Tapestry, Inc. (TPR) Q4 2017 Earnings Report, Transcript and Summary

Good day, and welcome to this Coach Conference Call. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Global Head of Investor Relations and Corporate Communications at Coach, Andrea Shaw Resnick. Please go ahead.

Good morning, and thank you for joining us. With me today to discuss our quarterly and annual results are Victor Luis, Coach, Inc.'s Chief Executive Officer; and Kevin Wills, Coach's CFO. Before we begin, we must point out that this conference call will involve certain forward-looking statements, including projections for our business in the current or future quarters or fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon a number of important factors, including risks and uncertainties such as our ability to achieve intended benefits, cost savings and synergies from the Stuart Weitzman and Kate Spade acquisitions; expected economic trends and our ability to anticipate consumer preferences, control costs, successfully execute our transformation and operational efficiency initiatives and growth strategies. 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. These non-GAAP measures exclude certain items related to our transformation plan, operational efficiency plan and Stuart Weitzman's acquisition-related charges and Kate Spade acquisition-related charges, as well as the impact of foreign currency fluctuations were noted The company's sales and earnings per diluted share comparison for fiscal 2016 have also been presented both including and excluding the impact of the 53rd week in fiscal 2016. You may identify these non-GAAP measures by the terms non-GAAP, constant currency or excluding the additional week. The company believes that presenting these non-GAAP measures is useful for investors and others in evaluating the company's ongoing operations and financial results against historical performance, and in a manner that is consistent with management's evaluation of the business. You may find the corresponding GAAP financial information or metric as well as a 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 fourth fiscal quarter and full year 2017 results and will also discuss our progress and global initiatives across the market. Kevin Wills will continue to details of financial and operational results and our outlook for fiscal year 2018, following that we will hold the question-and-answer session where we will be joined Todd Kahn, President and Chief Administrative Officer and Secretary and Joshua Schulman, President and CEO of the Coach Brand. This Q&A session will end shortly before 9:30 AM. We will then conclude with some brief summary remarks. I'd now like to introduce Victor Luis, Coach Inc’s CEO.

