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, 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. Victor Luis, President, International Retail, will report on our Asia direct opportunity. 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. Now let me outline the speakers and topics for this conference call. Lew Frankfort will provide an overall summary of our third fiscal quarter 2011 results and will also discuss our strategies going forward. Victor Luis will speak to our Asian direct businesses, providing an update on China and other markets in the region. Mike Devine will continue with details on financial and operational results of the quarter. Following that, we will hold a question-and-answer session where we will be joined by Mike Tucci, President, North American Retail. We'll end the Q&A shortly before 9:30 a.m. Luke will then conclude with some brief summary comments. I'd now like to introduce Lew Frankfort, Coach's Chairman and CEO.

Thanks, Andrea, and welcome, everyone. As noted in our release this morning, we were very pleased with our quarterly results, including store sales and earnings growth and the continuation of excellent comparable store sales in our North American Retail businesses. Our performance clearly demonstrates the brands of vitality across channels, geographies and bodes well for the future. Further, the ability to generate these results in light of the tragic events and their aftermath in Japan speaks to the diversification of our business model and the strength of our brand proposition globally. Beyond the top line, we are also very pleased with our high levels of profitability and substantial cash generation. In addition, we make continued progress against our global business initiatives, including international expansion, men's and digital media. We experienced strong response to our new collection, and our pricing and assortment strategy continued to resonate with consumers worldwide. We're well situated to build upon our leadership position and continue to gain market share. Further, the announcement today of the increased dividend reflects our financial strength and our confidence in Coach's future. Before I review the quarter and provide an outlook for the category and our business, I would be remiss not to touch on the tragedy in Japan. Of course, we have been saddened by the devastation in Japan, but we're relieved to learn within days of the earthquake and tsunami that all Coach colleagues was accounted for and safe. When I visited Japan early April, I was impressed by the resiliency of the people and the progress made in restoring more normal conditions. And I was moved by the incredible spirit and tenacity of our own Coach Japan colleagues, who rallied together during a very difficult time. Moving on to some key highlights of our third fiscal quarter. First,…

Thanks, Lew. To put the opportunity in perspective, the premium bag and accessory market in Asia, including Japan, is nearly $12 billion today. And in contrast to the global market, which is about 85% women's and 15% men's, in Asia, Men's represents nearly 1/4 of the spend. Excluding Japan, the market is growing at a double-digit rate led by mainland China. In addition, Hong Kong, Korea and Southeast Asia are all expected to grow at more than 10% for the next several years, while Taiwan is projected to grow at a slightly slower pace. Overall, the region offers excellent potential where we can leverage our well-honed retail skills and international experience to drive the business, as we have done in Japan and are now doing in China. Coach is already among the top 5 brands in these markets with at least a mid-single digit share, and we have proven strategies in place to increase brand awareness and grow sales. In Japan, the overall consumer market has been challenging for some years, and the category has contracted. Our goal was and continues to be market share gains, and we have done this quite well in our core Women's business. As elsewhere, we're now also focusing on Men's where we've already seen early success. As Lew noted earlier, we do expect the continued impact from the tragedy over the next few months, primarily a function of reduced traffic as the infrastructure problems in the northern and eastern parts of the country remain, resulting in transportation and power issues. However, barring further significant aftershocks or worsening of the nuclear crisis, we expect our business to continue to show steady improvement. We expect to open 2 more stores in the fourth quarter for a total of 9 new Coach Japan locations, including 5 Men's…

Thank you, Victor. Lew and Victor have 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 rose 14% with Direct-to-Consumer, which represents over 3/4 of our business, up 15% and Indirect up 14%. Earnings per share for the quarter increased 23% to $0.62, as compared to $0.50 in the year-ago period, as net income rose to $186 million from $158 million. As noted in the press release, we estimate that the events in Japan impacted sales by approximately $20 million and earnings per share by about $0.025 during March and the third quarter. On a non-GAAP basis, our operating income totaled $280 million in the third quarter, up 12% from $249 million in the same period last year. Operating margin in the quarter was 29.4%, compared to 30% even in the year-ago period. In the third quarter, gross profit rose to $692 million from $616 million a year ago, and gross margin rate remained strong at 72.8%, compared with 74.1% a year ago, reflecting the impact of higher sourcing costs. Moving to expenses. We were pleased that we were able to gain 70 basis points of leverage in the quarter. Specifically, SG&A expenses as a percentage of sales, also on a non-GAAP basis, improved from prior year levels in the third quarter and represented 43.4% of sales versus 44.1%. Once again, our primary Direct businesses here in North America and in Japan provided leverage to the corporate P&L, more than offsetting the impact of our investment spending. We believe we're striking the right balance between driving future growth opportunities and operating efficiencies. As noted in our press release, we recorded certain one-time items during the third quarter, which resulted…

Thank you. [Operator Instructions] Our first question comes from Bob Drbul with Barclays Capital.

