that your comps are accelerating in Japan, or is that linked to something else?

Well, first, our comps aren't accelerating. They've been fluctuating between low and high single digits for years now. Our primary growth is through distribution. The level of promotional activities in Japan are no greater today than they were yesterday. They're consistent.

Okay. And then I was just wondering if you had given further thought to the potential of a dividend given the tough equity markets we're experiencing today?

It's never far from our minds. We talk about it regularly, so the answer is yes, it continues to be under consideration.

Okay, thank you.

You're welcome.

Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. You may ask your question.

Good morning, everyone. Can you talk a little bit about how you're reorganizing the business in terms of by brand or by product category, by usage? How is that going to impact costs or sales or margins or better help you develop product? Thank you.

The intention is really to help us better develop product, and I think the best illustration I can provide is by illustration. We're creating a group to focus on higher-end product and we're calling that Collection Group. And that group is going to have, within the same entity, designers, sample makers, product development people and sourcing people who will be responsible for the procurement of materials. And to the extent that we are going to be introducing new collections in this white space, and we are, there's longer lead times that are required for new material development, and by having a dedicated unit from conception to completed production will enable us to be more nimble, enable us to also broaden our development activities. So that's really taking our category teams to the next level.

Thank you.

You're welcome.

Thank you, everybody, for joining us today. It is now 9:31 per my watch and, of course, I look forward to taking your questions as does Mike Devine throughout the day, but we're going to end this conference call. Have a terrific day. Thanks, everyone.