Tapestry, Inc.
Q4 2015 Earnings Call Transcript

Published: 4 Aug 2015

[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 the Global Head of Investor Relations and Corporate Communications at Coach, Andrea Shaw Resnick.

[Andrea Shaw Resnick:]

Good morning and thank you for joining us. With me today to discuss our quarterly and annual 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, controlled costs, successfully execute our transformation initiatives and growth strategies, or our ability to achieve intended benefits, cost savings and synergies from the acquisition. Please refer to our latest annual report on Form 10-K, our quarterly report on Form 10-Q for the quarterly periods ending December 27, 2014, and March 28, 2015, 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, as adjusted, constant currency, or excluding transformation-related charges or acquisition costs. You may find the corresponding GAAP financial information or metric, as well as the related reconciliation, on our website www.coach.com/investors. And then viewing the earnings release posted today. Now, let me outline the speakers and topics for this conference call. Victor Luis will provide an overall summary of our fourth fiscal quarter and annual 2015 milestones and learnings and will also discuss our progress on global initiatives. Jane Nielsen will follow with details on financial and operational results for the quarter and year, along with our outlook for FY 2016. After that, we will hold a Q&A session where we will be joined by Andre Cohen, President, North America. This Q&A session will end shortly before 9

[Victor Luis:]

Good morning. Thank you, Andrea, and welcome, everyone. As noted in our press release, we are pleased with our fourth-quarter and full-year progress on the comprehensive plan we laid out a year ago to reinvigorate our business and brand. Our execution of these strategic initiatives and resulting performance has been consistent with our expectations and underscores our confidence in the path we've chosen. As we moved through fiscal 2015, we drove sequential improvement in our North America bricks and mortar business while dramatically reducing the number of promotional impressions in the marketplace against the backdrop of heightened promotional activity. In addition, our international businesses posted moderate growth on a constant currency basis, highlighted by a double-digit increase in Europe and strong growth in China where sales approached $600 million. Sales growth in China was driven entirely by the Mainland, as Hong Kong and Macau continued to experience traffic declines from a decrease in PRC tourists. We also took an important step in becoming a multi-brand company with the acquisition of Stuart Weitzman, which will be an additional growth driver for the company. As noted previously, we will develop each brand separately. Over the long term, we will learn from each other, driving synergies across our respective businesses. Specifically, we will leverage Coach's international infrastructure and expertise in handbags and accessories to develop Stuart Weitzman's handbag and accessories business. And in turn, Coach will benefit from the Stuart Weitzman expertise in footwear development where they're proven leaders in fashion and fit. Though early days, we've been pleased with Stuart Weitzman's integration into the Coach Inc. family, leveraging our shared core brand equities and common values. Similar to Coach, it's a brand built on offering innovation, relevance and value to a loyal customer base and is known for its craftsmanship and quality. Now, as has been our recent practice, I'd like to share some of the actions we've taken to build momentum across our three key brand pillars of product, stores and marketing as well as our updated learnings. Starting with product. Overall in fiscal 2015, we successfully re-platformed our offering with the introduction of Stuart Vevers product across all geographies, channels and categories. This new product is innovative and authentic to Coach, and we are pleased with the reaction from both existing and new customers to Stuart's first seasons. In addition to our successful fashion week presentations, we've started to engage in a rich dialogue with the fashion community driving awareness, relevance and credibility. More specifically, [technical difficulty] (05

[Jane Hamilton Nielsen:]

