Operator:
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 Global Head of Investor Relations and Corporate Communications at Coach, Andrea Shaw Resnick.
Andrea Shaw Resnick:Global Head of IR and 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.
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 cost, successfully execute our transformation and operational efficiency initiative, on 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 financing short term such as accounting adjustments, contingent payments and integration costs. You may find the corresponding GAAP financial information and 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 third fiscal quarter 2016 results and will also discuss our progress on global initiatives across markets. Jane Nielson will continue with details on financial and operational results for the quarter and our outlook for the business for the balance of the year. Following that we will hold a question and answer session where we will be joined by Andre Cohen, President North America. This Q&A session will end shortly before 9.30 AM. We will then conclude with some brief summary remarks.
I would now like to introduce with Victor Luis, Coach’s Chief Executive Officer.
Victor Luis:Chief Executive Officer:
Good morning. Thank you, Andrea and welcome everyone. As noted in our press release, we are very pleased with our third quarter performance which was consistent with our expectations and reflects a return to growth for Coach across the key financial metrics of sale, operating profit, and EPS.
We drove further sequential improvement in our North America direct business with both channels strengthening similarly, while the internet also contributed to results this quarter. Our international businesses posted strong growth on a constant currency basis highlighted by double-digit increases in Mainland China and Europe as well as sales gains in Japan and other Asian countries.
We were especially gratified by our ability to drive this inflection for the brand against the backdrop of macroeconomic and promotional headwinds and amid volatile tourist flows close globally. Overall our results continue to give us confidence that the cumulative impact of our actions will continue to drive top-line growth this fiscal year and positive North American comps in the fourth fiscal quarter.
Importantly during the third quarter, 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 elevated Coach 1941 assortment resonated in our retail stores globally as well as in key new specialty retail accounts having debut in Nordstrom’s, Saks, 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.
In outlet, our Snoopy Fashion was particularly well received and we will continue to surprise the light to consumer in this channel with increased levels of innovation. We continue to transition the fleet into a modern luxury concept driving comp improvement. Finally, our new heritage marketing campaign focused on originality and authenticity highlights Coach’s key competitive differences separating us from the landscape of both legacy European luxury and American accessible brands.
We are also pleased by Stuart Weitzman’s results this quarter. As noted in our press release, we expect to close on the acquisition of the brand’s Canadian distributor in the fourth quarter.
Longer term we continue to believe that Stuart Weitzman has significant potential and the integration to date reflects our ability to operate as a multi brand company. And as Jane will discuss in more detail, we also announced an operational efficiency plan today focusing on creating a more agile streamlined corporate structure enabling us to be more responsive to rapidly changing business conditions. The plan includes the elimination of over 300 positions worldwide, representing about a 10% decrease in global corporate staff or about a 2% reduction in our total workforce.
These actions will allow us to emerge as a global brand led company with fewer layers, larger stance of responsibility, and a consistent global voice across merchandising and marketing. To this end, we are promoting two seasoned Coach executives, Andre Cohen and Tod Kahn. Andre is being promoted to President, North America and Global Marketing adding North America wholesale as well as Global Marketing, Customer Experience, and Digital to his responsibilities.
Tod is being promoted to President and Chief Administrative Officer and Secretary and will expand his scope to include IT, supply chain, global environments, and procurement. They are both proven leaders with experience across many aspects of Coach’s global business and are well prepared to address the opportunities ahead of us as we continue to transform. Most importantly, they have consistently delivered results for our brand and company in their respective 8 years tenures.
In addition, Diane has assumed the role of Global Head of Merchandising for the Coach brand. In this new role Diane will oversee merchandising for the entire Coach portfolio including women’s, men’s, and license categories.
With these changes, Gebhard Rainer, President and Chief Operating Officer, and David Duplantis, President Global Marketing Digital and Customer Experience would be leaving Coach. I want to take this opportunity to thank both Gebhard and David for their important contributions to the company. Gebhard notable for his work on the successful integration of Stuart Weitzman over the last year and most recently for his leadership in our restructuring and efficiency initiatives and David who has made significant contributions to Coach over his 18 year tenure and roles spanning North America Merchandizing, eCommerce, and Digital and Global Marketing. He was the key player in building Coach into a leading global lifestyle brand establishing our digital footprint and most recently in our brand transformation.
The entire Coach team has great admiration and respect for Gebhard and David’s significant accomplishments and we wish them the best.
Now as has been our recent practice I’d like to share some of the actions we’ve taken to build momentum across the three Coach brand pillars of product, stores, and marketing. Starting with product where Coach is clearly emerging as a house of modern fashion design. During the third quarter as in the first half of the year essentially all of our retail channel assortment both men’s and women’s were Stuart’s designs. It was however the first quarter that included Coach 1941 and emphasized our elevation strategy.
This was a pivot from holiday where we distorted the under $300 price point in our gifting assortment.
