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

Good morning and thank you for joining us. With me today to discuss our quarterly results are Lew Frankfort, Coach's Chairman and CEO, and Mike Devine, Coach's CFO. Mike Tucci, President of North American Retail, is also joining us. Before we begin, we must point out that this conference call will involve certain forward-looking statements, including projections for our business in the current or future quarters or fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences or control costs. Please refer to our latest annual report on Form 10-K for a complete list of these risk factors. Also, please note that historical growth trends may not be indicative of future growth. Now let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our second fiscal quarter 2009 results and will also discuss our strategies going forward. Mike Tucci will then review the holiday season from a U.S. retail perspective and discuss key initiatives for the spring season ahead. Mike Devine will continue with details on financial and operational results for the quarter. Following that, we will hold a question-and-answer session that will end shortly before 9:30 a.m. Lew will then conclude with some brief summary comments. I'd now like to introduce Lew Frankfort, Coach's Chairman and CEO.

Thanks, Andrea, and good morning, everyone. As noted in our release this morning, we were able to report second quarter sales and earnings per share that were only slightly lower than prior year despite the most challenging holiday season our company has experienced during my 30-year tenure. The heavily promotional atmosphere against a deteriorating economic backdrop impacted both traffic and conversion rates in our retail stores and department store locations and ultimately led to weaker than expected sales. Importantly, we achieved our goal of providing consumers with truly innovative wow product offering compelling value. We made the deliberate decision not to discount in our retail stores, protecting our brand equity, while our business model provided the flexibility to leverage our factory business. Before we discuss the details of our second quarter results, I believe it's important to touch on a few key points. First, Coach is operating from a position of strength. We have made and will continue to make good sound business decisions to position us for profitable growth in the years ahead. We are continuing to build a foundation for growth by investing prudently. Our store fleet is strong, and we will be appropriately cautious about our square footage growth given the current backdrop. Our multichannel distribution model is diversified and includes substantial international and factory businesses, which reduces our reliance upon our full-price U.S. business. We will continue to protect our brand. The strength of our balance sheet and business model gives us the flexibility to adapt our pricing strategies to make the right decisions for the long term. Our toughest comparisons are to our own historic metrics. Second, all of our research and our experience points to the fact that the handbag and small leather goods category will hold up better than apparel and other wardrobing…

Thanks, Lew, and good morning. Lew has just given you a recap of the quarter, which was challenging in all respects, most notably in our full-price stores, where we held to our pricing and service standards. In factory, as mentioned, we used our promotional levers to drive sales and manage inventory. As mentioned in our release, many of our customers responded positively to our new holiday offerings, though the significantly depressed backdrop and barrage of poor economic news clearly impacted spending. Madison, the first lifestyle collection that fulfilled our strategy of compressing multiple years of product innovation into a single fiscal year, was the most important initiative during the quarter. It was well received by consumers, notably those silhouettes which reflected our sharper pricing initiative, such as the Sabrina Op Art satchel at $298. In addition, new items such as our $98 Madison wallet and Op Art Capacity wristlet at $119, were top sellers, while categories such as jewelry and fragrance were great giftables at sharp prices. This suggests an opportunity to better balance our assortment and realign our pricing strategy, which I will discuss in more detail in a minute. Turning to spring, we're enthusiastic about our transitional and seasonal offerings. As part of this transition, we recently introduced the Penelope Collection, offered in leather, our Classic Signature and Silk Shantung and Op Art across multiple silhouettes. These classic shapes, coupled with great functionality and nickel hardware offer broad appeal. A particular standout is our new Shopper Style. Rounding out the third quarter introductions will be an updated Heritage Stripe group in February and the new Parker Collection in March. With its soft feminine pleats and twisted straps, Parker represents another significant design evolution for Coach. The collection is currently in pilot with excellent results in 10 stores across…

