Tapestry, Inc.
Q1 2007 Earnings Call Transcript

Published: 24 Oct 2006

[Operator:]

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

[Andrea Shaw Resnick:]

Good morning and thank you for joining us. With me today to discuss our quarterly results are Lew Frankfort, Coach's Chairman and CEO; and Mike Devine, Coach's CFO. Mike Tucci, President of North American Retail, is also joining us. Before we begin, we must point out that this conference call will involve certain forward-looking statements, including projections for all our business in the current or future quarters or fiscal years. These statements are based upon a number of continuing assumptions. Future results may differ materially from our current expectations based upon risks and uncertainties, such as expected economic trends or our ability to anticipate consumer preferences or control costs. Please refer to our latest annual report on Form 10-K for a complete list of these risk factors. Also please note that historical growth trends may not be indicative of future growth. We presently expect to update our estimates each quarter only. However, the failure to update this information should not be taken as Coach's acceptance of these estimates on a continuing basis. Coach may also choose to discontinue presenting future estimates at any time. Now, let me outline the speakers and topics for this conference call. Lew Frankfort will begin with an overall summary of our first fiscal quarter 2007 results and will also discuss our strategies going forward. Mike Tucci will review our key initiatives through the holiday season. Mike Devine will conclude with details on financial and operational highlights for the quarter, as well as our outlook for the second quarter and full fiscal year 2007. Following that, we'll hold the Q&A session that will end by 9

[Lew Frankfort:]

Thanks Andrea, and welcome everyone. As you know, we once again announced excellent top line growth and even stronger bottom line results of 23% and 40% respectively for the quarter just completed. Our results are especially impressive as they represent an acceleration in our performance, notably in our US full-price businesses. Clearly, there were two drivers of Coach's growth. First, the continued entry of new consumers to the franchise, many of whom are trading up to the Coach brand. And second, existing consumers with whom Coach is gaining a greater share of their growing accessory wardrobe. Both consumer groups are responding enthusiastically to the higher levels of what we call distinctive newness in FY '07 as two of three major lifestyle platforms planned for the year have been introduced other the last four months. Some highlights of our first fiscal quarter were

[Mike Tucci:]

Thank you, Lew. As mentioned in our release, our transitional and fall offerings were remarkably successful across all categories and collections. We began the quarter with Signature Stripe, our new weekend casual collection, and the first of three completely new lifestyle platforms for FY '07. This collection was immediately embraced by our customers who loved the lightweight, reversible Coach silhouettes and great matching accessories at sharp price points. Also in July, we brought back an updated Soho collection in leather, suede and classic signature, which included novelty lace styles. In August, the Chelsea handbag group offered in leather, nubuck and optic signature for the first time offered a satchel and was very well-received. In September, our popular Hamptons collection returned for its seventh season and performed strongly against all fabrications, leather, suede and signature, as well as embossed leather. To open October, we brought in Legacy, our second new lifestyle platform for FY '07. The collection represents a return to our craftsmanship heritage with truly iconic Coach elements in a broad assortment of handbag, accessories and wearables. Our Legacy collection is a key focus and major investment for holiday. As always, we're excited about the ten key item concepts for the holiday season. Collectively, we estimate that they will represent over 50% of our business in the holiday selling period. They are

[Lew Frankfort:]

Thanks, Mike. Over the last several years, we have generated consistently strong results by staying true to our proven formula for success. Our proposition is based upon five differentiating elements, which together set us apart from the competition

[Mike Devine:]