The Rouge, Saddle and Dinky, have all performed well with price points up to $800 and above. The Swagger Family which anniversaried its original launch in February 2015, comp-to-comp with the new Mercer Satchel also contributing to results.
Essentials lot of the emphasized were highlighted by the introductions of Turnlock Edie, Edie 31, and Prairie. In outlet, the offering of Stuart’s designs and updates represented over 90% of the assortment with key new styles in women’s such as Satchel, the city zip, and the mini-Bennett performing well along with the reimagined CD and Christy groups.
On the men’s side, a strong growth of bags and backpacks drove our business. We also had an exceptional response to the Snoopy Fashion as mentioned proving that this customer will response to innovation and novelty.
After the success of our first complete runway show in September and the Coach 1941 launch, we followed up in February at New York fashion week introducing our 1941 Fall Collection. Once again it received significant attention from the fashion press as well as top tier specialty retailers and luxury department stores.
On stores, we’re continuing to establish our new modern luxury concept stores globally, renovating and opening 40 during the quarter including six renovations and two new modern luxury stores in our directly operated North America business taking us to about 290 across all channels worldwide. We remain on target to end the year at over 400 of our doors including wholesale in the new format. Consistent with plans, these renovations have been driving significant inflections from previous trends and comps which exceed the balance of fleet in the vast majority of stores around the world.
We are especially excited about the ongoing positive comps we’re driving in our renovated North America retail stores.
Including those stores that have now anniversaried their remodels. In North American department stores we renovated eight shop-in-shop locations to Modern Luxury in the third quarter.
Finally we have about 35 shop managers in place today and have seen the significant impact versus the balance of doors and expect to hire another 15 by the end of the year. On the marketing front, we remain focused on creating desire for our brand amplifying our fashion positioning and our 75 year legacy of design innovation, craftsmanship and quality, building emotional connections with consumers globally.
In February, we did viewed our heritage campaign featuring Coach icons and starting with the Saddle Bag followed by the Dinky Bag in March. This global brands campaign is a key vehicle to communicate our authentic history as America’s original house of leather with taglines such as we got our heritage deals fashion way we inherited it. Setting us apart from the direct competitors who are often inspired by our archives. Also positioned to amplify our brand heritage we are very pleased with the response to our Coach Vintage initiative.
A collection of highly-coveted bags from the 1970’s and 1980’s that we reclaimed masterfully restored and hand-embellished by Coach artisans modernizing them for today and making each a one of a kind. The collection was a big hit during its debut launch at Colette in Paris in December and later saw a success at Barneys, New York.
Our next installations will be available in premium locations in Beijing, Tokyo and Hong Kong with the global online auction completing the initiative later this fall further amplifying our storied heritage and fashion credibility to accrual audience. Our fashion advertisement campaigns supported the launch of Coach 1941. Focused on the Saddle Bag and shop by photographers Steven Meisel he has captured the attention of consumers worldwide who are both positioning and social out of home and print.
In resonating with our broad audience and primarily position through the digital channels -- continue to be the faces of our celebrity campaign.
Once again our runway shows we’re highly engaged and amplify through social media with our London men’s show in January garnering over the 150 million impressions and our February, New York fashion week show driving over 700 million impression and ranked number three of the top mentioned hash tags by WWD during New York fashion week reflecting the increasing vibrancy of our brand and our online into shop the runway initiatives featuring the road bag sold out within an hour.
On coach.com we’re further enhancing our emotional balance with our visitors through a series of personalization initiatives including the recent introduction of our customizable story patch. We’ve also evolved our suite of -- initiatives and introduced the feature that allows for adding a charm to bags to making them even more personal.
Looking forward to the balance of calendar of 2016 we will continue to amplify our fashion positioning while celebrating our 75th anniversary focusing on the 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. As the result of these efforts we are seeing continued progress with consumers. Importantly in our quarterly North America brand tracking survey held in March we saw an increase in category drivers as a percentage of Coach consumers and strength in our overall brand affinities.
So as our plans unfold and the momentum builds we are delighted with our progress and proud of all that our team has accomplished to drive Coach’s transformation. The Coach brand is very much on its way to evolving from a specialty retailer and accessories brand to a true house of fashion design defining modern luxury. We are excited to see our created vision and direction gain traction and we will continue to update you on these initiatives.
The low single digit rate in the March quarter. Our quarterly survey also showed a higher handbag purchase among the broad premium purchasers versus six months ago. Importantly Coach’s sales of women’s bags and accessories 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 global net sales on an manual basis posted strong results in the quarter.
We continue to believe it as a growth opportunity for the brand and still forecasting mid single-digit growth during FY ‘16.
Over our planning horizon, we believe men’s remains a $1 billion opportunity. In North America we have tested and intensified men’s focus in key stores which in increased marketing support and enhanced assortment in the more prominent location in store. With a strong response from consumers we will be expanding our men’s presence in the fourth quarter and specifically will be rolling out men’s to over 25 mall retail and 40 mall outlet doors.