Thanks, Mike. As we've discussed many times, we have two drivers of long-term growth - first is distribution, as we expand our global network of store locations with an emphasis on North America, Japan and China, and second is productivity, which we drive across all geographies through the introduction of innovative and relevant product and a compelling store environment. What you have heard today from Mike and me doesn't change our long-term focus. We will continue to build market share here in the U.S. and grow our store base, although at a slower pace. We will continue to open new locations in Japan with a focus on regional markets and factory stores where the opportunities are greatest. And we will continue to develop the emerging market potential, completing the acquisition of our retail business in China during April, where our sales remain robust. It's important to underscore that we remain confident that in the emerging new reality of lower consumer spending in the U.S., the handbag and accessory category will continue to take share from other wardrobing categories such as apparel given the secular shift in spend that we have seen for the last decade. By offering her a balanced assortment of great product and exceptional value, we will continue to grow our market share position. At this time, I will turn it over to Mike Devine, our CFO, for further detail on our financials. Mike?

Thank you, Lew. Good morning, everyone. Lew and Mike Tucci 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 declined 2%, with direct-to-consumer, which represents over three-quarters of our business, up 2%, and indirect down 19%, primarily due to lower shipments to U.S. department stores. Earnings per share for the quarter decreased 3% to $0.67 as compared to $0.69 in the year ago period as net income declined to $217 million from $252 million. Our operating income totaled $348 million in the second quarter versus $403 million in the same period last year. Operating margin in the quarter was 36.3% compared to 41.2% in the year ago period. In the second quarter, gross profit dollars declined 6% to $692 million from $737 million a year ago, but remain strong at 72.1% versus 75.4% in the prior year. During the course of the quarter, we chose to increase discounting levels in our factory stores in response to the deteriorating retail environment, which was the primary negative impact to our gross margin. Channel mix and the sharper pricing initiative in our full-price divisions also dampened gross margin. We do expect all three factors to weigh on our second half results as well as we expand our sharper pricing initiative in the full-price division. SG&A expenses as a percentage of sales rose from prior year levels in the second quarter and represented 35.8% of sales versus 34.2%. While we are not providing specific guidance for the second half, I would note that should we see a continuation of 2Q sales trends, we would expect our expense ratio to remain well above prior year levels given our investment spending on China and…

Thank you. (Operator Instructions) Your first question comes from Robert Drbul - Barclays Capital.

Lew, if I could squeeze in two questions, the first one, can you talk a little bit about how you came to the repricing of 10% to 15%, why you guys believe that that is the appropriate level in terms of moving through some of the product? The second question is I think Mike talked a lot about some new pilots that were performing better or above plan. Can you talk about how trends have been sort of post-Christmas or in January a little bit for us?

Let me ask Mike Tucci to begin, and then I'll pick up the rest.

Sure. Bob, I'll talk a little bit about our current business and also about price positioning and Lew can add his thoughts as well. It is January, Bob, and I think we all know that the Christmas quarter was challenging. We do see importantly that there's been a stabilization in full price. We feel strongly that our decision to keep the stores fresh from a product standpoint, introduce newness on 1226 to capture that post-Christmas opportunity, was a very important move for us. And we're pleased with what we're seeing with the results in Penelope. We have new products hitting the stores in full price on Monday the 26th which will feature Heritage Stripe, and then we end the quarter with Parker, which is a very strong collection for us and it's performing well in pilot. It's a very challenging time in the stores, certainly, from a consumer standpoint, but we believe that there is a stabilized trend here that somewhat gives us a sense of confidence. On the factory side, we're very much concentrating on managing flow of inventory. The results there have been solid. We did manage the post-Christmas period very well in factory, and there again we have newness hitting the stores this weekend with the launch of our SoHo Collection in factory. On the pricing side, the real opportunity for us is around balancing the assortment and providing more SKU choice across price ranges, and we've determined that if we look at our historical pricing, running the handbag business at $200 for a number of years and then moving north to $300 and in the more recent past getting into the $330 to $340 range, that $300 is a real important level for us to focus on to maximize handbag penetration in our stores. And while a lot of the activity that we're putting into the stores currently is a reprice and it's done on the back end, the focus on our development for FY '10 is to do that on the front end and engineer that product and plan those assortments and invest in those assortments to hit that price bucket and bring our retails down to that $300 range as an average.

