Tapestry, Inc. (TPR) Q2 2016 Earnings Report, Transcript and Summary

Good day and welcome to this 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 the Global Head of Investor Relations and Corporate Communications at Coach, Andrea Shaw Resnick. Andrea Shaw Resnick - Global Head, Investor Relations & Corporate Communications: Good morning and thank you for joining us. With me today to discuss our quarterly results are Victor Luis, Coach's Chief Executive Officer; and Jane Nielsen, Coach's CFO. Andre Cohen, President, North America, 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 a number of important factors, including risks and uncertainties such as expected economic trends or our ability to anticipate consumer preferences, control costs, successfully execute our transformation initiatives and growth strategies, or our ability to achieve intended benefits, cost savings and synergies from the Stuart Weitzman acquisition. Please refer to our latest Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission for a complete list of risks and important factors. Please note that historical trends may not be indicative of future performance. Also, certain financial information and metrics that will be discussed today will be presented on a non-GAAP basis, which you may identify by the terms non-GAAP, constant currency, excluding the negative impact of foreign currency, or excluding charges associated with the financing short-term purchase accounting adjustments, contingent payments and integration costs. You may find the corresponding GAAP financial information or metric as well as the related reconciliation on our website, www.coach.com/investors, and then viewing the earnings release posted today. Now, let me outline the speakers and topics for this conference call. Victor Luis will provide an overall summary of our second fiscal quarter 2016 milestones and learnings, and will also discuss our progress on global initiatives. Andre Cohen will discuss our North America business in more detail. Jane Nielsen will follow with details on financial and operational results for the quarter, along with our outlook for the balance of FY 2016. After that, we will hold a question-and-answer session. This Q&A session will end shortly before 9:30 a.m. Victor will then conclude with some brief summary comments. I'd now like to introduce Victor Luis, Coach's CEO. Victor Luis - Chief Executive Officer & Director: Good morning. Thank you, Andrea, and welcome, everyone. As noted in our press release, we are very pleased with our second quarter performance, which was consistent with our expectations and reflects the most significant progress to-date on our transformation plan, despite the difficult retail environment globally. We drove further sequential improvement in our North America bricks and mortar business, led, as expected, by our retail stores, while our outlet store channel also strengthened against the backdrop of lower tourist traffic and a highly promotional environment. Our international businesses posted strong growth on a constant currency basis, highlighted by double-digit increases in Europe and Mainland China as well as sales gains in Japan. Overall, our results continue to give us confidence that the cumulative impact of our actions will result in the return to top-line growth this fiscal year and positive North American comps by our fourth fiscal quarter. Importantly, during the holiday period, we delivered on our plan across businesses and geographies while continuing to successfully execute our brand transformation across the key consumer touch points of product, stores and marketing. Our broader gifting assortment resonated with our customers globally across all price points and in all channels. We continued to transition more of the fleet into our modern luxury concept with a significant increase in remodels prior to holiday, driving results globally and the continued positive comps in the North American retail stores which have been renovated. Finally, our holiday marketing struck a fine balance between fashion and bolder, more relatable gifting messages. We are also excited about Stuart Weitzman's results during the quarter, which exceeded expectations. Boots, in particular, sold well, notably in domestic retail stores and in spite of the unseasonably warm weather. Stuart Weitzman's strong outperformance against the category clearly reflected the brand's strong development of fashionable trend-right product as well as its growing relevance with increasing numbers of consumers globally. We are also excited to see Stuart Weitzman continue to gain traction internationally, notably in Asia where the brand is still nascent but has significant long-term potential. Importantly, we are effectively integrating Stuart Weitzman into Coach, Inc. while continuing to successfully execute the Coach brand transformation. Since acquisition, we've strengthened the Stuart Weitzman team by bringing in new talent. Specifically, we've recruited a new chief merchant while also leveraging Coach leaders and handbag specialists in product development roles and in senior finance and human resources positions. Now, as have been our recent practice, I'd like to share some of the actions we've taken to build momentum across our three key brand pillars of product, stores and marketing, starting with product, where Coach is clearly emerging as a house of modern fashion design. During the second quarter, as in Q1, essentially all of our retail stores' offering, both men's and women's, were Stuart Vevers' designs. Handbags continued to be driven by the Swagger family, with the Nomad Hobo also a key bestseller for the season. Essentials, including the Edie shoulder bag group, the Prairie Satchel and the Turnlock Tote were also great gifts at key price points. And our gift box program resonated globally. In outlet, we continued to increase the offering of Stuart's designs and updates, representing about 90% of the assortment with key new styles, such as Blake launched in late Q1, and the reimagined Phoebe and Christie groups in women's, as well as a strong group of backpacks driving our men's business. Our gift box program, where we distorted investment, also was very successful. In the wake of our first complete runway show in September, our new Coach 1941 collection received significant attention from top tier specialty retailers and luxury department stores. The collection will debut next month in Saks, Nordstrom's, Opening Ceremony, Fred Segal and Jeffrey New York, as well as Colette in Paris, LUISAVIAROMA, Umeda Hankyu in Japan, Galleria West in Seoul and Lane Crawford in Greater China. Of course, it will also be available at select Coach retail flagships globally, with all stores receiving the iconic Saddle Bag, which arrived earlier this month and was the buy-now feature of our September fashion show. We also just presented at London Collection Men's the overwhelmingly positive reviews from both the editorial and retail communities. Naturally, we're thrilled by the attention that Stuart's collections are generating and see it as a clear vote of confidence for our strategic and creative direction. On stores, we're continuing to establish our new Modern Luxury concept stores globally, renovating and opening over 65 during the quarter, including 24 renovations and two new Modern Luxury stores in our directly-operated North American business, taking us to about 250 across all channels worldwide. We remain on target to end the year at 40% of our doors in the new format. Consistent with plan, these renovations have been driving significant inflections from previous trends in comps, which exceeded the balance of the fleet in the vast majority of stores around the world. We've also seen our new retail and outlet Modern Luxury stores meeting or exceeding their targets in aggregate. In North American department stores, we completed six additional case-line conversions, renovated four shop-in-shop locations to Modern Luxury in 2Q, and added four Modern Luxury shops. Finally, we have about 30 shop managers in place today and have seen a significant impact versus balance of chain and expect to hire another 20 by the end of the year. On the marketing front, we remain focused on creating desire for our brands and building emotional connections with consumers globally. During the holiday season, we were decidedly more fun and festive in our marketing approach, including a lighthearted holiday film with the tagline #GiveCoachOrElse, which aired on network television in the U.S., a first for the brand, and globally on our brand websites and social media platforms, driving over 135 million impressions worldwide. And our popular Coach Pups campaign brought smiles to consumers' faces. Looking forward to the first half of calendar 2016, we will begin to celebrate our 75th anniversary, focusing on our distinctive brand proposition. No other American brand in our space can claim the unique combination of heritage and craftsmanship that is our DNA, fused with the modern fashion sensibility of Stuart's vision. Next month, we will debut our Heritage campaign, featuring Coach icons and starting with the recently launched Saddle Bag. The global brand campaign is a key vehicle to communicate our authentic history as America's original house of leather. We're also excited about our Coach Vintage initiative, a highly-coveted collection of four of our most iconic bags that we've reclaimed, masterfully restored, and hand-embellished by artisans, modernizing them for today. The collection has been curated for sale in premium channels worldwide including Colette in Paris and Barneys in New York and Los Angeles. We will also feature installations in Tokyo, Shanghai, and Beijing, as well as a global online auction. You can learn more about Coach Vintage on coach.com, where we have an environment dedicated to several of our 75th anniversary initiatives. In the digital arena, we launched e-commerce in the UK early in the quarter and drove over 0.5 million visits to the site during the period. In the U.S., we continued to gain traction through mobile devices, which represents over half of our online visits. And for holiday, we launched enhancements to coach.com, with personalized e-gifting, where customers sent Coach products as digital gifts. And as we increased our positive brand impressions, we continued to reduce the number of eOS events from prior year, and are now at our planned sustainable cadence of about two events a month or six to seven a quarter. As a result of these efforts, we have seen continued progress with consumers in our quarterly North America brand-tracking survey, fielded in December. Importantly, our overall brand affinities remain strong with consumers. And this quarter, we were particularly pleased to see notable improvement among category drivers in the high quality and unique attributes compared to six months ago, which we believe is a direct reflection of the investments we have put into the make of our product. So, as our plans unfold and we continue to show steady improvement, we are very pleased and extremely proud of all that our team has accomplished during the past three seasons to drive Coach's transformation. The Coach brand is very much on its way to evolving from an accessible luxury handbag and accessories brand to one of the most relevant modern luxury brands in fashion. We're excited to see our vision and direction take hold and we'll continue to update you on these initiatives as we move forward. Turning now to a discussion of category trends, overall, we estimate that the North American premium women's handbag and accessories market was essentially flat in the December quarter, with unit growth still quite positive, offset by lower AURs given the heightened levels of promotional activity. Importantly, against this backdrop, Coach's sales of women's bags and accessories, while still negative, once again improved sequentially in North America. And, of course, as a lifestyle and multi-brand company, we also participate in categories outside of women's bags and accessories. Men's, which represents about 17% of our global net sales, posted strong results in the quarter. We continue to believe it is a growth opportunity for the brand and are still forecasting mid single-digit growth during FY 2016. Over our planning horizon, we believe men's remains a $1 billion opportunity. We also recently brought our men's footwear in-house, including production management, where we were previously only doing design. While the business is still in its infancy, we have been very pleased with our initial results. And, of course, we also remain focused on building Coach, Inc.'s market share within the fragmented men's and women's $27 billion global premium footwear category, which we estimate will grow at mid-single-digit pace over our planning horizon. Looking ahead, we see significant growth opportunities for the Stuart Weitzman and Coach brands in this category. While Jane will provide additional details on sales and distribution by geography, we wanted to touch on some current trends and strategies by market. So I'll turn it over to Andre for a discussion of North America.