Thanks, Victor. Following Victor's overview of the highlights of the quarter and the year, as well as our transformation progress and learnings, I would just like to add that one year in, we are very much on track from an investment and restructuring perspective. We've taken the majority of our total expected transformation-related charges over the last five quarters totaling about $275 million, including right-sizing our inventory levels. We expect to incur the balance of these charges, around $50 million, by the end of FY 2016, primarily related to global store closures and organization effectiveness, bringing the total multi-year charge to about $325 million. We've invested in re-platforming our stores and wholesale doors, so the timing of some projects has moved from FY 2015 into FY 2016 as we've noted previously. We've been able to cost-engineer our new modern luxury concept, enabling us to do more extensive renovations at a lower overall cost. Therefore, we now expect to spend about $450 million to renovate our global fleet, down from previous guidance of $570 million. We've realized cost savings from our initiatives around restructuring and organization efficiency sooner than we expected, achieving about $100 million in FY 2015 and expect an incremental $50 million in FY 2016 for an annualized rate of $150 million. And we've exceeded the financial targets we set out for the Coach brand for the full year on a non-GAAP, constant currency basis. As you may remember, we expected to land FY 2015 at a low double-digit decline in revenues on a constant currency basis. And, for the Coach brand, sales were down 12% for the year on this basis. For North American comps, we originally expected store sales to be down high teens given the pullback in promotion, with a significant reduction in eOutlet, or eOS events, pressuring comp by an additional 10 points, yielding an aggregate comp of down in the high 20%s. For FY 2015, store comps were down 15% with sequential improvement each quarter, while total comps declined 22%. We targeted a gross margin of 69% to 70% for the Coach brand for the year and came in at 69.7% on a non-GAAP basis. We targeted growth of low- to mid-single digits in SG&A dollars for the Coach brand, but were actually down 1% on a non-GAAP basis, in part due to lower occupancy and depreciation expenses related to renovation and flagship store timing, the benefit of the stronger dollar and the realization of cost savings faster than anticipated. And we guided to a high teens operating margin, which actualized at a non-GAAP rate of 18.9% for the Coach brand. Finally, we originally expected CapEx to total about $350 million to $400 million excluding our headquarter spend in FY 2015 and actualized at about $200 million, with some shift into FY 2016 primarily associated with project timing, including some key flagship locations. Consistent with this shift, in total, our distribution growth for the year was flat across all channels and geographies. Similarly, our fourth quarter performance for the Coach brand was in line with expectations shared in our April call and in keeping with our annual guidance on a non-GAAP basis. For the Coach brand, our quarterly revenues declined 15%, with North America down 20% and International down 5%. On a constant currency basis, Coach brand revenues decreased 12% overall, with North America sales down 19% and International sales up 3%, reflecting the impact of the strong dollar, notably on the Canadian dollar and the yen. Our gross margin for the Coach brand was 69.5% in the fourth quarter on a non-GAAP basis. The year-over-year increase in gross margin in Q4 was due to channel mix, driven by International sales outpacing North America, as well as a significant decline in disposition sales, partially offset by a negative production variance impact as expected. SG&A expenses as a percent of net sales totaled 56.4% compared to 49% in the year-ago quarter, all on a non-GAAP basis. Therefore, taken together, the Coach brand non-GAAP operating margin was 12.7% in Q4. And on a Coach, Inc. non-GAAP basis, the acquisition of Stuart Weitzman in early May contributed $43 million to fourth-quarter and full-year revenue. Therefore, on a consolidated Coach, Inc. basis, sales declined 12% for the quarter or 8% in constant currency and declined 13% for the year or 11% in constant currency. Excluding transformation-related charges and acquisition costs, Coach, Inc. net income for the quarter totaled $85 million with earnings per diluted share of $0.31. Stuart Weitzman contributed $3 million and $0.01 to the quarter. Now turning to GAAP metrics, during the fourth quarter of FY 2015, we recorded charges of $66 million under our multi-year transformation plan. These charges consisted primarily of accelerated depreciation for renovations, lease termination costs related to store closures and organizational efficiency costs. In addition, we recorded costs of approximately $21 million associated with the acquisition of Stuart Weitzman. These actions taken together increased the SG&A expense by about $83 million and cost of sales by about $5 million, negatively impacting net income by $73 million after tax or about $0.21 per diluted share in the fourth quarter. As a reminder, during the fourth quarter of FY 2014, we recorded charges of approximately $130 million for transformation and other related actions. These charges consisted primarily of the realignment of inventory, impairment charges and a portion of the costs related to store closures. In aggregate, these actions increased our COGS by $82 million and SG&A expenses by $49 million in the period, negatively impacting net income by $88 million after tax or $0.31 per diluted share. Therefore, including these charges, reported