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

Thank you and good morning. With me today to discuss our quarterly results are Lew Frankfort, Coach's Chairman and CEO, and Mike Devine, Coach's CFO. 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 10K for a complete list of these risk factors. Also, please note that historical growth trends may not be indicative of future growth. We present 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 third fiscal quarter 2008 results and will also discuss our strategies going forward. Mike Devine will continue with details on financial and operational highlights for the quarter as well as our outlook for the fourth fiscal quarter of 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 welcome everyone. We've announced strong top-line and bottom-line growth of 19% respectively for the quarter just completed, in line with our expectations. We were pleased with our performance, especially in light of the worsening retail climate in the U.S. We also continue to be pleased with the strength of new stores, which are still coming online well ahead of expectations. Overall, Coach's quarterly performance reflected the strength of the Coach franchise and the continued outperformance of the U.S. handbag and accessory category as compared to overall retail sales. For the fourth quarter of the fiscal year ending in June we are projecting sales of $780 million and EPS of $0.50, both up 20% from year ago levels, taking the full year to about $3.18 billion with EPS of $2.06, each increasing 22%. It's worth mentioning that this EPS guidance has been in place throughout the fiscal year. Given the continued uncertainties in the economic backdrop, we have decided to wait until the end of our fourth quarter to provide specific guidance for the next fiscal year. At the same time, it's important to underscore the confidence we have in our ability to continue to drive significant top and bottom line growth through both distribution and productivity gains. In terms of distribution, given the compelling returns we are continuing to generate we will execute our existing distribution plans in North America, including the opening of 40 new retail stores in the coming year. Regarding productivity, our confidence stems first and foremost from our product, coupled with 1) the overall strength of the Coach proposition underscored by our key business and brand equities, 2) our broad and loyal consumer franchise, and 3) our innovative and consumer-centric nature. While I will get into further detail about current conditions and the…

Thank you, Lew. Lew has just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our third quarter results. As mentioned, our quarterly revenues increased 19%, with direct to consumer up 20% and indirect up 15%. Earnings per share for the quarter increased 19% to $0.46 as compared to $0.39 in the year ago period as net income rose to $162 million from $147 million. Our operating income rose 13% to $257 million in the third quarter versus $227 million in the same period last year. Operating margin in the quarter was 34.5% compared to 36.2% in the year ago quarter. The strengthening of the yen impacted all lines of our P&L given the consolidation of CJI's income statement. Adjusting for the currency impact this quarter, we would have seen a 16% increase in sales 3 points lower than reported - but a 17% increase in operating income, 4 points higher than reported, as our operating margin would have been essentially even year to year. In the third quarter gross profit rose 15% to $558 million, up from $486 million a year ago. Gross margin was 75% flat versus 77.8% last year, impacted by the unanticipated sharp rise in the yen versus the dollar along with the expected effect of the promotional environment and channel mix. In fact, this dramatic and unanticipated move in the yen reduced our gross margin rate by over 190 basis points. SG&A expenses as a percentage of sales improved 100 basis points from prior year levels during the quarter and represented 40.5% of sales versus 41.5% as we achieve leverage in all three of our spending categories. First, we saw leverage on what we like to refer to as our semi-fixed corporate functions. Second,…

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Bob Drbul. You may ask your question. Please state your company name.

Lehman Brothers. Good morning.

Morning.

Good morning.

Lew, I guess I have two questions for you. I understand not giving FY '09 guidance at this point, but I guess could you maybe give us a little bit of color on your expectations in terms of double-digit top line, et cetera? And the second question that I have, I'm just wondering if you could elaborate on your decision to essentially decrease the transparency of the business by not providing your normal comp breakdown which we've all found pretty helpful over the years.

Sure. Well, first, as I said just a few minutes ago, we're confident that we're going to continue in FY '09 and beyond to achieve significant top and bottom line growth. The reason we're not providing guidance at this time is because we think it would require a level of false precision. Our distribution levers are in place. We're going to be continuing to open new stores as we indicated and expand others. In addition, we also expect to achieve productivity gains around the world, including here in the United States. So we do look forward to a good year with double-digit gains on the top and bottom line. In terms of our decision to provide consolidated comps, it's really a result of our internal thinking that we need to align the way in which we run our business with the way in which we report it. As you know, we have a diversified business model. It's multi-channel and international. We're not solely dependent on any one channel and geography, and our growth is driven by both productivity and, as I said before, distribution gains. In North America, our Retail business consists of one brand with two platforms - full price and factory. And our franchise, as you know, is built on one set of brand equities that actually transcend an individual store concept of venue. And because of this, when we think about our business we first start with our retail stores. And as you know, we do not go on sale in our retail stores. And want to be able to leverage the opportunities that our dual-platform provides us, so during challenging times, focusing on one metric enables us to maximize brand building activities in our lead, full price channel while using promotional activity and other marketing levers in factory to drive very profitable overall growth. And at the end of the day, you need to judge us on our overall performance and on the strength of the brand, and this is the way we look at it.