Good morning. Thank you, Andrea, and welcome, everyone. As noted in our press release, we are pleased with our solid fourth quarter performance in which we achieved positive North America Coach Brands comparable store sales growth for the fifth consecutive quarter and drove double-digit growth on a comparable weeks basis at Stuart Weitzman. These results capped an excellent year as we continue to make progress on our transformation plan, delivered strong Coach Brand International growth notably in Europe and Mainland China, while driving operating margin expansion and double-digit net income and EPS gains on a comparable 52 week basis. Importantly, the Coach Brand continues to gain fashion relevance, while our [audio break] with Selena Gomez brings our [audio break] and message to broader audiences. We were also very pleased with the overall contribution of Stuart Weitzman as we invested in the brand both to doors and most significantly in people. We now have the key leadership and design talent to drive long-term performance both in growing the global footwear category and in Stuart Weitzman’s nascent accessories business. And as you know, we also took a major step in our corporate transformation with the acquisition of Kate Spade & Company which closed in July, becoming the first New York based house of modern luxury lifestyle brands. Kate Spade brings a unique brand attitude and additional consumer segments to the Coach, Inc. portfolio. We expect that this acquisition will enhance our position in the attractive and growing 80 billion global premium handbag and accessories footwear and outerwear market. After the last three years of our transformation and acquisitions, the three brands of Coach, Inc. are today united in a common philosophy, first, driven by brand led strategies that focus on the consumer and on an inclusive approach to luxury; second, a focus on innovation across product, marketing and experiences both in our stores and in our digital channels. And lastly, the objective to drive sustainable revenue and earnings growth through strategies that are focused on long-term brand health. Our strategic priority is to achieve this balance by making the appropriate investments, while carefully managing our distribution channels to optimize growth. To this end, looking ahead to fiscal 2018, we will continue to drive innovation across all of our brands, focusing on creating long-term value for our customers and shareholders. Specifically our FY ‘18 strategies for our three brands are for the Coach Brand and under the leadership of CEO Josh Schulman, we will be writing the next chapter in Coach's transformation, as we focus on building emotional connections with the broader audience. I am especially excited that Josh also brings a new perspective to our coach.com business, refocusing on the brand’s digital opportunity globally, including how we can maximize the continuing shift to the online channel. While we have created a compelling vision of the Coach man and woman, the brand is still primarily focused on women’s leather goods. We have a significant opportunity to grow our business in lifestyle categories, notably in men’s through continued growth in bags and small other goods, as well as in our dual-gender offerings of footwear and outerwear. We are particularly excited to launch the new Coach women's footwear assortment both in our stores and in the wholesale channel, following the take back of our license at the end of FY ’17. Even within our core category of women's leather goods, we have the potential to fulfil many more of our customer’s functional and occasional needs across price points and attitudes. A key element of this strategy will be adding renewed excitement and diversification in our product offering notably in the $300 to $400 handbag price point in retail. We will also look to focus innovation in our customer experience by expanding our personalization and luxury leather services both across our store and e-commerce platforms. We believe that we have an opportunity to build a relationship focused sales culture, anchored by our modern luxury selling ceremony to deepen the bond between our associates and customers, ultimately driving frequency of purchase of brand loyalists and new customer acquisition. Of course, we still have room to grow the Coach brand geographically, notably in Europe which is largely untapped and in China which still has significant potential both from a domestic and travel retail perspective, as well as a new market such as Russia and India through distributor partners. And finally, in Coach Brand marketing we are particularly excited about our work with Selena Gomez with the fall campaign heading now and her namesake bag arriving in stores at the end of the month. Moving to Stuart Weitzman, we expected to drive double-digit growth as we evolve the brand identity across all consumer touch points under the leadership of CEO Wendy Kahn and Creative Director, Giovanni Morelli. This includes defining unique brand codes, differentiating the brand from the competitive set. Giovanni and the team are focused on launching the new creative direction for Stuart Weitzman, including Giovanni’s first footwear collection in April 2018 and a new handbag collection and for winter of 2018. These collections are about introducing innovation and capturing new occasions in wardrobing opportunities and footwear, while building credibility in the leather goods category. We are also looking at distribution opportunities globally, notably in the key Asian markets where the brand is rapidly growing in awareness [audio break] expect to see a new store concept for Stuart Weitzman later this year. And of course all of these programs will be supported by 360 degree marketing strategies to align global initiatives. And for Kate Spade, while early days we know we have a lot of work ahead to integrate our teams and processes at the corporate level. At the brand level, our focus remains on delighting customers in the distinctly Kate Spade way, full of color and playful sophistication. Since we announced a deal in May, I've enjoyed getting to know more about the Kate Spade brand, team and culture. We are excited that Kate has significant opportunity for global growth across channels and geographies, while ensuring that we take the right brand enhancing actions early on to manage discount impressions in the market. What we know today is that Kate Spade is a strong unique brand with leadership and the attributes of fashionable, fun and feminine bringing, important attitude and customer diversification to the Coach portfolio. Our research has shown very little overlap between our three brands with Kate having the most traction with millennials. It is a brand with highly productive retail and outlet stores and a strong top tier department store presence in North America. Outside of the US, there is significant opportunity in Japan, the second largest handbag and accessory market in the world and where the brand already has a strong presence, but it's still under penetrated. We're also really pleased with the initial response to Kate Spade in the UK market and excited about the long-term growth opportunities in China, where our initial brand tracker shows promise and consumer traction for the brand. As we look ahead for Kate Spade in FY ’18, we are taking several steps to position the brand, building a foundation for solid and sustainable growth and taking a page or two from Coach's own playbook. We were significantly curtail promotional impressions by reducing surprise sales and pulling back on wholesale disposition. We will also accelerate innovation in the core handbag and accessories categories, along with ready-to-wear and tech leveraging the Coach Inc. supply chain and product development capabilities. We will review the store fleet and leverage opportunities to maximize the brand's global footprint, notably in the outlet channel where the brand is under penetrated. We will wind down Jack Spade brand, refocus the license portfolio and concentrate on the most significant women's opportunities, women's handbags, ready-to-wear, tech accessories and footwear, both domestically and internationally. And we will tailor the brands whimsical and fun marketing messages ensuring that it resonates in all key global markets. I am excited to partner with the terrific Kate Spade team as Interim CEO, as we look to both capture synergies and more importantly drive global resonance and growth. Now as has been our practice, I'd like to share some of the actions we've taken to drive Coach Brand performance. Starting with product, where I am pleased and proud to say that Coach has been recognized as a house of modern fashion design with Stuart Vevers winning the CFDA Accessories Designer of the year award in June. In retail, [Technical Difficulty] continued to block brand elevation increasing the penetration of 1941, as well as innovation across price points and attitude. In Q4, outlet delivered our largest brand collaboration to date with Mickey [ph] arriving in mid-May at twice the size of our successful Peanuts collaboration. On stores, in the fourth quarter we’ve continued to establish our modern luxury concept globally ending the year with just over 720 locations in the new format across all channels and in line with our target. Consistent with the plan, these renovations have been driving comps, which exceed the balance of the fleet in the vast majority of stores around the world. As you know, one of our key strategic initiatives during a FY ‘17 was elevating the Coach Brand in North America wholesale channel. We've added new locations in top tier specialty stores, while also rationalizing our overall department store distribution, taking our door count down by about 25% to just over 750 at year end. In addition, we reduced promotional events in the channel