net income for the fourth quarter of fiscal 2015 totaled $12 million, with earnings per diluted share of $0.04, bringing the total year net income to $402 million and earnings per diluted share of $1.45. This compares to FY 2014 fourth quarter net income of $75 million, with earnings per diluted share of $0.27, which brought the total year FY 2014 net income to $781 million and earnings per share of $2.79 on a GAAP basis. Now, taking a deeper dive into the drivers of our fourth-quarter and full-year sales by geography, including distribution growth and starting with our domestic businesses. As you read in our release, our FY 2015 sales in North America decreased 20%. North American direct sales also declined 20% for the year with comps down 22%, including the impact of reduced eOutlet events, which pressured total comps by seven percentage points. At POS, sales in North America department stores declined about 20% from prior year, while shipments into this channel also declined similarly as planned. For the fourth quarter, North American sales fell 20%. Comparable store sales decreased 19%, reflecting a 10% decline in store comp with an additional nine percentage points of pressure from the decrease in eOS events. At POS, sales in North America department stores declined at mid 20%s versus prior year as expected, reflecting the elimination of Coach-specific promotional events from the prior year, while shipments into the department stores declined somewhat less. During the fourth quarter, we closed 19 North America retail stores, taking us to a net closure of 74 retail stores for the year. We also closed one and opened four outlet stores in the fourth quarter, taking us to a net closure total of three for the year, with 14 closures and 11 openings. We expanded a total of six stores during the year, two retail stores and four outlets. In total, our square footage in North America declined 6% for the year. In FY 2016, we would expect to close an additional 10 to 15 more retail stores as well as fold our three remaining men's retail stores into existing locations. We also expect to close a few outlet stores on a net basis. Taken together, with a number of relocations and expansions, we expect our directly operated Coach brand square footage in North America to be essentially unchanged in FY 2016. On the North America department storefront, we opened about 20 new doors for the year, taking us to about 975 locations. In FY 2016, we expect to convert most of the remaining 200 case lines as well as opening 10 additional doors. Moving to China, in FY 2015, our sales approached $595 million, up about 9% from prior year and in line with our guidance. Our fourth quarter sales rose 5%, with strong growth on the Mainland more than offsetting weak results in Hong Kong and Macau. During the fourth quarter, we opened a total of seven new stores, all on the Mainland, and closed one in Hong Kong. For the full year, as expected, we opened 21 new locations, but closed only three locations for a total of 18 net new locations, taking us to 171 in total. Some of the targeted closures have moved into FY 2016. Our square footage grew 22% for the year. In FY 2016, we expect to open about 20 to 25 new locations, closing about five to 10, with square footage growth of about 12% to 15%. In Japan, sales for the year were down mid-single-digits on a constant currency basis, as expected, impacted by the overhang of the April 2014 consumption tax increase. On a dollar basis, sales declined 17%, reflecting the weaker yen. For the fourth quarter, sales in Japan rose 2% in constant yen as we anniversaried the tax increase and saw increased tourist flows from the Mainland Chinese, while sales in dollars declined 15%. We had a net decline of two locations in Japan for FY 2015 and for the fourth quarter, but a 1% increase in square footage given the opening of the Shinjuku flagship. In FY 2016, we'll focus on our modern luxury renovations, notably in stores in and around Tokyo. At the same time, we expect to close about five to 10 net locations as we take a portfolio approach to optimizing our store base. In total, our square footage should decline 5% to 10% for the year. In Europe, sales rose nearly 50% to $90 million for FY 2015, while fourth quarter sales were up sharply as well. During the fourth quarter, we added three directly-operated locations, taking us to 34 for the year. We also added over 100 wholesale locations during the year, taking us to over 200. In FY 2016, we expect to open five to 10 directly-operated stores for square footage growth of 40%. In addition, we plan to expand the number of both wholesale and multi-brand locations. For our directly-operated businesses in Asia outside of China and Japan, sales rose slightly on a local currency and declined slightly in dollars for the year. During the fourth quarter, sales were essentially flat in local currency and declined at a mid-single-digit rate in dollar, impacted by the MERS outbreak and related slowdown in tourist traffic in Korea. During the fourth quarter, we opened one location, taking us to five net new openings for the year and ending FY 2015 with 102 locations in Korea, Malaysia, Singapore and Taiwan. As noted previously, we are focused on developing our current store bases in these countries and don't expect additional openings or square footage growth. Taken together, in FY 2016, we would expect our global brand footprint for Coach across channels and geographies to be up low single digits in square footage. Moving on to the balance sheet, inventory levels at quarter end were $485 million, including $33 million of inventory associated with the acquisition of Stuart Weitzman. This compared to ending inventory of $526 million for the Coach brand in FY 2014. Therefore, inventory declined 8% on a Coach, Inc. consolidated basis and declined 14% for the Coach brand, in line with sales. Cash and short-term investments stood at $1.5 billion as compared with $869 million a year ago. Given our debt issuance in the third quarter and the subsequent closure of the acquisition during the quarter, our total borrowings outstanding were approximately $900 million at the end of the fiscal year. 