Thanks, Victor. As you read in our release for the quarter, our total Coach brand sales in North America were down 7% as reported and 6% in constant currency. Our Direct business, excluding wholesale, was also down 7% as reported and 6% in constant currency. In aggregate and as targeted, we drove a significant inflection in our business this holiday, led by retail. Comp trends also improved in our outlet stores, with record Black Friday weekend sales. Overall, our total store comp was down 3% year-over-year, with high ticket offset by lower conversion and a decline in traffic, which was hurt in part by the overall weak mall trends. Our total comp was pressured an additional point by eOS, as we pulled back from 10 events in last year's second quarter to seven in total. Now looking at results sequentially, as planned, an improvement in conversion drove the inflection in comp as our initiatives across product, stores, and marketing built momentum. Our in-store traffic trends also improved on a sequential basis, despite a significant worsening in overall mall traffic. Against this backdrop of deteriorating traffic, specifically in the outlet channel, competitive pressures intensified and we responded with a higher level of promotion than expected. Importantly, we remain confident in our ability to deliver a positive North American comp by the fourth quarter, again led by the improvement in our retail stores, with the most significant driver being conversion. Now, turning to our retail performance and the metrics we traditionally share on products, the above-$400 price bracket rose in penetration, saw another positive comp on a sales and unit basis, and represented about 35% of handbag sales, up from about 30% last year. The increases showed continued progress of our elevation strategy, with higher price points and more fashion-forward products such as Nomad and Swagger performing strongly. In addition, our gifting offer, covering a broad arrange of styles and price points, also registered well, driving balance in our assortment, with the below-$300 price bracket posting a positive sales and unit comp in the quarter. Our Essentials bags, such as the Turnlock Satchel, Prairie Satchel, and Scout hobo were important drivers, as was an extended offering of holiday giftables and accessories. As has been the case for quite a while, leather continued to outpace logo across all channels. In the second quarter, logo across all categories represented less than 5% of North American retail sales, and in outlet, it was under 30%, down year-over-year in both channels. Now, in stores, as Victor mentioned, we've been very pleased with the performance of our Modern Luxury stores, particularly in the North America retail channel, where comps remain positive, with now 66 stores renovated, including 14 added in the first half. In the outlet channel to-date, we've also seen an improvement in trend post-renovation and relative outperformance versus the balance of outlet stores. As noted, we've not seen the same level of inflection in outlet, given the newer store base, notably in men stand-alones. To-date, we have completed 26 outlet renovations, including 12 in the first half, and opened a total of five outlet stores in the new format, three in FY 2015 and two year-to-date. We remain on target to renovate about 60 North American stores this year. In terms of elevating our customer experience, our stores in Time Warner Center in New York, Rue Saint-Honoré in Paris and Shanghai Hong Kong Plaza, are the latest installations of our concept craftsmanship bars. We'll be refining and deploying the concept to select flagship stores globally, providing customization options and leather services, such as monogramming, which harken back to our roots as a leather goods manufacturer. We're also in the process of training dedicated leather services specialists in each craftsmanship bar. This is a truly unique and differentiating feature of Coach stores, which is delighting customers across all markets. In addition to the pinnacle craftsmanship bar experience, as we reinforce our positioning as America's original house of leather, we're also rolling out three core leather services, leather care, monogramming and repairs assessment, in all stores globally. The initial impact of these services has been very positive, driving conversion and repeat purchase. Also in support of the customer experience, we continue to refine our Modern Luxury Hosting Ceremony and introduced a new store associate uniform globally in October. This is another step towards creating a more consistent Modern Luxury in-store experience, with our staff looking and feeling more stylish and elevated. Now turning to event marketing, as you know, over the last 18 months, we have changed our approach to customer events in the retail channel, resulting in a significant reduction in promotional activity on a year-over-year basis in FY 2015. In terms of learnings, as noted on the last two calls, we found that our semi-annual open sales, which are now known as the winter sale and the summer sale, have served as recruitment vehicles for new customers. As a result, this year, we're holding two shorter-duration open sale events over key traffic periods with the intent of attracting new retail customers. The first of these occurred around Black Friday, including a VIP preview with a tiered offer, which we then opened up to the public. We're very pleased with the results, with the events both bringing in new customers and reactivating lapsed ones. Similarly, our winter sale, which started and ended earlier than last year, was also quite successful. At the same time, we've adjusted the cadence and further reduced our closed targeted customer events to two a year, the first of which was held as planned in September with the next expected in March, which will include a single pass-along invitation for a friend in our direct-mail invitations. As a reminder, the timing of this year's event is consistent with last year. Importantly, we continue to evolve and optimize the timing and type of events. Our goal is to further reduce the number of days on promotion in our retail channel in FY 2016. Now looking ahead to spring and summer, in retail, we just kicked off Coach's 75th anniversary by introducing the Saddle Bag, an archival glovetanned leather bag offered in multiple sizes and modernized with an array of colors and trims. Additional anniversary styles that were launched in the March quarter include the Dinky Bag, pouches in small leather goods, and an archival rucksack in men's. As Victor noted, Coach 1941 will launch in conjunction with Spring Fashion