I guess I'd like to ask the team a question about China, really [indiscernible] spent a lot of time on it. Can you size the opportunity longer term? Do you think it can be bigger than your North American business? And can you address any goals or your thinking around the profitability of that region in a near term, but even longer term?

Why don't I begin, and then turn it over to Victor. First Bob, the opportunity in China is boundless. It's still early days. Our market share is only in the area of 5%. Our category is growing rapidly. We like to set our reasonable milestones. So our first challenge is for China to surpass Japan, which today is at over USD $700 million, and China this year, as we reported, will do about $185 million. On an effort to actually eclipse the U.S., we will need to become the # 1 brand in China at a time when the China accessories market is large enough to support our such sales. Is it something that might occur? Perhaps, but we in the end have a long way to go. Victor?

Sure. I would add that today, we're looking at a market in China that's approximately $3.2 billion, including travel retail, which we expect to grow to approximately $7 billion by FY '15. So already larger than Japan, which today is approximately $4 billion and where, as Lew mentioned, we today are over $700 million in sales. So we do see tremendous growth in a market where, as Lew mentioned in his remarks, we have at least 120 cities with a population of 1 million or more and truly tremendous opportunity in terms of distribution as well. China is developing as a wonderful market for multichannel distribution, both in department stores where we have tremendous opportunity. There are today approximately 600 department stores in China, of which approximately 100 of them already have luxury cosmetics, with sales approaching the top 100 department stores in Japan as another great measure, as well as the rapidly-developing shopping mall and slowly but surely developing factory outlet mall channel, which will be another terrific opportunity for us. So we're truly excited, and I would echo Lew's comments that we do feel the opportunity to truly be boundless. I'll turn it over to Mike for some comments on profitability.

Yes, Bob, as you've heard us say many times on these calls and in other forums, we're very excited about the level of profitability we feel the China business can achieve for a couple of fundamental reasons. Firstly, we do sell through at a premium to North America pricing in the region, not premiums as rich as Japan's but in the neighborhood. And so our gross margin rates in China are quite robust rivaling even that of the Japan business. In terms of store four-walls, we are already seeing four-walls nicely into the 40% range and so that's driven of course by that gross margin rate. But also as you might suspect, our store wages are lower in China than they are anywhere else in the world, contributing to a healthy four-wall. And as we gain in productivity and the brand gains awareness with landlords, we'll see our occupancy rate. The other big expense items on the store P&L begin to decline as a percentage of sales further enhancing store four-walls. Victor mentioned in his prepared remarks our approach to the region with a Asia distribution center and an Asia shared service center. So we're keyed to drive an efficient back office infrastructure to support both the China business and Pan-Asian approach. So all of those things taken together a lot of words will drive very, very healthy rates of profit and volume of profits from the region as we move into '12 and beyond.

Thank you, Mike.

And Mike, I just have one quick follow up. On the $0.025 hit from Japan this quarter, can you give us an estimate on how detrimental Japan was to the gross margin that you reported this morning?

Yes, it could be helpful, Bob. Clearly, with Japan being one of our highest gross margin regions, losing that $20 million was hurtful of the gross margin rate but relatively immaterial. We certainly would've recorded a modestly higher gross margin rate, but it is a small percentage of the total company's business, and we were able to absorb it. I would add, though, I have to take this opportunity, that had we had that $20 million of sales and about $0.025 of earnings, we would have actually seen operating margin that leverage. We were -- did come up just short of Q3's op income level. Had we had the $20 million of that very profitable Japanese business, we would've seen operating margin improvement, which I have to say coming into the quarter, I do not think was going to be possible. So the business operated very efficiently across all geographies and mature businesses during the quarter. Similarly, I would just say for the fourth quarter, same dynamic. In our own projections that we've just kind of shared with you, we will see some very modest operating margin deleverage for the quarter. We would have gotten operating margin leverage had we not had the quake impact. Of course these are all forward-looking statements now to talk about fourth quarter. But I do think it demonstrates the diversity of our business model globally that we're able to absorb this profitable loss and still project that we can hit 31.5% op income for the year, kind of what we've been pointing to for a number of quarters now. So in a way I'm thinking about that as an increasing guidance, if you will, adjusted for the quake impact.

