Tapestry, Inc. Q1 FY2020 Earnings Call

Good day and welcome to the Tapestry 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 & Corporate Communications at Tapestry, Andrea Shaw Resnick.

Good morning and thank you for joining us. With me today to discuss our quarterly results are Jide Zeitlin, Tapestry’s Chairman and Chief Executive Officer, and Joanne Crevoiserat, Tapestry's Chief Financial Officer. Before we begin, we must point out that this conference call will involve certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including projections for our business in the current or future quarters or fiscal years. Forward-looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to our Annual Report on Form 10-K, the press release we issued this morning, and our other filings with the Securities and Exchange Commission for a complete list of risks and important factors that could impact our future results and performance. Non-GAAP financial measures are included in our comments today and in our presentation slides. You may find the corresponding GAAP financial information as well as the related reconciliations on our website www.tapestry.com/investors and then viewing the earnings release and the presentation slides posted today. Now, let me outline the speakers and topics for this conference call. Jide will provide an overall summary of our fiscal first quarter 2020 results for Tapestry as well as our three brands. Joanne will continue with details on financial and operational results of the quarter and our outlook for fiscal year 2020. Following that, we will hold a question-and-answer session, where we will be joined by Todd Kahn, Tapestry’s President and Chief Administrative Officer and Chief Legal Officer; and Josh Schulman, CEO and Brand President of Coach. Following Q&A, we will conclude with some brief summary remarks. I would now like to turn it over to Jide Zeitlin, Tapestry’s Chairman and CEO.