Okay. Thank you very much, Lew. Good luck.

Thank you.

Thank you. Our next question comes from Michelle Clark. You may ask your question, and please state your company name.

Morgan Stanley. Thanks and good morning, everyone.

Good morning.

Two questions for Mike Devine. Mike, the first is on the gross margin, the hit to gross margin, if you can detail the basis point impact 1), from promotional activity, and 2) from the channel mix shift. And then the second question relates to inventories. Your inventory per square foot rose close to 24% year-over-year. Can you just detail for me one more time the impact of the timing shift that you discussed on the call? Thank you.

Sure. So let me go to gross margin first, Michelle. Let me say that other than the unanticipated movement of the yen, generally we're pleased with where gross margin landed for the quarter. In other words, it basically did hit the expectation in the guidance that we had. In fact, we slightly exceeded our expectation. And I do just want to point out initially that the supply chain, we really feel, has done a terrific job. Our design teams, merchandising, sourcing, et cetera, have continued to drive organic gross margin rate improvement. In fact, our indirect channels actually were up modestly during the quarter from the year ago period. So there are a number of good things going on and happening within the gross margin line. Unfortunately, those organic improvements were not enough to offset both the channel mix and promotional activities. So the two of those combined - channel mix and promotional - offset by some sourcing good news came to about a 90 basis point decline year-over-year. And you may recall on our last call we guided down about 100 to 110, so ever so slightly better than that. And then unfortunately, with the dramatic change in the yen - the yen hasn't moved this much in a single quarter since 1999, and we didn't see it coming - that whacked us almost 200 basis points through the gross margin rate line. So that's kind of the gross margin story. In terms of the inventories, the yen got us there as well, Michelle, as, of course, in Japan we hold our inventories in yen and then when we consolidate our financial statements, it's a pure translation back. And that accounted for about 6 points of growth on the inventory year-over-year. In other words, if we went back and restated our inventory at last year's FX rate, Q3 ending FX rate, the growth would have declined about 600 basis points. And then last year we had a shipment timing issue where we were very light on receipts right at the end of March and reported a bit of an artificially low ending balance at the end of Q3. So if you actually went back and smoothed it over two years, what we would have seen is an inventory CAGR building off of '06 to Q3 '08 of just over 20%. During that time, our sales CAGR has approached 25, so we still feel very good. And most importantly, as I said in the prepared remarks, what really matters is our inventories are clean and we're in good shape going into the spring, and we think the compares at June will fall back in line as we don't have so much noise.

Great. Thanks and best of luck in the fourth quarter.

Thank you.

Thank you.

Thank you. Our next question comes from Jeff Edelman. You may ask your question. Please state your company name.

Thank you. Good morning. Lew, my first question is for you. If we think about the initiatives you mentioned - product, store environment, a more elevated and sophisticated look - are we seeing somewhat of a shift in strategy and maybe that's why we're not - that might also be contributing to the decision [in comp] since you're apparently maybe moving your retail stores further upscale and then looking for the big volume growth to come from the factory stores with a different mix of merchandise?

It's not the case, Jeff. I mean, even though my remarks focused on innovative newness, you're going to see actually a greater proportion of our mix this fall and holiday at sharper price points, both in bags and accessories. And we believe that critical balance is essential, and we're not looking to focus in a distorted way on any particular consumer group. What is occurring in reality is that women, whether they're aspiration consumers who are trading up into Coach or fashion consumers, their tastes are evolving rapidly. And during challenging economic times, we need to have a particularly compelling offering for her to purchase, and that's really the intention. Further, in terms of America - and we can use Short Hills as an example of a very upscale mall in North America where we compete directly with the European luxury brands - we do need to showcase our store in a manner that is appropriate for the consumer who shops in Short Hills. Conversely, in a more mainstream mall, you will continue to see a prototype yet more advanced but that is more in keeping with the shopper in that mall. So no change in strategy, no de-focus away from full price.