with our days on sale down by over 35% for the year. On the marketing front, Selena Gomez's first global handbag advertising campaign for the Coach Brand hit in July and will run through this fall/winter followed by a second campaign in spring summer 2018. Following a global PR burst around Selena and Coach in late June, our multi-touch point media and owned channel marketing launched on July 6th, focused on driving awareness engagement and recruitment. Through the end of July, we achieved 2.5 billion impressions, an uptick in recruitment across social channels and a significant increase in North America web traffic. As a result of all these efforts, we are seeing continued progress with consumers, importantly in our quarterly US new brand tracking surveys fielded in June, we saw strength for the Coach brand with a broad premium market across key emotional and functional attributes. While this comp perceptions, an important measure of brand health declined versus prior year once again this quarter. In addition, among category drivers, Coach's perception of having high quality handbags increased. Moving forward with the addition of Kate Spade we will have much more to share with you as a house of brands. Turning now to a discussion of category trends. As we look ahead to FY ’18, we expect that the channel, consumer and macro dynamics that exist today affecting the category in specific and consumer spending in general will persist. Channel shifts continued to impact traffic. The macroeconomic environment is uncertain. Currency cross-winds are affecting tourist flows and geopolitical events are negatively impacting sentiment. As a result, visibility into category growth is limited as the landscape continues to rapidly shift. Overall, we estimate that the North America premium women's and men's handbag and accessories market was essentially flat in the June quarter and for the year, which we believe has continued to be impacted by negative trends seen in the US department store space, as brands, including our own have pulled back from the channel. As in FY ’16, we saw men’s grow faster than women’s in North America. Globally, the premium handbag and accessory category accelerated in FY ’17, both on the US dollar and local currency basis, up mid single digits. While Kevin will provide additional details on sales and distribution by geography, we wanted to touch on some current trends and strategies by market. All the compares are against last year's 13 week period, thereby excluding the 14th or 53rd week. Starting with North America. As you read in our release for the quarter our total Coach Brand sales rose 4%, including the negative impact of our deliberate department store pullback. While our direct business rose 5% on a dollar basis and 6% in constant currency, over [Technical Difficulty] over 4% in the quarter. Higher conversion drove the overall comp with in-store traffic trends significantly improving from third quarter, reflecting the Easter shift though still slightly negative. Most importantly in the fourth quarter we comped the comp, given that the fourth quarter of FY ‘16 was the first positive quarterly comp we achieved post the implementation of our transformation plan. Finally, our business with international tourists in North American stores was slightly lower during Q4, negatively impacted by under a point with declines in Chinese tourist traffic once again mostly offset by other nationalities, notably Japanese and Korean visitors. Now turning to our retail performance and the metrics we traditionally share on product. The above $400 price bracket rose and penetration, saw another positive comp on sales and unit basis and represented over 45% of handbag sales, up from about 40% in last years fourth quarter. We also experienced strength in small bags and accessories, driven by cross-parties, clutches and wristlets, which offer a high level of versatility and functionality at compelling price points. The four, our below $300 penetration was similar to prior year with the biggest shift out of the $300 to $400 handbag price bracket of focused innovation in the quarters ahead. Men's was very strong in the fourth quarter at almost 20% of total Coach Brand sales. For the fiscal year, at POS our men’s sales totalled over $840 million and we now believe men's is well over a $1 billion opportunity for the Coach Brand. To this end, I am very pleased to welcome Cristiano Cathy [ph] previously President of Jack Spade to the Coach brand as SVP, Head of Men's. In this newly created role, he will be responsible for men’s global merchandising and bringing together the teams from design, product development, wholesale sales and marketing to amplify our investment in this tremendous business opportunity. As we look ahead to fall to Coach Brand, in retail our goal is to continue to elevate and differentiate the brand by offering innovation and emotion through our product assortment, marketing and in-store experience. We will expand 1941 Rogue family through introduction of additional size offerings and further refresh our leather craft assortment across price points and functions. Looking ahead to fall in outlet, we are excited to launch Coach Vivo [ph] City just in time for back-to-school shopping. Overall for FY ‘18 in outlet, while we continue to update and elevate our leather goods assortment with new silhouettes every season, we are excited to grow our women's and men's lifestyle categories with more frequent deliveries of ready-to-wear newness and an expanded footwear collection. And in men’s, we plan on continued growth through expansion across all categories, capitalizing on the strong momentum from our men's growth seen in FY ’17. Most generally and across all channels globally, we are very excited about the introduction of Coach own branded women's footwear after taking back the license at the end of FY ‘17. For perspective, the global women's and men's premium footwear market is approximately $28 billion and growing with women's representing about two thirds of the total. We are starting with a focused and curated offering of about 100 skews for pre-fall with limited wholesale distribution of about 120 wholesale doors. We are building into pre-spring and spring for about 100 to about 175 skews with a more dressy assortment and look to grow distribution from there. We will be using key Coach codes, such as Shadow Elks [ph] Shearling, Charms, metal Horse and Carriage branding. In addition, we will incorporate proprietary craftsmanship details such as the Tea Rose and Studding, which we’ve become known for and building on styles and classifications where we already have seen some traction. We are focused on three key areas, introducing proprietary design elements, establishing brand codes in the category and perfecting fit and comfort by leveraging learning’s from Stuart Weitzman. And now moving on to international. In the fourth quarter international Coach Brand sales rose 6% on a reported basis and 9$ on a constant currency basis benefiting from wholesale shipment timing as projected. For the year, Coach Brand international sales increased 3% in dollars and 2% in constant currency. Greater China sales increased 3% versus prior year in dollars and 7% in constant currency on a 13 week basis, driven by double-digit growth and positive comparable store sales on the Mainland offset in part by softness in Hong Kong and Macau. For the year, Greater China sales were about even with prior year in dollars, while sales rose 5% on a constant currency basis in 2017. Importantly and despite a rapidly evolving retail landscape, we remain optimistic on the prospects [Technical Difficulty] as the drivers we have consistently mentioned remain relevant and our China team continues to do an excellent job of building our brand equity in that market. In Japan sales declined 3% in dollars and approximately 1% in constant currency in the fourth quarter. For the year, sales increased 4% in dollars and decreased 2% on a constant currency basis impacted by a decline in Chinese tourists spend lapping last year's dramatic increase, as well as an overall decrease in square footage as we optimized our retail footprint. In our other directly operated Asian markets outside of China and Japan, mainly South Korea, Taiwan, Singapore and Malaysia sales decreased mid-single digits in dollars and declined similarly in constant currency for both quarter in the year, due primarily to weakness in Korea where macro-economic and geo-political headwinds continued to pressure spending from domestic consumers and tourists. In Europe, we experienced a strong increase in sales during 4Q ‘17 driven by double-digit growth in directly operated channels and benefiting from planned shift in wholesale shipment timing as previously announced. For the year, sales rose approximately 15% in dollars and 20% in constant currency. Finally, I would point out that we're continuing to see volatile results in our international wholesale business, which increased on a net sales basis in the quarter due to shipment timing as expected while POS sales declined. For the year, net sales increased modestly and sales at POS decreased as weaker tourist location results offset domestic growth. In closing, we are encouraged with the momentum of our business and proud of the progress we've made along our transformation journey elevating the perception of Coach Brand globally. Of course, we're also very pleased with the integration and performance of Stuart Weitzman as we strengthened the leadership team and positioned the company for long-term growth across geographies and categories. And for Kate Spade, we look forward to unlocking the brand's potential and updating you on our progress in the quarters ahead. Now I'll turn it over to our CFO Kevin Wills for details on our financial results and guidance for fiscal 2018. Kevin?