The only thing I'd like to add is that when we look at our historic handbag units of penetration in a single store, we actually determined that the optimal positioning for us was to have a sweet spot between $200 and $300. When we had an ample array of bags between that price range, we did our absolute best. And we do believe that with the value orientation that consumers have today more than ever that by effectively by rolling back prices through introducing new products into this sweet spot, we will be able to regain momentum and that's our intention.

Your next question comes from Dana Telsey - Telsey Advisory Group.

Can you talk a little bit about as you expand the lower price points potential impacts on gross margin and how you're thinking about the balance of the higher price versus the lower price in the assortment? And just lastly, on Japan, how is the environment in Japan? What is the strategy there compared to the U.S.? Are prices being adjusted there also?

I'll begin and then ask Mike Devine to participate. I'll start with Japan. The pricing initiative is a global initiative. What we want to do is become even more affordable than we have been. As you know, Dana, we've been very successful as an acceptable luxury brand and we realize that consumer spending will not return at the end of this period to prior levels, so we have to find the right balance so that we can be exceptionally compelling, both for aspirational consumers trading up and as an alternative to the European luxury brands. So when you look at our pricing, whether it's in Japan, Korea or in North America next year, you will see on average the price is 10% to 15% lower. Mike, you want to comment on gross margin, if you would?

Sure. Dana, if you go back and review how we've talked about this over the last couple of quarters, we actually anticipated the sharper pricing initiatives being about 100 basis points year-over-year on a compare '09 to '08. The good news is that the program has been successful and our sell-throughs for the sharper priced items have actually been stronger than anticipated, and as a result we're actually running above that. But that is again good news because it's driving higher net operating margin dollars while compromising the gross margin rate. I think as we've talked about a couple of times on today's call, with the environment we're facing, we're actually looking at expanding the program in the second half and into FY '10, so I think you could anticipate something more in the 150 basis point area on a year-over-year compare.

Your next question comes from Michelle Clark - Morgan Stanley.

The first question is I was hoping you could give us a sense of how traffic and sales trends played out throughout the quarter and maybe give us some commentary on a monthly basis. And then the second question is on inventory, up 39% on a comparable store basis. Any sense of how that lays out by channel would be helpful.

Sure. In terms of the second quarter, really important to note we have a very back-weighted quarter. December is the driver and it represents an enormous percentage of our total quarter, and the reality is that we saw a very challenging period from early December right up through Christmas in terms of traffic and sales trends. On the full-price side, I think we're all very well aware of what the market conditions were and what the promotional environment was, and that really weighed on our results overall. So it was difficult as we led into our peak period to see traffic and sales trends that really pulled down the quarter. As I said earlier, the post-Christmas period from a calendar standpoint and weighting standpoint was actually more positive and it did help us towards the very end of the quarter.

Michelle, Mike D. here and I'll take the question on inventory. I do want to first start out by reemphasizing what I spoke to in the prepared remarks is that the good news is we have a very robust factory channel. We are able to repurpose our inventory balances from our full-price division into factory stores and sell through at a very profitable operating income level. So what you'll see us do is adjust factory production down, made-for-factory product down, in the back half of the year, move the excess inventory balances that we're carrying out of Q2 into that channel, and as I said in the remarks, have units back in line by year end. That being said, I think we're seeing inventory growth across channels, most notably our two biggest inventory pools, of course, are in the U.S. and Japan. Japan is up more dramatically because of the impact of FX, where the yen is much stronger than a year ago, but the increases are pretty well balanced across all business units and divisions.

Your next question comes from Christine Chen - Needham & Company, LLC. Christine Chen - Needham & Company, LLC: Can you talk a little bit about the department store business? I know it's a small part of the business and you planned it down. Are you going to in this environment try and exit doors as well as plan the business down?