Week in February with a comprehensive product expression in our top 50 locations, as well as key handbags in all stores. We'll add new styles with our bestselling Swagger family in fun fashion colors and unique novelty patchwork. Additionally, we're launching new styles in the Nomad Hobo group and a new silhouette, the Mercer Satchel, in stores since last week, all of these new bags speaking to our important category-driver segment. We'll also continue to animate essentials with the launch of Turnlock Edie priced at $395, with chain straps and Turnlock details differentiating it from bestselling key item Edie. And we'll add a fun layer of novelty prints, studs and grommets to play up essentials. The Chelsea Crossbody, a key under-$300 item, will also launch in Q3. Our Men's business in the third quarter will be driven by continued momentum in backpacks, our first Men's collection launch, and distortion in marketing spend on the category. In-store merchandising will position Men's more front-and-center and we'll animate the collection with media support and in-store events. In outlet, given the response we've historically seen to novelty, we're most excited about Peanuts, a key initiative for Q3. Peanuts just launched last week in stores and is off to an exceptionally strong start. As you may remember, Peanuts was introduced in retail last year and drove very strong interest in the brand. As always, we'll focus on key high-traffic moments, including Martin Luther King weekend, just passed, and Presidents' weekend coming up in February. To this end, the Billie Backpack, launched just in time for MLK weekend, is off to a strong start. Next month, we'll re-launch key styles such as Kelsey, Phoebe and Christie in on-trend seasonal colors, when our novelty assortment will feature hologram, wide floral, and stud detailing. In March, we'll introduce Carlyle, a cool and highly functional shoulder bag showcasing our iconic Turnlock. And now, turning it back to Victor for International. Victor Luis - Chief Executive Officer & Director: Thanks, Andre. Most generally and similar to North America, we're distorting our focus in developed markets towards maximizing productivity. We're taking a portfolio approach to our store base, investing in our best locations where we we'll see the biggest return and culling where appropriate. In developing markets, we're continuing to open stores, taking advantage of real estate opportunities. And in all markets, we are increasing marketing and investing in the Modern Luxury store experience, using elements such as the craftsmanship bars we discussed to underscore our heritage and history of authenticity. In Greater China, second quarter sales rose 5% in constant currency, in line with our annual target, with double-digit growth on the mainland and with positive comps offsetting weak results in Hong Kong and Macau. Hong Kong and Macau continue to be impacted by the dramatic slowdown in inbound tourist traffic, notably from the mainland. At this juncture, with very limited visibility to an evolving macroeconomic environment, we are only updating our previous guidance of $625 million to reflect the renminbi devaluation since our last earnings call, resulting in an updated annual forecast of about $610 million Importantly, despite short-term volatility, we remain optimistic on the prospects for this market over the long term, as the drivers we have consistently mentioned are more relevant than ever. It's important to note that we still see the Chinese tourist as an increasingly large part of our business globally and have experienced the strengthening in Chinese tourist spending, notably in Japan and Europe. We are staffing into this trend, increasing the number of Mandarin-speaking store associates in these geographies. To that end and as expected, Japan sales were up 2% on a constant currency basis, despite a decrease in square footage, benefiting from increased tourist flows from Mainland Chinese. On the dollar basis, sales declined 3%, reflecting the weaker yen. While Japan is a mature market, where we are distorting investment to our high-profile Tokyo stores and flagships while optimizing our fleet, we are continually assessing and leveraging the opportunity with tourists. In addition, the response to our new Modern Luxury stores from Japanese consumers and tourists alike has been quite positive, seen most notably in conversion in these locations. In Europe, our brand is continuing to grow rapidly through new directly-operated stores, wholesale locations and comps. Specifically in the second quarter, our business grew at a double-digit pace on a total and comparable store sales basis, despite the negative impact resulting from the tragic attacks in Paris. Importantly, during the quarter, we opened our Paris flagship on Rue Saint-Honoré, a significant milestone in our brand development and evolution in Europe, raising awareness with domestic consumers as well as tourists. We will continue to look for other flagship opportunities, with a focus on major European cities. Overall, we continue to believe that FY 2016 will be another year of very strong growth, with sales growing to about $125 million. Overall planning horizon, our goal is to achieve over $0.5 billion in sales at retail, representing a mid-single-digit share of the premium men's and women's bag and accessories market. In our other directly-operated Asian markets outside of China and Japan, namely South Korea, Taiwan, Singapore and Malaysia, sales were up modestly in local currency and declined in dollars. Here, too, we have focused on driving productivity through our transformation initiatives. Finally, I would like to point out that we have seen disparate results in our international wholesale businesses, which, while small, are important to growing brand awareness. In the second quarter, we again saw strong growth in those distributor-operated locations focused on the domestic consumer, while travel retail has continued to be soft due to volatility of tourist flows globally, notably in Hong Kong and Macau. On a net sales basis, revenue grew significantly in the quarter, driven by shipment timing to ensure appropriate inventory positions for Chinese New Year. Generally, we are very pleased with the execution of our brand transformation as we continue to position the Coach brand for long-term success while effectively supporting the growth and development of the Stuart Weitzman brand and navigating the volatile global economic trends and currency fluctuations in the intermediate term. Now, I will turn it over to Jane for details on our financial results and guidance for fiscal 2016.

