Tapestry, Inc. Q4 FY2022 Earnings Call

Good day and welcome to the Tapestry Conference Call. Today’s call is being recorded. Please note this call may be recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Global Head of Investor Relations, Christina Colone.

Good morning. Thank you for joining us. With me today to discuss our fourth quarter and year end results as well as our strategies and outlook are Joanne Crevoiserat, Tapestry’s Chief Executive Officer; and Scott Roe, Tapestry’s Chief Financial Officer and Chief Operating 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. This includes 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 other 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. Given that FY ‘21 included an additional week in the fourth quarter, the years referenced in today’s comments will be on a comparable 13 and 52-week basis unless otherwise noted. For a full reconciliation to corresponding GAAP financial information, please visit our website, www.tapestry.com/investors and then view the earnings release and the presentation posted today. Now, let me outline the speakers and topics for this conference call. Joanne will begin with highlights for Tapestry and our brands. Scott will continue with our financial results, capital allocation priorities and outlook going forward. Following that, we will hold a question-and-answer session, where we will be joined by Todd Kahn, CEO and Brand President of Coach. After Q&A, Joanne will conclude with brief closing remarks. I’d now like to turn it over to Joanne Crevoiserat, Tapestry’s CEO.

Good morning. Thank you, Christina, and welcome everyone. We achieved exceptional results this fiscal year, accelerating revenue and profit growth across our portfolio, reflecting the strength of our brands and the skill and creativity of our teams worldwide. Our performance illustrates our competitive advantages and the effectiveness of our strategic growth plan developed nearly three years ago to transform our organization for a new retail landscape. This involved changing our operations to adopt a more consumer-focused approach and leveraging our data-rich platform to attract new consumers while enhancing connections with existing customers. Our ambition also required us to lead in digital while maintaining our excellent store operations, recognizing the growing importance of the omnichannel experience. We committed to driving efficiencies in various business areas to support brand building and high-return investments. Consequently, we needed to be more agile while intensifying our innovation across all consumer touchpoints. As we sharpened our vision, which we named the Acceleration Program, we never expected the external environment to shift dramatically due to the COVID-19 pandemic. Although this significantly changed our landscape, it validated our strategic direction. With consistent execution, we emerged as a stronger company. By focusing on the consumer, we gained 15 million new customers in North America alone over the past two years, including about 7.7 million new customers in fiscal ‘22. Notably, these new customers are transacting at higher average unit retail prices, and they return to our brands more frequently. At the same time, we increased retention rates and reactivated lapsed customers across our brands, resulting in a larger number of active customers engaging with us at higher average spending. We also saw substantial growth in digital, reaching $2 billion in sales with strong margins in fiscal ‘22, tripling levels from fiscal ‘19. There is potential for even more growth in e-commerce as we leverage our established online capabilities. Additionally, we increased average unit retail prices, showcasing the strength of our brands and the popularity of our product offerings through innovation and craftsmanship. This growth was supported by a reduction in SKU counts by 40% to 50% and a significant decrease in promotions as we use data and analytics to refine our go-to-market strategies. Overall, these achievements contributed to Tapestry achieving a record annual revenue of $6.7 billion for the fiscal year. This performance highlights the strength of our globally diversified business model in a challenging environment. In the second half of our fiscal year, while our operations in China faced significant COVID-related disruptions, our strong performance in other regions, especially North America, fueled impressive growth. Our portfolio saw gains across the board, with each brand achieving double-digit sales increases during the fiscal year, resulting in accelerated growth compared to fiscal '19, even amidst substantial supply chain challenges that we adapted to meet heightened demand. We transformed our business model, realizing $300 million in annual expense savings, which supported our growth initiatives, including a significant increase in brand marketing to 8% of sales, doubling from fiscal '19. We drove earnings growth 35% beyond pre-pandemic levels, utilizing our strong free cash flow to return $1.9 billion to shareholders in fiscal '22 alone. Moreover, we made significant strides on many corporate responsibility commitments in fiscal '22, establishing the Tapestry Foundation, partnering with FIT’s Social Justice Center, and collaborating with the Worldwide Life Fund on a pioneering leather traceability program in Brazil. Additionally, we hired our first Chief Inclusion and Social Impact Officer and committed to the open to all charter to mitigate racial bias in retail, emphasizing our dedication to building an equitable, inclusive, and diverse company. Overall, we have made remarkable progress through our Acceleration Program. I am confident in the foundation we've built, which allows us to remain agile in an ever-changing environment while focusing on driving sustainable growth across our brands moving forward. Now, let's dive into the highlights from each of our brands, starting with Coach. In fiscal year ‘22, we achieved 18% top line growth, which is a 15% increase over pre-pandemic fiscal ‘19 levels, as we attracted over 4 million new customers in North America while nurturing