[Operator Instructions] Our next question comes from Kimberly Greenberger with Morgan Stanley.

Thank you. Congratulations on a nice quarter.

Thank you, Kimberly.

I'm wondering if you can talk about your outlook for sourcing cost inflation and the pricing strategies as you look into the back half of calendar 2011. And Mike, if you could just remind us about your gross margin outlook here for the remainder of the calendar year, that would be helpful.Thanks.

Sure. Kimberly, we're essentially in the same place on gross margin as we have been in terms of our guidance for the balance of FY '11. You'll recall that we were one of the first companies to talk about inflationary pressures well over a year ago, and that's holding. That being said, there are a number of positive things going on within gross margin to help offset these pressures. And we're guardedly optimistic that we'll see some modest sequential improvement actually in the first half of our FY '12, the back half of this calendar year versus the second half of our FY '11. It's because of counter-sourcing efforts, material inflation will not hit us as hard as others. The other thing that will be helpful is we'll also begin to anniversary those higher input costs from early last year's fiscal '11. Wage inflation is our biggest issue and we're battling that by moving products into lower-cost countries. We're ahead of schedule on this initiative, but it is still very early days there. And so while we are protecting our opening price points, we are also surgically taking advantage of pricing power, and we're doing this in both channels, both in our full price and our factory channel. The other thing we'll start to see which will be very helpful, is channel mix will actually begin to help us, we believe, as we move into FY '12, which will be a nice thing as growth in the Asian region that Victor spoke to helps channel mix there. And also just the underlying trends in our Full Price business in our mature markets of North America and Japan will also help channel mix. So we still are feeling good about our previous guidance gross margin in the boundary of 72% to 73%, going forward. We feel it very achievable.

Thanks, Mike. Is it helpful at all that global automobile production is expected to fall short, this year, of the prior expectation? I think that the auto industry is one of the largest consumers of leather.

It's a very good point, Kimberly. It's a supply and demand equation of course, as you would imagine. And so if demand is down, that will certainly help buyers of leather. Our team has done an amazing job counter-sourcing, and leather is not a big driver of our inflationary cost pressure, especially year-over-year. So the issue you bring up will be helpful to us but somewhat immaterial to the total reported gross margin with all the other factors that impact it.

Our next question comes from Neely Tamminga with Piper Jaffray.

Let me also add my congratulations on a great quarter. Victor, thanks for joining the call. And I'm just wondering if you can walk us through a little bit more on some of the evolution of this company as you go from just being primarily 2 geographies to multi-geography? Clearly, you spoke to the back office aspect as in the shared services but could you give us a sense again and just let us know how you guys are designing for the different geographies and buying from designs? Are you doing a good global design and then having regional people purchase towards the preferences of each individual consumer? Just help us understand that a little bit more as the company continues to clearly grow globally.

Sure, as you all know of course, we have 1 design team, which is based here in New York, and that design team does design globally. In each of our geographies, we have in-market merchants who, constantly, with the support of our consumer insights team, are looking to understand the consumer and provide the design team with some logic to add to the magic that they of course do in designing the product. We have a very strong merchant team in Japan. We have today a merchant team in Shanghai, as well as Hong Kong, that is developing. And those teams provide the inputs into New York and then we'll buy from a global assortment, which occasionally, of course, is tweaked to meet local needs. On the whole, though, I would say that our assortments are rather global. In Japan, China, collections such as Madison, Poppy and Kristin, which are today the main drivers in the North American business, are also main drivers for us in the region. There may be some functional areas that we have to tweak, whether it be in smaller goods or in handbags. As an example, for example, in handbags across Asia, across body bags, given the amount of commuting that takes place, do tend to have a higher penetration than say here in North America. That is something that we simply input into our buys locally. And I think one of the most important differences, as I've mentioned in my remarks, is the Men's opportunity. In Japan, the Men's market of that $4 billion size today, represents approximately 20%. In mainland China, it can represent 50% to more for most of our competitor brands, and it's approaching about 50% of the market, again. In Hong Kong, Macau and the rest of the region, and we're looking at 25% to 30% as well. And so our, in-market merchant teams are working very, very closely with our central merchandising teams and our design team to ensure that those very specific needs of that specific Asian male consumer are met. And so it's a highly collaborative effort with a tremendous amount of consumer insights, as well as, of course, the design talent, which is very much focused on presenting 1 New York Coach aesthetic to the world based here in New York.

That's really helpful, Victor, thanks. And good luck and feel better, Lew

Thank you.