Thanks, Victor. Victor has just taken you through the highlighting strategies. Let me now take you through some of the important financial details of our fourth quarter results, as well as our outlook for fiscal year 2018. Please note the comments I'm about to make are based on non-GAAP results, corresponding GAAP results, as well as a related reconciliation can be found in the earnings release posted on our website today. Now turning to the details and focusing on Coach Inc. Net sales totalled $1.13 billion for the fourth fiscal quarter, as compared to $1.15 billion in the prior year, excluding the additional week included in fiscal 2016 results, net sales increased 6% on a reported basis and 7% on a constant currency basis. For the year, net sales totalled $4.4 9 billion even with the prior year, excluding the additional week included in fiscal 2016 results, net sales increased 2% on both a reported and constant currency basis. As planned, the company's strategic decision to elevate the Coach Brand’s positioning in the North American wholesale channel through a reduction in promotional events and/or closures negatively impacted sales growth by approximately 60 basis points and 150 basis points in the fourth quarter in fiscal year 2017 respectively. Gross profit in fourth quarter totalled [Technical Difficulty] while the gross margin rate for the quarter was 66.8% compared to 67.8% last year. As expected, we experienced a year-over-year decline in gross margin in the quarter, specifically channel mix which was a benefit in the first nine months of the year negatively impacted gross margin in the quarter. In addition, as we're now anniversary lower product cost this benefit did not fully offset the ongoing negative impact resulting from promotional activity, notably the North America outlet channel, where the environment remains very competitive. Coach Inc. gross profit for the year totalled .$3.08 billion, while gross margin was 68.7% compared to 68% in the prior year. SG&A expenses totalled $577 million in Q4 or 50.9% of sales, as compared to 52.7% in the year ago period. For the year, SG&A expenses were $2.27 billion and represented 50.6% of sales as compared to 50.7% a year ago. As noted in our press release, SG&A expense for both Q4 and full year 2017 included $20 million in non-cash charges relating to the impairment of select stores and a negotiated reduction in a prior purchase commitment for certain store fixtures that we deem no longer appropriate. Operating income for the quarter was $180 million, while operating margin was 15.8%, including approximately 180 basis points of non-cash impairment charges as been previously. This compared to operating margin of 15.1% in last year's fourth quarter. For the year operating income was $813 million, while operating margin was 18.1%, including 50 basis points in non-cash impairment charges versus 17.3%a year ago. Net interest expense was $4 million in the quarter, as compared to $7 million in the year ago period. Net interest expense was $19 million in fiscal year ’17, as compared to $27 million in fiscal year ‘16. The effective tax rate for the quarter was 19.2%, as compared to 24.7% in the prior year quarter. For the year, effective tax rate was 23.2% versus 26.4% in fiscal 2016. Our tax rate will vary throughout the year given the diversity of our sales base and resolution of various tax issues. To this end, our fourth quarter tax rate benefited from the geographic mix of earnings. Net income for the quarter totalled $142 million compared to $126 million a year ago with earnings per diluted share $0.50. Net income for the year totalled $609 million compared to $552 million last year with earnings per diluted share of $2.15. Excluding the additional week in fiscal 2016, earnings per diluted share increased 32% and 13% for the quarter and full year respectively. Now moving to global distribution of the brand. For the Coach Brand we opened seven net locations globally in fourth quarter and eight net locations during the year, finishing fiscal year ‘17 with 962 directly-operated locations worldwide. Overall and consistent with plan, our global Coach Brand directly-operated square footage rose low-single-digits in fiscal year ‘17, with North America square footage down slightly versus the prior year with net store closures in both retail and outlet offset by higher single-digit square footage increase in international, led by growth in Europe and Mainland China. For Stuart Weitzman, consistent with our plan, we closed one location in the fourth quarter , while opened up six net locations for year, ending fiscal year ‘17 with 81 directly-operated stores globally. Now turning to our cash flows. Net cash from operating activities in the fourth quarter was $324 million, compared to $249 million last year. Free cash flow in the quarter was an inflow of $233 million versus $129 million in the same period last year. Our CapEx spending was $91 million versus $120 million. For the full fiscal year 2017, net cash from operating activities was $854 million compared to $759 million a year ago. Free cash flow in fiscal ‘17 was an inflow of $571 million versus $362 million in fiscal year ’16. CapEx spending totalled $283 million for the year compared to total CapEx of $396 million in fiscal year ’16, which included $146 million associated with our new corporate headquarters build out. In addition, through fiscal 2017 as previously announced we received $680 million in net proceeds associated with a sale leaseback of Hudson Yards building, as well as approximately $125 million which relates to the sale of our previous headquarters building. Inventory levels at quarterly end were $470 million compared to $459 million a year, an increase of 2%. At the end of the fiscal year, cash and short term investments were $3.1 billion, as compared to $1.3 billion a year ago. The year-over-year increase was due to a net cash flow generated during the year and the issuance of approximately $1 billion of senior unsecured notes in June as part of financing for Kate Spade acquisition. Our total borrowings outstanding at year end was $1.6 billion, consisting of senior unsecured notes, as compared to approximately $900 million a year ago. Subsequent to the close of the fiscal year, we borrowed $1.1 billion in term loans, which combined with cash on hand allowed us to fully fund the acquisition of Kate Spade, which closed on July 11th. Now turning to our capital allocation policy. Our long-term priorities remain unchanged. First, we will continue to invest in our brands in order to drive sustainable growth and value creation. Secondly, we will seek strategic acquisitions looking for great brands with opportunities for expansion. And finally, returning capital to shareholders with a focus on dividends. Since outlined on these priorities some years ago, our strong balance sheet has provided flexibility to invest in the Coach Brand transformation, successfully acquire two great brands in Stuart Weitzman and Kate Spade with modest leverage, while continuing to return capital to our shareholders. Moving forward, we remain committed to a conservative balance sheet management. To that end, we expect to reduce outstanding borrowings to $1.9 billion by the end of fiscal 208, with a repayment of $800 million six-month term loan with excess cash. At the same time, we’re maintaining our dividend at an annual rate of a $1.35. Now turning to fiscal 2018. As we look to fiscal 2018 it will clearly be a year of change as we integrate the Kate Spade business. One of those changes will be our reportable segments. Given the acquisitions Kate Spade and move to brand president reporting structure, we are shifting to reportable segments by brand. This is consistent with how we have organized the company and how we will operate our business. With this change beginning in fiscal 2018, we plan to drive global brand comps. In addition, given the significant evolution of the company from a mono-brand specialty retailer when we announced our transformation plan in 2014 to a house of brands today, the guidance provided over three years ago is no longer applicable to current business and structure. Going forward, we will provide annual guidance during our fourth quarter earnings call for the year ahead. As always, we remain committed to transparency and providing you with information to track our progress against our plans. During fiscal 2018, we will naturally incur a number of integration and one-time charges associated with Kate Spade acquisition. I will provide more details on these expected charges in a few moments. But note, that these charges will be excluded from our non-GAAP results. Additionally, the Kate Spade results will be included in the Coach Inc. results starting on July the day subsequent to closing. Now turning to our outlook on a non-GAAP basis. We expect total revenues for Coach Inc. in fiscal 2018 to increase about 30% versus fiscal 2017 to $5.8 billion to 5.9 billion with low single digit organic growth. This includes the expectation for low single digit Coach Brand global comps and a low double-digit increases Stuart Weitzman brand sales. In addition, we expect the acquisition of Kate Spade to add over $1.2 billion in revenue. The Kate Spade revenue projection includes the impact of a planned strategic pullback in the wholesale disposition and online flash channels and assumes a high single digit decrease in comps for the fiscal year. In addition, we are projecting operating income growth of 22% to 25% versus fiscal 2017 driven by mid single digit organic growth, the acquisition of Kate Spade and estimated synergies of $30 million to $35 million. These synergies are expected to offset in part the reduction in profitability from the strategic and deliberate pullback of the Kate Spade wholesale disposition and online flash sales channels. Taken together, the Kate Spade business and resulting synergies are expected to add approximately $130 million $140 million to operating income. We have owned Kate Spade for just over a month and have been working diligently to identify synergy opportunities. To-date, we are very pleased with our findings as we expects to realize approximately $30 million to $35 million of fiscal year ‘18 synergies, which annualized to run rate synergies of approximately $50 million. This compares with their original expectation of annualized run rate synergies of $50 million by the third year post the acquisition. Much work remains on synergy front and we look forward to updating you on our longer term opportunities in the quarters ahead. Interest expense is expected to be about $90 million for the year. The full year fiscal 2018 tax rate is projected at about 25% to 26%. As noted in our press release, in fiscal year ‘18 the company is adopting Accounting Standard Update, ASU 2016-09 for accounting of employee share-based payments. This will influence our effective tax rate as certain tax impacts that were previously recorded to equity will now be included in income tax expense. Further, .because the tax impacts are defined by the company’s stock price, Restricted Stock Units or RSUs and Performance Restricted Stock Units or PRSUs vesting and when employees exercise their stock options, the timing and amount of the impact cannot be estimated and are therefore excluded from this guidance. That said, the majority of RSUs and PRSUs vest in the first quarter of the fiscal year and accordingly it is likely that first quarter fiscal rate could be most impacted. We expect our weighted average diluted shares outstanding for the year to be approximately 289 million. Overall, we are projecting earnings per diluted share for the year in the range of $2.35 to $2.40, an increase of about 10% to 12%, including low-to-mid single-digit accretion from the acquisition of Kate Spade consistent with our previously communicated forecast. We also expect our CapEx for Coach Inc. to be approximately $325 million in fiscal ’18. As previously noted, we will be incurring a number of integration and one-time charges associated with Kate Spade acquisition and integration. These charges will include such items as transaction fees and integration costs, which includes severance, store closure cost and inventory valuation adjustments. We expect $40 million to $45 million related to acquisition transaction this estimate for integration charges remains working process at this time and we can’t anticipates pretax charges to be in $150 million $200 million range in fiscal 2018, with approximately $35 million being non-cash. Additionally, we expect to incur approximate $10 million in operational efficiency charges. Now turn to our debt and capital structure. Post the Kate Spade acquisition, our total debt was approximately $2.7 billion. As previously noted we intend to repay our $800 million six-month term loan with cash on hand and end 2018 with $1.9 billion of debt. We remain committed to a conservative capital structure and moderate leverage and based on free cash flow and cash on hand we may elect to further reduce indebtedness by prepaying long-term bank debt. Finally, our fiscal year ‘18 directly operated distribution plan by brand is as follows. We expect 15 net closures globally for Coach Brand with net closures in North America and Japan, partially offset by net openings in Europe and Mainland China. We expect approximately five net Stuart Weitzman openings in fiscal year ’18, and for Kate Spade we expect 20 to 25 net openings globally and across channels with majority of new door growth coming in the outlet channel. As you know, these net openings were partially offset the reduction in online [ph] flash and wholesale disposition as we build the foundation for long-term brand health. It is important to note that due to the Kate Spade acquisition, we expects significant variability between quarters throughout the year and across all financial metrics based on the implementation of strategic initiatives and realization of synergies, as well as the variability in brand and channel mix, as well as currency. Taken together, we expect these factors to have the most significant negative impact on firs quarter, resulting in mid-to-high single-digit declines in operating income versus fiscal 2017. We expect to deliver double-digit operating income growth in quarters two, three and four, pattern to be uneven in fiscal 2018, we expect to realize annual operating income growth of 22% to 25% as previously mentioned. Similarly, we would expect a higher inventory to sales ratio that has been our recent history due to elevated inventory levels at Kate Spade. We will protect the brand by not moving excess inventory into the disposition market but rather primarily flow into our own network into the second half of the year. Therefore, we would expect inventory to sales ratio to improve as we move through fiscal 2018. In closing, we will grow both our Coach and Stuart Weitzman brands in the year ahead, while successfully integrating Kate Spade, which we expect o be accretive to our fiscal 2018 results. Overall, we remain optimistic about global opportunities and we are committed to driving long-term sustainable growth across our portfolio of our brands. I’d now like to open it up for Q&A. Operator?