our existing customer base. Importantly, we maintained a strong operating margin of 30%. This reflects the high level of innovation we are offering consumers, supported by consistent execution and highlighting Coach's significant future potential. In the fourth quarter, we experienced an 8% sales increase compared to the previous year, with 14% growth in North America driven by our strategic initiatives. We presented a focused and appealing product assortment across categories, with our core families such as Tabby, Willow, Rogue, and Field continuing to resonate with consumers through innovation to maintain relevance and emotional appeal. In Rogue, we introduced new styles, including a classic top handle handbag and seasonal options. Tabby's collection has surpassed expectations, especially our core women's offerings and the recent men's expansion with the soft messenger gaining traction. Additionally, the men's category and our lifestyle assortment, particularly footwear, saw substantial gains, which will drive growth for Coach by enhancing brand appeal and top line momentum that increases customer recruitment, purchase frequency, and overall spending. Regarding average unit retail prices, while we saw a yearly increase, we faced some pressure in the fourth quarter mainly due to geographic mix challenges. In North America, handbag average unit retail prices remained about 40% ahead of pre-pandemic levels, consistent with the third quarter but slightly lower than the previous year. However, we remain optimistic about Coach's pricing power moving forward and anticipate further opportunities for average unit retail price increases in fiscal '23, aided by overall price hikes that began in August. We have continued to incorporate data into our decision-making to meet consumer needs while driving efficiencies in our go-to-market strategies. Through product testing and predictive analytics, we have delivered a more targeted assortment, resulting in higher sell-through rates and improved SKU productivity. Our efforts to engage customers emotionally have led to stronger brand outreach. We utilized multi-layer influencer strategies for our marketing campaigns across platforms like TikTok, which enhanced our offering. Consequently, we attracted around 1 million new customers engaging in our North American channels during the quarter. Cumulatively through the Acceleration Program, Coach recruited over 8 million new customers, with a growing presence of millennial and Gen Z individuals. Importantly, during this time, we have maintained engagement with our existing customers, increasing both overall spend per customer and purchase frequency. We invested in our digital business, leading to a low double-digit revenue growth for the quarter. By the fiscal year end, e-commerce accounted for nearly 30% of sales for the brand, a significant increase from the high single-digit penetration before the pandemic. Looking ahead to fiscal year ‘23, we plan to build on the foundational changes we've implemented, focusing on expanding customer reach and enhancing lifetime value by attracting new customers, especially younger audiences, while boosting overall purchase frequency and retention rates. We will prioritize growth in our core leather goods, continuing to strengthen our iconic families, ramping up gains in men’s and lifestyle categories, especially footwear and ready-to-wear where we have seen strong growth, and invest in digital and long-term opportunities in China. We aim to convey and integrate Coach's narrative into our messaging across all consumer touchpoints to reinforce our brand purpose. In conclusion, Coach is a distinguished brand with significant opportunities as we strive to foster deeper connections with consumers through innovative products, emotional storytelling, and a purpose-led agenda. Our achievements over the past fiscal year, marked by accelerated sales growth and strong margins, reinforce our confidence in the brand and its potential for sustainable long-term growth. Next, moving to Kate Spade. The brand achieved record revenue exceeding $1.4 billion in the fiscal year, reflecting a 22% growth while also expanding operating margin. Throughout the year, our team focused sharply on rebuilding the brand's foundation and defining our purpose. We have consistently delivered results, showcasing the strength of our team, the solid execution of our strategic initiatives, and the distinct positioning of our brand. In North America, we gained over 3 million new customers, reactivated nearly 1.5 million lapsed customers, and achieved low double-digit growth in average customer spend. In the fourth quarter, Kate Spade exceeded expectations on both sales and profitability, demonstrating progress against our growth strategies. We amplified key handbag platforms by innovating our product offerings, focusing on our core families, especially the top-selling collection, which drove the quarter's performance, particularly our new cross-body options launched last quarter. Fashion shapes such as the Manhattan tote and the new top handle Merang also exceeded expectations. Unique novelty items have consistently been an asset for the brand, playing a significant role in our storytelling culture, with new novelty collections demonstrating strong sell-through rates that outpace overall average unit retail prices. Additionally, we boosted brand visibility through emotional storytelling and community engagement. Our Cabana capsule has served not only as an engagement tool but also as a means to test product launches and develop best practices, complemented by pop-up events in key cities like New York, London, and Kuala Lumpur. These pop-ups embraced the vibrancy and joy associated with Kate Spade, leading to significant new customer acquisitions, where 50% of purchases were made by new customers. Our TikTok hashtag campaign, showcasing the Cabana collection with a wide range of influencers, garnered 8 billion views since launch, far exceeding our expectations. We have leveraged data to maintain a consumer-focused approach, enhancing our understanding of customer preferences and purchase