Good morning. Thank you, Andrea, and thanks to everyone for joining our earnings call. This is my first call as CEO, and it marks Tapestry's 77th call since Coach's IPO in 2000. I recall how thrilling it was to tune into that first call 19 years ago when I joined as an advisor to the company. Observing our journey over the years, I’ve come to appreciate the resilience of this exceptional organization. The synergy of a strong brand with outstanding people and culture has allowed us to reinvent ourselves, rectify past mistakes, and tackle new competitors and shifting consumer preferences. My first two months as CEO have been guided by optimism rooted in our history, which has been shaped by innovation and adaptation. I have immersed myself in daily operations and key decisions, and this experience has reinforced my belief that our three brands connect powerfully with significant and distinct consumer segments globally. Each brand gains from our shared resources, which drive efficiencies and facilitate the sharing of best practices across divisions. I am eager about the work ahead to drive growth by adopting a more consumer-focused approach to our investments and enhancing our execution. Although our first quarter EPS exceeded the forecast we provided in August, our results reflect various external and internal challenges, from the situation in Hong Kong to competitive pressures and self-induced errors. We will address several of these challenges during this call. Now, let’s look at results by brand. Coach showed solid and consistent performance, marking our eighth consecutive quarter of positive comps, illustrating how well our products resonate with consumers globally, bolstered by brand interest and vitality. Coach's digital and international channels again led growth this quarter. I recently returned from China, where all of Coach's international store managers gathered, including those from London, Tokyo, Sydney, and beyond. This team and their associates are exceptional. While I admit my bias, I believe they are the best retail team at scale. Turning to Kate Spade, revenue aligned with our expectations, despite a mid-teens decline in comparable store sales due to previously identified product and merchandising challenges we are actively addressing. Kate Spade’s geographic mix skews more toward North America than Coach, making the brand more vulnerable to domestic market challenges, including decreased traffic and heightened promotional activities compared to key international markets. At Stuart Weitzman, sales were affected by weaker wholesale demand, which overshadowed growth in the brand's direct business. Nonetheless, gross margin expansion resulted in an operating loss that was in line with our plan and last year’s quarter. We are maintaining our Tapestry outlook for fiscal year 2020, understanding that achieving this guidance means we must continue to drive growth at Coach while simultaneously improving performance at Kate Spade and Stuart Weitzman. Our objective is to ignite desire for our brands and make investment decisions with a consumer-centric mindset. We are focused on becoming more agile, continually leveraging data and technology to enhance productivity and speed to market. These improvements will help us fund additional brand-building initiatives and return capital to shareholders. We have commenced a thorough review of our business to identify both short-term and long-term opportunities. Now let’s discuss brand results in more detail, starting with Coach. Global comparable store sales grew by 1% in the first quarter, largely driven by strong performance in our international channels and across e-commerce. Excluding pressures from Hong Kong, which intensified during the period, comps increased by about 2%. The growth in our brick-and-mortar comparable store sales was supported by strong product offerings and traffic. Coach achieved positive comps in most international regions, including Europe and Asia. As expected, Japan’s results were strong, benefiting from preemptive demand ahead of the consumption tax increase effective October 1. Meanwhile, our Greater China operations faced constraints due to the Hong Kong situation, but we still achieved positive same-store sales on the Mainland and in Taiwan. Our international wholesale business also saw an increase this quarter. Comps in North America remained flat compared to last year, despite a decrease in tourist spending. Additionally, while North America wholesale shipments were down from last year due to timing, our point-of-sale business increased despite fewer promotional days. We take pride in the brand's performance in North America, especially given the challenges of weaker mall traffic in both outlet and full-priced retail. Looking at our first quarter progress against Coach's brand strategies for fiscal year 2020, we accelerated product innovation across our price structures with new introductions like Tabby, Troupe, and Hadley, alongside an outlet collaboration with Disney and several new sporty and functional styles. We achieved comp growth in signature across both channels, particularly notable was the increase in global and North America outlet handbag average unit retail against a highly promotional backdrop. Furthermore, we saw significant growth beyond bags in our developmental women's and men's footwear and ready-to-wear categories. We strengthened our fashion authority through cultural relevance, illustrated by our September New York Fashion Week runway show attended by global influencers and celebrities including Michael B. Jordan. We also launched a new "Dream It Real" campaign with a diverse global cast that included Jordan, Yara Shahidi, and Kiko Mizuhara. Additionally, we recently introduced a collaboration with Jordan featuring the anime franchise Naruto, which sparked strong excitement and sell-throughs in the men’s category. We also enhanced the in-store experience this quarter with a signature art pop-up next to the vessel at Hudson Yards and a Coach Originals store takeover in New York coinciding with our Spring 2020 show. Coach Originals celebrated the brand's heritage in a contemporary manner with unique product stories, including restored vintage bags and handcrafted combinations of Vintage Coach bags. These initiatives drove impressive sales in their respective locations and significantly boosted digital engagement. Due to Coach Originals' positive reception and its connection to the spring collection, we plan to roll out pop-ups in high-profile locations globally. As we approach the holiday season, we are excited to continue innovating within our core families while introducing new items like the Tabby shop, showcasing the breadth of this best-selling style and our updated take on the Horse & Carriage logo. In outlets, we will also launch a Star Wars collaboration, and we are enthusiastic about our strong gifting assortments in both channels. In summary, we are optimistic about the upcoming holiday season and the rest of fiscal year 2020 for Coach. We are confident in the potential for continued growth as we aim to enhance innovation and relevance globally. Moving on to Kate Spade, total sales dipped by 6% on both a reported and constant currency basis, with a mid-teens comp decline partially offset by new store openings and the acquisition of operations in Singapore, Malaysia, and Australia, which we are yet to anniversary. Comparable store sales aligned with our expectations, decreasing 16% overall, impacted by the brand's vulnerability to the challenging North American market and identified product and merchandising issues. In brick-and-mortar, average ticket was positive, which, together with stable gross margins, highlights our careful management of in-store promotions. However, traffic remained under significant pressure, a major contributor to the decline in comparable store sales. Conversely, international markets outperformed our domestic business, with positive comps in Mainland China and Japan. Regarding product and brand strategy at Kate Spade, the team is addressing initial learnings by broadening the product assortment in retail to include a wider variety of key designs and materials, catering to different consumer occasions. We are incorporating more color and novelty for the holiday season and beyond, with playful elements reflecting the brand's unique personality. We are also refining our marketing, as seen in our first quarter campaign featuring Anna Kendrick, our beloved brand ambassador. Our Spring Runway show at New York Fashion Week showcased a diverse cast of women, receiving positive feedback for being feminine, optimistic, and relatable. In the outlet, we are enhancing innovation levels with our first collaboration designed specifically for that channel. We anticipate these actions will support sequential improvement in comps as we progress through the year. We are currently in the midst of a comprehensive review of our business, focusing primarily on the Kate Spade brand. Our goal is to reengage our core consumer and attract new customers. We need to balance sophistication with novelty and color across all brand facets. Research shows that consumers admire the brand, but we must ensure our products are relevant to their lifestyles, supported by marketing that emotionally connects with them. As for Stuart Weitzman, while overall sales results were disappointing, we made strides in several strategic initiatives this quarter. We expanded our footwear offerings beyond just boots and sandals, seeing growth in sneakers to align with market trends. Our fall campaign featuring Kendall Jenner and Yang Mi reached over a billion impressions, raising global awareness. We also generated local buzz and media coverage in China following the successful launch of the Plaza 66 pop-up in Shanghai, landing the cover of Vogue China. As we look ahead, we're focused on enhancing our execution from concept through market release. This means delivering fashion innovation while adhering to our high-quality standards and meeting commitments. Stuart Weitzman has always represented the fusion of fashion and fit, a key differentiator valued by our customers. We’re tackling challenges through investments in talent, operational improvements, and a focus on our core design aesthetic. I am confident in our ability to leverage the brand's strengths to drive revenue growth and profitability. In summary, we met first quarter results aligned with our plan, and our teams are now concentrating on the holiday season. These are exciting times at Tapestry, with continuous opportunities to connect consumers with our brands. Each brand possesses strong equities that resonate with distinct consumer segments, diversifying our portfolio. Each brand utilizes Tapestry’s infrastructure and core capabilities, including local market knowledge and a wealth of talent, to drive significant benefits. Now, let’s turn to Joanne for the financial review of the quarter and our outlook.