[Operator Instructions] Our first question comes from Christian Buss with Credit Suisse.

Yes. Thank you very much. I was wondering if you could talk a little bit about your expectations for Kate Spade in international markets in the near term. How much are you willing to push that business going forward?

Thank you, Christian. We're very excited about Kate Spade brand and its international opportunity. Look, just comparing with Coach Inc. where we are in the four key global markets, first and foremost of course, there's tremendous opportunities still here in the U.S. We got a brand that basically is in a 178 locations relative to our 400 as you heard, on our speakers notes we definitely see opportunity to manage the outlet channel more proactively here in North America. So that's one. And then is the three key international markets, Japan, China and Europe, we see tremendous opportunity. The brand is more mature in the Japanese market where there are 88 locations, relative to where Coach is for example with a 180, 184-5 locations, we definitely see an opportunity in that market and then in Europe and in China we’re especially excited because we're in our infancy in Europe. There are seven locations, Kate's doing really well in the U.K where it just getting its footing if you will with the first seven locations in UK and Ireland and then one location, six in the U.K. and Ireland, one location in Paris, but especially excited by the initial results there. And then in China, we are today in approximately with a distributor partner at 33 locations relative to 175 to 180 for the Coach Brand. And we see an opportunity of course to grow our awareness in all of these markets, as an example here in the U.S. Kate’s unaided awareness is 31% relative to Coach’s 71% and in Japan which is the second largest market in the world for us and indeed for Kate and for the category, Kate’s awareness is 15% unaided relative to Coach’s 51%. So we're very focused on the international opportunity. And I think you'll hear a lot about that in the quarters ahead.

Great. Thank you very much and best of luck.

Thank you.

Our next question comes from Bob Drbul with Guggenheim Securities.

Hi, good morning. I guess the question is, could you elaborate a little bit more on the traffic results you know, for the Coach business, both full line and outlet and how the quarter progressed and how do you see the fall progression?

Sure. I'll let Josh jump in. I'll take that question. Overall Bob we've been seeing very consistent traffic trends over the last few quarters. More or less, I would say in the negative single digits range. Obviously we've been driving the business through conversion, great product and pretty consistent across both channels with maybe the full price store suffering a little bit more from the traffic perspective than the outlet channel.