And of course we also remained focus 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 a mid-single pace over our planning horizon. Looking ahead we see significant growth opportunities for the Stuart Weitzman’s 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. Starting with North America.
As you read in our release for the quarter our total Coach brand sales and direct business in North America were up both 1% as reported and 2% in constant currency.
In aggregate we drove another significant improvement in our direct businesses in the third quarter. Comp trends in both retail and outlet stores accelerated while the internet contributed to aggregate comp as well. Overall our comp was flat that is expected by retail including the slightly positive impact of our ecommerce business which contributed less than 1 percentage point. Higher ticket and higher conversion will offset by a decline in traffic which was hurt in part by the overall weak mall trends.
As a reminder we have now fully anniversaried the pull back in eOS and in preferred customer events which impacted both our coach.com and retail business businesses. Therefore going forward we would expect our online business to move at least in line with our store trends.
Now looking at results sequentially. As planned improvements in both conversion and traffic from the second quarter drove results with tickets still positive. While Easter contributed to our comp this was offset by a shorter winter sale period which ended about 10 days earlier than last year. Importantly our performance underscores our confidence in delivering a positive North America comp by the fourth quarter.
Now turning to our retail performance and the metrics we traditionally share on products. The above $400 price racket rose in penetration saw another positive comp on sales and unit basis and reported about 40% of handbag sales up from about 30% last year. The increases showed continued progress of our elevation strategy driving our handbag AUR to over $300 in the quarter for the first time since FY 09.
As planned we deemphasized the entry price point gifting assortment coming out of holiday and therefore saw a decline in the 300 and below handbag price segment and after several years of decline in Logo penetration and gains in leather our North America Logo business have stabilized that less than 5% in retail and about 25% in our outlet channel similar to the prior year. We will continue to monitor consumer preferences and fine tune this balance as needed.
Now on stores. As mentioned we have been very pleased with the performance of our modern luxury stores particularly in the North America retail channel where comps remains cops remained positive with now 67 stores renovated including 15 added in the last 9 months.
As noted we are especially excited about the ongoing positive comps for driving in those stores that have now anniversaried their remodel. In the outlook channel as noted previously our results have been more mixed and we have not seen the same level of inflection given the newest store base notably in men’s standalone. Today we have completed 31 outlet renovations including ‘17 and FY ‘16 and open the total of seven outlet stores in the new format, three in FY ‘15 and four year-to-date. We remain on target to renovate about 60 North American stores this year.
In terms of elevating our customer experience this quarter we make significant progress in leveraging our leather services to differentiate the Coach experience and to drive convergence while opening three new craftsmanship bars globally. So Ocean -- young Japan and King Persia in Philopedia. Turning to event marketing in FY ‘16 we continue to evolve and optimize our events with the goal of further reducing the number of days on promotion and as previously mentioned our plan included two close the targeted events this fiscal year. The first of which was held in September and the second of which occurred in March consistent with prior years timing.
We will also run two shorter duration open sales events over key traffic periods. Black Friday and Mother’s day. We have been encouraged by the behavior of new customers acquired during sales events to subsequently engage in full price purchasing at that same rate as new customers acquired during the non promotional periods.
Looking ahead to spring and summer. In retail we’re excited about introducing our first ever as a pre fall collection grounded and handbags and ready-to-wear with new animation and sizes of the best selling and new novelty platforms in the iconic Coach Dinky and Saddle bags. We will continue to implement our elevation and fashion strategy in all doors with additions to the popular Swagger family in the rainbow of front fashion colors and unique colorful exotics. Additionally we have skew adds in the and coming in May.
Men’s trends strength continues into the fourth quarter driven by ongoing traction in leather goods ready-to-wear and footwear with enhanced store replacement and marketing distortions. Ending June we will be celebrating our 75th anniversary with the special collaboration with another storied American brand to be announced later this spring.
In outlet we are heading into mother’s day which will feature elevated flow novelty via leather applicate details and print. Our gift offering is robust including bath sets color small bags and small leather goods and newness in jewelry. In May we’ve launch a rainbow color story aligned with our retail stores featuring some of our strongest new styles that launched in the third quarter including the just in time for memorial day we will reintroduce our reversible which was the best seller during the holiday season. In June story featuring an update to our best selling print in and small bags which are important key drivers for the summer season and we’re also excited to roll out to rollout men’s to all outlet locations incurred by the back path messenger bags and then assortment of wallets and bags.
And now moving on to international. In greater China our third quarter sales rose 2% in constant currency driven by double-digit growth and positive comps on the Mainland Hong Kong and Macau on the Mainland excuse me. Hong Kong and Macau remained weak and continues to be impacted by a dramatic slowdown in bound tourist traffic notably from the Mainland. At this juncture with very limited visibility to an evolving macroeconomic environment and tourists spending flows we are updating our annual forecast to be in the area of $600 million to reflect continued softness in Hong Kong and Macaw.