drivers. Our mini and micro shapes have effectively attracted new customers, while our fashion shapes and novelty offerings resonate with existing customers, informing our assortment architecture and marketing strategies. This approach is evidenced by strong customer metrics, as we increased the number of active customers in North America by reactivating lapsed customers and re-engaging our current base. We welcomed over 700,000 new customers to the brand in just the quarter. We capitalized on the strength of our lifestyle positioning, achieving double-digit growth in ready-to-wear, footwear, and jewelry categories, as we offered innovative products that emotionally connect consumers to the Kate Spade story and brand essence, fostering deeper consumer connections and higher lifetime value. Additionally, we have made continued investments in our digital business, exploring innovative ways to engage consumers online, including a greater involvement of influencers. Kate Spade's digital revenue now comprises one-third of total sales, a marked improvement from a 20% penetration three years ago. Overall, Kate Spade enters fiscal '23 with momentum. Our focus this fiscal year is to deepen connections with our community, leveraging our brand's power for global growth. To achieve this, we will deliver a distinctive leather goods collection, capitalize on the brand's unique market position, drive higher average unit retail prices, accelerate growth in lifestyle areas like jewelry, footwear, and ready-to-wear, enhance customer lifetime value by reactivating and engaging existing customers, and attract younger, more diverse audiences through emotional storytelling that amplifies the brand’s distinct position and universal mission. Our success at Kate Spade reflects our commitment to customer centricity and brand development. By emphasizing factors that differentiate our brand in consumers' eyes, such as our lifestyle offerings and community engagement through storytelling, we resonate with both new and existing customers while driving higher average unit retail prices and increasing our global presence. We are increasingly confident in the brand's potential to achieve $2 billion in revenue and high-teen operating margins during our planning horizon. Now, turning to Stuart Weitzman, throughout fiscal '22, the brand maintained a strategic focus on driving growth, enhancing execution and remaining flexible to meet rising consumer demand. The success of these efforts led to double-digit sales growth for the fiscal year and a return to profitability despite external challenges, particularly COVID-related issues in China. In the fourth quarter, Stuart Weitzman continued to advance its growth strategies. We enhanced profitability by leveraging strengths in North America to counterbalance pressures in China. Despite challenges in the margin-dependent China region, we improved operating margins compared to the prior year and exceeded our forecast for the quarter. We maintained a consumer-first strategy, presenting a compelling and trend-oriented offering while leveraging data and analytics. Sandals emerged as a standout category, meeting consumer needs for occasion wear, particularly from our iconic Nudist collection, which accounted for five of our top ten styles. We also introduced newer products that gained traction, with our versatile Stuart pump highlighted for its strong performance as a workwear option and set to become a new family in fiscal ‘23. Our streamlined and relevant product range, combined with reduced promotions and beneficial price increases, drove over 20% growth in average unit retail prices in North America. Looking ahead, we see ongoing opportunity to raise prices and enhance full-price sales while securing our market position. Our engaging messaging has successfully attracted new customers while helping us continue to reconnect with and reactivate clients. We also accelerated partnerships with wholesalers and expanded our global presence in key accounts. Finally, we continued to invest in digital, resulting in nearly 20% sales growth. Digital sales represented over 20% of revenue for the fiscal year, a considerable increase from the low double-digit penetration before the pandemic, indicating vast potential for further e-commerce growth. For fiscal ’23, Stuart Weitzman aims to maintain momentum by innovating across all consumer touchpoints. Our strategies will encompass creating high-demand products focused on emotional appeal, leveraging our strengths in occasion wear and building on our casual offerings, increasing brand visibility through impactful marketing, accelerating growth in China while expanding in North America, enhancing digital revenue by improving the online experience, and boosting profitability through high-margin opportunities and increased store productivity. We believe these strategic priorities will enhance brand awareness, increase market share, and set the stage for sustained profitable growth. In summary, our results demonstrate the strength of our brand, the capabilities of our teams, and the effectiveness of our strategic initiatives. This performance reflects the enduring and attractive nature of our categories, which fulfill both emotional and functional consumer needs. As we enter a new fiscal year, the environment remains challenging and rapidly evolving. However, the strong foundation we've built positions us to be agile and responsive to shifts in the market while balancing near-term challenges with our long-term objectives. We see significant opportunities ahead as we leverage our unique combination of authentic brands supported by an agile, data-driven operating model. This foundation has fueled our impressive acceleration over the past three years and is vital for our ongoing success as we prioritize the speed and responsiveness that meet consumer demands. We are confident in our ability to achieve long-term sustainable growth and look forward to detailing our financial and strategic roadmap at our Investor Day in September. Now, I’ll hand it over to Scott to discuss our financial results, capital priorities, and fiscal ‘23 outlook.