Our next question comes from Lorraine Hutchinson, Bank of America Merrill Lynch.

Rick Patel in for Lorraine. Can you just update us on your mix of handbags priced below $300? Do you feel this mix is appropriate today, given what you're seeing in the marketplace? And how should we expect that to change over time?

Sure. We have -- we've been very dedicated to this overarching $300 price positioning. Our handbag under $300 penetration and offer is right at about 50%. We see that as being a really important level for us, and we also see some trend growth happening in leather, which is impacting price point, gives us an opportunity to nuance some of our pricing in a positive way. There's some margin opportunity there. And we had very, very nice growth incidentally in handbags over $400. With that penetration, it went to about 18% versus 10% in the prior year. That's a big deal and driven very much by this leather trend that we're seeing. I think just to add a sense or two on factory, very similar trends there, strong leather trends. And we had a very nice AUR increase in handbag in the Factory business, while maintaining what we think is the competitive positioning in that channel.

That's helpful. Thank you very much.

Our next question comes from Christine Chen, Needham & Company. Christine Chen - Needham & Company, LLC: Thank you and congratulations on a good quarter.

Thank you, Christine. Christine Chen - Needham & Company, LLC: I wanted to ask about your Factory business. Your factory channel seems to be really clean of full price inventory. Wondering what the percentage of factory, specific factory exclusive it was in the quarter versus last year? And then wondering about footwear, what is it as a percentage of your total? And is it driving the increases at the department store level? Or is it pretty equal between bags and footwear there?

Christine, I think you're breaking up a little bit, but the essence of your question was around mix of product in Factory. Christine Chen - Needham & Company, LLC: Yes.

Where we saw again a very, very strong contribution from factory exclusives, terrific response to newness there. The level there was 86%, and that's been a running average for us, in about that zone. Again, a forward [indiscernible] pricing and margin flexibility there, and we see that continuing. Our Footwear business is very good, stable. We don't have a significant Footwear business in our factory channel but on the Full Price side, our Footwear business continues to be positive. Christine Chen - Needham & Company, LLC: What about at the department store level?

On the department store side, our Footwear business has also been healthy. We haven't seen account growth there, but we're very much focused on what we see as an assortment productivity opportunity in the wholesale channel, and that has been very successful for it this spring.

We enjoyed that 5% market share in that channel. Christine Chen - Needham & Company, LLC: And have you been able to pull back on some of the promotions at Factory? [Technical Difficulty] Christine Chen - Needham & Company, LLC: I'm sorry, I said were you less promotional at the factory channel?

In fact, our margins in Factory were slightly better, and our promotional levels were pretty much even with the year prior. Christine Chen - Needham & Company, LLC: Great. Thank you, and good luck.

Our next question comes from David Schick, Stifel Nicolaus.

When we hear about 40%-plus I think you said four-wall contribution in China and that's the fastest-growing business you have, and it feels like Men's is partially what Coach is doing around Men's but also maybe a growing global marketplace for Men's or demand for Men's. And we look back at what you've done margin-wise. How should see operating margin-wise? What should we think about ,for operating margin 5 or 7 -- not in the immediate planning future but 5 or 7 years out, should it be higher than what you've achieved in the past? Given those new businesses growing at higher margins?

It's a provocative question, David. There are so many factors that go into determining operating margins including, of course, our raw material cost. Our general view is that operating margins should continue at the 30%-plus level and could very well approach the mid-30s over the next few years.

You've done better than that. Beyond that given the growth [indiscernible]

Think boldly, David.

Very good. Thank you.

Our final question comes from Paul Lejuez with Nomura.

Thanks, guys. Just wondering as you think about the European expansion how much of your store growth will be centered on tourist-type destinations versus stores that are more likely to attract a more local customer? Thanks.

Good question. And initially, a good portion of our business will be focused on tourists because we're opening major locations in major cities where tourist accounts for a majority of business within those markets. As we develop awareness and interest on the brand among locals and expand our fleet to the secondary cities as well as the suburbs, we will see that mix change.

Thanks, and good luck.

Thank you for your attention, and now I'll turn it back to Lew for a few closing words. Lew?

Just a few. I wasn't sure whether my voice was going to last through the call. Of course, we posted an excellent quarter. As you well know, I think all of you are familiar with our track record. We feel very good about where we're positioned for the rest of the spring season and for the fall and do look forward to double-digit top line and bottom line growth and would like you along for the journey. Have a good day.

Thank you everyone for your attention. Have a great day.

Thank you. And this does conclude the Coach earnings conference call. We thank you for your participation. You may now disconnect your line.