Importantly in despite near 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 see the Chinese consumes an increasing part of our total business. During the third quarter our global business with the Chinese continue to grow. Declines in travel flows into North America and Europe notably France along with continued softness in Hong Kong and Macau were more than offset by strong domestic spending and growth in Chinese tourist spend and other key travel destinations including Japan, Korea, and South East Asia.
To that end sales in Japan were up 7% on constant currency basis and 8% on the dollar basis, reflecting the strong yen despite a decrease in square footage. Sales again benefited from increased PRC tourist flows and the positive response to our new modern luxury stores from Japanese consumers and tourists that like seen most notably in conversion in these locations. We would expect some slowdown in the constant currency growth of our Japan business in the Fourth Quarter as we anniversary the dramatic increase in Chinese tourist last spring.
In Europe, our brand is continuing to grow rapidly through new directly operated stores, wholesale locations and comps. Our over archived focus continues to be building the brand awareness with both local domestic consumers as well as tourists. In the third quarter our business grew at a double digit pace driven by both distribution and comparable store sales. As many brands have referenced we did experienced relative softness in trends in the quarter due to weaker tourist’s traffic following the tragic terrorist attacks.
Overall and despite these headwinds we are maintaining our FY ‘16 sales outlook of about a $125 million. Overall planning horizon our goal is to achieve over a $0.5 billion in sales at retail representing a mid single-digit share of the premium men’s and women’s bag and accessory markets. In our other directly operated Asian markets outside of China and Japan mainly South Korea, Taiwan, Singapore and Malaysia sales growth was solid across the entire region in local currency but declined in dollars. Here too we are focused on driving productivity through our transformation initiatives.
Finally, I would like to point out that we are seeing desperate results in our international wholesale businesses, which, while small, are important to growing brand awareness. In the third quarter, our overall sales at TOS increased moderately driven by strong growth in those distributor distributed operated locations focused on the domestic consumer. While travel retail grow up was relatively weaker due to volatility of tourists spending flows globally. On the net sales basis, revenue grew modestly in the quarter driven by shipment timing with the second quarter.
In closing we are encouraged with the momentum of our business across all of our regions and the returns of growth for the company. Most importantly we are proud of the progress we have made along our transformation journey in the evolving perception of the Coach brand and Coach as we move from the specialty retailer to house of modern luxury brands.
Now I will turn it over to Jane for details of our financial results and guidance for fiscal 2016. Jane?
Jane Hamilton Nielsen:Chief Financial Officer:
Thanks, Victor and good morning. Victor has just taking you through the highlights and strategies, let me now take you through some of the important financial details. 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.
Overall we are very pleased with our performance in the third quarter which marks to return to growth for the company within infraction across the key metrics of sale, operating profit and earnings. These results clearly reflect the positive impact of our transformation strategy augmented by the Stuart Weitzman’s business.
Consolidated net sales totaled $1.03 billion for the third fiscal quarter, an increase of 11% versus prior year. On constant currency basis total sales increased 13% for the period. Net sales for the Coach brand grows 3% in dollars and 4% on a constant currency basis. With both the North America and international segments up on a year-over-year basis.
Stuart Weitzman brand sales was $79 million in the quarter. Total gross profits was $713 million an increase of 7% compared to the year-ago period, while gross margin was 69% versus 71.6% last year negatively impacted by foreign currency and inclusion of Stuart Weitzman in this year’s margin.
Coach brand gross margin was 69.9% and included approximately a 110 basis points of pressure from currency. In terms of trends by segment North America gross margin declined on a year-over-year basis but to a lesser extent than in the first half of the year as planned. Margin continued to be negatively impacted by increased promotions in the outlet and wholesale channels. In response the heightened discounting activity.
These decreases were partially offset by the impact of an improved mix of elevated product sales and higher initial mark ups primarily in our outlet store.
International segment gross margin increased from prior year excluding the negative impact of foreign currency. Stuart Weitzman brand gross margin was 58.2% in the quarter and pressured overall consolidated gross margin by 90 basis points as expected. Consolidated SG&A expenses were $561 million an increase of 8% versus prior year. As a percentage of net sales SG&A totaled 54.3% compared to 55.8% in the year-ago quarter.
Coach brand SG&A expenses increased 1% consistent with expectations and totaled 54.8% as a percentage of sales.
Stuart Weitzman SG&A expenses was $39 million or 48.9% of sales. Total operating income for the quarter increased 4% from last year to a $152 million., while operating margin was 14.7% versus 15.8%. Operating margin for the Coach brand was 15.1% in the quarter. Importantly we are pleased with our margin results in Q3 and our confident in our path to operating margin expansion beginning in the fourth quarter of fiscal 2016.
Operating margin for the Stuart Weitzman brand was 9.3% and pressured Coach Inc consolidated operating margin by 40 basis points in the quarter. Net interest expense was $7 million in the quarter as compared to $1 million in the year-ago period. Net income for the quarter totaled $124 million with earnings per diluted share of $0.44 of 24% and 23% versus prior year respectively. This included a contribution of $5 million or $0.02 per share from Stuart Weitzman.