Thank you, Lew. Lew and Mike T have just taken you through our highlights and strategies. Let me now take you through some of the important financial details of our first quarter results. As mentioned, our quarterly revenues increased 23% with direct to consumer which represents over three-quarters of our business, up 29%; and indirect of 11%. While our POS sales in U.S. department stores actually accelerated in the mid 30s for the quarter. The timing of shipments to wholesale customers muted our reported revenues for the indirect channels. Net income for the quarter increased 34% to a $126 million, or $0.34 per share as compared to $94 million, or $0.24 per share in the year ago period. This was ahead of the analysts' consensus estimate of $0.31 for the quarter. Our operating income rose 36% to a $198 million in the first quarter versus a $145 million in the same period last year. Operating margin in the quarter was 35.7% compared to 32.3% in the year-ago quarter, a 340 basis improvement. In the first quarter, gross margin increased by 70 basis year-over-year from 76% flat to 76.7%. For the quarter, gains from product mix and supply chain initiatives drove this improvement, while channel mix and a weak yen remained negatives. SG&A expenses as a percentage of net sales were well below prior year levels in the first quarter and represented 41% of sales versus 43.7% last year. We were very happy to deliver significant leverage from our U.S. store base driven by the strong comps reported for both channels. We also saw excellent leverage on what I call our semi-fixed corporate functions. Inventory levels at quarter end were $301 million, up about 40% above prior year levels, driven by both the investment in key holiday initiatives Mike T discussed, which position us well for the expected well strong selling season as well as the timing of receipts. It should be noted that our two-year inventory growth of 47% is well under our two-year sales growth of 61%. Further, this two-year inventory increase allows us to support 57 net new U.S. stores and 25 net new locations in Japan, and substantially increased sales levels over the two-year period. Accounts receivable balances rose $13 million, or 13%, while days sales outstanding declined by three days from 36 to 33 days. Cash and short-term investments stood at $456 million, as compared with $448 million a year ago. It should be noted that the quarter end cash balance reflects the repurchase of about $720 million of Coach common stock during the interim 12 months. The company repurchased 5 million shares of common stock at an average cost of $29.99 during the first fiscal quarter, thereby completing the existing program. As noted in our release, our Board of Directors has authorized a new $500 million program effective through June of 2008. Net cash from operating activities in the first quarter was $81 million compared to $55 million last year during Q1. Free cash flow in the first quarter was an inflow of $44 million versus $33 million in the same period last year, primarily due to higher net income. CapEx spending, mainly for new stores and renovations was $36 million, versus $22 million in the same quarter a year ago. Now, I'd like to provide you with some of our updated goals for fiscal 2007. For the second fiscal quarter, we are targeting net sales of about $785million, representing a year-on-year increase of about 21%. With US comparable store sales gains of at least 10% in the retail channel and mid-teens in the factory channel, and at least mid single-digit total comp gapes at Coach Japan. For Japan, we've previously reported full price Coach Japan comps only. Going forward, we plan to increase our disclosure to combine full price and factory, or total comps. This will provide a better bridge to our overall direct-to-consumer sales results. For the first quarter of '07, our total comps were up high single-digits, consistent with last year's first quarter when full price comps rose at a mid single-digit pace and total comp was high single-digit. Second quarter operating income is targeted to be up over 22% year-over-year and earnings per share of $0.56, an increase of about 26%. Our current goals for the full fiscal year are net sales growth of over 20% to about $2.55 billion with at least 10% comparable store sales gains in both the U.S. retail and in factory channel in the second half of the year; and a total sales increase in Japan of about 20% in constant currency, driven primarily by distribution growth through new store openings and expansions augmented by at least mid single-digit total same location sales growth. We're targeting an operating margin up about 37.5%, which assumes the gross margin at last year's extraordinary levels over the balance of FY '07 and further SG&A leverage. Operating income dollar growth of over 25% above FY '06. Interest income of about $35 million, or about flat to FY '06 will add the pre-tax income, while net income will be somewhat offset by a higher tax rate rising to about 38.5% for the year, due to the fact that incremental taxable income is being taxed at higher rates. Including these factors, we expect to generate EPS growth of at least 28% which will produce earnings per share of at least $1.63 compared with analysts' consensus estimate of $1.58. For FY '07, we continue to expect CapEx to rise to about $150 million, primarily for new stores and expansions, both here and in Japan. As Lew noted, we will be opening at least 35 new US retail factory stores, and continuing our North American expansion programs. In Japan, we plan to open about 15 to 20 net new locations. While these are our current goals, our actual results may vary from these targets based upon a number of factors including those discussed under the business of Coach, Inc and risk factors in our annual report on form 10-K. Coach also does not assume any obligation to update these targets as the year progresses. In summary, we're confident that our growth strategies will enable us to continue to gain share in the large and growing global market for fine accessories and gifts. Thank you all for your attention. Now Lew, Mike, Andrea and I will be happy to take some questions.