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. As noted in our press release, the Board declared a quarterly cash dividend of $0.3325 per common share, payable in late September, maintaining our annual rate of $1.35. We remain strongly committed to our dividend. And as our transformation takes hold, we expect to resume increasing our dividend at least in line with net income growth. Net cash from operating activities in the fourth quarter was $186 million compared to $316 million last year during Q4. Free cash flow in the fourth quarter was an inflow of $111 million versus $254 million in the same period last year. Our CapEx spending was $75 million versus $62 million in the same quarter a year ago. For the fiscal year 2015, net cash from operating activities was $937 million compared to $985 million a year ago. Free cash flow in the fiscal year 2015 was an inflow of $738 million versus $766 million in the fiscal year 2014. CapEx spending totaled $199 million for the year compared to $220 in the prior year. The decline from previous guidance related to the shift in timing of retail store and wholesale remodels and openings into FY 2016 and related vendor payments. Turning now to our financial outlook for the Coach brand on a standalone, 52-week basis in FY 2016, which we included in our press release. First, on Coach brand sales, we still expect to deliver a low single-digit increase in constant currency in fiscal 2016. Based on current exchange rates, currency headwinds are expected to have an approximate 200 basis point negative impact on annual revenue growth, disproportionately impacting the first half and, most notably, the first quarter. We are projecting a low single-digit aggregate comp decline in North America with eOS pressuring comp in the first half as we continued to run about two events a month versus 13 events in last year's first quarter and 10 events in last year's second quarter. As previously noted, we would expect comp to improve throughout the year, with the most significant inflection occurring in 2Q, driven by product innovation, renovated modern luxury stores and our 75th anniversary marketing initiatives. We expect to reach positive comps in the fourth quarter. Gross margin is expected to be in the area of 70% on a constant currency basis, with negative foreign currency expected to impact gross margin by 80 basis points to 100 basis points. SG&A expenses, net of savings, are expected to grow at a mid-single-digit rate in constant currency, somewhat less in dollars and ahead of sales reflective of our increased marketing spend, transformation initiatives and a higher occupancy and depreciation expense related to store renovation and flagship project timing shift from FY 2015 to FY 2016. We continue to expect at least $50 million in incremental cost savings from our transformation and restructuring initiatives. When modeling the year, keep in mind SG&A expenses are expected to grow faster in the first half, driven by investments in marketing spend associated with the 75th anniversary and, in part, offset by currency. Taken together, we would expect operating margin to be in the mid to high teens. Interest expense for the year is expected to be in the range of $30 million to $35 million. And finally, our tax rate is expected to be in the area of 28% for the year. We expect our rate to be lower in fiscal year 2016, primarily attributable to geographic mix of earnings, the anticipated closure of certain audits, the expiration of statutes in the fiscal year 2016 and the ongoing benefit of available foreign tax credits. In addition, we are forecasting Stuart Weitzman brand sales in the area of $335 million on a dollar basis for fiscal 2016, an increase of about 10% from FY 2015, driving Coach, Inc. consolidated revenue growth of high single digits and adding about $0.09 to earnings per diluted share, excluding financing, transaction costs and short-term purchase accounting adjustments. It should be noted that Stuart Weitzman's gross margin is well below Coach brand, and as is the company's operating margin. Over time, we believe there is an opportunity to drive both higher, as we increase efficiencies and drive international expansion. As a reminder, fiscal 2016 will include a 53rd week, which is expected to contribute about $75 to $80 million in incremental revenue and $0.06 in earnings per diluted share. We expect CapEx for FY 2016 for Coach, Inc. to be in the area of $300 million, excluding the capital costs associated with the new headquarters, which are expected – now expected to be approximately $185 million in FY 2016. Over the next few years, our first priority is to continue to invest in our business as we have a compelling opportunity to drive sustainable growth and value creation, and we're putting our capital against this opportunity. Our second priority, strategic acquisitions, is also about growth. While we have nothing planned imminently, we want to have the flexibility to act if and when it's in the best interest of Coach and our shareholder. And, third, capital returns. As I've stated before, as our transformation takes hold, we expect to resume growing our dividend at least in line with the net income growth. Underpinning all three – all of these priorities, our guardrails for allocating capital effectively are