The charges under our previously announced transformation plan have totaled $313 million to date including $9 million in the third quarter as outlined in detail in this morning’s press release.
We continue to expect to incur the balance of these charges by the end of FY ‘16. Primarily related to global store closure and organizational effectiveness bringing the total multiyear charge to about $325 million. Now moving to global distribution as you know our over focus continues to be our stores elevating brands perception, optimizing our store fleet and opening new locations selectively in key markets. In total we closed 9 net Coach brand locations globally primarily related to store closures in North America as planned.
In addition we opened one Stuart Weitzman’s directly operated location in the quarter.
Looking to the full year, in FY16 we continue to expect our Coach brand directly operated square footage to be up low single-digit globally. This guidance continues to assume that Coach brand square footage in North America will be essentially unchanged. Internationally distribution growth will be led by Europe and China where we continue to predict double-digit increases in square footage. In Japan we continue to estimate a mid single-digit decline in square footage as we take 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’s distribution, we continue to expect to open approximately 10 new directly operated locations in FY16.
Moving to the balance sheet inventory levels at quarter end were$464 million including $27 million of inventory associated with Stuart Weitzman’s. This compare to ending inventory of $457 million for the Coach brand in the year-ago period therefore inventory rose 2% on a Coach Inc consolidated basis, but was down 4% for the Coach brand.
Cash and short-term investments stood at $1.3 billion as compared to $2.0 billion a year-ago. Given our debt issuance in the third quarter of FY ‘16 and 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 third quarter was $199 million compared to $167 million last year. Free cash flow in the quarter was an inflow of $98 million versus the $122 million in the same period last year. Our CapEx spending was $101 million versus $45 million in the same quarter a year-ago.
Now turning to our outlook, as noted in the press release we’re maintaining our overall fiscal 2016 guidance for the both Coach and Stuart Weitzman brand. Starting with our outlook for the Coach brand on a standalone 52 week non-GAAP basis for FY16, Coach brand sales are still expected to increase at low single-digit rate in constant currency in fiscal year 2016. Based on current exchange rates currency headwinds are expected to negatively impact annual revenue growth by 225 basis points to 250 basis points. We’re still projecting a low single-digit aggregate comp decline in North America in FY ‘16 while reaching positive comps in the fourth quarter. Gross margin for the Coach brand is still projected to be in the range of last year’s margin of about 69.5% on a constant currency basis with negative foreign currency effects expected to impact gross margin by 90 to 100 basis points.
SG&A expenses net of savings are still expected to grow at a low single digit rate in constant currency. While growth is expected to roughly flat in dollars. We continue to expect at least $50 million in incremental cost savings from our previously announced transformation initiatives. This guidance also includes the expected small positive impact from savings related to the operational efficiency initiatives as outlined in today’s press release.
Taking together our operating margin is still projected to in the mid to high teens. Interest expense for the year is estimated to the area of $30 million. And finally our tax rate is still expected to in the area of 28% for the year. The expected rate reduction on year-over-year basis is primarily attributable to the geographical mix of earnings the ongoing benefit of available foreign tax credit, the anticipate closure of certain audits and the expression expiration of statutes in (inaudible).
In addition we are continuing to forecast Stuart Weitzman brand sales to the in the area of $340 million on a dollar basis for fiscal 2016, an increase about 10% from FY ‘15 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.
Keep in mind we continue to project a negative impact of about 70 basis points and 20 basis point on a consolidated gross margin and operating margin respectively from the inclusion of Stuart Weitzman given the margin profile of the business.
As mentioned we are also excited to announce the purchase of Stuart Wietzman’s Canadian distributor which is expected to close in Q4 and have an immaterial impact on this year’s result. As a reminder fiscal 2016 will include a 53 week in our fiscal fourth quarter which is expected to contribute approximately $75 million to $80 million incremental revenue and $0.06 in earnings per diluted share on a non-GAAP basis.
We expect CapEx for FY 16 for Coach Inc to be in the area of $250 million excluding the capital cost associated with the new headquarters which are expected to be approximately a $175 million in FY16.
Before concluding I did want to provide you with an update on the status of our investment in our new headquarters building at Hudson Yard. As you know together with our partner related companies we are exploring options to sell our interest in the Hudson Yards joint venture. While securing our future needs for space by entering into a long-term lease there. It remains unlikely that any sale of our interest or other transactions would close prior to our fiscal year-end.
Importantly, our capital allocation policy remains unchanged 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, well we have nothing planned immediately we want to have the flexibility to act is and when it’s in the best interest of Coach Inc and our shareholders and third capital return as I stated before we’re 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 our guard rails for allocating capital effectively maintaining strategic flexibility strong liquidity and access to the capital market.