Thanks, Victor. Victor and Andre have just taken you through the highlights and strategies. Let me now take you through some of the important financial details of our second fiscal quarter results for the consolidated businesses of Coach, Inc. as well as the Coach brand and Stuart Weitzman, ending with our outlook for FY 2016. Please note, the comments I'm about to make are based on non-GAAP results. Corresponding GAAP results, as well as the related reconciliations, can be found in the earnings release posted on our website today. Starting with Coach, Inc. on a consolidated basis, net sales totaled $1.27 billion for the second fiscal quarter compared with $1.22 billion reported in the same period of the prior year, an increase of 4%. On a constant currency basis, total sales increased 7% for the period. Gross profit totaled $859 million versus $841 million a year ago, while gross margin was 67.4% versus 69%. SG&A expenses of $574 million compared to $542 million in the prior year, an increase of 6%. As a percentage of net sales, SG&A totaled 45.1% on a non-GAAP basis compared to 44.4% in the year-ago quarter. Operating income for the quarter totaled $285 million compared to $299 million in the prior year, while operating margin was 22.4% versus 24.5%. Net interest expense was $6 million in the quarter as compared to net interest income of approximately $400,000 in the year-ago period. Net income for the quarter totaled $188 million, with earnings per diluted share of $0.68. This included a contribution of $13 million or $0.05 per share from Stuart Weitzman. This compared to net income in the second quarter of FY 2015 of $200 million, with earnings per diluted share of $0.72. Turning now to performance by brand and starting with the Coach brand; as a reminder, all comments I'm about to make are on a non-GAAP basis. Net sales for the Coach brand totaled $1.18 billion for the second fiscal quarter compared with $1.22 billion reported in the same period of the prior year, a decrease of 3%. On a constant currency basis, total sales decreased 1% for the period. Gross profit totaled $799 million, while gross margin was 67.7%, down 130 basis points overall, including 110 basis points from currency. Our consolidated Coach brand gross margin continued to benefit from channel mix, with our international segment outpacing. However, our gross margin in North America declined on a year-over-year basis. Margin was negatively impacted by increased promotion in our outlet and wholesale channels in response to heightened discounting activity in those channels, as Andre mentioned. Higher average unit costs also pressured our gross margin in North America as we continued to invest in product innovation, providing our customers with an elevated product offering at compelling price points. International segment gross margins increased from prior year, excluding the negative impact of foreign currency. SG&A expenses totaled $536 million, a decrease of 1%. SG&A expenses in the second quarter were somewhat lower than our expectations and reflected lower occupancy costs as well as a shift in marketing timing. The stronger dollar also was a benefit to expenses. As a percentage of net sales, SG&A expenses totaled 45.4%. Operating income was $263 million, while operating margin was 22.3%, in line with expectations. Turning now to Stuart Weitzman, Stuart Weitzman brand net sales totaled $94 million for the second fiscal quarter, with strength in boots and domestic retail driving a beat in our sales and margin projections for the quarter. Gross profit for the Stuart Weitzman brand totaled $61 million, resulting in a gross margin of 64.3%. SG&A expenses were $38 million or 40.8% of sales. Operating income was $22 million, representing an operating margin of 23.6%. During the second quarter of FY 2016, the company recorded charges of $14 million under its multi-year transformation plan. These charges consisted primarily of organizational efficiency costs and accelerated depreciation for store renovations. In addition, the company recorded costs of approximately $10 million associated with the acquisition of Stuart Weitzman, which primarily includes charges attributable to integration-related activities, contingent payments and the impact of limited life purchase accounting. These actions taken together increased the company's SG&A expenses by about $24 million, negatively impacting net income by $18 million after-tax or about $0.07 per diluted share in the second quarter. Our total transformation-related charges over the last seven quarters were about $305 million. We continue to expect to incur the balance of these charges by the end of FY 2016, primarily related to global store closures and organizational effectiveness, bringing the total multi-year charge to about $325 million. Now moving to global distribution, as you know, our overarching focus continues to be replatforming our stores, elevating brand perception, optimizing our store fleet and opening new locations selectively in key markets. During the quarter and consistent with our annual guidance, there was little change in our global directly-operated door count. As we now include a table detailing our openings and closures by geography and brand in our press release, I'll just touch on the highlights. In total, we added one net new Coach brand location globally in addition to four Stuart Weitzman locations in the quarter, three in the U.S. and one in Europe. Looking to the full year, as our overall plans have not changed materially, I'll be brief. In FY 2016, we continue to expect our Coach brand directly-operated square footage to be up low single digits globally. This guidance continues to assume that Coach brand's square footage in North America will be essentially unchanged in FY 2016. Internationally, distribution growth will be led by Europe and China, where we are continuing to project double-digit increases in square footage in FY 2016. In Japan, we continue to estimate a mid-single-digit decline in square footage as we take a portfolio approach to optimizing our fleet. And in our directly-operated businesses in Asia outside of China and Japan, we continue to focus on developing our current store base and expect only modest square footage growth this fiscal year. Closing with Stuart Weitzman distribution, we continue to expect to open approximately 10 new directly-operated locations in FY 2016. Moving to the balance sheet, inventory levels at quarter-end were $438 million, including $29 million of inventory associated with Stuart Weitzman. This compared to ending inventory of $447 million for the Coach brand in