Okay, just a short follow before I go to Mike. The sharper price point, is this dialing into and designing into a sharper price point or is this reflecting a lower gross margin?

It's designing into a sharper price point.

Okay, great. Thanks. And Mike, the FX impact, I understand how it hits the inventory given the fact that the profit sits on the CJI balance sheet. Is that lost profit or does this come around and help you further down the road? Could you sort of give us a sense how this plays out?

Sure. Good question, Jeff. The piece that really whipsawed us this quarter is really driven by the FX, and so the FX rate - the yen, in other words - will have to weaken again to have the opposite impact on the gross margin impact. So just to give you a sense, we had anticipated and I think the banks were calling for yen to be at about 112 for the balance of the calendar year when we gave our projections on our last call and it closed the quarter at 99.3, so a 13% swing. And so what happens there is that we need to mark the yen inventory up based on the stronger yen. And that inventory in Japan includes our wholesale [ship-in] margin, and as a result that margin is left on the balance sheet and doesn't come back to the P&L. So the FX would have to move to have that come back to us. What I will say, though, is it is creating some good news for us in the coming months and quarters in that the product that CJI is buying from Coach New York now they're paying for with a much stronger yen. And as that product sells through, it will have a positive impact on our gross margin rates going forward.

Great. Thank you.

Thank you. Our next question comes from Christine Chen. You may ask you question, and please state your company name. Christine Chen - Needham & Company, LLC: Needham & Company. Thank you very much. Good morning.

Good morning, Christine.

Good morning, Christine. Christine Chen - Needham & Company, LLC: I had two questions. I'm wondering if you've seen any patterns in performance across your different store types flagship, fashion and core - as well as geography? And then the second question is, as you continue to grow your own store base, is there a thought to maybe cut back on the number of doors in the department stores? Thank you.

First, Christine, our performance across store type has not changed, the pattern continues. Where we continue to see fluctuations is geographically. So in North America, consistent with the holiday quarter, our business in California and Southern Florida has been very soft. Conversely, our business in the Midwest and Texas, as examples, continue very strong. With regard to department stores, we actually several years ago rationalized the number of locations when we went down from about 1,500 locations to about 900 today. And we're actually opening new locations now selectively, partnering with the leadership of Macy's in particular, to do so. Christine Chen - Needham & Company, LLC: Okay. Thank you and good luck for the first quarter.

Thank you.

Thank you. Our next question comes from Erwan Rambourg. You may ask question, and please state your company name.

Hi. It's HSBC. Good morning.

Good morning.

Just three questions, if I can. Several of the European countries we cover have mentioned that traffic in the U.S. was okay in January and February but was quite severely down in March. Is this an evolution that you've seen in the quarter in the U.S. concerning your businesses? Then maybe I'll ask the other two. The second question is on Japan. We've seen a run rate of 16%, 17%. You're still growing significantly at a faster pace than the European players at 12%, however going from 17% to 12%, is this linked to a sudden sluggish of the Japanese market or can it be linked to the fact that some of the European brands are now addressing a sort of entry price point in that market? And then finally looking at combined comps in the U.S., you've had 7% in Q2, where I think you spoke of an emotional recession. Now in Q3 you have a 9% combined comp with what some people consider as being a real recession. How do you think about the macro resistance of the brand, and do you see the macro environment worsening or is it reasonable to factor in sort of mid to high single-digit combined comps going forward? Thank you.

Obviously I'll take them one at a time. Concerning traffic in the United States for Coach was consistent throughout the quarter. We didn't see a fall off during March. And again, year-on-year traffic in same stores has been weak; our overall traffic, because we've opened up many new locations, obviously has been higher than prior years. In terms of the 12% growth in Japan versus 17%, that's within noise level. We're aware our business is very strong in Japan. We see no signs of slowdown whatsoever for Coach. We actually welcome the entry price points from the European luxury brands that are closer to ours because we're hopeful it's going to stimulate more interest in the category, so the overall category will begin to grow. In terms of the macro environment, it's a very tough call. Clearly, the environment has weakened. Consumers are more pessimistic. And our response to that is to be more nimble and to compress several years of innovation into one year and to utilize our factory channel, which is a promotional channel, to help us drive very profitable sales until the economy stabilizes. We think it's going to be a rough go throughout the entire calendar year on a macro basis.