In closing we are very pleased with our progress to date. Our third quarter results mark the return to top-line operating profit and earnings growth and underscore our ability to drive sustainable growth for the Coach brand and the Coach Inc. To this end we continue to expect FY17 to be the year when Coach brand returns to growth across all financial metrics leveraging top-line growth that is expected to be in line with the category. We remain committed to driving process improvements to be a more agile focused and effective organization while also creating the flexibility to pursue our creative vision and drive growth across our brand in support of this global and as Victor mentioned today we announced as series of operational efficiency initiatives focused on creating an -- and scalable business model.
In aggregate we expect to incur pretax charges associated with these actions of approximately $65 million to $80 million which will be reflected beginning in the fourth quarter of fiscal 2016 and will be substantially complete by the end of fiscal 2017. The significant majority of these charges will be recorded in SG&A expenses. Importantly combined with other key measures previously implemented under our transformation plan these initiatives are expected to enable us to reach our previously stated goal of about 20% operating margin for the Coach brand in fiscal year 2017 despite increased category and macroeconomic uncertainty and we’ll continuing to invest in our growth strategies.
With that I’d like to open it up to Q&A.
Question & Answer
Operator:
Thank you. We will now open it up for questions. If you would like to ask a question please star followed by the number one. Please un-mute your phone and record your name clearly when prompted. Your name is required to introduce your question and to withdraw your request please press star followed by the number two. Our first question comes from the line of Bob Drbul. Sir you may ask your question.
Bob Drbul:
Good morning.
Victor Luis:
Good morning
Jane Hamilton Nielsen:
Good morning
Bob Drbul:
I’ve two part question on sales really. Given that your mentioned January was impacted by the shorter winter sales and you accomplished flat for the quarter would not suggest that you are already running a positive comp through the last two months February and March and the second part of it is taking that one step further when think about your guidance for the positive North American comp in the fourth quarter would that suggest your running a positive comp right now as well?
Victor Luis:
Thanks for the question Bob its certainly hard to argue with the math and I think that you can certainly say if we assume that we did indeed have positive comps in February in March as you suggest. In terms of the fourth quarter look we still have couple of months ahead of us but certainly as the team we remain confident in our guidance positive North America comps for the quarter.
Bob Drbul:
Great. Thank you very much.
Victor Luis:
Thank you.
Operator:
Thank you. So participants once again please limit yourself to one question and our next question comes from the line of Ike Boruchow of Wells Fargo. Your line is now open.
Ike Boruchow:Wells Fargo:
Hi everyone. Good morning thanks for taking my question.
Victor Luis:
God morning.
Jane Hamilton Nielsen:
Good morning.
Ike Boruchow:
So I guess Bob I will take margins so I just wanted to dig into the fiscal ‘17 margin comment about our 20% for the Coach brand. So that’s pretty impressive step up from what’s looks like will be something around 17% to 18% this year. Can you just kind of walk us through the drivers there maybe bucket to biggest opportunities as you see it and conversely what you think are the biggest headwinds you face on the margin front as you get into next fiscal year.
Jane Hamilton Nielsen:
Sure as we’ve stated our operating margin guidance for fiscal FY ‘17 is really premised on the returned to growth in line with the category of the Coach brand. We now expect the category to be in the low to mid single-digit range. A very stable gross margin on constant currency basis of 69% to 70% so stable gross margin, top-line growth and then we will leverage SG&A to get to the operating margin expansion that leverage of SG&A fully incorporate what we called out in our original transformation plan which was the restructuring actions that we will conclude with this fiscal year and a small benefit from the operational efficiency initiatives that we announced today.
Ike Boruchow:
Great thanks.
Victor Luis:
Thank you.
Operator:
Thank you very much. Our next question comes from the line of David Schick, of Consumer Edge Research. Your line is now open.
Victor Luis:
David.
David A. Schick:Consumer Edge Research:
Can you hear me?
Victor Luis:
Yes.
David A. Schick:
Okay sorry about that. Thanks. So I will go back to sales on a longer-term basis you talked about e-commerce impacting the comp positively and also you talked about the net effect of the Chinese consumer in different markets.
Could you talk about how you think about e-commerce impacting your comp over the long-term going forward and again sort of a net basis what’s the right way to think about the longer-term trend in the Chinese tourist impacting all these different markets.
Victor Luis:
Sure. In terms of e-com we have now of course anniversaried all of the EOS pull back so we would expect it to grow at least in line with what it’s happening in our store network of course look the consumers are continuing to shift online so I would not be surprise if it is growing at a slightly faster pace than the store network from here on now. Now that we have comp all of the pull back.
In terms of the Chinese consumer and the excitement look first and foremost the long-term opportunity with the Chinese consumers is as present as ever I could not be excited about what we are seeing in terms of even government policy is still focused on domestic consumption the infrastructure continue to develop in the Mainland which is obviously helping domestic consumption as well. As well as the continued traction that our team is driving for the brand there it’s absolutely vital of course because relevance on the Mainland will mean relevance wherever the Chinese consumer chooses to shop as they travel globally.