[Andrea Shaw Resnick:]

Thank you. With the Q&A, please note that each questioner is asked to keep their questions to a single one. Thanks and let's open it up for Q&A.

[Operator:]

Your first question comes from Bob Drbul – Lehman Brothers.

[Bob Drbul:]

Hi, good morning.

[Lew Frankfort:]

Good morning, Bob.

[Bob Drbul:]

Congratulations on the terrific results. The question that I have is, you talked a little bit about your ability to attract new consumers to the franchise during this quarter. Can you elaborate a little bit more on some of the comments you made last month around what you view as the current market size and the growth opportunities in both units and dollars domestically?

[Lew Frankfort:]

Sure. First, our department store sales grew about 30% at POS in the United States this past quarter. When we look at it, we realize that from a dollars perspective, while our market share is about 25% or was 25% last year, the actual units that we sold in department stores only represented about 10% of their sales. As a result, with our increase of about 30% in a category growing between 10% and 15% in department stores, our actual units sold is only about 12% of total units sold in department stores. In all of our discussions with department store leadership as well as in our consumer research, what we're finding is that many consumers are trading up from lower, both private label brands as well as brands that we have not considered part of our overall set. So overall, where we have historically said the market is about $5 billion, that does not take into account any consumers trading up from brands such as the Le Sport Tech, DKNY, Liz Claiborne, Banana Republic and so on. When we add these brands in as well as private label, it looks as if the market is probably somewhere between $7 billion to $7.5 billion; that is the addressable market. So instead of having overall market share of about 25%, it looks to us that our market share is probably somewhat less than 20%, which suggests that the opportunity for us to have sustained, excellent growth in North America is larger than we had contemplated ourselves.

[Bob Drbul:]

Great. Thank you.

[Lew Frankfort:]

You're welcome.

[Operator:]

Your next question comes from Jeff Evelyn – UBS.

[Jeff Evelyn:]

Thank you, good morning. My congratulations also. Lew, a question, sort of a follow-up on what Bob had asked. This was the first quarter, I believe, your average transaction stabilized versus the prior year. Was there a shift in the product offerings on the floor? Was there something unique to this quarter? Could it reflect that maybe you are getting more new consumers trading up? Then as part of this, if your average transaction does not keep increasing, what happens to the resultant lack of operating leverage per transaction? Thank you.

[Lew Frankfort:]

First off, I think you pretty much answered it. There are a lot of new consumers entering our franchise. We estimate that as much as 30-35% of our sales in our first quarter are consumers new to our franchise. What happens, Jeff, is when we actually pass higher traffic, we focus much more heavily on conversion rather than UPTs. What we enjoyed this quarter, against higher traffic, is higher conversion. Also, there was not as much of a focus on UPT growth. We think, actually, average transaction is going to grow in the second quarter, by mid single-digits, low to mid single-digits.

[Jeff Evelyn:]

Okay, thank you.

[Mike Devine:]

Jeff, if I could speak to the operating margin comments, you can see actually if you look at our SG&A leverage that we were able to convert this traffic at very profitable levels and drove increased operating margins through the P&L.

[Jeff Evelyn:]

Okay, thank you.

[Operator:]

Your next question comes from Paul Ojay – Credit Suisse.