Thanks, Joanne, and good morning, everyone. Looking back at fiscal year ‘22, we delivered strong results in the face of a volatile backdrop as we focused on the factors within our control. We have fundamentally transformed the company, creating a solid foundation that enables investment in high-return initiatives to fuel sustainable top and bottom-line growth. This year, we delivered a record $6.7 billion in revenue, grew earnings per share by 20% against last year and 35% versus pre-pandemic levels, and we returned $1.9 billion to shareholders, demonstrating our strong cash flow generation, confidence in the future, and our commitment to enhancing value for all stakeholders. Turning to the fourth quarter, our results capped a strong year. Revenue rose 9% in constant currency or 7% on a reported basis. By region, North America again drove the results in the quarter, delivering a sales increase of 12%. Revenue in Greater China was pressured as anticipated due to headwinds associated with the pandemic, including lockdowns in major cities. As such, sales declined 32% versus last year due entirely to the pullback in store traffic, as digital trends in the region rose 10% compared to the prior year. Importantly, overall trends in Greater China improved modestly throughout the quarter and into fiscal ‘23. In Japan, on a year-over-year basis, sales trends accelerated meaningfully compared to the prior quarter, increasing over 25% on a constant currency basis or approximately 10% on a nominal basis. For Europe, sales rose approximately 65% against last year with strength in both stores and online. While 1-year trends in Japan and Europe have improved significantly due to the anniversary of last year’s pandemic-related headwinds as well as strong traction with domestic consumers, revenue in both regions remained below fiscal ‘19 pre-pandemic levels. Across the balance of Asia, trends again accelerated sequentially on a 1-year basis, rising nearly 60%, driven by Malaysia and Singapore. By channel, sales in the margin-accretive digital channel rose high single digits in the quarter while stores and wholesale saw continued growth. Moving down the P&L. As expected, gross margin declined in the quarter given the incremental freight expense of $36 million, representing approximately 215 basis points of pressure as well as unfavorable geographic mix from the lower penetration of high-margin China business. That said, performance of our underlying business remains strong, and we continue to utilize data to better understand and meet the needs of our consumers while simultaneously lowering overall promotional activity. SG&A was slightly above the prior year and better than our expectations. Even excluding the anniversary of a $25 million contribution towards the endowment of the Tapestry Foundation last year, we improved our SG&A rate, reflecting leverage across the expense base. Taken together, operating income was largely in line with our expectations and 7% above last year. Earnings per diluted share for the quarter was $0.78, 20% ahead of last year and nearly 30% above FY ‘19 pre-pandemic levels. So now turning to our balance sheet and cash flows. We ended the quarter in a strong position with $953 million in cash and investments and total borrowings of $1.69 billion. There were no borrowings outstanding under our $1.25 billion revolver. Free cash flow for the fiscal year was an inflow of $759 million, including CapEx and implementation costs related to cloud computing of $162 million. CapEx for the year came in favorable to our expectations and included a timing shift of approximately $35 million into FY ‘23 due to shifts in projects mostly in Asia. Inventory was up 35% at year-end, including an increase in transits of over 50% impacted by longer lead times. Overall, we’re pleased with the makeup of our current inventory, which is highly penetrated in core styles. We expect inventory to end fiscal ‘23 up single digits versus the prior year. Moving to our capital allocation priorities. In fiscal ‘22, we returned approximately $1.9 billion to shareholders. That was led by $1.6 billion in share repurchases, which is over $1 billion ahead of our original guidance for $500 million. The incremental buyback was supported by our significant free cash flow generation as well as our strong liquidity position as we emerged from the acute pressures of the COVID-19 pandemic in fiscal ‘21 with a more conservative cash position. Therefore, the momentum we drove in our business and our confidence in the future allowed us to return to more normalized cash balances by the end of fiscal ‘22. In addition, we returned $264 million to shareholders through our dividend program. Now looking forward, our capital allocation priorities remain unchanged. First, we’re investing in the business to drive long-term, profitable growth; and second, we’re returning capital to shareholders through dividends and share repurchases. Therefore, in fiscal 2023, we’re planning approximately $1 billion in shareholder returns, primarily through share repurchases of $700 million under our existing $1.5 billion authorization. In addition, our Board of Directors approved a 20% increase in our quarterly dividend, bringing our anticipated annual dividend rate to $1.20 per share. We remain committed to increasing our dividend over time at a rate faster than earnings growth. Now moving to our outlook for fiscal 2023. We’re entering ‘23 with a number of tailwinds. We operate in high-margin categories, which have proven to be durable and resilient. We have strengths in pricing power at each of our brands underscored by the gains we’ve made throughout the Acceleration Program, and margins will benefit from a reduction in incremental levels of air freight versus the prior year. That said, our eyes are wide open, and we’re not immune to headwinds that exist in our space. The appreciation of the U.S. dollar, ongoing COVID-related disruption in China, soft consumer sentiment compared to historical averages in the U.S., and ongoing cost inflation and supply chain disruptions. In times like these, we’re leveraging our established capabilities and leaning into our competitive advantages while investing in our brands to drive growth over the long-term. For the fiscal year, we expect constant currency revenue growth of 6% to 7%. On a reported basis, we anticipate revenue in the area of $6.9 billion, which represents growth of 3% to 4% and includes roughly 300 basis points of FX headwinds from the significant appreciation of the U.S. dollar. Our guidance assumes balanced growth with all brands and channels contributing to constant currency top line gains for the year. By region at constant currency, this contemplates low to mid-single-digit growth throughout the year in North America and a gradual recovery in Greater China resulting in growth for the fiscal year as well as double-digit gains in Japan and Europe. In addition, we anticipate a year-over-year operating margin decline in the area of 50 basis points, due entirely to FX headwinds of roughly 100 basis points. This contemplates gross margin relatively in line with the prior year, reflecting the benefit of moderating freight costs as well as AUR increases across all brands. We expect these tailwinds to be partially offset by the previously anticipated rising input costs for materials as well as the negative impact of FX. On SG&A, we anticipate modest de-leverage for the year, reflecting continued investments in growth drivers, including digital and the planned 2023 opening of our new fulfillment center in Las Vegas. Moving to below line items. Net interest expense for the year is anticipated to be approximately $35 million, a significant decline versus fiscal ‘22, reflecting the benefit of our recently executed cross-currency swap arrangements. The tax rate is expected to be approximately 21%. This represents an increase against last year, primarily due to the anticipated geographic mix of earnings. Weighted average diluted share count is expected to be in the area of 242 million shares. This reflects approximately $700 million in share repurchases expected for the fiscal year as noted. So taken together, we expect EPS of $3.80 to $3.90, representing double-digit growth compared to the prior year. Finally, CapEx and cloud computing costs are forecasted to be in the area of $325 million, including the previously mentioned $35 million shift from fiscal ‘22. We anticipate approximately half of the spend to be related to new stores and renovations, primarily in China, with the balance dedicated to our ongoing digital and IT initiatives and investments related to our new fulfillment center in Las Vegas. Given the volatile environment and last year’s atypical comparisons, we again expect significant variability by quarter. Specifically, we expect revenue and earnings growth versus prior year to be back half weighted, helped by the sequential improvement planned in China as we move throughout the year. In addition, we will anniversary the substantial incremental headwinds from freight beginning in the second fiscal quarter of the year, providing a tailwind to margin. For the first quarter, we expect revenue to increase mid-single digits in constant currency, which included a decline of approximately 15% projected in Greater China. On a reported basis, we anticipate global sales to increase slightly, including a negative impact of approximately 350 basis points from FX with EPS in the area of $0.75. In closing, we delivered strong results in fiscal ‘22 with 18% top line growth driving record annual sales. EPS increased 20% versus prior year and 35% over pre-pandemic levels. At the same time, we returned $1.9 billion to shareholders. This is a testament to the resilience of the categories where we play, the strength of our brands, the benefits of our transformed globally diversified business model, and our talented teams around the world who continue to drive our strong performance. As we look forward, we remain confident in our trajectory and disciplined in our approach to driving long-term sustainable growth and total shareholder return. And now I’ll open it up for your questions.