Today what we are seeing most recently as I mentioned earlier is of course the impact of the terrorist attacks in France and specifically in Paris having a direct negative impact on Chinese stores flows there we’re seeing slightly negative flows into the US as well as off course as continued negative flows into Hong Kong and Macaw that is one area where we thought in the fourth quarter we would have seen ourselves comping the fall from last year and we have not and but that’s more than being offset by the very strong growth that we continue to see in Japan, Korea and increasingly in Southeast Asia and although many of those markets are distributed around we’re very excited by what we’re seeing in Thailand and in Australia as well.
David A. Schick:
thanks so much
Victor Luis:
Thank you David
Operator:
Thank you very much Our next question comes from the line of Erinn Murphy with Piper Jaffray. You line is now open.
Erinn Murphy:Piper Jaffray:
Great thanks Good morning. I wanted to focus on the outlook is actually I realize they are lagging the full price in part on plan but maybe speak a little bit more about some of the initiatives you’re working on to close the gap in performance between full pricing whether you can expand upon the upcoming you have in those channel and then any tweaks that you’re making now that a remodel strategies deeper into that. Thank you.
Victor Luis:
Sure, we will let Andrea answer that for you.
Andrea Shaw Resnick:
Good morning. Let me start by saying the both channels actually improved on this similar rates sequentially so we’re pleased with the performance both in retail and in outlets we do the retail was going to lead so the retail performance in absolute terms is slightly ahead of outlets basically a couple of main areas we have been working on in and now at least specifically one its design and innovation and we’ve realized through the -- I think Victor mentioned in his prepared remarks on snoopy that when you got real innovation in the motion it comes twice it was successful than it’s something that we are trying to replicate over the next few quarters both in terms of these run off sort of we called -- concept and more generally in terms of putting more design and innovation in the outlet channel.
In terms of the modern renovations they have not seen as successful as in retail. We have not move that much that said we got a number of learning that we are currently addressing we used our would be common store as a pilot. What we’ve done thing such as moving product more products of the flow we realized when there is too much product on the role knocking up on the flow its effect competes conversion. We have fragmented the store that to not so you don’t get sort a of 360 view when you enter the store etcetera so lots of small operational improvements.
The positive news is that and would be when we started this tweaks 2 or 3 months ago we have seen an improvement in the controllable metrics conversion in ADT. So a good learning and we are going to keep implementing them throughout the chain.
Erinn Murphy:
Great. Thanks and best of luck.
Victor Luis:
Thank you.
Operator:
Thank you very much. Our next question comes from the line of Randy Konik with Jefferies. Your line is now open.
Randy Konik:Jefferies:
Yes. Thanks a lot I guess just back on the outlets you have done great job in the full-priced channel getting right of those promotions and moving to a full-priced higher average take of business. You talked a little bit about just a little bit about the increased promotions and outlet wholesale. Can you give some perspective on what inning we are in there where you can potentially may be walk a little away from those promotions and just little more flavor that will very helpful. Thank you.
Victor Luis:
Hello I will let Andre talk with outlets and then I will take the wholesale channel.
Andre Cohen:President North America:
Sure. So we have certainly seen the environment become more competitive and outlet generally over last couple of quarters traffic has continued to drop and competitive intensities is increased. So we have been prognostic in dealing with that we have been promotional where we have to be we have pulled back where we could. Going forward again the plan is to innovate more to just have a high -- of new lists innovation and more emotional play concepts to offset the price pressures we have seen over the last couple of quarters.
Victor Luis:
In terms of the wholesale channel look I think all of you who traveled through the department store world where we are present in North America obviously very aware of the environment you may also follow a lot the brain trackers that are out there in terms of sales to understand what is happening with promotions in AUR in that channel. And I would say that we are in the very early innings there of our transformation. As many of you know we have invested now in and I just mentioned in my prepared remarks in 12 locations in the new concept that’s out of a thousand that we have across North America we are investing in the shop manager program for the top 50 locations by the end of this fiscal year and in both of those cases we are seeing a inflection versus the rest of the fleet.
In addition, of course we have made very significant progress in our penetration with the Tier 1 department stores with 1941, while also pulling back on those Coach specific promotional days. Irrespective of all of that the absolute number of chain wide sale days continues to be an issue in that channel and we continue as the team to have discussions with our partners about a couple of areas. One first and foremost as the potential further pulled back on all our promotions which would include our exclusion and collaboration with our partners from the bulk of store wide events and quite frankly we’re also looking at potentially exiting lower volume doors go forward. So these are considerations that we’re taking right now.
Randy Konik:
Helpful thank you.
Operator:
Thank you very much Our next question comes from the line of Oliver Chen with Cowen & Company. Your line is now open.