Thanks, Jide, and good morning, everyone. As Jide has just taken you through the highlights and strategies, I will cover some of the important financial details of the quarter as well as our outlook for fiscal year 2020. Before I begin, please keep in mind that my comments are based on non-GAAP results. Corresponding GAAP results and the related reconciliations can be found in the earnings release posted on our website today. In addition, as noted in our press release, beginning in fiscal year 2020, we are presenting the impact of foreign currency gains and losses within other expense and income. Accordingly, our Q1 results are presented on this basis and our prior year results have been recast for comparability. Turning to our first quarter financial results. Total sales were in line with our expectations, with revenue declining 2% on a reported basis and 1% in constant currency. As Jide mentioned, Coach showed continued momentum with global comps increasing 1%. Kate Spade revenue declined by 6% with comps decreasing 16% in line with our projection, while Stuart Weitzman sales decreased 9% reflecting softer wholesale demand. Gross margin was down 20 basis points in the quarter, primarily due to FX headwinds at Coach. In addition, gross margin results reflected incremental pressure related to tariffs, principally at Kate Spade given the brand's higher penetration of ready-to-wear and jewelry, which are primarily manufactured in China. At Stuart Weitzman, gross margin expanded significantly driven by channel mix with the growth in direct sales. SG&A for the quarter was even with the prior year and better than forecast as we tightly controlled cost in the context of a challenging environment. We also benefited from favorable expense timing with some costs originally planned for Q1, now shifting into the second quarter. Favorability in SG&A was partially offset by an FX loss in the quarter, primarily related to the devaluation of the RMB. Earnings per share of $0.40 was ahead of our guidance of $0.35 to $0.37. During the quarter, as highlighted in our press release, across Tapestry, we added a net of four locations driven by international expansion at Kate Spade and Stuart Weitzman. We ended the quarter with 1,544 directly operated stores globally. Turning to our balance sheet and cash flows. At the end of the quarter, cash and short-term investments were approximately $788 million, while borrowings outstanding were $1.6 billion consisting primarily of senior notes. As noted in our press release, during the quarter, we recorded impairment charges of $76 million related to store assets including the lease assets recorded in connection with the adoption of the new lease accounting standard. Inventory ended the quarter at $880 million, up 7% versus last year, consistent with our expectations for sequential improvement during the quarter. We expect inventories to remain elevated in the second quarter but end the fiscal year approximately even with last year. For the first quarter, net cash from operating activities was an inflow of $6 million versus an outflow of $19 million a year-ago. CapEx spending was $72 million versus $55 million a year-ago and reflected the shift in spend from the fourth quarter as mentioned on our August call. We continue to expect CapEx to be approximately $300 million for the year. Free cash flow for the quarter was an outflow of $66 million versus an outflow of $75 million last year. Now turning to capital allocation. In this fiscal year, we're dedicating our resources to driving organic growth rather than pursuing strategic acquisitions while returning capital to shareholders through dividends and share repurchases. To that end and consistent with our expectations for the fiscal year, we bought back $300 million of common stock in the first quarter. Together with our current annual dividend payout, we're on track to return approximately $700 million to shareholders this fiscal year. Moving to our 2020 outlook. Consistent with our prior practice, the following guidance is presented on a non-GAAP basis and replaces all previous guidance, starting with the second quarter. We are projecting revenue to be similar to the prior year. This guidance incorporates continued low single-digit comp growth at Coach. At Kate Spade, we expect comps to decline at a high single-digit rate, while revenue at Stuart Weitzman is expected to be approximately even with last year. Operating income is expected to decline in the quarter due to a contraction in gross margin as well as mid single-digit increase in SG&A growth, including the shift in timing of expenses from the first quarter. We expect earnings-per-share to be $0.95 to $1 in Q2. Now turning to our full-year outlook where we are reaffirming key elements of our guidance. We continue to expect total revenues for Tapestry to increase at a low single-digit rate from fiscal 2019. This includes the expectation for low single-digit growth at Coach, driven by continued positive low single-digit comps. We expect Kate Spade to deliver low to mid-single digit sales growth driven by distribution. At Stuart Weitzman, we now project slight growth, reflecting weaker than expected performance in Q1 as well as continued soft wholesale demand. In addition, we are still projecting a modest decline in gross margin for the year, including the negative impacts associated with bringing the Kate Spade footwear business in-house in the second half of the fiscal year along with pressures from currency, primarily at Coach. The gross margin projection now also incorporates the impact of non-U.S tariffs on imports from China, including the 30% tariff on handbags and small leather goods enacted on October 1, as well as the 15% tariff for categories such as footwear, ready-to-wear, and jewelry. For context, we have a diversified manufacturing base and our exposure to China is relatively limited for handbags and small leather goods where we've migrated our production. However, in footwear, ready-to-wear, and jewelry, which are smaller but fast-growing categories for Tapestry, we currently have more exposure to China. We continue to expect SG&A growth to be approximately in line with top-line growth, reflecting the important investments we've made in the long-term health of our business, including systems, new stores, and regional buybacks. Net interest expense is now expected to be approximately $50 million for the year, reflecting lower interest income related to the recent federal rate cuts. The full-year tax rate is still projected to be approximately 17.5%. Overall, we continue to project earnings per diluted share to be roughly even with last year. Touching on distribution. Across Tapestry, our distribution expansion efforts will focus on international markets. By brand, we expect little change in our Coach directly operated store count with closures in North America offset by modest net openings in international markets. At Stuart Weitzman, we expect to open a net of 15 to 20 locations globally. And at Kate Spade, we're projecting 30 to 40 net openings in this fiscal year. In closing, we are focused on sharpening our execution and delivering our financial plan with the important holiday season underway. As Jide discussed, we're working to address both near-term and long-term opportunities with a consumer-centric mindset. We are also looking to be more agile and invest in areas that maximize returns. Overall, our strategic initiatives are intended to drive sustainable growth and productivity across our brands and unlock the inherent value in our multi-brand model. At the same time, we're committed to returning meaningful capital to shareholders supported by our strong balance sheet and cash flows. I'd now like to open it up to Q&A.