We will take our first question from Bob Drbul of Guggenheim Securities.

Hi, good morning. I guess, Joanne, I was wondering, when you look at the last couple of years, as you guys think about FY ‘23, the environment is clearly challenging. Can you just talk about the confidence that you guys have that you can deliver another strong year for shareholders? Thanks.

Good morning, Bob. I would say that we’re confident in our ability to connect with the consumer. Over the last 2 years, we’ve gained 15 million new customers in North America alone. And we just – as you pointed out, we just delivered a great year. We posted record revenue levels, double-digit growth at each of our brands. And those results last year and over the past 2 years have been delivered in a very difficult environment. We saw top and bottom-line growth over that period, and we’re up double digits to pre-pandemic levels. And that really speaks to the success of our Acceleration Program. We’ve built a very strong foundation, and we see significant runway ahead. Given the macro backdrop, as you mentioned, we believe that our outlook is both prudent and realistic. We expect constant currency 6% to 7% growth for the year. And some of the drivers of our confidence start with our team. I believe we have the best team in the business. Our team has proven to have agility, and we’ve been responsive to all of the changes that we’ve seen in the backdrop. Our brands are strong and getting stronger. And over the last 3 years, we’ve really pivoted the company with – to have a real focus on brand building and brand building capabilities, and we’re investing behind that and in the future of our brands. We play in attractive categories. The categories that we serve our customers have proven to be resilient over time and durable. And I think the success of our transformation is really underpinned by our laser focus on the customer. We’re staying closer and closer to our customers and executing behind that. And not only are we calling for growth in this fiscal year, but we see a tremendous amount of runway ahead across each of our brands, and we’re looking forward to sharing more of those details at our Investor Day coming up next month.

We will now turn to Ike Boruchow from Wells Fargo.

Hey, good morning, everyone. Scott, you gave some additional color to the fiscal year guide, but I just wanted to follow-up. Is there more you can provide us on the shape of the year? There is a lot of variability first half, back half with freight in China, etcetera. So any other help on the shape would be helpful. And then on GSP, I see that that’s not included in the guide, but if that does go through, can you just remind us the EPS benefit on an annualized benefit that you guys would see? Thanks.