[Operator:]

Thank you.

[Andrea Shaw Resnick:]

Please note also that we will go obviously beyond the 9

[Operator:]

Thank you. The first question comes from Bob Drbul with Nomura.

[Bob S. Drbul:]

Hi. Good morning.

[Victor Luis:]

Good morning, Bob.

[Jane Hamilton Nielsen:]

Morning, Bob.

[Bob S. Drbul:]

Good morning. I just had a couple questions, I guess. The first one is when you consider the moderation in the North American bag and accessory category growth driven by the deceleration you mentioned among major players, do you think this presents a challenge or an opportunity for Coach?

[Victor Luis:]

Well, Bob, in the short answer, it's clearly an opportunity. What we're seeing of course in the short term is an overhang in the luxury market that is being driven by the macro issues and the extreme exchange rate volatility that we've discussed that is obviously impacting tourist flows. But we also do strongly believe that the consumer is simply waiting for more innovation; and clearly, there's an opportunity for Coach to drive market share and category growth by driving innovation in the marketplace and providing relevant brand experience as we have in the past. I had the pleasure of driving our business in Japan in what was a very mature market where we grew by taking market share, so this is not a new experience for us. We've long said and history shows that times of inflection in our category and in North America and indeed globally are driven by innovation. And simply put, consumers are looking to be inspired and delighted. And our transformation is very focused on doing just that

[Bob S. Drbul:]

Great. And then if I could just ask a follow-up. When you reiterated this morning, I think, the return to positive comps, return to growth in the fourth quarter, and the return to growth in FY 2017, just when you look at all the noise in the marketplace and all the noise in the category, is there one or two main factors that continue to provide your confidence in this return to growth?

[Victor Luis:]

For me, it really comes down to, Bob, as I mentioned, our ability to execute in all of the investment that we're putting behind our transformation and our confidence in our strategy. It really comes down to, first and foremost, as we mentioned the inflection that we're seeing in these 45 doors here in North America. We have 150 or approximately 15% of our global fleet now in the new concept. By the end of this fiscal year, we will have closer to 40% of the fleet. And we're really excited about the programs that we have ahead of us through products, through marketing as we celebrate our 75th anniversary, kicking off from September.

[Bob S. Drbul:]

Great. Thank you very much. Good luck.

[Victor Luis:]

Thank you.

[Operator:]

Thank you. The next question comes from Joan Payson with Barclays.

[Joan Payson:]

Hi. Good morning, everyone.

[Victor Luis:]

Good morning.

[Jane Hamilton Nielsen:]

Hi, good morning.

[Joan Payson:]

Victor, I think you mentioned a positive consumer response to the new product that you put into those North American factory stores. Could you just provide a little more color on what you've been seeing in the outlets recently? Any change in traffic or ticket trends?

[Victor Luis:]

Sure. I'll ask Andre to step in and provide some context on that. As I did mention just to highlight, approximately 50% of the SKUs now in our outlet channel are new designs from Stuart. Andre?