Thank you. Our first question comes from the line of Bob Drbul of Guggenheim.

Hi, good morning. I guess my first question, Jide, I know it's early days, but can you just give us your assessment of the business from where we are and why you are still a proponent of the multi-brand strategy, assuming that you’re?

Terrific. Good morning, Bob, and thank you for your question. Let me address it perhaps both through a rearview mirror perspective as well as one that’s forward-looking. So as noted, 60 days in, my perspective I believe is balanced somewhere between realism and optimism. If we take a look backwards for just a moment, we did what we told you we would do, right? We delivered an inline quarter and the start to the year was as expected. We repurchased $300 million in stock and we're on track to return a total of $700 million to our shareholders this fiscal year inclusive clearly of our dividend. And this represents an increase of 40% year-on-year and underscores our commitment to return capital to our owners. Lastly backward-looking, we’ve maintained our outlook for fiscal year 2020 even in the face of internal and external headwinds such as Hong Kong. That said, looking forward, we need to sharpen our focus on execution. And as such, we're asking a lot of hard questions here internally. First principles for us are to focus on driving organic growth, and you heard me say a number of times in my prepared comments, and you heard Joanne also reiterate it, we are very focused on being consumer-centric. What we mean by that is we really need to ensure that our core consumer is at the heart of everything we do from product to marketing to store design. This is a key element of the work that we’ve launched here in recent weeks. We need to make sure that we're really in a position to create relevant brand stories that connect our consumers with the values of our brands. The second area of focus is on driving growth to ensure that you’ve got operating leverage in the business. So how can we become more agile, more efficient? We really believe that there is an opportunity to better leverage data and technology to increase our speed to market. We also need to be more efficient in productive across many different areas from marketing strategies to concept to market strategies, in terms of product assortment, in terms of our stores, and also the ways that we work. I think if we’re able to do this, it will allow us to ultimately unlock resources that we can invest more in brand building while at the same time returning capital to our shareholders. More specifically to your question on our multi-brand strategy, one of the things that we're very focused on is unlocking the further benefits of our multi-brand model. I very much believe that our brands are stronger together as a result of our shared platform. This said, let's acknowledge that Tapestry is a relatively young multi-brand company, and we're doing a lot of work to better define that balance between corporate and brand functions, and do so in a way that’s appropriate to our brands and to our culture. The diagnostic work has just begun, but it's one that we’re moving forward with quite rapidly and we want to include it relatively soon, so we're in a position to address both near-term and long-term opportunities. We are clear that we face a number of challenges and we're clear about those challenges. At the same time, frankly, we're confident that these challenges are fixable and the solutions are largely within our control. So as we go forward, we are committed to being transparent in our communications and we will openly acknowledge where we see issues and at the same time we are going to move very swiftly to apply the learnings from the work we’ve done and from the deep experience in this organization. Thank you, Bob.