[Paul Ojay:]

Thanks. I had a question on Legacy. Can you talk about what percent of shop Legacy has represented here in its early days? Can you update us on where you are with the Legacy shop-and-shops? How many are you planning to do? Where are you in that process, and also, if you could just share with us the ending diluted share count?

[Mike Tucci:]

Sure. On Legacy, I think it's important to understand, step back just for a minute. We actually piloted Legacy in the spring season which indicated to us a significantly greater appetite for Legacy products; albeit at higher price points and a more sophisticated offering. We went back in and did invest more heavily particularly in key silhouettes like the Alley and the Shoulder Zip. It's early, you know, we're in our third full week of the Legacy installation, which includes 15 in-store shops in the United States in our premier locations. But we're very, very pleased with what's happening, penetrations in Legacy including wearables and related categories are consistently north of 20% in our stores. We do believe it is a driver of transaction size given the price point. The Legacy shops are consistently outperforming the overall average of 20% on a week-in and week-out basis. So that focus in the stores, the defined merchandising area with service elements and presentation highlights is really helping. I think the last piece on Legacy is that it's not simply a Q2 initiative. This is a major platform that we will continue to focus on throughout the year. We'll look at in-store opportunities in the back half of FY'07. We're currently looking at opportunities for FY'08 for additional locations within our stores. Concept ideas that we can expand on and really give the customer an opportunity to see Coach in a more broad spectrum and product offering.

[Mike Devine:]

Paul, your question on share count, the quarter end was very close to the quarterly average; about 1 million shares lower at 372.3.

[Paul Ojay:]

Thanks a lot, guys. Good luck

[Lew Frankfort:]

Thank you

[Operator:]

Your next question comes from David Shik – Stifel Nicholas.

[David Shik:]

As you discussed ClientTrack and it's part of the suite of things that you are talking about going into holiday, how much of ClientTrack this year for holiday is ramping up on the learnings you developed? How much is new functionality of the system or things you are trying within ClientTrack?

[Mike Tucci:]

On Client Track, we are in our 16th month of ClientTrack as a performance tool and a customer service tool in our stores. Now the big enhancements this year are around integration of our database, so that basically all of our consumer data and systems can talk to one another, and you can easily toggle back and forth to help identify customer needs. Purchase history, as an example, is an enormous aid in helping to convert customers and get them what they want, and that is a new enhancement that will be available to our customers for Q2, we launched it in Q1. Things like wishlisting and gifting opportunities. All of these actions result in what we call customer follow-ups, or to-dos. To give you an idea of the ramp-up, in Q1 we saw almost 60,000 customer follow-ups in our stores versus around 30,000 from a year ago. So we know that this is a tool with the enhancements that is being used. We measure against it at a store level on a daily basis, and it's essentially an electronic client selling book, very modern and very efficient and very much in keeping with how our sales associates think. So we see it as a real opportunity for us within Q2. Just to give you a little flavor, some of the things that are most popular are customers asking to be notified on new products launches in store. Our editorial database, where anything that is featured on an editorial basis is cross-referenced to ClientTrack, so should a customer call and ask about an item that they might see in the press, we can immediately reference them and contact them when we get that item for them. So we're feeling like it's a major tool for us and the stores have embraced it and it's performing well.

[David Shik:]

So just to boil it down for me, so in the 16th month, we shouldn't look at it as lapping. It's grown in its usefulness year-over-year?

[Mike Tucci:]

No question.

[David Shik:]

Okay. Great. Thank you.

[Operator:]

Your next question comes from Jim Hurley - Chelsea Advisory Group.

[Jim Hurley:]

Good morning and congratulations to all.

[Lew Frankfort:]

Thank you, Jim.

[Jim Hurley:]

You're welcome. My question is about Japan. Obviously very good results out of that region, which has not been the case for some of your competitors, and I just wanted to understand the integration efforts with CJI, and specifically if you are able to see operating expense leverage in the first fiscal quarter?