[Andre Cohen:]

Yes. Good morning. We've actually seen an increase in average tickets in factory over the last few quarters, which we're pleased with, lots of it driven by Stuart's new product, which has been outperforming compared to the balance of our assortments. We've seen storytelling work really well in outlet, so collections such as Badlands which we launched in April-May, did terrifically. It was about 100% above our expectations, above our plan, sold through completely. So where we've taken bets in terms of more innovative products and more design, more make in the product, it's really resonated with consumers.

[Joan Payson:]

Great. Thank you.

[Operator:]

Thank you. The next question comes from Anna Andreeva with Oppenheimer.

[Janet Lynne Knopf:]

Hi. Good morning. It's Janet Lynne on for Anna. Congrats on seeing sequential improvement in the business.

[Victor Luis:]

Thank you.

[Janet Lynne Knopf:]

So I guess just we were hoping with the category being more choppy in June, if you had been seeing more consistent performance in July, and what kind of category growth you have embedded for 2016 guidance?

[Victor Luis:]

Overall, we have – as we stated in our notes, we're looking at category growth into the medium term of mid-single digits. We remain confident in that 5% to 6% range. And in terms of July, we're very consistent with the guidance that we've just given. So no real change.

[Janet Lynne Knopf:]

Okay. And then one quick follow-up to Jane on the FX impact. Could we expect this to be more translational or transactional? And looking to 2017, should we expect the headwind to continue in the out-year if rates stay at current levels?

[Jane Hamilton Nielsen:]

Well, certainly the impact on revenue is translational. There is some impact that we called out in gross margin that relates to our hedging activities and impacts largely related to inventory.

[Janet Lynne Knopf:]

Great. Thank you so much.

[Operator:]

Thank you. The next question comes from David Schick with Stifel.

[David A. Schick:]

Hi. Good morning.

[Victor Luis:]

Morning.

[David A. Schick:]

Just to – thank you. To put it together, you talked about the category incrementally worsening of late, but your business having a little more traction of June. How should we put those two together? What are the things – obviously, there's been a little bit more time with the retouched stores, but if you could just put together what you think is impacting your relative delta for June? And then second, as a second question, how should we think about net advertising expense around the 75th anniversary, I guess, for the year?

[Victor Luis:]

Sure. First, in terms of the first part of your question, David, there isn't really one thing. I mean, we've been very consistent in sharing the fact that we believe that's really all of the multitude of actions that we're taking around product, around our stores and around our marketing, whether it be traditional print or recent activities around social media and across channels, not just specific to any one channel. We've been very consistent about that in trying to be as focused as possible in these 12 major North American markets so that we can drive towards an inflection point for the total brand. Obviously, look, the clearest sign that we have of our strategy is, as we mentioned during our notes and have been very consistent with, we couldn't be happier with the doors that we've renovated. We're doing everything possible to move ahead at a further and quicker pace with those. What we've done in the last six months with 150 locations, new and renovated, is pretty unprecedented in our space globally for luxury brands. So pleased with that, and by the end of this fiscal year, we'll have another 40% – about 40%. In terms of the investment in marketing, we are going to increase our marketing spend by another $25 million, has been the plan this fiscal year, and we're very focused on that. And it'll be across a multitude of different areas from of course investments in our fashion show to the follow-up work across social media and as well, of course, everything related to what we're doing in partnerships and events, especially with Coach Backstage and music and the like to drive relevance across different consumer groups.

[Jane Hamilton Nielsen:]

Yeah, David, just to add, just in aggregate, over the last two years, we're very much in line with the guidance we put out, which is a $50 million increase by the end of FY 2016 in total advertising. You'll see it in our release this year, and then we expect to continue next year.

[Victor Luis:]

And to be clear, in total marketing, which will be a mixture of advertising, social media events and the like.

[David A. Schick:]

Thank you.

[Victor Luis:]

Thank you.

[Operator:]

Thank you. The next question comes from Erinn Murphy with Piper Jaffray.

[Erinn E. Murphy:]

Great. Thank you. Good morning. I'm sorry if I missed this, but could you just help us bridge the gap between how you've kind of guided fiscal 2016 with the fiscal 2017 operating margin guidance I think you gave at the Analyst Day. I think you said 20% to 25%. I'm assuming it gets a little bit lower than that just given the broader – kind of broader category issues of late. But just any context around just that bridge would be very helpful.