Got it. And if I could just ask a second question, I think the guidance is for sequential Kate Spade improvement in comps in the second quarter. I just wanted to know if you could just give us a read in terms of your confidence in there? What are the key drivers that you’re seeing within that business on the sequential improvement expected? Thanks.

Absolutely, we are very focused on our product architecture and expanding it. We're concentrating on our merchandising, such as introducing more color in our outlet stores, and striving to achieve the right balance between sophistication and playful elements in our products, marketing, and store environments that align with our brand identity. These are fundamental steps to broaden the brand, product, and overall business reach.

Your next question comes from the line of Irwin Boruchow of Wells Fargo.

Hey. Good morning, everyone. So my one question will be regarding the progress at Kate Spade. I guess just curious, within your guidance for the fiscal year, is there a plan to see a positive comp in any quarter for the remainder of the fiscal year? And then just when we kind of think about the inflection in the business that's going to loom at some point. Jide, would you expect to see comps inflect positive before or able to see Kate's margin stabilize or could EBIT margin actually begin to improve ahead of comp growth? Just trying to understand the cost side, the pricing side, basically what’s going on at the brand overall.

Could you please repeat the second half of your question? I heard the first part regarding the fiscal year.

Yes. I was just basically asking is it possible that we could see the Kate Spade EBIT margins stabilize ahead of comp growth? Just trying to understand on the cost side and pricing, like how do we think about EBIT margin inflection in relation to comp inflection?

Yes, understood. So a couple of things. First of all, we are calling for sequential improvement as the year unfolds and particularly in the second half of the year. Footwear will be additive to the business as we brought in that license in the second half of the year. And in terms of calling specifically a positive comp or calling margin enhancement, that’s not something that I’m prepared to do at this moment.

Yes, I can jump in. Our guidance thus reflects sequential improvement in the Kate business as we see those merchandising actions really gain traction as we move through the year. Near-term we expect some gross margin challenges related to both tariff pressure, which is more exacerbated at the Kate Spade brand based on the penetration of ready-to-wear and footwear and jewelry, which are manufactured in China. Although we are working on diversifying our sourcing in that brand there are near-term pressures related to tariffs as well as bringing footwear in-house, although it will have a top line benefit, it will weigh on margins a bit in the back half. And then, we expect some heightened promotional activity as we clear through some inventory levels at Kate. So that’s the near-term story of gross margin for the brand.

Your next question comes from the line of Erinn Murphy of Piper Jaffray.

Great. Thanks. Good morning. I guess my question today is on the Coach brand and the consistency there. You’ve referenced the North American business bit flat. Could you share kind of what you saw between full price in outlet during the quarter? And then what did tourism into the North American market looks like this quarter in context relative to the prior view? Thank you so much.

Thank you. Josh?

Yes, I will take that one. Good morning, Erinn. As we mentioned, the North America market was flat this quarter, and given the challenging trends in both retail and outlet mall traffic, we were pleased with our ability to outperform the mall traffic in those sectors. We achieved this through various methods. There was an increase in our strategy around collaborations, which tend to drive significant traffic, particularly in the outlet malls. For instance, we had our collaboration with Disney in July, a graffiti artist capsule in August, and we have been improving our execution in these efforts, leading to increased traffic in outlets. Jide also noted our upcoming major collaboration with Star Wars, set to launch before Black Friday this year, which is something to look forward to. Regarding tourism, it has been challenging throughout fiscal 2019, and that trend continued into Q1. The growth we’ve seen in North America retail and outlets has primarily come from domestic customers.

Your next question comes from the line of Alex Walvis of Goldman Sachs.