[Mike Devine:]

I'll take the latter part, the financial answer, Jim, is that we did not see leverage there. We're continuing as we guided the Street to build infrastructure in Japan and we'll see that happen throughout '07. So in none of our projections or any of our forward-looking guidance have we planned on that happening in '07 and we are continuing to build that infrastructure so we can capture some of the integration opportunities that we believe we have there.

[Lew Frankfort:]

Was there another part to your question, Jim?

[Jim Hurley:]

Just in terms of how that business is developing. It seems like the strength has been maintained when that's not been the case for the rest of the market. Anything that you're doing on a merchandising front?

[Lew Frankfort:]

I think the most important thing to appreciate Jim, and I know you do, is that we have an alternative to the established brands. We offer a value-based proposition. Our accessible luxury proposition resonates especially well in Japan with the younger consumers and what we're finding, as we open in regional markets as well as our continued presence in existing markets is a very strong penchant towards Coach. They're embracing our monthly product flow, the innovation that we're offering in product responding very well.

[Jim Hurley:]

Great. Thanks and congrats.

[Lew Frankfort:]

You're welcome.

[Operator:]

Your next question comes from Julie Shaw - Merrill Lynch.

[Julie Shaw:]

Good morning. I had a question regarding operating margins. Your guidance seems to have a little bit less margin expansion built in from Q1 significant increases. How much expansion do you think is left and how do you get to these peak operating margins?

[Mike Devine:]

Well, we're guiding, Julie, to 37.5% operating margin level for the company for the full year. I don't think there are too many other retailer fashion stories that are achieving that. That's 150 basis points approximately above what we had last year. We believe that there is opportunity beyond that as we talked about many times, particularly being driven through the SG&A leverage that you saw us capture in Q1. We see with top line growth in the high-teens to 20% that we're guiding to through our long-range planning horizon, we can continue to deliver SG&A leverage well into the future and see an operating margin that at some point will begin to approach a 40% level.

[Julie Shaw:]

Great. And how much has mix, the product mix of legacy played into the gross margin expansion this quarter?

[Mike Devine:]

Yes. That, that collection is consistent with our extraordinary gross margin levels across our product offerings. So it's on balance equivalent to the levels we're achieving throughout our product offering.

[Lew Frankfort:]

Although, it had no impact in Q1 since we introduced legacy at the beginning of October.

[Julie Shaw:]

Right, right. Of course. Thank you very much.

[Lew Frankfort:]

You're welcome.

[Operator:]

Your next question comes from Margaret Major - Goldman Sachs.

[Margaret Major:]

Congratulations on the great results. I have a question about the pricing strategy for your full-price stores. Can you just talk about what's possible in terms of the upside for price points? I read a while back in one of the trade publications that Reed thinks that your prices, your stores and your customer would be accepting of even higher prices than what you're at right now, with regard to say $800 being the upper limit. So if you could talk about that and how you might evolve the pricing in stores? And then, I would like to ask about Japan, too. If you wouldn't mind running through how FX impacts the Japanese results, not just on the translation of the top line, but on gross margin. Because if you are sourcing in dollars and selling in a strong yen, wouldn't that be a positive? Lastly, with regard to the inventory, why do you think you needed to bring things in earlier this year versus last year? Is that just a sign of how bullish you are about holiday? Thanks.

[Lew Frankfort:]

Mike, why don't you take the second and third question?