Oliver Chen:Cowen & Company:
Thanks I saw their is particularly in international. Regarding inventories our question is regarding a inventories and what are you -- what are your regarding the next few quarters and holiday in terms of the context of the handbags sector and the promotional environment and also in context to how you’re thinking about how you’ll bucket prices with the 300 below versus above 400 mix? Thanks
Victor Luis:
I’ll let to Andrea start with first and foremost the bucketing strategy and with seasonality in that area and then Jane will take total inventories.
Andrea Shaw Resnick:
Yes so in Q2 a holiday quarter we had beefed our gifting assortment to be able to just offer a wide of prices and that strategy worked well. Coming out of Q2, we focused on our elevation strategy with 1941 launching across the bulk of chain we’ve seen a significant improvements in our $400 and above price points it’s now 40% of the business overall AUR for handbags of hit actually a record high $300 dollars that the highest we being in handbags since fiscal ‘09. So the elevation strategy is working obviously as we get into the more holiday periods we reflects with again a wider gifting assortment at a wider range of price points.
Jane Hamilton Nielsen:
If you look at inventory at inventories we as it’s been our case we always look to match inventory roughly in line with our sales growth outlook. So I think you’ll start to see inventories some getting modest growth in the fourth quarter and moving into FY ‘17 that very much in line with our sales outlook and expectations.
Oliver Chen:
Thank you best regards.
Victor Luis:
Thank you.
Operator:
Thank you very much. Our next question comes from the line of Michael Binetti of UBS. Your line is now open.
Michael Binetti:UBS Securities LLC
Hey thanks guys congrats on a nice quarter. I know there is been a questions on the outlets, If I could just, I guess if I just thinking a little bit more broadly by North America brand sales as we think about your guidance next year change for a low to mid single-digit North America comp growth roughly amount of category. I guess the challenge you sound clearly more comfortable with the sustainability of what you are seeing in full price. Do the outlets in your mind need to be positive to deliver that kind of low to mid single on a sustainable basis for the blended comp and so maybe just few comments on what you are seeing that gives you confidence that our channel contributes at the positive low into next year.
Jane Hamilton Nielsen:
So I just want to clarify our guidance just to be specific is for North America will be our growth in globally in line with the category which we now see to be low to mid single digit as our custom we will come back with more specific guidance in Q4 so what we seen a sequential improvement in both channels the improve this quarter similarly and we would expect to see continued improvement as we move into FY ‘17.
Michael Binetti:
Okay. Thank you.
Operator:
Thank you very much and Our next question comes from the line of Anna Andreeva of Oppenheimer. Your line is now open.
Anna Andreeva:Oppenheimer:
Great thanks. Good morning and congratulations to the team.
Victor Luis:
Thank you
Anna Andreeva:
As we’re hoping to talk about the initial CapEx expectations in ‘17 as the headquarter investment how should we think about the free cash flow generation in the business and as we think about priorities for cash could we I guess expect a dividend increase as net income is now and just quickly follow up on what sounds like positive quarter to-date comp are you seeing improvement in the outlet channel as well? Thanks so much
Jane Hamilton Nielsen:
So I take the cash flow and dividend and then I’ll turn it over at Andrea on the outlet channel. To net income growth and we complete building the build out of our headquarter building you will see a corresponding cash flow growth as we move into FY17 as expected. Our dividend is really a part of our priorities for cash and our priorities for cash are really unchanged first and foremost investing in the organic growth of our business. Second priority is being M&A value creating acquisition as I said nothing eminent but we want to remain open and flexible should we find something that we believe we’ll create long-term value for Coach Inc. and our shareholder and then finally as the return of capital to shareholders with our commitment to the dividend.
We look at our dividend annually with our board in August as we talked about in April 2014 we’ll look at the dividend in August that coincide with our year-end results and our outlook for the following year and negative termination at that time.
Andrea Shaw Resnick:
In terms of just for those quarter where on plan we are still working towards a positive comp for the quarter we seen all the indicators that we saw at the end of first quarter we still maintaining that momentum and we don’t plan I am not sure, no I can say at this point but.
Andrea Shaw Resnick:
Thank you that will conclude our Q&A as we are now pass 9:30 and the market has opened. I will turn it over to Victor for some concluding remarks. Victor?
Victor Luis:
Thank you Andrea. Let me just thank everybody for joining us a very important quarter for us this past third quarter as it marks the turn to growth for the Coach brand I could not be more excited with the momentum in our business and as a team we are obviously very proud of the evolving perception not only of the Coach brand but of Coach Inc and our impact in the market place.
The positive impact of our brand transformation augmented by of course Stuart Weizmann is clearly reflected in the overall financial performance with a terrific inflection across all of our key metrics with sales profit and earnings growth for the first time since the fourth quarter of 13. The turnaround of course that we’ve achieved today underscores our confidence and driving sustainable and profitable growth for Coach Inc, over the long term and I could not be proud of our entire team for the work and commitment that they have put into driving our brand and the passion that they are showing to win in the market place.
Thank you all.
Operator:
This does concludes to the Coach earnings conference. We thank you for your participation.
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