Great. Thanks so much. A little bit of a follow-up to the previous question. Can you talk a little bit about that the Coach brand continues to deliver solid results in North America, despite challenges seen elsewhere? Can you comment on the backdrop for consumer spending and overall retail traffic, where are we versus where we are 3 months ago? How are you expecting those trends to progress?

You know it's been very consistent. The data that we see about the consumer is that the consumer is in a good place. However, the traffic has been challenging consistently through fiscal 2019 and into Q1 and whether that’s retail malls or the outlet malls, the traffic has been tough. And so that really speaks to the execution of the teams in-house there driving excitement, so that we get an outsize share of the traffic that is coming to the mall and increasingly the customer shopping in an omni-channel ecosystem and engaging with us online where we’re seeing very robust growth. And when we talked about the digital growth and international growth outpacing a lot of that digital growth that’s happening in North America obviously.

Your next question comes from the line of Oliver Chen of Cowen & Company.

Hi.

Good morning, Oliver.

Good morning, Jide. Regarding the brand architecture at Kate Spade, what are your thoughts on achieving balance between product, brand identity, and novelty? As we look to understand the opportunities ahead for Kate Spade, I would appreciate your insights on the timing of changes, considering that various elements such as silhouettes and options are in play. How do you envision this process unfolding, and what order do you think different initiatives should be implemented as you adapt to market responses? Thank you.

Thank you. I want to share some thoughts about Kate Spade, as this has been a recurring topic. We've discussed brand equity and the importance of connecting with consumers emotionally, which involves both science and art, but is fundamentally an experiential process. Revitalizing a premium fashion brand isn't something that happens quickly. Looking back to six or seven years ago, when we overextended the Coach brand, we learned that rebuilding the brand's health takes time. I recall a phase after initiating significant changes to reconnect with our core consumers when we didn't see immediate positive results. We had to trust in the relevance of our brand values and our expertise in brand building. This parallels our current situation with Kate Spade. Since acquiring the brand, we've revamped its creative and commercial leadership and have a clear understanding of brand health and business growth. We recognize that this won't be a straightforward journey, but we're confident we'll navigate it successfully. Our assessment of the brand's core pillars reveals considerable opportunity that resonates with a wide consumer base worldwide. The work we've undertaken, including collaboration with external consultants since my tenure as CEO, has validated our internal insights about the significant market potential aligned with Kate Spade's brand principles. As previously mentioned, fostering sustained growth for premium fashion brands is not a linear process. We've experienced this before, and we believe we'll ultimately succeed. We're implementing several immediate tactical actions, such as introducing more novelty to our product line, expanding our offerings especially in satchels, and enhancing innovation in our outlet. These steps are part of a journey we’ve been through previously, and we are confident in our ability to achieve the desired outcome.

Your next question comes from the line of Mark Altschwager of Baird.

Great. Good morning. Thank you. I wanted to ask a question on Coach. So recently the Coach comp has been led by international. Just given the pull forward in Japan that benefited Q1 and some of the intensifying pressure in Hong Kong, does the performance in North America need to accelerate in order for the brand to maintain its positive comps? Overall, I’m just trying to better understand your level of confidence and the sustainability of the positive comps at Coach, given some of those intensifying macro pressures internationally? Thank you.

Good morning. We continue to be confident in our ability to drive low single-digit comp for the remainder of the year in each quarter. We understand that there will be puts and takes given some of the macro trends, but we are confident in our guidance.

Your next question comes from the line of Paul Trussell of Deutsche Bank.

Good morning. Thanks for taking our question. I wanted to ask about gross margins. Perhaps, first starting with the reported quarter, maybe break down for us some of the puts and takes across FX, product sourcing costs, mix, and days of promotion in terms of the overall companies and specifically the Coach banner's gross margin performance. And how should we think about those same puts and takes looking forward?

Yes. This is Joanne, Paul. I will jump on that. The gross margin, it makes sense I think that this aggregate by brand and talk about what happened in Q1. In the Coach brand, the gross margin performance was primarily driven by FX, so they decrease in gross margin. Promo activity was up a little bit, but much less than what we saw in Q4. In Kate Spade, the gross margin performance was fairly stable year-over-year and far less promotional than we had been in Q4. We were very focused on carefully balancing promotional activity and brand health in the Kate Spade brand and that continues to be a focus as we move forward. With Stuart Weitzman, we saw a significant increase in gross margin primarily due to channel mix with the increase in direct business through the impact of the distributor buybacks that we've invested in and new store openings that we’ve seen there. So that was the story for the first quarter. As we look to gross margin for the year, the modest decline in gross margin really, the mix at Hong Kong impacting Coach, in Kate Spade along with, I should say, along with FX pressures in the Coach brand. In Kate Spade we continue to see pressures as we right size inventory. So there will be some promotional pressures related to tariffs as I mentioned before. And related to bringing footwear in-house, which again, from the change from being a licensed business to bringing in-house weighs on our gross margins there. So those are the primary contributors to the gross margin outlook for the year.