[Mike Devine:]

We will take them in reverse order, Margaret. On the inventory, the timing is more about last year. We actually as we closed the September quarter last year, we were about $25 million light on receipts. So it's more about last year being light. Let me just say, this time of year as we're gearing up for holiday, we can receive as much as $4 million in receipts in a single day. So just so you can gauge, that's maybe just a little more than a week's worth of timing. That being said, we have heavied up our inventory investments to speak to the ten strategies that Mike talked to especially in the Legacy opportunity, and we're feeling great and that our inventories are exceptionally clean and well positioned going into the multi-robust selling period. And you'll see inventories back in line year-over-year, I think, at the close of the next quarter. Your next question was about FX, and we actually have that as a gross margin negative because we're buying inventories now with a weaker yen and therefore it costs us more yen to convert to dollars to buy the bags. So although, we've hedged pretty effectively, there still is a modest negative impact to our gross margin rate as a result of the weaker yen. In the prepared remarks, I talk about weaker yen and channel mix driven by the success of factory being negative. The two combined hurt us about 30 bp in Q1.

[Margaret Major:]

Thanks. And then, the pricing strategies, Lew?

[Lew Frankfort:]

Sure. First, Margaret, as you well know, we position ourselves as a brand that will always give consumers excellent value. Our pricing strategy remains consistent, that is wherever we are able to pass along to consumers in terms of our lower cost structures resulting in lower prices, we're pleased to do. More generally, what we are finding is that we have a capacity because of the breadth of our franchise to offer price points much higher than we do, with great success. Mike Tucci was talking about Legacy running over 20%. The average handbag in Legacy is over $400. Conversely in Signature Stripe, which we introduced in July, the average handbag price was in the low $200s, and what we're trying to do is strike a very fine balance by not alienating the value conscience consumer and yet at the same time, doing a better job attracting the luxury consumer. That’s why we tier our stores by the type of consumer and in addition, we have a rapidly growing Coach by special request business that the luxury oriented consumer, even who shops in one of our core stores can purchase an item that might not be available, through Coach by special request. We think the potential is basically boundless. We just have to be careful in the way in which we move.

[Margaret Major:]

Great. Did you sell out of the $10,000 alligator bag in the catalog?

[Lew Frankfort:]

So far, three out of five have sold.

[Margaret Major:]

I'm sure there will be gone by Christmas.

[Operator:]

Your next question comes from John Ruloux - Wachovia.

[John Ruloux:]

Hi, guys, great quarter. My question really goes back to the comments about the new stores running ahead of plan. Why do you think that is? Are you getting better locations? Maybe opening in markets where the business has been a little bit stronger historically? I wonder if you could comment on that and what it means for your return on investment? Is that creeping up on the new store side?

[Mike Tucci:]

I do believe that we are getting very strong locations within the malls and complexes that we are going into. We focus on that. We are a preferred brand for mall developers and we attract, I think, a very strong consumer to the enterprise, so let's leverage that we think about all day long. We like to think that our Coach stores are a beacon for the mall developers and for consumers and I think most important what we see happening is this idea that consumers are trading up. There is a very, very strong awareness of Coach as a brand in market s like El Paso and Rogers, Arkansas, and when we open a store there, we have people waiting for us. Woo offer the same commitment, same merchandise presentation that is consistent with stores in the rest of the country, and they're immediately coming in. We're converting them and we are developing relationships with them.

[John Ruloux:]

Do you have a little bit more leverage when signing a lease on the cost side so net-net better productivity combined with perhaps better expense control as your ROI, you know, up pretty significantly on the new store side?

[Mike Devine:]

That would be accurate.

[Lew Frankfort:]

I’ll just say one last thing. The thing that is most exciting, like when Mike and I visited El Paso, we spoke with consumers and the staff, they told us 30% to 40% in the first few months were new to Coach. When we spoke to individual consumers, they told us they welcomed us to El Paso. They were really enthusiastic. We have long queues outside of our store the day we opened.

[John Ruloux:]

Thanks, keep it up.

[Operator:]

Your next question comes from Christine Chen - Pacific Growth Equities.

[Christine Chen:]

Thank you. Congratulations on another fabulous quarter. Can you give us the percentages of limited edition product in the quarter versus the quarter before in novelty?

[Mike Tucci:]

Total special product as we define it, was around 14%which is consistent with where we were a year ago in Q1. Within that, limited edition product was around 4%. Again, consistent with where we were last year in Q1.