Sure, good morning. And thanks for the question. So on the first part, maybe a little more unpacking on the shape of the year by quarter. So first of all, in North America, Joanne’s comments, we do see some moderation in our growth. We talked about low to mid-single-digit growth. But importantly, that’s off a base of drilling last year, 28%, almost 30%. And on a pre-pandemic stack, more than 22%. So our business in North America is strong. It remains strong. And we expect that to be consistent throughout each of the quarters as we go through the four quarters of the year. Next, I’ll address the rest of the world excluding China and again, very strong year-on-year growth. Not quite as – we’re recovering there, not quite as strong on the 2-year stack. But versus last year, where we saw severe COVID impacts, Japan, rest of Asia, we’re seeing very strong double-digit growth, more than 20% in most regions, and we expect that to continue throughout the year. The one that’s a little different is China, as mentioned in the prepared remarks, just some perspective there. Last quarter, we were down about 32%. That’s a little better than we had guided. We guided down 35%. And importantly, as we exited the year and entered this year, we see the trends improving and continue to improve. So we’ve really just taken the trend line that we see and projected that through the balance of the year. So by Q3, we inflected the growth. And for the full year, we see single-digit growth in China. So that regional difference by year really accounts for a lot of the progression. It’s really a consistency in the trends that we see. It’s not a big change in trend. It’s just the mathematics of how those different regions come together. And then one, in addition to the revenue cadence by quarter, we should also talk about some of the profitability drivers. And the biggest one is freight. So you may recall, we’ve talked about freight last year being elevated for two reasons. Ocean rates up as well as air freight. And we’re essentially out of the air freight business, but it takes a while for that rabbit to work through the snake, right? And as that inventory or the freight is attached to that inventory, we’re going to see still some negative impact year-on-year in Q1 because we don’t start anniversarying the big air freight until Q2 and beyond. So, in putting some numbers on that, in Q1, we still expect a headwind from freight somewhere around 150 basis points on the negative. That inflects in Q2 and beyond. And for the year, we see about 80 basis points of favorability in freight. And importantly, from Q2 through Q4, so Qs 2, 3, and 4, that’s going to be about 140 basis points favorability to last year, and that gets you to that ongoing rate of about half of what we saw last year coming back to us as a tailwind. And then the last point that creates just a little noise is FX. So FX, we mentioned in the prepared remarks, about 300 basis points impact on top line, about 100 basis points on the bottom line. That’s a little more acute in the first quarter, about 350 basis points as we start to lap some of the movements in the USD as we move through the balance of the year. So, hopefully, that gives you a little bit of context on the shape. Second part of your question was GSP. As you noted, we did not reflect any assumption and changes in the law around GSP. It’s about $40 million in the annual duties paid because we don’t have the GSP regime in place. And if it should be retroactive, which in all recent past, it always has been, that would be about another $50 million. So, $90 million in total, assuming that it’s passed and assuming that it’s retroactive. So, a significant impact. It’s $0.30 plus or so.

Our next question comes from Lorraine Hutchinson of Bank of America.

Thank you. Good morning. Can you give us your thoughts on the health of the store fleet? And how you think about the footprint for each brand now that e-commerce is such a bigger part of the business?

Yes. Hi, good morning, Lorraine. We feel really good about our store fleet and the health of our store fleet. We had over the last 3 years, had a focus on improving the productivity and profitability of our store fleet and also understanding and making sure that we are delivering the right experience for our consumers in that physical touchpoint. And we believe stores are still important to the consumer, and it represents, as I have said, an important touchpoint. But with our focus on the profitability, even as we have come through the pandemic and had traffic pressures, our store fleet is more profitable than it was pre-pandemic level today, even today. So, we feel good about where we are positioned, and we see opportunities to continue to work to improve the experience we are delivering to consumers in that physical touchpoint as really an important part of the consumer shopping journey. Importantly, to your point, we have driven incredible growth in our digital business. We have reached $2 billion in that business, more than triple where we were pre-pandemic. And it’s important because we have taken a focus shifting from a specifically channel focus to focusing on the consumer, and we want to be where the consumer is in terms of how to engage the consumer with our brands. And we have, again, lots of traction in digital. It’s a $2 billion business. It comes with accretive margins versus the brick-and-mortar channel. So, for us, seeing that continued growth is a good thing and a good outcome. But at the same time, we are improving the profitability of our store fleet. And altogether, we are acquiring new customers across these channels, which is really healthy for our brands, including an increasing number of younger consumers. So, that’s how we are thinking about stores. We will continue to test and learn in the omnichannel capabilities for our store and make sure we are delivering the right experience for our consumers there.

Our next question comes from Michael Binetti of Credit Suisse.

Hey guys. Thanks for all the detail here. I think your – on the AUR comment, Joanne, did I hear you correctly that North America handbag AUR was negative year-over-year in the quarter. And I know you said global, I am assuming a lot of that was from China mix. I am curious on North America. And I think you referenced some ticket increases in August. Maybe the size there and what – whether the 1Q plan is based on a return to positive AUR for the Coach brand in North America?

Yes, I will kick it off by saying – and then I will pass it to Todd for some color on Coach. AUR, it continues to be – we continue to see pricing power across our brands. And for the quarter overall, we saw AUR growth. In the Coach brand in the fourth quarter, though we parse it out, Coach has been successful driving AUR growth for 3 years. And a lot of that is due to our focus on the consumer and delivering value and really leveraging data and analytics from our – in our platform, but also delivering the innovation that the customers value. And again, 3 years of a strong track record in the fourth quarter, the Coach brand in North America was down slightly, but still 40% above pre-pandemic levels. So, that gives you, I think, an understanding of the pace of change that we have made in the Coach brand. But that – we still see continued opportunity for growth ahead, and I will let Todd touch on that. In our other brands, Kate and Stuart, we are much earlier on that journey and continue to drive strong AUR growth and see runway ahead in those brands as well. So, bringing the power of our data-rich platform and our consumer centricity forward, it has had traction, and we see that going forward. But Todd, I will let you provide some color on Coach specifically.