Great. Thanks very much.

Thank you.

Our next question comes from Erinn Murphy with Piper Jaffray.

Great, thanks. Good morning. I was hoping you could unpack a little bit more about the reversal of gross margin in the fourth quarter. I think you highlighted channel mix and then you talked about [indiscernible] outlet. Could you just speak a little bit more about - what how much those impacted the margin in the quarter? And then was there any impact from the [indiscernible] license take back in Q4, is that going weigh on gross margins in fiscal ’18? Thanks.

Sure. And I'll let Kevin take that.

Good morning, Erinn. Few components I guess on the gross margin change, as we said on our Q3 call in May we didn't expect the fourth quarter gross margin to contract given that we began anniversarying some of the product cost benefits that drove the gross margin expansion in quarter one and three. We did achieve some cost reductions in Q4, but at a lower level as compared to the prior quarters and it was not sufficient enough to offset the promotional activity which basically stayed approximately same as in prior quarters. We also had expected to reduce the outlet promotion based on some innovations in product that we had put in the channel, however due to [audio break] products not fully resonating what consumers expected we did not [indiscernible] the promotions as planned. We also felt like that we missed a little bit on logo product and as we observed during the fourth quarter a broad emerging trend towards more logo products, which were going to be getting into as we move into the second quarter of this year. And as you noted, we did have some FX impact in channel mix and what we're seeing in the gross margin on [indiscernible] also note that as we move into fiscal ‘18 we do expect a year-over-year decrease in margin rate with more pressure in the first half with a significant majority of this year-over-year decline being attributable to Kate Spade business which runs at a lower gross margin rate. As it relates to the [indiscernible] question that will be a negative impact to the gross margin rate as we move into ’18 as we come in earlier. That was a last year’s business previously that was effectively 100% [audio break] about a little bit of headwinds as we move into fiscal ’18, but we certainly think it’s the right strategic long-term decision for us.

Got it. Thank you, guys.

Our next question comes from Ike Boruchow with Wells Fargo.

Hi, good morning. Thanks for taking my question. I guess Kevin just was wondering if you could give just a little bit more color on the Q1 op income decline you talked about just what exactly the drivers are that are negatively impacting you so much to start the year. And then just you talked about Kate Spade comps and high single digits for the year. Again, just any color you know first half versus back half, should we expect that to be much worse than high single digits to start and then Easter at the year. Just any color would be really helpful?

Sure. I’ll let Kevin speak to the first quarter, I can then – I’ll take the comp question on Kate.

Sure. Morning, Ike. There is a number of factors that are weighing in on the first quarter and I'll kind of try to unpack those for you. First on the sales, we do have some calendar shifts in the first quarter where we see some sales probably going to be moving from Q1 into Q2. We also expect probably some more FX headwinds on both sales and margin in the first quarter. Also keep in mind as we said earlier, we did not own the Kate Spade business until July 12th. So there's about $33 million to $35 million thereabouts of sales that occurs on the July period that we do not get credit for prior to us acquiring them. On the gross margin side, we do expect some continued pressure into the – in the first quarter, although at a lesser degree than we experienced in the fourth quarter and as I said earlier, as we moved into the second quarter we believe we're going to be in a better inventory position to be able capitalize on some emerging trends. And then on – thinking about from a pro-forma from the Kate Spade perspective, again we're going to see some pressure there from a gross margin. On SG&A side we got some puts and takes there. But as the top line we see a little bit of pressure creating some difficulty on the leverage perspective and I would also note that if you’re thinking about it on a pro forma basis with Kate [indiscernible] they did have some good news in their last year September quarter ended relative to [reverse in] [ph] incentive compensation benefits that they had been accruing for in their first half. So we're up against that. And then finally I would note that you know, you add all that together we're not expecting a meaningful operating profit contribution from Kate in Q1 due to the actions that we’re taking combined with the fact that their fiscal – our fiscal Q1 has not traditionally been a large profit contribution from the Kate business.

And then Ike in relation to comp and its progress throughout the year as you know in the speaker's notes and it's been very much something that we've talked about since we announced the acquisition was our desire to managing drive the brand for long term health and growth. We are taking two very important decisions towards that end which is reducing a lot of the promotional impression that we believe are more harmful to long-term brand health, specifically through the online price or flash sales, as well as through the more urban discount or wholesale disposition d channel, specifically of course we pull back on the surprise business will have a negative impact of course on comp throughout the year given that currently there brick and mortar comp has been consistent with the first quarter in their second quarter on what is now of course - with our fourth quarter. And I would say around negative 8 you would assume that the pullback in online will mean that brick and mortar comp will improve as the year progresses. That is our plan today.

Got it. Thank you.

Thank you.

Our next question comes from Oliver Chen with Cowen & Company.

Hi, thank you. Good morning. Our question was about your comments related to coach.com and your digital priorities. Just curious about what you're focused on in terms of stores and mobile and web site integration and also how you'll continue to stand your own in the face of Amazon making so many competitive strides as it relates to retail in general. And our second question was just about synergies with Kate Spade. What's the framework for easier to achieve synergies versus longer term synergies. And it looks like you had a nice findings initially, just what drove some of the differences in terms of what you've been seeing very recently since you've had Kate Spade for just a month? Thank you.

Sure. First I’ll Josh talk a little bit about his views and strategies on the web. We're very excited about his passion and experience there. And then I will jump in with Kevin on everything related to - everything related to synergies and cost.

Good morning. This is Josh. So as Victor said I am passionate about really building the coach.com business both from a business perspective and as a global digital flagship. We see opportunities to immediately impact the business by evolving our targeting strategies and the way we look at the spend allocated for performance marketing. And then as we revision coach.com as the global digital flagship really looking at it regionally on global basis and seeing how we can tie that more mystically into the omni channel experience that our customer has. From a product point of view online too, we have an opportunity to distinguish the channel and leverage an exclusivity message that can tie into some content creation, as well as amplifying the volume at some lower price point as well. In terms of Amazon, for the time being we don't see that as a true luxury play and where many of our core competitors play and we're more excited about engaging directly with our customers through our own digital channels and those of our premium wholesale customers.