the year-ago period. Therefore, inventory declined 2% on a Coach, Inc. consolidated basis and was down 9% for the Coach brand. Cash and short-term investments stood at $1.3 billion as compared to $1.1 billion a year ago. Given our debt issuance in the third quarter of FY 2015 and the subsequent closure of the Stuart Weitzman acquisition, our total borrowings outstanding were approximately $900 million at the end of the fiscal quarter. As previously shared, we expect to use these proceeds to cover our working capital needs in light of investments in our business and the new corporate headquarters. Net cash from operating activities in the second quarter was $302 million compared to $445 million last year in Q2. Free cash flow in the quarter was an inflow of $196 million versus $406 million in the same period last year. Our CapEx spending was $106 million versus $39 million in the same quarter a year ago. Before turning to FY 2016 guidance, I did want to provide you with an update on the status of our investment in our new headquarter building at Hudson Yards. As you know, we've long-stated our belief that our investment in Hudson Yards would be monetizeable over time. Given today's real estate market strength and high demand for Hudson Yards, we believe now is the right time to explore selling our interest in the Hudson Yards joint venture while securing our future need for space by entering into a long-term lease there. We have begun to pursue these options with our partner-related companies. While it's too early to speculate, it is unlikely that any sale of our interests or other transaction would close until after our fiscal year ends and we move into our new space. As noted in our press release, we're maintaining our fiscal 2016 constant currency revenue growth and operating margin guidance for the Coach brand while raising our consolidated operating income outlook based on second quarter results. So turning now to our financial outlook for the Coach brand on a standalone 52-week non-GAAP basis in FY 2016, first, on Coach brand sales, we still expect to deliver a low single-digit increase in constant currency in fiscal year 2016. Based on current exchange rates, currency headwinds are now expected to negatively impact our annual revenue growth by 225 to 250 basis points. We are still projecting a low single-digit aggregate comp decline in North America in FY 2016. As previously noted, we expect comp to improve throughout the year, driven by product innovation, renovated Modern Luxury stores, and our 75th anniversary marketing initiatives. We continue to expect to reach positive comps in the fourth quarter. Operating margin is still expected to be in the mid to high teens with some shift between the gross margin and expense ratio from previous guidance. To this end, gross margin for the Coach brand is projected to be in the range of last year's margin, or about 69.5% on a constant currency basis, with negative foreign currency effects now expected to impact gross margin by 90 to 100 basis points. SG&A expenses net of savings are now expected to grow at a low single-digit rate in constant currency, while growth is expected to be roughly flat in dollars. The lower projected rate of growth is based on favorability realized in the first half of the fiscal year. We continue to expect at least $50 million in incremental cost savings from our transformation and restructuring initiatives. Interest expense for the year is estimated to be in the range of $30 million to $35 million. Finally, our tax rate is still expected to be in the area of 28% for the year. The expected rate reduction on a year-over-year basis is primarily attributable to the geographic mix of earnings, the ongoing benefit of available foreign tax credits, the anticipated closure of certain audits, and the expiration of statutes in 2016, which is expected to significantly lower our tax rate in the third quarter. In addition, based on Stuart Weitzman's outperformance during the holiday quarter, as noted, we are now forecasting the brand's sales to be in the area of $340 million on a dollar basis for fiscal 2016, an increase of about 10% from FY 2015, driving Coach, Inc.'s consolidated revenue growth to high single digits on a constant currency basis and adding about $0.12 to earnings per diluted share, excluding charges associated with financing, short-term purchase accounting adjustments, contingent payments, and integration costs. As a result of the higher sales and margin outlook for the Stuart Weitzman's business versus our original expectations, taken together with our projection for the Coach brand, we are raising our operating income outlook for Coach, Inc. for fiscal 2016. This includes an estimated negative impact of about 70 basis points and 20 basis points on a consolidated gross margin and operating margin, respectively, from Stuart Weitzman, a lesser impact than previously anticipated. As a reminder, fiscal 2016 will include a 53rd week in our fiscal fourth quarter, which is expected to contribute approximately $75 million to $80 million in incremental revenue and $0.06 in earnings per diluted share on a non-GAAP basis. We still expect CapEx for FY 2016 for Coach, Inc. to be in the area of $300 million, excluding the capital costs associated with the new headquarters, which are expected to be approximately $185 million in FY 2016. There has been no change in our capital allocation policy. And over the next few years, our first priority is to continue to invest in our business, as we have a compelling opportunity to drive sustainable growth and value creation. And we're putting our capital against this opportunity. Our second priority, strategic acquisitions, is also about growth. While we have nothing planned imminently, we want to have the flexibility to act, if and when it's in the best interest of Coach, Inc. and our shareholder. And third, capital return, as I've stated before, we are committed to our dividend and expect our dividend to grow at least in line with net income growth as our transformation takes hold. Underpinning all three of these priorities are our guard rails for allocating capital effectively, maintaining strategic flexibility, strong liquidity and access to the capital markets. In closing, we have a clear strategy and a well-articulated implementation plan for FY 2016 and we're pleased with our progress to-date. Building on this momentum, we remain confident in our long-term targets. Importantly, we believe that we have the resources to fund our plan while maintaining our dividend during our heavy investment period. I'd now like to open it up to Q&A.