We're taking a very cautious approach, Christine, with the department store business, as we indicated. We actually shipped in much less inventory into the department stores in the fall and we're doing similarly in the spring. As far as rationalizing our doors in department stores, it so happens that we did that progressively over the last several years so that we're only in I believe about 60% of Federated's locations today. And indeed, in the store announcements for closure, for example, we don't offer Coach in any of those locations. So we do feel that the distribution that we have within department stores still works. It's obviously a very important channel, viable, and we will continue to participate actively in our wholesale business in North America. Christine Chen - Needham & Company, LLC: And what about product assortment for that channel, any changes there versus your full-price stores?

In our department stores, we have a much more concentrated assortment, as you know, much more highly edited and it's almost 100% handbags and accessories. They, too, will of course be a beneficiary of the rebalancing of our assortment back to this sweet spot between $200 and $300.

Your next question comes from Kimberly Greenberger - Citigroup.

Mike, I was just wanted to follow up on the inventory question. Could you give us any information on aging, how the aging compares this year to last year, and then just remind us how does the accounting work when you transfer goods from the full-price division over to factory? And you presumably get a slightly lower margin in factory; does that, I guess, pressure hit in the quarter when those goods are sold or did you already take some sort of an adjustment in the second quarter to reflect the lower expected margin on those goods once they do finally sell in the factory channel?

Kimberly, let me go to inventory aging first. As I mentioned in the prepared remarks, we're very comfortable with the aging currency of the inventory. It is current, high quality merchandise, largely in our sweet spot of handbags and women's accessories, and we're confident that we can move it and sell it through in the spring season in the factory channel. In terms of inventory accounting, we account for our inventories as they manufacture as opposed for as a retailer, so no, we have not taken any accounting charge as we anticipate moving inventory into the factory stores. We will realize the shorter margin as we sell through, but of course I have to remind you once again that the factory division actually drives a higher overall operating margin than our full-price division does today. So from a pure financial profitability metric, it actually will end up with a stronger op income result.

Your next question comes from Todd Slater - Lazard Capital Markets.

I'm just a little confused by the color of the trend and just wondering if you could expand on it a little bit. On the one hand you just had your toughest quarter, when people had to purchase gifts for Christmas, and now that there's not necessarily any reason to buy except the newness that you talked about - and the product does look terrific - but you said that you're seeing a stabilized trend that gives you confidence, so I'm just wondering if you could expand on that. And the other issue I'm confused about is why you wouldn't be assuming the worst in terms of consumer psychology and begin taking meaningful expense and headcount reductions as virtually all other companies in the space are doing?

Todd, when Mike referred to stabilization of our trends, it is in reference to our Q2 trends, not to LY. So unlike Q2, where we indicated that we saw a worsening situation throughout the quarter, that deterioration has not continued into Q3. Mike D., why don't you comment around the other part.

Sure. Yes, when it comes to managing expenses, we really believe that it's critically important that we seek to strike the right balance. Where appropriate, we need to aggressively cut expense to face the current reality, but at the same time we need to maintain our brand position and invest in growth initiatives such as China, for example, for our future. But that being said, I do think that we have taken fairly strong and nimble actions around expense control, Todd. You may recall that on our Q1 call when we gave new guidance for the fiscal year FY '09, we actually pulled $40 million of expenses out of the year at that time. And if you actually look at our actual results for Q2 compared to the guidance at that time, we actually in Q2 alone went $24 million lower than the guidance at that time. So just on that, we're not giving specific guidance going forward; on that basis, we have pulled $64 million of expense out of the year as we walked into it with our initial planning. So I'm really pleased with the way the organization has responded and feel good that we've acted fairly nimbly. That being said, with second half store volumes where they are, there is less further expense reductions. I wouldn't anticipate us taking additional expenses out of the second half at the same rate as we have in the first half, but we do still feel like there's a high single digit amount of expense leverage as we tweak sales volume. So I think we have acted nimbly. Mike Tucci in his prepared remarks talked about the actions we're taking around store count. We are not looking to expand any existing stores and are cutting our new opening pace in half in our full-price division. So I think we have taken a fair number of actions, while at the same time protecting our brand positioning, our service levels, and putting forward a modest amount of investment for future growth.