[Technical Difficulty] ability to get procurement savings. So those are in a more easier buckets, if you think about more the longer term, that's generally in the systems area, as well as the cost of good sold. So it takes longer to affect changes there. But overall we feel good about the process is underway. We feel good about the teamwork across the organization, as I noted earlier we will be updating you in each quarter earnings call.

Okay. Thank you. Best Regards.

Thank you, Oliver.

[Operator Instructions] Our next question comes from Anna Andreeva with Oppenheimer.

Great, thanks. Good morning, everyone. We had a follow up on gross margin, what's the negative impact we should expect from Kate for the year and should we that expect underlying codes gross margin up for ‘18. And then looking out, Coach Brands operating margins just under 19% this year, you had previously talked about reaching low 20s. Maybe talk about the puts and takes for ’18 and beyond?

Yeah, several questions there. First on the gross margin, the negative impact I think on a consolidated basis for Kate, did I get that right?

Yes.

I think we've not given you know, specific gross margin rate, but it will be you know, call it to probably in the $170 million to $200 million, 200 basis points range for the year. As I said earlier it will be uneven by quarter as we you know, do some of the actions that you would expect it to have that kind of level - of profit is lower than traditional legacy code just to our business. And the other question I know was the gross margin for the year in the Coach Brands. Again, we've not given specific, but you should think about the Coach Brand you know, legacy businesses having modest gross margin expansion for the year. And then…

Thank you. That's helpful.

Okay. Anything else?

The operating margins, maybe talk about reaching the low 20s and the puts and takes there for the Coach Brands? Thanks so much.

What we said earlier the operating guidance that we have previously provided is no longer operable as we've moved to a house of brand and we will be providing annual operating guidance fourth quarter each year, as we’re looking at it on a total business…

Got it. Okay, got it. Thanks so much. And best of luck.

Thank you.

Our next question comes from Lindsay Drucker Mann with Goldman Sachs.

Hey. Good morning, everyone. I wanted to ask about the comment on Kate and the outlet stores. Could you talk about first of all the split of where you expect to be opening outlook store, maybe even just a little more detail on the overall Kate store expectation for next year? Where and what kind of stores or though, are those. And second you know, as you think about the potential competition with Coach Brand in outlet stores with more competition from Kate and maybe customers cross shopping you know, how you plan to mitigate any potential pressure on the legacy Coach Brand business? Thanks.

Hi, Lindsay. I’ll take the first - the second half of your question first in terms of potential competition or overlap, I couldn't be more excited with the results that we just got. In fact, no more than a month ago in post-purchase and combining our data basis, as you know we have a very large Coach data base, we actually combined Coach Stuart Weitzman and Kate Spade data basis and did a little bit of cross shopping analysis and the result came back at less than 10% and that was slightly above 10% between Stuart Weitzman and Kate, which was really the highest cross over that we saw and was just about 10. So very exciting news. And I think speaks to our initial views and assumptions going into this, which is of course like riding an incremental business given the very unique brand attitude that Kate has, a much stronger leaning in towards a millennial consumer at over 60% which compares to basically just over 30% for the Coach Brand and a very differentiated brand attitude and positioning globally not just here in the U.S. although nascent in international markets. In terms of – so in conclusion, we're not worried at all about the crossover or competition that you look. In terms of – and we see ourselves obviously growing our total market share with a combined house of brands. In terms of distribution, very excited about the opportunities globally, as I talked to earlier, I believe it was the first question in terms of just the number of opportunities ahead of us, both in the digital and brick and mortar perspective. I think on the outlet side, the opportunities are really two. One is definitely distribution, the outlet channel provides great opportunity for those more value conscious consumers that we see globally and visit and probably off the brick and mortar channels, so ones that we're still seeing developments in rather global aggressive pace compared to full price. And then second is the opportunity for just us to support that team. There's a great insight, but we believe we can support them in managing it much more efficiently and better. But at of course through innovation and product and hand-bags, leveraging our supply, increasing and improving quality and gross margin overall, all opportunities are ahead of in differentiating between the channels as well. So exciting, we're still very much ahead of us on that front. We look forward to keeping you updated on it.

Great. And then just – outlet opening U.S. versus Japan or overall store openings, the net store openings where we should expect that to be for Kate?

I think you’ll see it globally. We're still very much in the process of obviously look, we’ve owned the business for a month. We have plans to really drive the business globally. We’re still in the process of negotiating with our partners and landlord partners globally. I think you'll see some growth in our opening of - here in the U.S., as well as internationally with a focus especially on Japan and China. Of course, China remains a business which is a joint venture with a third party distributor, but we will certainly fill you in on that and we’re very excited about the opportunity across all markets.

Thank you.

Thank you.

Our next question comes from Mark Altschwager with Robert W. Baird.

Good morning and thanks for all the details today. Just wanted to follow up regarding the new reporting. I think you mentioned plans for low single digit percent increase in Coach brand global comps. Can you just give us a sense of how the comp growth has been tracking in the international segment just to add some context to that guide? And then just directionally in North America how are you thinking about the comp growth in fiscal ‘18 versus fiscal ‘17 for Coach Brand? Thank you.

Yeah. On the international question, we have not provided comps on that and on the North America we have historically - we said going forward don’t provide global comps and as know indicated we're expecting actually low single digit growth in the Coach Brand thus likely.

Thanks.

Thank you.

Our next question comes from Omar Saad with Evercore ISI.

Thanks for taking my question. I thought you made some interesting comments around the outlet consumer’s response to some of the new products going through there. The fact that maybe you had to be a little bit more promotional than you expected and I think you also made some comments around logo not having enough logo product you know, where do you see that cycle shifting, back and forth. Help us understand what's going on in that channel because the products seems so much better? Thanks.

Thank you, Omar. Very good question. I'll let Josh jump in on that.

Good morning. One of my early observations was really how this team has driven the outlet channel through innovation and how and how that's been resonating with our customers these past few quarters. I think what we saw different at the end of Q4 was that there was a resurgence in demand for some of our local product that has traditionally occupied a higher margin within our mix. And so we have a higher turn on the logo product in the fourth quarter and we're actually working part now to position ourselves to be in business in that product. And my observation that is somewhat related to the overall logo trend, but I also see it as a terrific time for the brand health that this heritage product that is so iconic to Coach is seeing resurgence demand wherever we have it.

Got it. Do you think it's a little bit of a trend, logos and also just a reflection of the b brand health and the demand for it?