Thank you. We will now begin the question-and-answer session. Our first question is from Bob Drbul of Nomura. Your line is now open.

Hi. Good morning.

Good morning, Bob. Victor Luis - Chief Executive Officer & Director: Good morning, Bob.

I guess I've got two questions. The first one is can you elaborate a little bit more in terms of what's going on in the category today and how important that is for your continued progress and return to positive comps? And the second question that I have is can you just talk a little bit about how your current business trends are? Victor Luis - Chief Executive Officer & Director: Sure. In terms of the category, Bob, there's no doubt in our mind that the secular shift from apparel to accessories definitely continues, and that there isn't a better space to be in, in the fashion space than handbags and accessories. In the short-term, however, there is some volatility driven by macro issues and, of course, the extreme exchange rate volatility that we have seen, which is impacting tourists. At the same time, we strongly believe that the consumers are looking for innovation. They're looking for quality, value and, most of all, they're looking for authenticity. And we don't believe there is a brand better positioned to take advantage of that than us. Given our authenticity of heritage and craftsmanship that's very much our DNA, when blended with Stuart's creative vision and the terrific reviews that we continue to get towards our product, our stores and our marketing, we're incredibly excited by the results that we're driving, by the differentiated positioning that we're driving and are very much seeing those results continue to your second question, as we enter the third quarter. We're very much seeing similar trends with guidance contemplating a return to North America comps going positive in the fourth quarter, per Jane's comments.

Great. Thank you very much. Victor Luis - Chief Executive Officer & Director: Thank you.

Thank you. Our next question is from Ike Boruchow of Wells Fargo. Your line is now open.

Hi. Good morning, everyone.

Morning, Ike, Victor Luis - Chief Executive Officer & Director: Morning. Andrea Shaw Resnick - Global Head, Investor Relations & Corporate Communications: Hi, Ike.