Mike, do you plan any corporate headcount reductions or have there been any?

As we talked about on our last call, we have instituted what we're calling a Coach hiring frost. What we've done is we're really allocated increases in headcount only to those important growth initiatives, again, most notably China and our merchandising initiatives that we're now calling internally new venture, and so beyond that there's no plans at this current time.

Your next question comes from Paul Lejuez - Credit Suisse.

Just one clarification, then a question. Lew, did you say that during the quarter the factory channel traffic, ticket and conversion were up slightly? And then my question, you know, you guys are talking about lowering prices 10% to 15%, and you're also talking about increasing store productivity. Does that imply that you're planning to order inventory in units up at least 10% to 15% or even above that to drive higher store productivity? Just wondering how those comments all tie together with how you're planning inventory in the future.

All good questions. Mike T., you want to take the second part of the question?

Sure. In terms of inventory planning as we look into FY '10 and we're building those plans today, you have to really factor in our sell-through assumptions. And what's happening is while we are planning average unit retails in handbags to come down, we're planning on sell-through improvement, so we are buying very tight, which will mitigate unit increase. And of course, as we engineer product at lower retails, our cost base will reflect that as well. So from an inventory position, we are managing the business very, very tight in terms of our forward buys.

In terms of our factory stores, all three metrics - traffic, ticket and conversion - did rise moderately.

Your next question comes from Neely Tamminga - Piper Jaffray.

Mike, could you clarify a little bit the commentary you were making on factory stores? I think those of us who have followed the stock for quite some time know that factory's a very profitable division for you, but are you actually implying that factory profitability's going to be up in your fiscal back half? I'm just trying to reconcile that with you taking down the made-for product on the product mix side.

It's a good clarifying question, Neely. The answer is not that it will be up, I assume you mean on a year-over-year basis, but I wanted to emphasize the point that the factory division actually returns a higher four-wall operating contribution rate than the full-price division and so it takes a shorter gross margin rate. And the fact that we've been highly promotional in that channel in Q2 and we would anticipate into the back half will hurt our year-over-year compares, but nonetheless we still deliver very, very profitable four-wall operating returns higher than [inaudible] the full-price division.

Mike, that's even when you take down your percentage of penetration on made-for products?

That's correct.

Okay. And then just one other housekeeping. The stabilization that you guys are speaking to in January from the, I guess, less negative is kind of the implication based on Lew's commentary, I'm just wondering is the delta here the conversion rate or is it the traffic?

The real improvement or stabilization is around traffic in full price.

Your next question comes from Adrianne Shapira - Goldman Sachs.

You referenced the strong balance sheet earlier on. Could you help us think about capital allocation buyback appetite, even CapEx, in light of the lower store growth? I'm just wondering the reined-in 20 store openings, is that in response to the current environment or should we be thinking about that as a shift in mind-set going forward and perhaps, you know, should we expect that to continue to trend lower?

It's entirely a function of the current environment. We feel very strongly that we will once again, when the economy recovers, be well situated to achieve strong and profitable growth, and our opportunities continue abundant. What we're doing now, obviously, is adapting to an unprecedented retail environment, balancing both long-term and short-term considerations.

In terms of CapEx, if you go back and look you'd see that our CapEx on an LY basis in FY '08 was about $216 million. Adjusted for the spend on the building, this year we're anticipating that that spend be around $180 million on roughly the same store count. So we have tightened our capital spending considerably, another action that we've taken this year around expense control. From that you can adjust out expansions and 20 additional full-price stores next year. I think we're also likely to invest less with our U.S. wholesale partners going forward during this backdrop, so I think you'd see a number nicely below $180 million.