Yeah, we see it as positive and we're actively chasing now and we anticipate to be in a more complete stock position for Q2.

Thanks very much…

Omar, I would just add, and I think you'll see us to developing into that cross-channel go forward which is an exciting for. It really is.

Our next question…

Yes, yes for price [ph].

Thank you. Best of luck.

Thank you.

Our next question comes from Michael Binetti with UBS.

Hey, guys. Good morning. Thanks for taking my questions here. I just want to clarify one thing on the guidance really quickly. Jim Lehrer [ph] consolidation it sounds like it's contributing to the gross margin guidance that you talked about for the year. Is there any way you can help us to nationalize what that adds to revenue or either line for the year, EBITDA line?

Michael, it’s Kevin, now to be clear it's a negative to the gross margin rate for the year. The last one business effectively 100% margin now we take it in-house and obviously is less than 100% because you've got a cost. So it's actually a modest headwind on the gross margin rate for the year and overall it would be you know, small dollars in the big picture. So it's not a material impact, but it's you know modestly we're very slightly negative for the year we’re taking back.

Okay. It does contribute to upside of the revenue line, I just want to make sure is that right?

We've not disclosed that, but again it's a very tiny number in relation next year…

Yeah, Michael as you heard in my speakers notes, we're really taking a very deliberate approach to the stock here in year one, we’ve got a business that we starting with about skews, that compares to anywhere in north to 5, 600 skews under Jim Log [ph] We're starting with about 120 wholesale doors which from a department store or department store channel and wholesale for example we compare to 5to 600 dollars under Jim Log, if we were to include the disposition channel they were over thousands of door. So we're really starting with a very I would say a very focused and deliberate launch, but very excited about the opportunity long-term given the fact that it's a $28 million dollar opportunity for us and it's growing. And of course we’re leveraging a lot of that now specifically around fit that we're getting from [indiscernible] team.

Okay. And then – most of my other questions have answered, but curious if you could give us little language on a promotional environment. I know you have some competitors that are planning to close doors or may start closing doors, maybe you could talk about what you're seeing in some of the local markets as that happens and I feel about market share opportunity as you look ahead and obviously you'll be calling back and wanting your other brands, Kate Spade, how you think about the Coach market share opportunity into those competitive dynamics?

Sure. We don't see - look, overall I would say that we don't see dramatic shifts across channels from a promotional perspective. Of course, the department store channel has specifically seen the most substantial pullback across France and there the impact of Kate Spade is truly minimal. Now one of the most positive surprises for us actually we knew this through our diligence prior to the acquisition has been just how clean that brand has been and how well it's been managed from a promotional perspective, as it relates to the department store channel. And so we're excited about that. There's not much cleaning to do in there. As it relates to the online channel again, we see most of the impact from our own actions and what we see from Kate Spade has been very difficult to read in terms of impact across brands or cross-channel. For us this is really not as much about reducing it to gain market share in one channel or another. But really about managing brand power for the long-term, that's the strategy, that's what we're focused on. And so doing of course allow for a much more sustainable growth both top and bottom line for our brands.

Okay. Thanks a lot. Best of luck.

Thank you.

Our next question comes from Paul Trussell with Deutsche Bank.

Good morning. Thank you for taking my question. You certainly touched on this already. But maybe just a little bit more detail on the comp, especially in North America, you obviously comped the comp which was impressive this quarter. Maybe just elaborate on your confidence to be able to continue to do so over the coming quarters? And you know the particular factors and drivers that you're most excited about.

Yeah, I would say, look, we don’t add anything to what Josh had share with you which is obviously incredibly pleased with the fact that consecutive comp here in North America are very focused on continuing to drive engagement across channels, of course on brick and mortar full price outlet and digital channel and you'll see of course as Josh mentioned digital continues to be increasingly important for him and for the brands under his leadership. And globally, I wouldn’t add anything to what we've just guided, which of course is the low single digit cost of the brand across markets which we're excited about. So my brand is increasingly global as you know with growth coming especially out of Europe and China which has been appealing for a few quarters and of course in China for few years. That we’re continues to be very excited about.

Operator, we’ll take one last question.

Our final question this morning will come from the line of Simeon Siegel with Nomura.

Anything you can elaborate on your comment to refocus Kate's licensing. I believe they license a broader assortment of products, so how un-flexibility do you have there. And then the that comment pertained to geographic JV in Asia as well? Thanks.

Yes. The licenses are part - the discussion about licenses approximate licenses not distribution based licenses. As I mentioned we do have a JV with China that of course we will be focusing on, and it relates to the products based licenses, there is no intent to spend anything early. A lot of these licenses do have short times. So we will be re-evaluating them on a case by case basis. I think our objective is just truly focus on the core fashion category and especially in certain home licenses, but you will you will definitely see us reduce the number and average power and much more fully within the handbag in accessories business where we believe the greatest opportunity lies.

Great, thanks. Just a random question if can, when you talk about the promotional levels of outlet, do you find you are impacted by promotional levels across all our outlet retailers or its specifically promotional levels of your peers?

I would say in general when we talk about promotion levels, of course were most focused on what is happening I would say in the premium brands space and those domestic and European players that are closest to us across the distribution channels, whether that be with specialty of course in wholesale and in the out of the channel, which of course by nature is a promotional channel.

Great. Thanks a lot guys. Best of the luck to the year.

Thank you. Back over to Victor for some brief concluding remarks, Victor?

Thank you, Andrea, Just want to close by first and foremost welcoming the Kate Spade team, I know there is quite of those folks listening in and walking down to the Coach Inc. family. We’re incredibly excited to have them as a part of the team and very much looking forward to supporting them in their growth as a brand not only here in the U.S., but globally. Also want to thank and congratulate the Coach Inc and teams on a fantastic fiscal year ’17, as we continue to drive results and our brand transformation and as the Stuart Weitzman team moves under the direction of Wendy and Giovanni Morelli in this new chapter, as well. Obviously could not be more excited about our revolution corporately as a house of brands and bringing our vision to markets across the globe and looking forward to continuing to connect with all of you as we share the work that we're doing not only in our into adding our brands, but of course integrating the Kate Spade brand in the quarters ahead. Thank you all.

This does conclude the Coach earnings conference call. We thank you for your participation in today's call. You may now disconnect your lines and have a wonderful afternoon.