Victor, so your North American comps have been getting better for almost two years now. I guess my question is do you have a way of looking at the customer and who they are? Meaning, is this a function of the former Coach customer who maybe left the brand, is starting to come back or is this new customers starting to come in? And then, do you feel that it's the product, the store experience, the marketing, what do you think is the biggest driver in your opinion today? Thanks. Victor Luis - Chief Executive Officer & Director: Thanks, Ike. It's really both. We're seeing new customers come into the franchise. And what's most exciting, of course, is that we're seeing that happen not only through handbags and accessories, but also through the small businesses that we're now driving in apparel through Stuart's collections. And we're also seeing some lapsed consumers come back. And that is very exciting given the 75th anniversary plans that we have ahead of us and our continued reinforcement of what's true to Coach, which is really a focus on glovetanned leather and all of the activities that Andre discussed as it relates to the customer service experience that we're driving in our stores with the craftsmanship bars as well as the marketing activities. In terms of the areas of biggest impact, Ike, I would say it's a combination of all. It's very difficult to really peel this apart. We're driving total brand impression. We, of course, see the most significant inflection in those stores that have been transformed, as you heard in our prepared notes. The North American full-price stores in aggregate still very much comping positively, including those very first stores now that we have lapped that we opened post-Black Friday of 2014. So really excited by the continued performance in those locations and excited by what we're seeing not only here in North America, but also globally where the pre-post on those locations is very much outpacing the rest of the fleet.

Great. Thanks. Good luck. Victor Luis - Chief Executive Officer & Director: Thank you.

Thank you. The next question is from Oliver Chen of Cowen & Company. Your line is open. Oliver Chen - Cowen & Co. LLC: Thanks. Congrats. And also on the 1941 collection, which looks great. Andrea Shaw Resnick - Global Head, Investor Relations & Corporate Communications: Thanks, Oliver. Oliver Chen - Cowen & Co. LLC: Regarding your comments, Andre, on the outlet channel, the outlet channel has been a little bit tough sector-wise, but do you continue to see kind of a continuation of the need for higher levels of promotion? And what's the nature of that? Is it couponing or just sharper price points? And just a quick one, Victor, from a bigger-picture perspective, were there any aspects that you would have done differently, just as you post-game the quarter? Thanks.

So in general terms, as we'd anticipated, retail led, as I mentioned in my prepared remarks. The positive thing is we also saw a sequential improvement in the Outlet business. And that was led by conversion. We maintain a higher average ticket in outlet. That was driven by UPT primarily. I think in terms of how we dealt with the higher level of competitive promotional activity, we tried to be as nimble as possible. We played with couponing. We shifted within variable pricing in stores, handouts, multiples, et cetera. So we tried to be as nimble as we could. We were a little less blunt than we were in the past with sort of a one-off 50%-off coupon. We varied a lot our toolkit I'd say in promotions.

Yeah, Oliver, it's important – as we've come out of Q2, as we've revised our Coach brand gross margin guidance slightly, we've incorporated the activity in the heightened competitive activity into our guidance for the Coach brand gross margin for the full year. Victor Luis - Chief Executive Officer & Director: Yeah, I would just add, Oliver, and connected to your question, in terms of key learnings, first, the most significant learnings, obviously, were those related to Stuart's collection, launching the first season over a year ago in terms of just having enrichened our gifting offer and having a richer presentation of price points across various buckets, right, in outlets from the $150 of course and into full price above the $400 bucket, and you saw the balance of that and heard about that in Andre's remarks. Overall, though, it continues to be the same strategy and focus, which is to continue to give the consumers more value, not only through pricing, of course, and it's important to recognize that outlet is a promotional channel and consumers do go to that channel specifically for deals, but also through what we're doing with experience. Those of you who have had the opportunity to visit our Modern Luxury outlet stores I think see and feel that, and that continues to be a major program for us as we also continue to put make into the product and give consumers value across all of our channels. Oliver Chen - Cowen & Co. LLC: Thank you. Great job on the balance of fashion versus gifting and best regards. Victor Luis - Chief Executive Officer & Director: Thank you, Oliver.

Thanks, Oliver.

Thank you. The next question is from Erinn Murphy of Piper Jaffray. You may now ask your question. Erinn E. Murphy - Piper Jaffray & Co (Broker): Great. Thanks. Good morning. Victor, I was hoping for you to talk a little bit more about your digital strategy. As you fuel that, can you just talk about the signposts that you're monitoring that do suggest that you're getting that millennial customer shopping the Coach brand today? Victor Luis - Chief Executive Officer & Director: Sure. I think that when it comes to digital, we're really focused on a couple of key strategies. Obviously, there's e-commerce, and not only what we're doing here in North America. One of the major steps that we've taken over the last, I would say almost two years now since the beginning of our transformation strategies, of course, was to pull back on our eOS strategies. You've seen us put a lot of emphasis on bringing innovation to coach.com as a full-price vehicle as well as to everything that we're doing, of course, digitally through social media gaining very, very quick relevance for the brand, especially through Instagram, which has been a major focus for Coach. Internationally, you've heard during our prepared remarks today that we have just opened a new e-commerce site in Europe, having started with the UK. Our plans will be to roll that out across Europe over the next 12 months, while we also continue to gain traction in Asia. I'm happy to report that our teams in Asia have in many ways been leading the way in those markets for the entire category. In Japan, we've made great progress getting onto Line, and in China, not only Sina Weibo, where we're one of the leading – I believe still the leading fashion brand in terms of number of followers, but also on WeChat, where we've also been leading the way. So I would say globally, we are where the millennials are today engaging with brands. It's not just about the channel. However, we know that it's about the content. And there, we're incredibly pleased with the work that Stuart's doing, with the reviews that we're getting from the editorial community and from the bloggers that, of course, influence the millennial consumer. So it's a process. We're very much on our way, and it's very exciting to see the progress that we are making. Erinn E. Murphy - Piper Jaffray & Co (Broker): Thanks for the color, and best of luck. Victor Luis - Chief Executive Officer & Director: Thank you.