And then, Lew, just following up on your comment, so should we be thinking about that as things improve we should be ramping back towards a 40-store opening?

I think it's too early to provide that type of texture, although in a perfect situation the answer would be yes.

(Operator Instructions) Your next question comes from David Glick - Buckingham Research Group.

Lew, just a question on the handbag category trends. My recollection is that Q1 the category was up mid single digits and obviously that decelerated to minus 10. I was wondering if you could give us some color, maybe some data that you have that you could share with us that gives you the confidence that handbags as a category is still gaining share and are those share gains similar to previous levels or have those share gains narrowed somewhat?

A good set of questions, David. First, when we analyze the reason for the rate of decline, it was primarily our handbags being on sale at all levels at unprecedentedly low price points. And that doesn't really mean a unit decline. It really means a dollar decline that's a function of our handbags being on sale. Having said that, all of the research we do and we just fielded some research at the beginning of January to understand our consumer's purchase intent regarding bags versus apparel and other fashion accessories, and the reality is while consumers expect to spend less, they expect to spend relatively less in handbags than they do in apparel, and we think that trend will continue. Now our handbag sales in North America fell about 6% during the last quarter and we estimate the category fell about 10%. So in a very modest way, perhaps we gained market share, but we obviously did not feel very good about our results and we'd prefer to be in positive territory. And our general view is that when the market stabilizes, the handbag category will grow relative to apparel and assume a larger share of the consumer's wardrobing spend.

And then, Mike, maybe I missed it, but did you comment on your approach to share repurchases going forward? Obviously, you commented on the amount remaining; I assume you're going to be buying back stock. But if you could give us some color on how you guys are looking at that going forward.

Yes, we did just mention how much we had left on our current authorization, David. You know, our view has altered somewhat on our buyback activity. In the current credit crisis, where liquidity is king, I think you'll see us take a little more cautious and conservative approach to maintaining high cash balances and probably slow down the pace of buyback. In the last year we spent $900 million on buyback activity. If you go over an 18 month period, it's been $1.7 billion and we've taken 15% of our share count out. So we've been aggressive to date and it's benefited us, but in this current liquidity crisis we're going to be a little more conservative about holding cash.

So it's not a suspension of the buyback, just a slowdown in the pace?

Exactly.

Your next question comes from Lorraine Maikis - Banc of America - Merrill Lynch.

I just wanted to get a little clarification on our expectations for 2010. I know you're planning price points down and you said that you're expecting sell-through improvement. Is that based on an improvement in the consumer's willingness and ability to spend or is that purely product driven?

It's a function of multiple factors. One is distribution growth. As you know, we are growing our business across multiple geographies and that will continue in FY '10. Second, we do have a very diverse model and what's important to note, Lorraine, is that less than 30% of our sales are North American full-price sales. So we do have several businesses, factory businesses, international businesses, wholesale businesses, and other channels, many of which continued to grow during this period. So it's a combination of factors.

I think also one thing I would build on Lew's point, also referencing something Mike T. said earlier, is we're also buying much more tightly going forward, which will also drive the stronger sell-throughs.

Thanks, Lorraine, for that concluding question. Thank you all for joining us on our conference call today. As Mike noted, I'd now like to turn it back to Lew Frankfort for a few closing words. Lew?

Thank you, Andrea. Obviously, we're in uncharted waters, Coach is and America is as well. We know our business well. We have a very strong franchise. We have a very excellent balance sheet. All of you know that we don't borrow. And when we talk about inventory being equivalent to currency and our ability to repurpose it, it's probably more true for Coach than any other company that I'm aware of. So we feel very comfortable with where we are. We will continue to manage cautiously and at the same time invest prudently. And as I said earlier, our opportunities remain strong. We are the market leader. We will continue to build on that. And we do feel and believe strongly when the economy recovers we will be well situated to again achieve strong and profitable growth. Thank you and have a very good day, everybody.

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