[Jane Hamilton Nielsen:]

That's right. So right now, we're guiding for FY 2017 in the range of 20%. It's a little bit of tightening based on the category dynamics.

[Erinn E. Murphy:]

Okay. Great. Thank you. And then just a quick follow-up on just the June overall category growth, recognizing it was low particularly in the June month, but was the overall category, was it kind of flat to low single, low to mid-single? Just any context around what that category grew just given it sounds like some of your competitors have had a little bit more of a tough time of late. That would be helpful. Thank you.

[Victor Luis:]

We don't provide it for the month. I mean we're really looking at obviously results where we're taking it from public sources as well as our internal panel. And in general, as we said, we've had a slowdown from the previous quarter mid-single to low-single digits for the quarter.

[Erinn E. Murphy:]

Okay. Thank you, guys...

[Jane Hamilton Nielsen:]

We also know, Erinn, as reported by the ShopperTrak, the market intelligent (sic) [intelligence] (1

[Erinn E. Murphy:]

Okay. Thanks, Andrea. That's helpful.

[Operator:]

Thank you. The next question comes from Michael Binetti with UBS.

[Michael Binetti:]

Hey. Good morning, guys. Congrats on some of the improvements in the quarter. Victor, could you clarify for us some comments on the renovated stores? Is your conversion in the renovated stores outpacing expectations at this point? I know you highlighted the traffic inflected, but I didn't quite understand the comment on conversion being better.

[Victor Luis:]

Morning, Michael. So, conversion improved sequentially across the entire chain and particularly so in the renovated stores. Overall, it's been a mixed bag of metrics improvement in the renovated stores. Traffic has been the most consistent one, but we've seen improvement in virtually every renovated store. Next is average ticket, that's improved also disproportionately. Conversion has been mixed. In some cases, it's been up, in other cases not. But overall, all metrics have moved positively in these 45 renovated stores.

[Michael Binetti:]

Okay. And then, would you mind commenting on the June trend? I'm trying to sort out whether there was a shift in sales in June from moving the semi-annual sale.

[Jane Hamilton Nielsen:]

We had the semi-annual sale, Michael, as you'll remember, in both June, and we were not speaking only about us, we were talking about the overall category, as I referenced, as well as weaker traffic into malls in the month of June. Obviously, there are a lot of reports of other companies yet to come for us to provide a better analysis of what specifically happened in June. But, again, we did call out what we believe is a deceleration. And I know a number of the other analysts in the calls have also put it out in their research and their handpacks or their results.

[Michael Binetti:]

Okay. And is there any way you can help us think about – I know you gave us some of the cadence with the inflection in the second quarter in the comp. Is there any way you can help us think about the trend in the first quarter and put some dimensions around that inflection in the second quarter and through the year?

[Jane Hamilton Nielsen:]

Yeah, I think, Michael, what I'll say is, as we come out – we expect the most significant inflections to be in the second quarter. We'll have a significant – we'll have an increase in our modern luxury door renovations. You'll see our new product flows as well as 75th anniversary marketing initiatives. So as you're thinking about comps, the most significant inflection comes through in Q2. But really, we're thinking about it as a sequential progression through the year, getting to positive in that fourth quarter in North America.

[Andrea Shaw Resnick:]

And it's probably worth noting obviously our 1Q comp guidance, our overall guidance for the trend over the year does incorporate what we're seeing in the markets, most recently in the June numbers. Can I also ask – I won't wait for the operator to do this, but you limit yourself to one question. Thank you.

[Operator:]

Thank you. The next question comes from Matthew Boss with JPMorgan Chase.

[Matthew Robert Boss:]

Hey, good morning, guys. So, thinking longer term with the slowing in the category growth rate here currently, I mean, is there any way to think about any signs of stabilization? And then are you seeing any changes in the promotional cadence across the landscape as a result of some of the slower growth?