[Christine Chen:]

Are there plans to try to grow that percentage over time? I mean, I think this is probably the first time where it's been consistent versus it growing as a percentage of sales.

[Mike Tucci:]

I think we're constantly looking at our pricing mix, and importantly , we're actually talking internally about reviewing our definitions. One of the things that's happening out there is that we're seeing tremendous performance of what we call limited edition and special product in all stores and in particular, in core stores. So maybe what we've done is brought the consumer up and we raised our game. We may need to be more surgical internally about what we define as limited edition so that we can really push ourselves to find what those upper price boundaries are . So I think stay tuned on that one. We're pleased with where we are , but it's a constant review and it's driven by our investments and the product that we develop .

[Christine Chen:]

Okay, and with respect to factory doing so well, are you attempting to cross market to the factory customer and the Coach customers? I mean, I know there's a small percentage that cross-shops. Do you try and separate that when you market, or do you try and target , you know, that customer both ways ?

[Mike Tucci:]

We don't. We do not cross market at all. We do have a consistent service standard that we believe we treat customers graciously and with respect in any Coach store, be it a factory store or full price store, but we do not cross-market between full price and factory stores in any way.

[Christine Chen:]

It is still about 25%?

[Lew Frankfort:]

Further, we don't do any outreach for factory.

[Christine Chen:]

Okay. It's still about 25% crossover?

[Lew Frankfort:]

20%.

[Christine Chen:]

Thank you, good luck for the holidays.

[Lew Frankfort:]

Thank you.

[Operator:]

Your next question comes from Irwin Roberts – HSBC.

[Irwin Roberts:]

Good morning and congratulations. I just wanted to come back to the margin guidance , operating margin . You said it should be up about 150 basis points this year and. essentially linked to SG&A leverage . I think you have repeated quarter after quarter that the gross margin levels should be about the same as last year , but it was up 70 basis points in Q1 . I was under the impression that there should be a convergence of the comp rates between full price and outlets in, say, six to nine months . Is there a reason why gross margin can't continue to expand on a full year basis?

[Mike Devine:]

The biggest factor is if you look at the compares year over year, what you will see is the Q1 compare was the easiest that we have faced in '07 . The Q1 rate was 76% in Q1, and 78% for the remaining three quarters of '06. So we're up against a tough compare, and we feel very good about being able to meet that challenge and get to the 78% level for our year-ago period.

[Irwin Roberts:]

Thanks.

[Lew Frankfort:]

You’re welcome.

[Operator:]

Your next question comes from Brad Stevens - Morgan Keegan.

[Brad Stevens:]

Congratulations on a great quarter. Going back to the premium product question , what percentage of your Japanese business is now at the premium price points , and is there potential longer term to increase your 70% markup for doing business there ?

[Lew Frankfort:]

Do the second part, Mike, in terms of the markup and I will talk about the premium. I am not quite sure what he is saying. Is there an opportunity for to us increase the markup? Is that what?

[Brad Stevens:]

Yes.

[Lew Frankfort:]

I mean, there's always an opportunity that we have to weigh that against the cost and we're very comfortable with the relative positioning between the United States and Japan, and we're not looking to make any adjustment in the relative pricing of Japan to the United States. In terms of our limited edition product, in Japan, we're only scratching the surface . For example , last quarter, as part of our 65th anniversary, we presented a series of four bags that were numbered and I believe the total quantity was 2,000, and we sold through that enormously quickly. The Japanese consumers are particularly appreciative of limited edition product and again, we're in early days there.

[Brad Stevens:]

All right. Thank you.

[Lew Frankfort:]

You're welcome.

[Andrea Shaw Resnick:]

Thank you all for joining us today. That concludes the conference call . Of course, Mike and I will be available for questions throughout the day . Thanks and have a great one.

[Operator:]

Thank you. That does conclude today's conference call.