Thank you, Joanne. As Joanne indicated, we are coming off some amazing numbers, 40% above pre-pandemic in North America. And what we had said to you before was we had always planned on ticket increases this August and throughout the year. And generally speaking, it’s about 6%, sometimes a little higher, sometimes in that range. And we feel very good about that. We feel good about that because we have not seen any resistance from our consumer, and they really appreciate the codes that Coach offers that are unique, the value, and the innovation, and we anticipate seeing a return to AUR growth even in North America handbags in the first quarter and throughout the year.

Our next question is from Adrienne Yih of Barclays.

Good morning. Nice end to a fantastic year. Joanne, I wanted to go back to the comment on the 40% to 50% SKU reduction. What categories or did you just kind of tighten up so the AUR, the target AUR? Did you take out certain categories? So, any more color on that piece of it? And then, Todd, how much of the product reduction/design process is based on predictive analytics? And how do you balance sort of your creative force of the team versus the more analytical nature of kind of data analytics? Thanks so much.

Yes. Thanks, Adrienne. I will kick it off with our AUR and some of the data and analytics approach to how we thought about SKU reduction. And your point on understanding the assortment, we leveraged data and analytics to really help drive our SKU reduction efforts. We wanted to make sure that we did have the right assortment architecture and we cut a lot of the tail of the unproductive SKUs. But importantly, we leveraged analytics and market research to understand the consumer across the landscape and make sure that we had the right products to deliver against an understanding, a deeper understanding of the customer. So, as we developed our assortment architecture, understanding who the consumer is, who the target consumer is, and where we wanted to place our bets, and it’s been an important and a huge win for us as we have come through a pretty volatile environment to have that focused assortment that has – each SKU has a purpose, and we are evaluating which SKUs are attracting new customers, what are the entry points for our brands, where are we seeing customers move up in AUR and delivering that value that they recognize. It’s been a tremendous help to have more focused assortment as we navigate a lot of the supply and demand changes around the world. And it’s been a tremendous help in terms of communicating to the consumer what’s important. So, with all of the changes that have happened over the last 2 years, we are better at identifying the SKUs. We are better at allocating those items, that assortment across the world. We are better at allocating our inventory behind those, and we are better at messaging our consumers behind the reduced SKU count. So, a lot of wins on that store.

What I can add is our designers are not going to be replaced by AI any time soon. So what we have said often in the past is we are at our best when we blend magic and logic. And today, what that means is all the things that Joanne mentioned. But in addition, it’s informing the creative process. It’s informing design. We are having much better feedback loops earlier. And again, I want to make sure we continue to be innovative and creative, and that is not going to be something that we are outsourcing to computers. Stuart Vevers and his team really come up with incredible ideas and focus. And their goal, their muse is this younger consumer, this global consumer that cares about values that we infuse in the brand. So, again, it’s an informed creative process. We are at our best when we do this. We are using the Tapestry platform and the data to help us do this in a really authentic way, and you are seeing it in the product.

Our next question comes from Mark Altschwager of Baird.

Good morning. Thanks for taking my question. It’s been great to see the continued progress at Kate. Can you give us some updated perspective on the path to $2 billion? How are you thinking about growth by geography? And at what point does China become a bigger part of the story again?

Well, we see, Mark, the opportunity to achieve $2 billion. We are increasingly confident that as the team has really delivered and the brand is really performing, both on top and bottom line. And we see that traction with our existing customers. That has been our focus, right, to get the brand steady and growing in our core markets of North America and Japan. And we see tremendous runway and opportunity ahead to get to that $2 billion with growth in our core markets. We also go to your point, see opportunity to expand internationally. We have driven strong growth. Our business is small in both China and Europe. Europe has been performing quite well. We see opportunities to expand there. And over time, also impact the China market. So, that is an opportunity. The $2 billion is not contingent upon a big step into China. We see runway in our core markets in addition to China, which is right now, it represents a lot of white space for the brand to continue to grow beyond $2 billion.

Our next question comes from Oliver Chen of Cowen.

Hi Joanne, it’s Scott. Our survey data at Cowen is showing some pressure on the higher-end customer as well. Just would love your thoughts on the strategy for the average unit retail increases at the Coach brand in the fourth year of doing this, just the nature of what’s achievable yet still offering clear value and innovation. And Joanne, you mentioned younger customer in your prepared remarks as well as opportunity for continued brand building. Could you be more specific about what you mean there and where you see the evolution of the innovation going? Thank you.

Yes. Why don’t I toss it to Todd to talk about the Coach brand, and then I will follow it up with our young consumer.

Thank you. Good morning. We feel really good about where we are in AUR and particularly the place you focused on, which is the higher end. Two quick data points. First of all, in retail we saw AUR handbag growth even in the fourth quarter. And what that shows is the dramatic white space that exists today between Coach and the traditional European luxury brands. And I think what you see with Rogue and some of our more elevated products, the consumer is recognizing the value there, and there is a lot of opportunities to continue to grow there. And so I see us further increase our AURs throughout the year, both in North America and globally. And we are going to see that in Japan, in China, coupled with innovation, I feel very good, particularly about us capturing more of that white space.