[Victor Luis:]

I think there's been a lot of comments, Matthew, in the market about just the promotional environment in general, whether it be in department stores, the full-price malls or the outlet channel having picked up across the various categories, not just handbags and accessories, but fashion in general. And certainly what we're seeing go forward in terms of how to think about a stabilization in the category, as I'd mentioned, I think there's two or three things here. There's, first and foremost, the macro trends that we're seeing and especially in the luxury sector, handbags and accessories we know are very much driven as well by tourist in major markets. So I think that's one key impact that we'll see. And then secondly, it's going to be innovation. It's going to be brands coming forward and driving relevance and creating desire within obviously the various consumer segments. We're very focused on that with what we're doing and really looking forward to obviously driving forward with both our product and marketing and store initiatives in the months and quarters ahead.

[Matthew Robert Boss:]

Great. And then just quick clarification. Is the 28% tax rate this year, is that sustainable beyond this year or how should we think about it?

[Jane Hamilton Nielsen:]

We see it as our go-forward tax rate for the period of our planning horizon.

[Matthew Robert Boss:]

Okay. Great. Best of luck, guys.

[Jane Hamilton Nielsen:]

Thank you.

[Operator:]

Thank you. And our final question comes from Oliver Chen with Cowen & Company.

[Oliver Chen:]

Hi. Thanks. Congrats on the solid innovation we're seeing. And our checks, we are noticing that you're couponing less in outlets, and you've also done a great job kind of value-engineering and high-quality product at compelling prices. Should we expect to continue to see no couponing in the outlet channel? And on the modern luxury renovation, as you have been experiencing these nice lifts in traffic, is that because of the store displays? I'm just curious about linking that to the positive, the window displays.

[Andre Cohen:]

We've been trying to focus more on outlet channel as a brand building channel, as we believe it is. It's got a distinct consumer who doesn't really shop across channels, and that's resulted in some more experimenting with different promotional strategies. Overall, our discount rates have reduced in outlets over the past few months, and it's a mix of, what we call, variable pricing, so no couponing and focusing on different price points and discount rates within the store and the occasional couponing to drive – to surprise consumers and drive incremental sales. So that's one part of it. The other piece is, going back to my earlier comments, we are trying to market in a more deliberate way to that consumer, so we've been focusing on specific windows in outlet and really trying to deliver more value through improved product, more storytelling, delivering a higher customer experience within our stores as well. So...

[Jane Hamilton Nielsen:]

And, Oliver, I would say just as you look at that, that really reflects sort of what we're continuing to call for in terms of our gross margin outlook, which is really investing in the product, investing in higher quality, balanced by pullback in promotion with that FX being sort of a toggle over time, but continued benefit to gross margin of our international growth.

[Victor Luis:]

And, Oliver, to your question, I think, specifically on the traffic in the modern luxury doors, which is across channels, not just the outlet, part of the answer would be, as you suggest, of course the window program, which we're really pleased with. It helps to differentiate us. But also in general, what we hear from our sales associates is just word of mouth as consumers come in and experience the location, sharing it with others and driving increased interest in the location and in the brand.

[Andrea Shaw Resnick:]

Thank you, all. That concludes our Q&A. I will now turn it over to Victor Luis for some concluding remarks. Victor?

[Victor Luis:]

Thanks, Andrea. I just want to close by thanking you all again for joining us. With the first year of our transformation fully behind us, I certainly could not be prouder of our team, the continued commitment and courage they are demonstrating and executing our plans. We have a unique opportunity, a brand with a unique heritage as America's original house of leather. And we fully plan to leverage that as we celebrate our 75 years as a brand by taking a very bold step forward, defining a modern Coach with our first full runway presentation this September. In addition, with the acquisition of the Stuart Weitzman brand, I believe that as a company, we're much better positioned to capitalize on the growth outside of handbags and accessories. In short, we're committed to our strategies. We're going to be steadfast in our investments that we've outlined behind our products, stores and marketing as we drive growth and relevance for both our brands over the long term. We have a firm belief that we will return to best-in-class, and we look forward in the months and quarters ahead to sharing our 75th anniversary with you. Thank you, all.

[Operator:]

This does conclude the Coach Earnings Conference. We thank you for your participation.