Your next question comes from the line of Omar Saad of ISI.

Good morning. Thanks for taking my question. Jide, as a follow-up to the multi-brand question. Maybe you could talk about your assessment of some of the core competencies and capabilities, especially in the digital arena that Tapestry, the operating group has that it can really bring to bear unique capabilities and technologies it can bring to bear across multiple brands where do you think some of those competencies are that we can watch unfold across all three brands over the coming years? Thanks.

Thank you, Omar. I have a few comments. First, regarding the advantages of having a multi-brand approach, it provides a diversified earnings stream that lessens the reliance on any single brand. Additionally, it strengthens our position when negotiating with landlords, enhancing our marketing efforts and creating a more attractive platform for top talent. As we've mentioned in previous calls, we have developed our data labs capability over time, which allows us to utilize a comprehensive database to gain insights applicable to marketing, promotional strategies, brand alignment, product offerings, and store environments. Our new Chief Digital Officer, Noam, has significantly contributed by devising an enterprise plan aimed at improving efficiency across the platform. A key focus of our current diagnostic work is to enhance our digital capabilities. This encompasses everything from forming strategic partnerships with platforms like Tmall to finding innovative approaches in an omni-channel landscape that allows us to connect with customers at their preferred points of engagement. One key benefit of integrating experience management with new leadership is that we are now more open to exploring aspects of digital that the organization may have been hesitant to address previously. We are actively considering how to utilize these elements to support the business's top-line growth.

Just building on what Jide mentioned, I think a great example of this is our work with Tmall. As we’ve mentioned, we’ve recently launched Coach on Tmall with a soft launch in September, and we’ve seen terrific results with 90% of the customers being new customers to the brand. With known partnership we're going to be able to more quickly leverage those learnings across not just Coach, but the other brands. There's a lot of work here on how we can leverage insights from each other's digital activities for the greater good.

Your next question comes from the line of Michael Binetti of Credit Suisse.

Thank you for taking our questions. Jide, could you share if the brands are currently performing in line with your expectations for the quarter? I understand Coach is in the low single-digit growth range and Kate is in the high singles. Does that account for the decline we've seen in Japan following the tax rate changes? Also, regarding Coach, it has shown remarkable consistency in various economic conditions. What do you consider the leverage point for that brand? While you've effectively increased same-store sales at a low single-digit rate in recent years, margins have consistently improved. How do you see the sustainability of this trend considering the natural inflation in the business?

Absolutely. So why don’t I start and then Josh, you may want to jump in. First, it's early days in the quarter and our guidance that we’ve given in terms of full-year guidance is predicated on our current view in terms of outlook for the quarter end and beyond. So I wouldn’t say a lot more than that. But one comment I will make in terms of just Coach and the opportunity there, I very much believe and a lot of the initial work that we’re doing is that there is actually substantial opportunity over the intermediate to long-term to actually drive organic growth there to even more closely align the core brand values with where we believe consumers are today and where consumers are going. So if anything, some of the early days of the work that we're doing would suggest that there is greater growth opportunity there as opposed to what I think was implicit in your question in terms of the opposite of that.

So I will comment actually on both aspects of the question. Just a few things to watch out for in the upcoming holiday season. With Coach, I mentioned the Star Wars collaboration in outlet. We are also super excited about Coach's appearance as the first fashion luxury brand in the Macy's Thanksgiving Day Parade. All of us will be watching on Thanksgiving morning as our mascot Rexy flows down Broadway. I think that’s an example of the power of Coach. Coach is a powerful brand that has always been astute for inclusivity and how we can even more fully own that in a culturally relevant way. We are pleased with Coach and that the base we start with is a well-run machine with a 27% operating margin today. As we think about product opportunities for us, our strategy is really focused on innovation in our core. We’ve talked about the need to innovate in the good, better, and best price bucket. This quarter we specifically called out our handbag AUR in the outlet channel. We know a lot of you’ve been on the journey with us here, particularly in North America, and we're so pleased with the progress that our teams are making on introducing new differentiated product, but also leveraging some of the insights from our data labs. In terms of finessing their promotional strategies to drive a better AUR. So innovation in core is key, because leather goods are today and will always be the core of Coach. Secondly, collaboration and co-creation. Whether that is a big traffic-driving collaboration that we've done, we’ve mentioned Star Wars, which is coming up in the future. We’ve mentioned Disney, which drives a lot of traffic and sales, or Jide mentioned in his prepared remarks, a collaboration with Michael B. Jordan and Naruto, much smaller in scale, actually driving scarcity and brand heat, both of those are super important. And then, the third category of our focus here in product are acceleration categories. As we’ve said, there are opportunities for us in footwear, in men's, and to a lesser extent EEE in ready-to-wear, all of which are important focuses for us, and you will be hearing more about our important footwear launch of the City Sole family, which we will launch in spring. City Sole is a new sneaker and a hybrid category.