And let me just follow up with – to answer the second part of your question, Oliver, on brand building. We have spent the last 3 years really pivoting the company to get focused on how we continue to invest in our brands. And as we have done that, we have focused on acquiring new customers, reactivating the customers, lapsed customers, and continuing to drive higher customer lifetime value. And that focus on the customer is part of our brand building story. We are trying to acquire more customers and succeeding, 15 million new customers in the last 2 years alone, and we are seeing an increasing number of younger consumers. And we are doing that with capabilities that we have developed in marketing and also with data and how we are positioning our assortment, so understanding that consumer, getting closer to that consumer, and delivering product and experiences that they value. And again, we are seeing traction. We are showing up in the places where they are, particularly on digital channels. And we are showing up not only for the transaction, but engaging consumers as they are on their journey, the customer journey and discovery. So, part of our investments, and we talked about how we have significantly changed our investments to be behind that brand building and in digital, moving our marketing spend from 4% of sales to 8% of sales is meaningful, and we have the capabilities to continue to measure the effectiveness of the investments we are making and ensuring that we are getting the outcomes that we want. And you can see those results again in the customer acquisition over the last 2 years, and we expect that to continue.

Our next question comes from Brooke Roach of Goldman Sachs.

Good morning. Thank you for taking our question. Joanne, I would love to hear your outlook for growth for the accessories and handbag category into fiscal ‘23 for both units and AUR. Where do you see the largest opportunity for Coach brand to take share in the North American handbag and accessories market this year? Thank you.

We are fortunate to play in a category that has historically had very – proven very resilient and had durable growth over the years. We have seen pre-pandemic, the category grow in the mid to high-single digit range very consistently. And even through the pandemic, we saw consumers engaging with the category and coming out strong as we have recovered from the pandemic. But going forward, we expect the category to continue to grow in that mid to high-single digit level. And from the Coach brand, I give Todd and the team at Coach tremendous credit. They have really infused life and energy into that brand. We are acquiring new customers. We are driving innovation and really managing the business quite well. And you can see that in the customer acquisition that we are seeing at the Coach brand, we still have tremendous runway ahead for Coach. The category we see growing and we think Coach is very well positioned to continue to grow with the category at very strong margins.

Yes. I think the only thing I can point you to is it was very interesting recently, the business of fashion did a very deep dive in the handbag category. And with unaided awareness, they were asked consumers who were engaged in the category and anticipated buying a brand, what brand would they buy. And we were very pleased to see that Coach was the number one brand in the U.S. on an unaided awareness by consumers who have the intention to buy. Even what was also very interesting was on high net worth individuals, individuals who have over $1.5 million investment assets, Coach was number five in the U.S. So, that bodes very well and shows that we are cutting through in our messaging on values. And I think you are going to see us, and you are going to hear us talk quite a bit about it at the upcoming Investor Day, how we are going to chart our future and take us into the next meaningful growth period for Coach.

Our next question comes from Dana Telsey of Telsey Advisory Group.

Hi. Good morning everyone. Can you talk a little bit for each of the brands where you are on the journey of price increases? And does it at all differ in terms of how you are pricing for some of your exclusive or limited edition products? Thank you.

Good morning, Dana. First, I will start by saying we occupy an incredible position in the market, and we represent tremendous value for the quality and the innovation that we are delivering to consumers, and consumers are recognizing that. We have been seeing AUR growth consistently at Coach for 3 years. And consumers are recognizing the value that we are delivering in the marketplace. Where we are in the journey, we still see runway ahead across all three brands to drive AUR. We see pricing power across our brands, again, with customers recognizing that value. While Coach is further along on this journey, again, and as Todd just mentioned, we see runway ahead to drive more price increases more than offsetting inflationary input cost pressures as we move forward and as we deliver – continue to deliver great value in the market. And in the context of the market, we have seen the Pinnacle Luxury players move price up pretty substantially over the last 3 years. And that creates that white space for all of our brands to position our – and continue to position AUR higher. Again, at Kate Spade and at Stuart Weitzman, continuing to see strong AUR growth in the last quarter over the last year, earlier on the journey, so much more runway ahead in those brands as well.

Thank you. That concludes our question-and-answer session this morning. I will now turn the call over to Joanne for some concluding remarks.

Thanks, operator. I want to close by thanking our teams around the world for their passion and commitment. They drove these standout results that we delivered. We delivered record annual revenue this year with double-digit growth at each brand and our digital business reaching $2 billion, along with earnings 20% above last year, so a standout performance. Really clearly demonstrating the strength of our brands and the power of our transformation which positions us well for the future. We have significant long-term runway. And through a continued focus on the customer and commitment to brand building, I am confident in our ability to drive sustainable growth going forward. I am looking forward to sharing more details on our long-term roadmap at our Investor Day next month, and I hope to see you all there. Thank you.

This does conclude the Tapestry earnings call. We thank you for your participation. You may now disconnect your lines. Everyone, have a great day.