Right. Okay. And just going back to Japan, can you give us an idea of where your market share stands on a sort of calendar '07 basis if you have that?

It's about 12%.

Okay. Thank you very much.

You're welcome.

Our next question comes from Kimberly Greenberger. You may ask your question. Please state your company name.

Great. Thank you. Good morning. Citigroup.

Good morning, Kimberly.

Kimberly.

Lew, I was hoping if not providing quantitative measures maybe you could just qualitatively address the improvement in your total consolidated comp. It was plus 7% in the second quarter. Here you're looking at plus 9%. Can we assume that both full price and factory saw improvement sequentially?

Kimberly, I wish we could do that but we made a decision that we're only going to provide consolidated comps and at the same time provide some texture. And as I indicated before, traffic in full price continued weak while conversion and average ticket rose. The factory business continued very strong.

Okay. Lew, there was something you mentioned in the press release about striving to compress several years of product evolution into fiscal '09. I was wondering if you could talk to us about the opportunities with doing that and also are there any challenges with the way that your product development cycle works that you might see? Thanks.

Sure. First, the initiatives that we're talking about were actually conceived last spring and last summer, so we've been thinking now for more than a year that we wanted to compress several years of innovation within one year. And our supply chain from our design group through our merchants, our sourcing group, raw materials procurement group, and our operations and quality control people have been basically gearing up for a major change in the way in which our products are manufactured. And when you see our product in our stores - and I think you got a preview of some of the new collections when you visited here - you're going to find, as I said before, that they're softer, drapier, lots of new materials, and this has been in the works for a long time. So our supply chain management group has been able to do a remarkable job in meeting the requirements, and we're actually on track. We measure deliveries every month and we got a preview of what July and August looks like, and we've been assured the quality is consistent with Coach standards and second, that 99% of the product will be on time.

Terrific. Thanks, Lew, and good luck here.

Thank you.

Thank you. Our next question comes from Dana Telsey. You may ask your question. Please state your company name.

Good morning, everyone - TAG. Can you talk a little bit about the average ticket improvement in the quarter, provide some color on it. Is there an improvement in the core customer? Is there less trading down? And in regard to the promotional environment, I think last quarter some factory customers were incentivized to shop at full price. Did you see that at all this quarter? And just lastly, on the progress on the realignment of the product development organization that you mentioned last quarter, how is that moving along? Thank you.

Okay. I'll take them in order. Our average ticket rose modestly during the quarter. What we discussed during the holiday quarter remains largely the same although our handbag mix increased relative to the holiday quarter and even though it was lower than last year due to the arrival of jewelry primarily. So we haven't really seen any shift in consumers. With regard to our promotional activities focused on driving factory consumers into full price, that pilot was very successful. And we do know that our factory consumer loves the Coach brand, but she's a value shopper. She only wants to buy it on sale. Right now we're monitoring the performance of the factory consumer who purchased through one of our loyalty programs at full price to see whether we're able to attract her without a discount at full price. Our general view is that we will not be very successful, that she will need to be promoted to come to - our product will need to be promoted for her to come to full price. Our margins are so good that we're very comfortable with the profitability from those promotions, and we are actually conducting another loyalty event - I believe it's going to be next month - focused on the factory store consumer purchasing in full price.

Okay. Great. Thank you.

You're welcome.

Thank you. And our final question comes from Paul Lejuez. You may ask your question, and please state your company name.

Thanks. It's actually Tracy Kogan filling in for Paul from Credit Suisse. Two questions just to follow up on the last question about promotions. Do you expect to have to increase your level of promotions over the next couple of quarters? And then secondly, can you give us a sense of what you're expecting for Capex for next year and how that breaks out between new stores, remodels and IT? Thanks.

First, with regard to promotional activities, we don't think that's going to be necessary at all. We expect promotional activities to remain at this level or decline over the next few quarters.

In terms of Capex, Tracy, I think we'll hold that guidance along with our fully FY '09 guidance for our next call, but I would just say directionally we don't anticipate anything materially different. We're continuing our store expansion programs, investing in technology where it makes sense to drive earnings growth. So for the modelers out there, I would anticipate '09 being similar to '08.

Thank you. Good luck.

Thank you.

Thank you. It is now just after 9:30. The market is open, and we're going to conclude this conference call. We look forward to taking your questions throughout the day and this week. Thanks, everyone, for joining us.

Thanks and this does conclude the Coach earnings conference. We thank you for your participation.