Your next question comes from the line of Rick Patel of Needham.

Good morning. Thank you for taking the question. My question is on Kate Spade. So given what you’re seeing with traffic, can you provide some additional color on the outlook for marketing? I’m curious if you will invest more in performance-based marketing or higher up the funnel, what you can do differently there. And as we think about financials, any context on how much marketing investment may change relative to last year?

Yes. I will say this; we don’t anticipate any significant shifts in our marketing spend as we go forward. Although we are one of the conversations that we’ve had a lot of discussion on internally is the mix of performance versus brand building. If you take a look at last year’s second quarter, we didn't spend effectively anything on marketing. This year we will spend on marketing.

Your next question comes from the line of Brian Nagel of Oppenheimer.

Hi. Good morning. Thank you for taking my question. My question is broader in scope. Over the past few quarters, we have been discussing the weakness we've observed. You've outlined the initiatives you're implementing to improve results at Kate and even Coach. However, I'd like to know how much of the weakness in the bags, primarily related to Kate but to some extent Coach as well, you think results from internal missteps compared to changes in the competitive landscape. Additionally, within your multi-brand strategy, is there still sufficient differentiation between Coach and Kate that they aren't competing against each other? Thank you.

Thank you. Both questions really address the same issue from different angles. Our efforts are focused on understanding brand equity and ensuring we have a clear consumer base for each brand. The work we've conducted so far, building on prior internal research, confirms that we have distinct consumer groups. As we target these groups, we anticipate greater differentiation in product positioning and branding. Specifically, the Kate Spade brand connects strongly with a core consumer who seeks fun and feminine products. We believe there is significant opportunity in this positioning. While we are optimistic, we also recognize the substantial work ahead to fully realize this potential.

We have time for one more question. The final question will come from Paul of Citi.

Hey. Thanks, guys. You guys have talked about some industry headwinds facing the business. I’m curious would you consider to be the greatest pressure points in that North American business? Maybe talk about by brand, and if any of those headwinds are actually shown some signs of improvement or are they working against you even further? Thanks.

Right. The main challenge we've discussed is domestic traffic, primarily due to a decline in tourism. Let's start with Coach, and then we can address the other brands as needed.

Yes. I think we mentioned this earlier. Overall, we are not limited by geography when recognizing revenue, so tourist traffic trends fluctuate over time. However, they have clearly affected North America for a prolonged period. This situation pushes us to sharpen our focus on the domestic customer and find ways to better serve them. Historically, we may have had stores that catered more to tourists, and those are facing the most challenges. But even in those areas, we need to prioritize the domestic customer. We've noticed that their shopping habits are changing. Domestic customers are increasingly starting their shopping online and want to continue that experience in the store. Therefore, our primary focus is on creating a more integrated approach between these channels to meet the evolving needs of the domestic customer.

In terms of Kate Spade, the traffic trends remain consistent. There’s nothing particularly different to report there. Regarding Stuart Weitzman, we are facing challenges stemming from past supply chain issues, which have affected our wholesale order book, and we are actively working to resolve that. Thank you for the question.

That will conclude our Q&A. Jide, I will turn it over to you for some brief closing comments.

Terrific. Thank you, Andrea. I want to just take a moment to thank our shareholders. We are mindful that it is your capital that enables us to come to work every day, seeking to connect consumers emotionally with our powerful brands. We take our responsibility as stewards of your capital very seriously. To my fellow employees, thank you for everything you do for our customers and thank you for your contributions to the culture of this house of remarkable brands. I’m grateful for the opportunity to work with each of you. Thank you.

Thank you for participating in this Tapestry conference call. You may now disconnect your lines and have a wonderful day.