Thank you. The next question is from David Schick of Stifel. Your line is open. David Schick - Stifel, Nicolaus & Co., Inc.: Hi. Good morning.

Morning, David. David Schick - Stifel, Nicolaus & Co., Inc.: And congratulations on the success in Weitzman. So you talked about having the flexibility to act with more acquisitions. Could you talk about how Weitzman will work within the overall Coach out a couple years, and then how you would think about other acquisitions? What are the ways you would think through that? Victor Luis - Chief Executive Officer & Director: Well, David, at the moment, we're obviously very, very focused still on integrating Stuart Weitzman. I couldn't be more pleased with what we're seeing with that brand, the team, and the traction that they're gaining. It really speaks to the strategy that we have and what we internally have called modern luxury, which is getting a collection of brands together that have quality, that have authenticity, and, at the same time, share in fashion relevance and can engage in a modern way with consumers. In the case of Stuart Weitzman, what we're seeing is really an affirmation of all the due diligence that we've done. It's a terrific brand with amazing fit, amazing quality, superb supply chain, truly a leader in the space in the U.S. And in a season where boots were not selling given the unseasonably warm weather, they were the top performer across all channels, whether it be here in top-tier department stores in the U.S., Europe, and in China where they're gaining increasing relevance which is very exciting for us. And it's not only the products. They're doing an amazing job engaging with consumers. We talked about what Coach is doing, of course, online, but what the Stuart Weitzman team has been doing with their marketing is a great example for us at Coach and indeed for the entire industry as they engage with more youthful consumers online. In terms of longer term, it's very much consistent with what we have shared. We will, of course, be leveraging the Coach team to support Stuart Weitzman in the development of their handbag and accessories business. We discussed already the talent that is already working on that project. And by the end of this calendar year, beginning of next, we should begin to see some of that product hit the Stuart Weitzman stores. In addition, the Stuart Weitzman team will be supporting Coach with the footwear supply chain opportunities that exist when it comes to fit and certainly comfort and potentially longer-term, in a more meaningful way as well. And we're supporting the Stuart Weitzman brand already in some significant ways with real estate, and we've talked about Regent Street, where we will be opening the first Stuart Weitzman flagship in the UK next to the Coach flagship there later this year. David Schick - Stifel, Nicolaus & Co., Inc.: Thank you. Victor Luis - Chief Executive Officer & Director: Thank you. Andrea Shaw Resnick - Global Head, Investor Relations & Corporate Communications: We can take one more question.

The next question is from Anna Andreeva of Oppenheimer. Your line is now open. Anna Andreeva - Oppenheimer & Co., Inc. (Broker): Great. Thanks so much. Good morning and congrats to the team. Victor Luis - Chief Executive Officer & Director: Thank you, Anna. Anna Andreeva - Oppenheimer & Co., Inc. (Broker): I guess a follow-up on the category in North America, could you share how much of the deceleration is the AUR pressure? I think you said the units are still up nicely. And do you need the category to bounce back at all for Coach to achieve those positive comps by the fourth quarter? Thanks so much.

Yes. In terms of what we've seen in the market, there's been a deceleration of AURs and units going up. In the case of Coach in retail, we actually drove positive ADT. (60:26) So that's an important factor in Q2. So and as I mentioned earlier, we've seen that sequential improvement in our overall business, particularly led by retail, with conversion improving sequentially and our traffic also improving sequentially quarter-over-quarter. Victor Luis - Chief Executive Officer & Director: Yeah. In terms of the second part of your question, the short answer is no. We're really excited about the traction that we're seeing in our brand sequentially. Since the start of our transformation, we've seen our comps in North America improve by 20 points, irrespective of what's happened in the category. And so as we look to the future, this is really about driving relevance for the Coach brand. It's not to say that we're immune to what's happening around us, but we're very, very focused on executing our plan. And we're very pleased with the results that we're seeing and very much looking forward, as guided, to achieving positive comps in North America in the fourth quarter. Anna Andreeva - Oppenheimer & Co., Inc. (Broker): That's great. Best of luck. Victor Luis - Chief Executive Officer & Director: Thank you.

Thank you. Andrea Shaw Resnick - Global Head, Investor Relations & Corporate Communications: Thank you. That concludes our Q&A. I will now turn it over to Victor Luis for some concluding remarks. Victor? Victor Luis - Chief Executive Officer & Director: Thank you, Andrea. I just want to close by, first and foremost, thanking all of you for joining us again and looking forward to seeing, of course, and hearing from you again during the rest of the quarter as we visit with some of you individually. I also want to thank and congratulate both the Coach and the Stuart Weitzman teams for their hard work and the commitment to driving our second quarter results and truly the fantastic development that we're seeing in our brands against what is a volatile global backdrop. Our brands are special. They represent decades of blending a unique know-how in the crafts that we have with modern-inspired design of our teams. And it's fitting for us that in the 75th anniversary of Coach as we celebrate that this year that we will again drive growth by fusing very much the history that we share and the authenticity of our craft with the vision of our creative teams. And thank you all for being with us. Andrea Shaw Resnick - Global Head, Investor Relations & Corporate Communications: Thank you.

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